B Com Acc. Tax 2b Study Guide 2021

TAXATION 2B Educor ©
B.COM IN ACCOUNTING
TAXATION 2B
STUDY GUIDE
2021
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TABLE OF CONTENTS
1. About Brand..........................................................................................................................................6
2. Our Teaching and Learning Methodology ............................................................................................7
Icons..............................................................................................................................................8
3. Introduction to the Module................................................................................................................10
Module Information ...................................................................................................................10
Module Purpose .........................................................................................................................10
Outcomes ...................................................................................................................................10
Assessment .................................................................................................................................10
Pacer ...........................................................................................................................................12
Planning Your Studies .................................................................................................................12
4. Prescribed Reading .............................................................................................................................12
Prescribed Book ..........................................................................................................................12
Recommended Articles ..............................................................................................................13
Recommended Multimedia ........................................................................................................13
5. Module Content .................................................................................................................................14
5.1.1. Introduction ........................................................................................................................15
5.1.2. Components of gross income. ............................................................................................16
5.1.3. Components of Gross Income definition ..............................................................................3
5.1.4. The Total amount .................................................................................................................3
5.1.5. In cash or otherwise .............................................................................................................4
5.1.6. Received by or accrued to ....................................................................................................5
5.1.7. Residence..............................................................................................................................6
5.1.8. Non-residence (source) ........................................................................................................6
5.1.9. Capital ...................................................................................................................................7
5.1.10. Summary...............................................................................................................................8
5.1.11. Revision Questions .............................................................................................................10
STUDY UNIT 2: GROSS INCOME – SPECIAL INCLUSIONS ............................................................13
5.2.1. Introduction ........................................................................................................................13
5.2.2. Special Inclusion – Gross Income: .....................................................................................14
5.2.3. Annuities – Paragraph (a): .................................................................................................15
5.2.4. Alimony or Maintenance – Paragraph (b) .........................................................................16
5.2.5. Services Rendered – Paragraph (c) ....................................................................................16
5.2.6. Restraint of Trade – Para (cA) and (cB) .............................................................................17
5.2.7. Services - Compensation for loss of office ........................................................................17
5.2.8. Fund benefits .....................................................................................................................18
5.2.9. Services - Commutation of amounts due ..........................................................................18
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5.2.10. Lease Premium – Paragraph (g).........................................................................................18

5.2.11. Know-How Payments accrued to a Person – Paragraph (gA)...........................................31
5.2.12. Leasehold Improvements – Paragraph (h) ........................................................................31
5.2.13. Fringe benefits – Paragraph (i) ..........................................................................................32
5.2.14. Proceeds from the disposal of certain assets ...................................................................32
5.2.15. Dividends ............................................................................................................................34
5.2.16. Subsidies and grants ..........................................................................................................34
5.2.17. Amounts received by or accrued to s 11E sporting bodies ..............................................34
5.2.18. Key-Man Insurance Policies – Paragraph (m) ...................................................................34
5.2.19. Recoupment and other inclusions – Paragraph (n) ..........................................................35
5.2.20. Further illustrations ...........................................................................................................35
STUDY UNIT 3: EXEMPT INCOME ...............................................................................................41
5.3.1. Introduction ........................................................................................................................41
5.3.2. EXEMPT INCOME ................................................................................................................42
5.3.3. Partial Exemptions .............................................................................................................42
5.3.4. Absolute exemptions .........................................................................................................47
5.3.5. Summary ............................................................................................................................50
5.3.6. Self-Assessment ..................................................................................................................53
STUDY UNIT 4: THE GENERAL DEDUCTION FORMULA ...............................................................56
5.4.1. Introduction .......................................................................................................................56
5.4.2. The general deduction formula .........................................................................................57
5.4.3. The meaning of carrying on a trade ..................................................................................58
5.4.4. Actually incurred ................................................................................................................59
5.4.5. In the production of income ..............................................................................................41
5.4.6. Not of a capital nature .......................................................................................................41
5.4.7. Expended for the purpose of trade ...................................................................................41
5.4.8. Section 23 prohibited deductions .....................................................................................41
5.4.9. Prohibition against double deductions .............................................................................43
5.4.10. Excessive expenditure .......................................................................................................43
5.4.11. Cost of assets and VAT .......................................................................................................44
5.4.12. Specific transactions ..........................................................................................................44
5.4.13. Summary ............................................................................................................................47
5.4.14. Self-Assessment ..................................................................................................................48
STUDY UNIT 5: INCOME AND EXPENSES OF INDIVIDUALS .........................................................51
5.5.1. Introduction ........................................................................................................................51
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5.5.2. South African income (section 1 – definition of “gross income”) ......................................51

5.5.3. South African dividends (section 10(1)(k) ..........................................................................51
5.5.4. South African interest exemption (section 10(1)(i)) ...........................................................51
5.5.5. Interest and dividends from tax-free investments (section 12 T) ......................................51
5.5.6. Foreign income ...................................................................................................................51
5.5.7. Definition of a foreign dividend (section 10B (1)) ..............................................................52
5.5.8. Other foreign income .........................................................................................................54
5.5.9. Specific deductions .............................................................................................................54
5.5.10. Current year contributions to pension funds .....................................................................56
5.5.11. Income of minors (Sec 7(3)) ...............................................................................................58
5.5.12. Foreign tax credit ................................................................................................................58
5.5.12. Taxation of married couples ..............................................................................................59
5.5.13. Separation, divorce and maintenance orders...................................................................60
5.5.14. Antedated salaries and pensions ......................................................................................60
5.5.15. Amendments in respect of the 2013 year of assessment ................................................60
5.5.16 SUMMARY ..............................................................................................................................61
5.5.16. Self-Assessment ..................................................................................................................62
STUDY UNIT 6: THE TAX RETURNS ..............................................................................................65
5.6.1. Introduction ........................................................................................................................65
5.6.2. Necessary documentation to submit a tax return ..............................................................66
5.6.3. More information on Tax Returns ......................................................................................66
5.6.4. Methods of filing an income tax return ..............................................................................66
Study the SARS guidelines and visit the two SARS sites whose links have been given to you above. ....67
5.6.5. Summary.............................................................................................................................67
STUDY UNIT 7: FRINGE BENEFITS AND ALLOWANCES ...............................................................69
5.7.1. Introduction ........................................................................................................................69
5.7.2. Allowances – S8(1)..............................................................................................................70
5.7.3. Travel allowance – S8(1)(b) ................................................................................................70
5.7.4. Fixed travel allowance ........................................................................................................70
5.7.5. The fixed cost component ..................................................................................................71
5.7.6. Reimburse travel allowance ...............................................................................................72
5.7.7. Subsistence allowances S8(1)(c) .........................................................................................72
5.7.8. Employees’ tax....................................................................................................................73
5.7.9. Other allowances – S8(1)(a)(ii) ...........................................................................................73
5.7.10. Entertainment allowance ...................................................................................................74
5.7.11. Computer allowance ..........................................................................................................74
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5.7.12. Cell phone allowance..........................................................................................................74

5.7.13. Home office allowance .......................................................................................................71
5.7.14. Seventh Schedule benefits .................................................................................................71
5.7.14. Right to acquire marketable securities .............................................................................72
5.7.15. Broad-based employee share plans ..................................................................................73
5.7.16. Taxation of directors and employees at the vesting of equity instruments....................74
5.7.17. Summary ............................................................................................................................77
STUDY UNIT 8: RETIREMENT BENEFITS ......................................................................................79
5.8.1. Introduction ........................................................................................................................80
5.8.2. Lump sums from employers ...............................................................................................81
5.8.3. Fund benefits definition of gross income and Second Schedule........................................81
5.8.4. Amendments in respect of the 2013 year of assessment ..................................................82
5.8.5. Summary.............................................................................................................................83
5.8.6. Self-Assessment ..................................................................................................................84
STUDY UNIT 9: PREPAID TAX ......................................................................................................85
5.9.1. Introduction ........................................................................................................................86
5.9.2. Pay as You Earn (PAYE) .......................................................................................................87
5.9.3. Fourth Schedule..................................................................................................................87
5.9.4. Liability to pay provisional tax ............................................................................................87
5.9.5. Estimates of taxable income ..............................................................................................88
5.9.6. Payments of provisional tax ...............................................................................................88
5.9.7. Amount and rate of provisional tax to be paid ..................................................................88
5.9.9. Late submission and payment penalties and interest ......................................................96
5.9.10. Late submission and payment penalties and interest ......................................................96
5.9.11. Summary ............................................................................................................................98
5.9.12. Self-Assessment ..................................................................................................................99
7. References ........................................................................................................................................101
8. Version Control .................................................................................................................................103
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1. ABOUT BRAND Commented [AC1]: Heading 1
Damelin knows that you have dreams and ambitions. You’re thinking about the future, and how the
next chapter of your life is going to play out. Living the career you’ve always dreamed of takes some
planning and a little bit of elbow grease, but the good news is that Damelin will be there with you every
step of the way.
We’ve been helping young people to turn their dreams into reality for over 70 years, so rest assured,
you have our support.
As South Africa’s premier education institution, we’re dedicated to giving you the education experience
you need and have proven our commitment in this regard with a legacy of academic excellence that’s
produced over 500 000 world – class graduates! Damelin alumni are redefining industry in fields
ranging from Media to Accounting and Business, from Community Service to Sound Engineering. We
invite you to join this storied legacy and write your own chapter in Damelin’s history of excellence in
achievement.
A Higher Education and Training (HET) qualification provides you with the necessary step in the right
direction towards excellence in education and professional development.
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2. OUR TEACHING AND LEARNING METHODOLOGY
Damelin strives to promote a learning-centred and knowledge-based teaching and learning

environment. Teaching and learning activities primarily take place within academic programmes and
guide students to attain specific outcomes.
• A learning-centred approach is one in which not only lecturers and students, but all sections
and activities of the institution work together in establishing a learning community that
promotes a deepening of insight and a broadening of perspective with regard to learning
and the application thereof.
• An outcomes-oriented approach implies that the following categories of outcomes are

embodied in the academic programmes:
• Culminating outcomes that are generic with specific reference to the critical cross-field
outcomes including problem identification and problem-solving, co-operation, self-
organisation and self-management, research skills, communication skills, entrepreneurship
and the application of science and technology.
• Empowering outcomes that are specific, i.e. the context specific competencies students
must master within specific learning areas and at specific levels before they exit or move to
a next level.
• Discrete outcomes of community service learning to cultivate discipline-appropriate

competencies.
Damelin actively strives to promote a research culture within which a critical-analytical approach and
competencies can be developed in students at undergraduate level. Damelin accepts that students’
learning is influenced by a number of factors, including their previous educational experience, their
cultural background, their perceptions of particular learning tasks and assessments, as well as discipline
contexts.
Students learn better when they are actively engaged in their learning rather than when they are
passive recipients of transmitted information and/or knowledge. A learning-oriented culture that
acknowledges individual student learning styles and diversity and focuses on active learning and
student engagement, with the objective of achieving deep learning outcomes and preparing students
for lifelong learning, is seen as the ideal. These principles are supported through the use of an engaged
learning approach that involves interactive, reflective, cooperative, experiential, creative or
constructive learning, as well as conceptual learning via online-based tools.
Effective teaching-learning approaches are supported by:
• Well-designed and active learning tasks or opportunities to encourage a deep rather than a
surface approach to learning.
• Content integration that entails the construction, contextualization and application of

knowledge, principles and theories rather than the memorisation and reproduction of
information.
• Learning that involves students building knowledge by constructing meaning for

themselves.
• The ability to apply what has been learnt in one context to another context or problem.
• Knowledge acquisition at a higher level that requires self-insight, self-regulation and self-
evaluation during the learning process.
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• Collaborative learning in which students work together to reach a shared goal and
contribute to one another’s learning at a distance.
• Community service learning that leads to collaborative and mutual acquisition of

competencies in order to ensure cross cultural interaction and societal development.
• Provision of resources such as information technology and digital library facilities of a high
quality to support an engaged teaching-learning approach.
• A commitment to give effect teaching-learning in innovative ways and the fostering of

digital literacy.
• Establishing a culture of learning as an overarching and cohesive factor within institutional

diversity.
• Teaching and learning that reflect the reality of diversity.
• Taking multi culturality into account in a responsible manner that seeks to foster an
appreciation of diversity, build mutual respect and promote cross-cultural learning
experiences that encourage students to display insight into and appreciation of differences.
Icons Commented [AC2]: Heading 2
The icons below act as markers, that will help you make your way through the study guide.
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Additional information
Find the recommended information listed.
Case study/Caselet
Apply what you have learnt to the case study presented.
Example
Examples of how to perform a calculation or activity with the solution
/ appropriate response.
Practice
Practice the skills you have learned.
Reading
Read the section(s) of the prescribed text listed.
Revision questions
Complete the compulsory revision questions at the end of each unit.
Self-check activity
Check your progress by completing the self-check activity.
Study group / Online forum discussion

Discuss the topic in your study group or online forum.
Think point
Reflect, analyse and discuss, journal or blog about the idea(s).
Video / audio
Access and watch/listen to the video/audio clip listed.
Vocabulary
Learn and apply these terms.
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3. INTRODUCTION TO THE MODULE
Welcome to XXXX
Module Information
Qualification title B.Com Accounting
Module Title Tax 2B
NQF Level 7
Credits 10
Notional hours 100
Module Purpose
 The purpose of this module is to introduce the theoretical and practical knowledge concerning
taxation of individuals as well as business entities (Gross Income and deductions, Capital
Allowances, Value Added Tax, Sole Traders, Partnerships, Companies, Donations Tax, Trust
Income, and powers and duties of the Commissioner for SARS).
Outcomes
At the end of this module learners should be able to:
 Have a thorough knowledge of gross income;
 Distinguish between capital and revenue;
 A have a thorough knowledge of special inclusions in gross income;
 Have a thorough knowledge of exempt income;
 Understand the each of the elements of the general deduction formula;
 Have a thorough knowledge and application of Section 11(a) is required;
 Have a thorough knowledge of the taxation of individuals is required as well as the
practical application of this knowledge; and
 Have a thorough knowledge of how to deal with employee and fringe benefits as well as
retirement benefits
 Understand the provisional tax calculation and the persons liable for provisional tax
returns and payments
Assessment Commented [AC3]: Let them know what is expected of

them.
You will be required to complete both formative and summative assessment activities.
Formative assessment: Commented [AC4]: Heading 4

These are activities you will do as you make your way through the course. They are designed to help
you learn about the concepts, theories and models in this module. This could be through case studies,
practice activities, self-check activities, study group / online forum discussions and think points.
You may also be asked to blog / post your responses online.
Summative assessment:
You are required to do one test and one assignment. For online students, the tests are made up of the
revision questions at the end of each unit. A minimum of five revision questions will be selected to
contribute towards your test mark.
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Mark allocation
The marks are derived as follows for this module:
Test 20%
Assignment 20%
Exam 60%
TOTAL 100%
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Pacer
The table below will give you an indication of which topics you need to include from the module pacer.
Week Topics
1 Gross income
2 Gross income – special inclusions
3 Exempt income
4 The general deduction formula
5 Income and expenses of individuals
6 Income and expenses of individuals
7 The tax returns
8 Fringe benefits and allowances
9 Retirement benefits
10 Prepaid tax
Planning Your Studies

You will have registered for one or more modules in the qualification and it is important that you plan
your time. To do this look at the modules and credits and units in each module.
Create a time table / diagram that will allow you to get through the course content, complete the
activities, and prepare for your tests, assignments and exams. Use the information provided above
(How long will it take me?) to do this.
What equipment will I need?  Access to a personal computer and internet. Commented [CvG5]: To be customised per module
This module will take you approximately 100 hours to complete. The following table will give you an
indication of how long each module will take you.
Unit Number Hours

1 6
2 6
3 12
4 8
5 20
6 10
7 16
8 8
9 14
4. PRESCRIBED READING Commented [AC6]: These resources cover all units in the
guide, not only the one I chose as an example.
At the end of a guide – all resources used (all units) should

Prescribed Book be copied and pasted into this section
i. Silke: South African Income Tax 2018
Stiglingh M; Koekemoer AD; Van Zyl L; Wilcocks JS; De Swardt RD; 2018
LexisNexis - ISBN: 9780409124910
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ii. Graded Questions on Income Tax in South Africa Mitchell,
K.I. & Mitchell, L.D. 2018
LexisNexis - ISBN: 978040912897
Recommended Articles
 http://www.sataxguide.co.za/residence-basis-of-taxation-in-south-africa/
 http://taxstudents.co.za/wp-content/uploads/bsk-pdf-anager/30_GROSS_INCOME_NOTES..PDF
 http://www.saflii.org/za/cases/ZATC/2007/1.pdf
 https://www.patc.co.za/what-is-non-taxable-or-exempt-
income/#:~:text=%E2%80%9CNon%2DTaxable%20Income%E2%80%9D%20is,from%20a%20Sou
th%20African%20source
 http://taxstudents.co.za/general-deduction-formula-section-11a/
Recommended Multimedia
Websites:
 http://taxstudents.co.za/general-deduction-formula-section-11a/
Video / Audio
 https://www.youtube.com/watch?v=NLqNGFb6puk&list=UUGklvmFBw-4tdoU771txUBw
 https://www.youtube.com/watch?v=_aGuPgIiELQ
 https://www.youtube.com/watch?v=N3qZ6SUi4EU
 https://www.youtube.com/watch?v=u6SH2AKctdU
 https://www.youtube.com/watch?v=CWfjYf7HCsc&list=UUGklvmFBw-4tdoU771txUBw
 https://www.youtube.com/watch?v=V9p6UEc9UrQ&list=UUGklvmFBw-4tdoU771txUBw
 https://www.youtube.com/watch?v=wV8ZDhAQaD0&list=UUGklvmFBw-4tdoU771txUBw
 https://www.youtube.com/watch?v=zubdwlrnVWs&list=UUGklvmFBw-4tdoU

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5. MODULE CONTENT
You are now ready to start your module! The following diagram indicates the topics that will be covered.
These topics will guide you in achieving the outcomes and the purpose of this module.
Please make sure you complete the assessments as they are specifically designed to build you in your
learning.
Commented [AC7]: Update accordingly

Unit 1: Gross income
Unit 2: Gross Income - Special inclusions
Unit 3: Exempt income
Unit 4: The general deduction formula
Unit 5: Income and expenses of individuals
Unit 6: The tax returns
Unit 7: Fringe benefits and allowances
Unit 8: Retirement benefits
Unit 9: Prepaid tax
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STUDY UNIT 1: GROSS INCOME

The purpose of this module is to determine the gross income of a tax payer.
Purpose
By the end of this unit, you will be able to:
 Determine whether an amount has to be included in gross income
after analysing each component of the gross income definition
Learning
 Establish what Gross income is in terms of the Income Tax Act
Outcomes
 State the requirements of gross income for residents
 Calculate a person’s gross income
It will take you 6 hours to make your way through this unit.
Time
Gross Total income before taking any exemptions,
income – deductions or allowances into account. This includes
Important terms income other than cash, such as an asset given or
and definitions service rendered in exchange for the sale of goods.
Income Tax – A tax imposed on all taxpayers; calculated on the taxable

income of both natural and legal persons.
Taxable The amount you will be taxed on once exempt income and
income – allowable deductions have been deducted from your gross
income
5.1.1. Introduction
Gross income, in relation to any year or period of assessment, means
“in the case of a resident, the total amount, in cash or otherwise, received by or accrued to or in favour
of such resident, during such year or period of assessment, excluding receipts or accruals of a capital
nature”. (SARS, Income Tax Act 58, 1962)
Since not all of these terms in the definition are defined in the Act, each term is examined to determine
its meaning for taxation purposes.
Once you have studied this section, you should be able to explain the determination of gross income.
In this unit, we will cover:
 Amounts in cash or otherwise;

 Received by or accrued to;
 Year or period of assessment;
 Receipts and accruals of a capital nature.
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5.1.2. Components of gross income.
There are three parts to the definition of gross income:

 The first deals with “residents”.
 The second deals with “non-residents”.
 The third deals with special inclusions
There is need to determine whether an individual is a resident or not because

 Residents are taxed on their worldwide income while
 non-residents are only taxed on income received from a South African source
A natural Peron is a resident of the Republic if he is ordinarily resident in the Republic or if he complies
with the physical presence test. A person other than a natural person will be a resident of the Republic if
it is incorporated, established or formed in the Republic or has its place of effective management in the
Republic.
Hint Questions on gross income will usually be discussion-type questions. If necessary, you will have to
discuss each component of the definition of gross income, in order to establish whether an amount
constitutes gross income or not.
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 Table 1-1: The basic formula for the calculation of income tax
Gross income xxx
Less: Exempt income (xxx)
Income xxx
Less: Deductions (xxx)
Add : Taxable portion of capital gains xxx
Taxable Income xxx
Taxable liability as per tax table xxx
Less: Rebate (xxx)
Net normal tax payable xxx
Less: Pre-paid taxes (xxx)
Net tax due/(refundable) xxx

(M, 2018)
The table above shows the basic framework of determining the normal tax payable by a taxpayer who is
a natural person, as it includes the deduction of applicable rebates.
Illustration
Lee Ross a 27-year-old taxpayer has supplied you with the following information with regards to the tax
year ended 28 February 2015:
Gross income R188 000
Exempt Income (dividends received) 13 000
Allowable deductions (pension fund contributions) 6 500
Taxable portion of capital gain from the sale of a second dwelling 20 000
Employees’ tax paid to SARS during the year 19 800
The current year of assessment is 2018 therefore refer to the 2018 tax tables and applicable rebate
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Solution
The basic formula for the calculation of the income tax liability of Lee Ross’s tax liability/refund for the year is as
follows:
Table 1-2: Solution using Gross Income framework
Less: Exempt income (dividends receive) (13 000)
Income 175 000
Less: Allowable deductions (pension fund contributions) (6500)
Add: Taxable portion of capital gain (sale of a second dwelling) 20 000
Taxable Income 188 500
Tax liability as per tax tables
R31419 + [25% x (R188 500 – R174 550)] 34 907
Less: Primary Rebate (12 726)
Less: Employees’ tax paid to SARS during the year (19 800)
Tax due 2 381
5.1.3. Components of Gross Income definition
The components of gross income can now be explained

 The total amount,
 In cash or otherwise
 Received by or accrued to, or in favour of a person
 From anywhere, in the case of a resident
 From a South African source in the case of a non-resident
 Other than receipts or accruals of a capital nature
5.1.4. The Total amount
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The element of total amount in the definition of gross income implies that the amount must include not only money,
but the value of every form of property earned by the taxpayer, whether corporeal or incorporeal which has a
money value.
• There must be an amount – Need not be cash.
• If you receive something which has a value – there is an amount.
• Wider meaning: includes money and value of assets with a monetary value.
• There must be an amount received or accrued before gross income arises.
• In CIR v People Stores (Walvis Bay (Pty) Ltd (1990 AD), one of the judges, Hefer J, accepted the following
statement made by Watermeyer J in Lategan v CIR (1926 CPD):
“In my opinion, the word ‘amount’ must be given a wider meaning and must include not only money, but the value
of every form of property earned by the taxpayer, whether corporeal or incorporeal which has a money value…’’
• Therefore, if a taxpayer receives something which is an asset and this asset has a value, then there is an
amount for the purposes of the gross income definition.
• You must be able to determine an actual amount received or accrued before there can be any question
of gross income. The tax is to be assessed on all receipts or accruals having a money value. If it is something
that has no value in money or cannot be turned into money, it cannot fall into gross income.
• Even the value of any property received must be included in gross income. This was established in the
Lategan v CIR case where the court held that the term “amount” included not only money, but also the
value of every form of property the taxpayer earned.
5.1.5. In cash or otherwise
In cash or otherwise implies that even if the total amount may not have been received in cash, but has accrued to
the tax payer, or has been given in the form of another asset other than cash.
• Cash: Money
• Otherwise: Barter/asset exchange transactions
• Assets: Tangible or intangible e.g. rights where they have a monetary value.
• Non-cash items must be valued at the date of receipt or accrual.
• If the “asset” received can be valued (usually at market value) and can be converted into money, it is gross
income.
 Example – In cash or Otherwise
Mr C, an architect designed all the houses in a golf course development as well as the golf course and the golf
clubhouse, in return for being given one of the houses once it was built.
Assume that the accrual takes place when Mr C receives transfer of the house and that the value of the house at
the date of transfer is R2,8 million.
What must be included in Mr C ‘s gross income?
• Mr C’s gross income is R2,8 million.
• As long as the amount (being a tangible asset/intangible right) has an ascertainable money value which
can be objectively determined, it will fall into gross income.
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5.1.6. Received by or accrued to
This element deals with the timing of the benefit in the hands of the tax payer and the liability for tax purposes.
• Timing issue: which Tax year does the income fall under.
• Amount to be included in Gross income at the earlier of when it is received or when it accrues.
• Receipt:
– “Received” means received on your own behalf and for own benefit (not received on behalf of
somebody else)
– Theft: stolen money….not a receipt (not gross income)
– Fraud: fraudulently overcharge customers is a receipt (gross income)
– Amounts received as a “loan” is not a receipt (obligation to repay it)
– Receipts in advance – Receipt
– Deposits received general principle = it constitutes gross income, e.g. - advance on selling price,
security deposit, non-refundable deposits.
i) Received in advance Example - Receipt in advance
Mr M entered into a contract with Mr P whereby Mr M was to remove the unknown plants from Mr P’s garden.
The agreement was that Mr M would be paid R6 500 when he started the work, and R6 500 when the work was
completed. Mr M was paid the first amount of R6 500 on 25 February 2016, and the balance was paid when work
was completed on 5 March 2016.
• What is Mr M’s gross income for the 2018 year of assessment?
• What happens to the second amount of R6 500? Is this amount included in Mr M’ s

gross income for the 2018 year of assessment?
Amount of R6 500 received in advance by Mr M will be included in his gross income.

The second amount of R6 500 had not been received, nor had it accrued at 29 February 2016 ( the end of Mr M’s
2016 year of assessment/tax year) as the work had not yet been completed. It therefore only becomes ‘gross income’
in the 2017 tax year of assessment.
The reason that the amount received in advance is gross income in Mr M’s hands in the 2016 year of assessment is
that he has no obligation to repay it. It is not a loan to him. It is a prepayment and has an obligation to do the work.
ii)Received by or accrued to Accrual:
• Takes place when the taxpayer becomes unconditionally entitled to the amount.
• Becomes payable and due to payment.
• Not contingent on a future event.
• Settlement discounts – seller not entitled to full amount until the discount period has lapsed.
• Notional amounts are not gross income (e.g. interest that could have been earned on available funds/
money deposited)
 Example of Accrual
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• Note: In both cases, the taxpayers have February year-end.

• (1) The sale and delivery of goods by a person in terms of a credit sale takes place on 1 February 2016
with payment to be made on 30 March 2016.
• Because a valid contract of sale has been concluded on 1 February 2016 and delivery has taken place, the
seller becomes entitled to the payment at that date. Accrual, therefore takes place on 1 February 2016
and not on 30 March 2016. The amount will be taxed in the year ended 29 February 2016.
• (2) The sale of goods on credit on 1 February 2016 with delivery to take place on 1 March 2016 and
payment on 30 March 2016. The agreement is that the seller has to perform first (he must deliver the
goods before he becomes entitled to the selling price.
• Here the seller does not become entitled to the purchase consideration until delivery takes place on 1
March 2016.
• Accrual date will, therefore, be 1 March 2016 and the amount will be included in the taxpayer’s tax return
for the year ended 28 February 2017
 The year of assessment

You could rephrase and say usually from 1 March every year to 28/29 February of the following year
 Anti-avoidance provision:
The amount received for services rendered is deemed to have been received by the person who rendered the
service.
5.1.7. Residence
SA has a ‘residence’ basis of tax (as from 2001) vs a ‘source ‘basis. South African residents are taxed on their
worldwide income irrespective of source, whereas non-South African residents are taxed on income from a sources
in the Republic of South Africa.
• Definition of ‘resident’:
– A person who is “ordinarily resident” in SA settled/enduring connection, true home or
– A person who has spent a certain number of days in SA (physical presence) more than 91 days in
total in the current year of assessment and prior 4 years AND more than 915 days in total during
past five years (the 5th year being the current year of assessment
• A juristic/legal person is a resident if: incorporated, established, and formed in SA or if it has its place of
effective management in SA.
5.1.8. Non-residence (source)
A person who does not pass the residence test is referred to as a non-resident for tax purposes.
• Non-residents are taxed on the ‘source’ basis in SA.
• If gross income is earned in SA, the non-resident will be taxed only on it.
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5.1.9. Capital
Gross income does not include receipts or accruals of a capital nature.

• …. unless there is a specific inclusion (Unit 2)
• If a capital receipt or accrual is not dealt with under gross income, it is dealt with under Capital Gains Tax
(CGT)
• General rules to consider:
– All income can be classified as either revenue or capital
– Recurring amounts every month/year = revenue
– Revenue asset (trading stock) vs Capital asset (holiday house) determines nature of income.
– Tree (capital) and its fruit (revenue/income)
– Purpose/intention at the time of purchase can determine capital/revenue nature
– Frequency
– Nature of business
– Gifts/inheritance/donations
– Gambling
The onus of proof for an amount being capital or revenue lies with the taxpayer.
 Example – Capital Receipt
Mrs Black purchased listed shares in a foreign company for R10 000 on 1 October 2018. on 31 January 2018 she
sells the shares for R56 000.
(i) If the sale gives rise to a receipt or accrual which is not of a capital nature, the full selling price of R56 000
falls into Mrs Black’s gross income. She will be allowed a deduction of the cost of the shares of R10 000
and will be taxed on R46 000.
(ii) If the sale gives rise to a receipt or accrual which is of a capital nature, the R56 000 will not be included in
gross income.
However, in terms of the provisions of the Eighth Schedule a portion of the Capital gain will be included in Mrs Black’s
taxable income calculated as follows:
Proceeds 56 000
Base Cost (10 000)
Capital gain 46 000
Less: Annual exclusion (30 000)
Capital gain R16 000
Include 40% in Mrs Black’s taxable income
R16 000 *40% R5 328
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5.1.10. Summary
In this study unit, gross income was defined in detail and elements of the definition were explained. It has to be
noted that the key elements of residence and non-residence must be understood as they form the basis upon which
gross income can be determined.
 Further illustrations
Example
Bobby Jay (22 years old) decided to ‘take a break’ after completing his studies to travel and see the world. He
returned to South Africa in May 2014. He was employed by DD Manufactures on 1 July 014 at a salary of R9 500 per
month up to December 2014 after which he received an increase of R300 per month. This was his only income and
he did not contribute to any funds which would constitute tax-deductible expenses. During the year his employer
paid an amount of R2 860 to SARS in respect of employee’ tax for Bobby Jay.
The calculation of his tax liability for the tax year ended 28 February 2018 is as follows:
Taxable income for the period 1 July 2014 to 8 February 2015 = (R9500 x 6) + (R9800 x 2) = R76 600
His total income for the year of assessment = R76 600
Thus his tax payable according to the tax tables (R76 600 x 18%) = R13 788
Deduct the primary rebate only as he is under the age of 65 (R13 788 – R12 726) = R1062. This represents his tax
liability for the year
Deduct the amount of income tax already paid from the tax liability (R1 062 – R2 860) = R1 798, refundable to
bobby jay
Read pages 27 - 58 in your prescribed textbook.
• Remember to use Harvard referencing style.
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Caselet
COMMISSIONER FOR INLAND REVENUE v BUTCHER BROS (PTY) LTD 13
SATC 21 (A) - 1944
Importance Classification: Very important.
It analyses the meaning of an amount. It determines the method to be used
to value an asset received other than in cash (where there is no employer/
employee relationship) and places the onus on the Commissioner, in the first
instance, to establish that there is an amount. It is only after an amount is
established by the Commissioner that the onus reverts to the taxpayer in
terms of section 102 of the Tax Administration Act (previously section 82 of
the Income Tax Act). It is also authority for the proposition that a lease
premium is a consideration passing from a lessee to a lessor, whether in cash
or otherwise, distinct from and in addition to, or in lieu of, rent.
Facts: The taxpayer owned land which was leased to a cinema company for a
period of 50 years with a further option for another period of 49 years. In
terms of the lease, the lessee was obliged to erect a cinema building, at its
own expense, on the property and on the termination of it or any renewal of
it, all buildings and improvements on the land let would become the absolute
property of the lessors without their having to pay or being liable to the
lessees for any compensation in respect of the buildings or improvements
made during the course of the lease. There was no special provision in the
Income Tax Act at that time (but now covered by paragraph (h) of the
definition of “gross income”) whereby an agreement of this nature could be
deemed to create income in the hands of the lessor. The Commissioner for
Inland Revenue considered (and had case law authority to support his view)
that the amount expended on the buildings was an amount received or
accrued as a premium or like consideration in respect of a grant of a right for
the use or occupation of premises and therefore was entitled to include the
amount so expended in the taxable income of the taxpayer. The defence was
raised, however, that the taxpayer would obtain no benefit from the
improvements until the expiry of the lease in 50 years‟ time and, since the
buildings may have fallen into disrepair by that time or even demolished, the
valuing of the buildings was impossible. Thus there could be no ascertainable
value accruing to the taxpayer.
Issue: Could the buildings have an ascertainable value in 50 years‟ time?
Held: The buildings which the lessee company had undertaken to erect,
without compensation, would constitute a consideration in the nature of a
premium but only if such right at the date of its receipt had an ascertainable
money value. The rights, which had accrued to the lessor company could not
be regarded as constituting an amount received by or accrued to that
company in the year the buildings were completed as they had not, at that
date, any ascertainable money value which could be included by the
Commissioner in an assessment for that year.
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The different components that make up the gross income definition.
Self-Assessment
Let’s see what you have learned so far by taking this short self-assessment.
Question
You are the tax official at a small accounting firm. You received the following
queries from clients, and you must indicate whether they are correct or not.
 REQUIRED:
Indicate whether the following statements from your clients are true or false
according to the gross income definition (s1 of the Income Tax Act). Provide
reasons if a statement is deemed false.
a) If a taxpayer keeps the money from deposits received outside of his
control in a separate trust account, the deposits are not taxable.
b) Dividends will usually accrue on the date they are paid.
c) The source of income is the place where the capital is employed
and not where the “brain” of the company is located.
d) A natural person is ordinarily resident where he or she normally
resides, apart from temporary and occasional absences.
e) If a farmer exchanges produce he has grown on his farm for a
plough at his local cooperative, the value of the plough will not be
included in his gross income.
f) The onus of establishing an amount to be included in gross
income lies with the taxpayer
g) Amounts received from illegal business activities will be included
in gross income.
h) The concept of “accrued to” means due and payable.
5.1.11. Revision Questions Commented [AC8]: For the lecturer and student – please
remember to prepare an answer sheet for all questions in
the module.
Answer the compulsory revision questions below.
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Question One
Mr X, an auditor and South African resident, sold his motor car which he had used for private purposes
for several years. He purchased the vehicle for R100, 000 in 1998 and sold and delivered it to the buyer
for R125, 000 cash in the current year of assessment. The R125, 000 is regarded as a receipt of a capital
nature.
Should the proceeds of R125, 000 be included in Mr. X’s gross income for the current year of
assessment? Justify your answer.
Question two
Suppose that Mr. X, in the same year of assessment, also received rent in the amount of R 100 000 in
respect of a flat that he owns in New York, (Rent usually constitutes a receipt of an Income nature)
Should the rent be included in Mr. X’s gross income for the current year of assessment?
Question three
The following are three case studies:
 Linda Day took her annual leave during February 2015 and only received her salary for February
when she returned to work 12 March 2015
 Robert Long’s employer was experiencing cash flow problems and, instead of an annual bonus,
gave him a computer from trading stock
 Ruth sing is employed as a salesperson and received a cash award from her employer after
being named ‘salesperson of the year’. This is an annual award made by the employer to the
employee who contributed most to the growth of the company.
Discuss the three case studies and determine whether the taxpayers (who are all residents of SA) will be
taxed on the money or goods and if so, when.
Question four
With regard to gross income:
 Lucinda Moore is a racehorse trainer who sometimes bets on the horses that she trains.
One of these horses won the ‘2014 Durban July’ and Lucinda won a total amount of R350 000 because
of the R3500 bet that she had placed on the horse. She also received a bonus of R50 000 from the
owner because the horse won the race
 Dean Crosby, a civil engineer, carried on business as an equal partner in an estate agency in Durban
until 1 March 2017, when he sold his share in the partnership for R300 000, R100 000 representing
his share of the partnership trading debtors, R60 000 his share of the furniture and fittings of the
business and R140 000 representing goodwill. The amount of R160 000 representing the payment
for the debtors and fixed assets was paid out in cash. Dean agreed to accept an amount of R7 000
per annum for life as payment for the goodwill.
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 On 1 April 2017, he accepted employment in a large civil engineering company in Johannesburg.

On 1 May 2017, he purchased a plot of land in Bryanston on which he wished to erect a house for
himself and his family. He was forced to acquire a far larger property than he required, as the seller
was unwilling to dispose of only part of the property. Dean therefore immediately advertised and
sold the excess portion of the property for R500 000 on 30 June 2017.
 Marty Hope holds deposits amounting to R10 000 on flats in a block of flats in Bloemfontein which
he erected during the previous year of assessment and which he has let during the current year of
assessment. These deposits are refundable to tenants who vacate the premises, provided the
premises are in the same condition as when they obtained the right to lease them and they have
occupied the premises for at least a contractual period of lease of six months. He has banked the
R10 000 in a separate bank account and will not use these funds, except for the repayment of
deposits to qualifying tenants.
 Bob Feldmann requires a deposit of 5% on orders placed by his customers for fresh eggs and farm
chickens. Should the customer cancel the order, the customer forfeits the deposit. During February
of the current year of assessment, he accepted deposits amounting to R5 000 for deliveries to be
made in March of the following year of assessment.
 Lenny Diver is a diving instructor in a local scuba-diving club. While diving, he discovered the
undamaged wreck of a ship in fairly shallow water off the coast of East London. The ship sank two
hundred years ago, carrying a cargo of China. He realised that this cargo of antique china would
now be very valuable and proceeded to embark on a salvage operation, hiring a boat, equipment
and assistants for this purpose. He received an advance payment of R1 million for the treasure
from a museum in London, to which he granted the sole right to purchase the entire cargo. By the
end of the year of assessment, he had salvaged china with a total market value of R1,3 million.
 Buster Bloom was contracted as a diver by an oil company and was busy repairing a pipeline of the
South African coast of the South African coast when he came upon a chest of gold coins which was
lost when a ship sank in that area in 1763. He sold the coins to a museum for R2 000 000 on 1
August 2014. Buster is a South African resident.
 Betty Best is a South African citizen who inherited a house from her grandmother. As her work is in
Johannesburg and the house is n Nelspruit, she decided to sell the house and was fortunate to find
a buyer who paid her R900 000 for the house (R200 000 more than the estimated value according
to the valuation for her grandmother’s estate). The house was sold on 1 May 2014, she invested
the money and received R18 000 in interest for the year ended 28 February 2015.
Do you think that the income received by these persons will form part of their gross income for the year
ended 28 February 2015? Give reasons for your inclusion or exclusion of these amounts in gross income.
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STUDY UNIT 2: GROSS INCOME – SPECIAL INCLUSIONS

This learning unit outlines the special inclusions that form part of the gross
Purpose
income of tax payers.
 List all the categories of receipts and accruals that are specially
included in gross income
Learning
Outcomes  Demonstrate your ability to discuss whether a particular receipt or
accrual should be specially included in gross income, even if it does
not meet the “not of a capital nature” requirement of the general
definition
Time It will take you 6 hours to make your way through this unit.
Rebate – An amount deducted from a taken off the tax after your
tax rate has been worked out. There are rebates for
various kinds of businesses, types of taxes, business
activities and so on. It’s important to find out if your
business qualifies for any rebates, as this can decrease the
Important terms
amount of tax you have to pay to the Receiver.
and definitions
Remuneration Money paid to an employee, including a salary or wages,
– leave pay, travel allowances, overtime pay, bonuses,
gratuities, commissions, pensions, annuities, any amounts
paid for services rendered or variation of office,
retirement lump sums and any fringe benefits.
5.2.1. Introduction
The general definition of “gross income” is contained in section 1 of the Income Tax Act. That definition
is extended by the addition of paragraphs (a) to (n). These are the so-called “special inclusion”
provisions. These provisions are also dealt with in this learning unit. They involve certain receipts and
accruals that do not fall within the scope of the general definition of “gross income” (usually because
they are capital in nature) but are nevertheless specifically included. In other words, even though these
amounts may be capital in nature, they still must be included in gross income.
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Once you have studied this section, you should be able to explain the specific components included in
gross income.
 Annuities
 Alimony payments
 Restraint of trade payments
 Fund benefits;
 Lease premiums;
 Leasehold improvements
 Fringe benefits
5.2.2. Special Inclusion – Gross Income:
Generally, the special inclusions provide which capital receipts have to be included in gross income.
• The question of source is not really relevant, because SA residents pay tax on income from a
non-SA African source.
• Paragraph (n) of the gross income definition deems recoupments arising under section 8(4) to
be a SA source.
Special Inclusions (a) to (n)
(a) Annuities.
(b) Alimony or maintenance receipts.
(c) Payments received for services rendered.
(d) Restraint of trade payments
(e) Lease Premiums.
(f) Know-how payments accruing.
(g) Leasehold improvements
(h) Fringe benefits
(i) Key-man insurance policies – amounts received by employer policyholders
(j) Recoupments and other inclusions

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5.2.3. Annuities – Paragraph (a):
Paragraph (a) of the gross Income definition provides that all annuities, including capital annuities are
included in gross income.
Annuity is not defined in the Act, but special court case, ITC 761 (1952), the court outlined what it
considered to be the important characteristics of an annuity, which are:
• It provides for a fixed annual payment (even if it is divided into instalments)
• The payment is repetitive
• And is chargeable against some person, i.e. there is an obligation to pay. This means that
voluntary payments even if they are repetitive do not constitute an annuity.
• A pension is an annuity, for example, the court held that an annuity had two essential
characteristics:
(a) It was an annual (or periodical) payment; and
(b) The beneficiary had the right to receive more than one such payment.
Although one of the requirements is that an annuity must be a fixed amount, this does not mean that
the amount can never change
For example, if a parent provides for an amount of money to be paid to his child annually over a period
of time and further provides that the amount is to be increased by 20% per annum, such an amount is
an annuity.
A debt or a capital amount payable in instalments is not an annuity. So if a business is sold for a fixed
sum of, say R1 000 000, payable over 10 years at a rate of R100 000 per annum, the contract is one of
sale and not an annuity contract.
Example
Annuity vs Capital payable in instalments
Mr X sold his business for R3 million on 1 March 2015, plus an amount of R10 000 per month for 10
years (starting) in March 2015). If he died during the 10-year period, the monthly payment would stop
at the date of his death. The amount of R3 million was not payable up front but had to be paid to Mr X
at a rate of R50 000 per month until the full amount was paid.
Calculate how much of the above would fall into Mr X’s gross income for the 2016 year of assessment.
Solution:
Gross income, para (a) annuity: R10 000 x12 = R120 000.
The R50 000 per month is not an annuity. It is a Repayment of the capital sum of R3 million which has to
be repaid in full. The R10 000 per month does not make up a capital sum, because if Mr X lives 10 years,
he will have received R1,2 million under this part of the agreement, but if he only lives for 5 years, he
will receive R600 000.
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5.2.4. Alimony or Maintenance – Paragraph (b)
Paragraph (b) of the gross income definition includes in gross income of a spouse or former spouse:
Although the amount is included in the gross income of the ex-spouse who receives it, where the order
or agreement is after 21 March 1962, the amount is exempt in the hands of the receiving spouse in
terms of section 10(1)(u) of the Income Tax Act. The paying spouse does not receive any tax deduction
of the amount
The Income Tax Act states that where maintenance is paid by a Pension Fund to a member’s ex-spouse,
the member is deemed to have received the amount. Therefore, the member is taxed on the
maintenance paid to his ex-spouse. The ex-spouse receives is tax free. The pension fund deducts the
amount from the reserves it holds for that member
5.2.5. Services Rendered – Paragraph (c)
Services – Para (c) of the gross income definition provides that all amounts received in respect or to be
rendered, or in respect of (or by virtue of) employment, whether such amounts are capital or revenue
in nature, are included in gross income.
Example
Prize
Mr G, a sole proprietor runs a business called ABC Insurance Brokers, selling insurance policies for a
number of insurance companies. As he sold the most insurance policies for XYZ Insurance Company, it
gave Mr G a prize of R50 000 in cash, and a gold watch worth R25 000.
 The total prize (of R75 000) is taxable in Mr G’s hands even though he does not work for XYZ. He
received it because of a service rendered (he sold the most insurance policies)
 Amounts received as compensation for services rendered would normally fall into gross income
in terms of the general definition.
 However, in certain instances, namely where voluntary awards are made, it may have
contended that the receipt is of a capital nature and therefore falls outside the ambit of the
gross income.
Para (c) was introduced to expand on the gross income definition to overcome this type of problem.
 The taxpayer had received a reward of R200 000 for providing the police with information
regarding illegal dealings in diamonds. The special court held that the payment was not made
for services rendered to the police and therefore did not fall into gross income definition.
Examples of amounts falling into para (c)
 A voluntary bonus, Christmas bonus, performance bonus etc.
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 Tips received by waiters, etc

 Rewards for providing the police with information.
5.2.6. Restraint of Trade – Para (cA) and (cB)
Definition – is not a payment for service rendered but, rather a payment for an undertaking not to
render services (in competition with the payer)
Restraint of trade receipts are of capital nature, but para (cA) of the gross income definition includes
certain restraint receipts to be included in gross income, e.g. if they are received by any of the
following:
 A person who is or was a labour broker without an exemption certificate
 An entity which is or was a personal service provider.
 Where the recipient is taxed on the restraint of trade, section 11 (cA) allows the payer a tax
deduction over the period of the restraint.
 If the period of restraint is less than three years, the deduction is spread over three years. To
be allowed a deduction, the payer must incur the expense in the course of his, her or its trade.
Para (cB) is added to the special inclusions in gross income from 1 March 2018.
The para provides that a restraint of trade receipt is included in the gross income of a natural person if
the restraint has been imposed in respect of or by virtue of either of the following:
 Employment or holding of office (e.g. director)
 Any past or future employment or holding of an office.
Therefore, if a natural person sells a business and a restraint is put on him or her by the purchaser, the
restraint is taxed as a capital receipt, not as a revenue receipt. This is because it does not relate to
employment or the holding of office.
5.2.7. Services - Compensation for loss of office
Paragraph (d) of the definition of gross income requires the inclusion in gross income of
Any amount, including a voluntary award received or accrued in a year or period of assessment
In respect of the relinquishment, termination, loss, repudiation, cancellation or variation of an office or

employment or of any appointment or right or claim to be appointed to an office or employment.
Amounts that meet the requirements of the definition of severance benefits will also be included in
gross income in terms of par (d).
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5.2.8. Fund benefits
Paragraph (e) of the definition of gross income brings a retirement fund lump sum benefit and a
retirement fund lump sum withdrawal benefit into a person’s gross income. The taxable portion of
these lump sum benefits is included in gross income and not the gross lump sum benefit received.
5.2.9. Services - Commutation of amounts due
Paragraph (f) includes any amount received or accrued in commutation of amounts due under a
contract of employment or service in gross income. Commutation means substitution. Paragraph (f) has
been applied to the following amounts;
 A lump sum payment received by an employee for the breach of a contract of employment by
his employer, based on the unexpired portion of the service agreement
 A lump sum payment received from an employer on the termination of services in lieu of
notice required to be given in terms of the service agreement
 A lump sum payment to an employee in terms of the service agreement on retirement, being
in lieu of accumulated leave.
5.2.10. Lease Premium – Paragraph (g)
A lease premium is a payment over and above or instead of rental. Para (g) of the gross income
definition includes in gross income a (lease) premium (or consideration in the nature of a premium)
received by or accrued to the taxpayer in respect of the giving of use or occupation, or the right of use
or occupation of certain assets (tangible and intangible) to a lessee.
Example
Lease premium
Mr O enters into an agreement to lease a building to Mr E for an up-front lump sum (lease premium) of
R800 000, plus a rental of R35 000 per month. The lease commences on 1 June 2015 at which time the
lease premium is paid. On 31 December 2018, Mr E entered into an agreement with Mr F in terms of
which he ceded his rights as lessee under the lease to Mr F. This was done with the permission of Mr O,
so that Mr F then had to pay the monthly rental directly to Mr O. As the market rental for the building
was R55 000 per month and as the lease still had a number of years to run, Mr F agreed to pay R900
000 to Mr E for the cession of the lease. As Mr E had already paid the January rental to Mr O (and
claimed a tax deduction), Mr F refunded the Jannuary rental to Mr E.
 Tax Position 2018 Mr O
Gross Income – Lease premium R 800 000
Rental (35 000*9) R 315 000
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 R1 115 000
Mr E
Gross Income – Refund/January rental (recoupment) R35 000
Compensation for cession of lease
Note: The compensation is capital as Mr E is giving up a right which is part of his income – earning
structure (see study unit 5). It is not a lease premium and it is not paid by the lessee to a lessor. Had Mr
E sub-let the property to Mr F (under a separate lease agreement) and was then paid the R900 000, the
amount would be a lease premium as Mr E would be a lessor in relation to Mr F. Mr F would pay rental
to Mr E under sub-lease and Mr E would then in turn have paid rental to Mr O under the head lease.
The facts in this example were that Mr E stepped out of the agreement so that the lease could be
directly between Mr F and Mr O. Mr E never became a lessor. This means that the compensation
received by Mr E is not a lease premium.
A bullet rental (i.e. large rental as the start of a lease) is not a lease premium. It is not in addition to or
instead of rental. It is rental in itself and it is therefore revenue and it is included in the gross income of
the lessor. A deduction for lease premiums paid is given to the lessee.
5.2.11. Know-How Payments accrued to a Person – Paragraph

(gA)
Para (gA) of the gross income definition brings know-how payments accruing to the taxpayer into gross
income. These amounts received for the imparting or the undertaking to impart any scientific,
technical, industrial or commercial knowledge or information, or for the rendering of any assistance or
services in connection with the application or utilization of such knowledge or information. The sale of a
copyright would give rise to a capital receipt where the seller held it as a capital asset.
5.2.12. Leasehold Improvements – Paragraph (h)
Definition: is an improvement which a lessee makes to property which he has leased from the lessor.
The property does not belong to the lessee, but as he has the use of it, he is willing to spend money on
improving it, e.g. by erecting a building. From the lessor’s point of view, the value of the improvements
is included in his gross income if the lease stipulates that the lessee must make the improvements. If
the improvements are made voluntarily by the lessee (i.e. not stipulating in the lease), the lessor is not
taxed on the value of the improvements.
Example
Leasehold improvements
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GH (Pty) Ltd (the lessor) entered into a lease agreement with OP (Pty) Ltd (the lessee). In terms of the
lease agreement OP was to build a fuel station complying with the requirements in a set of plans and
instructions from the lessor. The reasonable cost of building the filling station as set out in the plans
was R8 million.
OP (Pty) Ltd decided that it would be a good idea to build a supermarket as part and parcel of the filling
station and the lessor gave a permission to do so. The cost of the final improvements (filing station and
supermarket) was R12 million.
The gross income of GH (Pty) Ltd is as follows:
Reasonable value of improvements per the obligation in the lease is R8 million
5.2.13. Fringe benefits – Paragraph (i)
The above para (i) of the gross income definition includes the value of Fringe benefits received by an
employee or director from his/her employer in gross income. The value is the ‘cash equivalent’ of the
fringe benefit as determined under the provisions of the 7th Schedule. An employee is taxed on the
value of the fringe benefits he receives.
5.2.14. Proceeds from the disposal of certain assets
The proceeds from the disposal by a taxpayer of fixed capital assets are capital in nature and therefore,
in the absence of a special inclusion in gross income, are not included in gross income. However, a
special provision includes these proceeds in gross income if certain requirements are met. Paragraph
(jA) includes in the gross income of a taxpayer:
 Any amount received by or accrued to him during the year of assessment from the disposal of
any asset;
 Manufactured, produced, constructed or assembled by him;
 That is similar to any other asset manufactured, produced, constructed or assembled by him
for purposes of manufacture, sale or exchange.
Example
X (Pty) Ltd purchased a motor vehicle on 1 March 2017 for an amount of R 150 000.X was entitled to a
S11e allowance of 20% on the Motor vehicle. The Motor vehicle was sold on 31 August 2014 for an
amount of R 160 000.
Calculate the tax value of the motor vehicle as follows;
Cost 150 000
Less; S11 (e) wear and tear
2014: R150 000×20% (30 000)
32
2015: R 150 000×20%×6/12mths (15 000)
Tax Value 105 000
Calculate the recoupment for the year ended 28 February 2018as Follows
Lower of selling price and cost price 150 000
Less; Tax value 105 000
Recoupment 45 000
Note the recoupment is limited to the deductions previously allowed. If the selling price were less than
the original cost then the recoupment would be less than deductions, e.g. if the selling price of the car
was R120 000, the recoupment would be as follows;
Lower of selling price and cost price 120 000
Less; Tax value (105 000)
15 000
Deferment of recoupment-s8 (4) (e)
If an asset is disposed of voluntarily e.g.by way of theft or destruction, a taxpayer (who uses the full
proceeds to purchase a replacement asset) may elect that the recoupment on the disposal of the
original asset is not included in his income in the year in which it arises. In terms of the amended S8 (4)
(e) which came into effect on 22 December 2003, the recoupment will be spread over a period of years.
The portion of the recoupment to be added to income in each year is;
Recoupment × Tax allowance on the replacement asset in current year
Total tax allowance in respect of the replacement asset
The replacement asset must be purchased and brought into use within a set period of time otherwise
the taxpayer will be required to recognize the full recoupment in the year of disposal.
Example
The motor vehicle in 2.1a above was stolen on 31 August 2014 and X (pty) Ltd received R120 000
insurance payout in compensation. If X used this money towards the purchase of a replacement vehicle
costing R200 000 on 1 December 2014, then the recoupment to be included in X’s taxable income for
the year ended 28 February 2015 would be as follows;
Recoupment on vehicle (as par example 2.1a) 15 000
S11 (e) allowance on vehicle 2:20%×R200 000×3/12 months 10 000
Therefore, the amount of deferred recoupment to be included in gross income of X:
R 15 000×R 10 000/200 000 750

Note; if the person disposes of the replacement vehicle then the full amount of the deferred
recoupment which has not yet been included in income in the year that the person disposes of the
replacement asset. E.g. If X (pty) Ltd disposes of the vehicle 2 on1 March 2015, X would be required to
33
include R14 250(R15 000-R750) of deferred recoupment in its income for the year ended 28 February
2016.
5.2.15. Dividends
Paragraph (k) of the definition of gross income includes in gross income any amount received or
accrued by way of dividends.
5.2.16. Subsidies and grants
Paragraph (l) of the definition of gross income includes any amount received or accrued by way of a
Grant, or Subsidy in respect of any soil erosion works referred to in s 17A (1), or Any of the matters
mentioned in items (a) to (l), inclusive, or par 12(1) of the First Schedule in the gross income of that
person.
5.2.17. Amounts received by or accrued to s 11E sporting bodies
Amounts received by or accrued to a company, non-profit company or association of persons that has
been incorporated, formed or established in the Republic for the carrying on of sporting activities falling
under a code of sport administered and controlled by a national federation, must be included in gross
income.
5.2.18. Key-Man Insurance Policies – Paragraph (m)
This is an insurance that the employers take on the lives of employees to protect themselves against
loss of profits if those employees die or are disabled
Gross income paragraph (m) includes any amount in respect of a policy of insurance on the life of an
employee or director in the employer’s gross where the employer is the policyholder and the policy
relates to death, disablement, or severe illness of the employee or director.
The loans or advances in respect of the policy holder are also included. The amount taxed when the
proceeds are paid out is reduced by loans or advances previously included in the employer’s gross
income.
Example
Loan from insurer
D (Pty) Ltd insured life of its director (Mr D). It deducted the premiums on the policy under section
11(w) of the Income Tax Act. During the year of assessment of the company ended 28 February 2013, it
borrowed R100 000 from the insurer (using policy as security) and was taxed on this amount in terms of
34
para (m). During the tax year ended 29 February 2016, the policy paid out an amount of R800 000. The
insurer took R100 000 repayment of the loan, so that the company received R700 000.
For 2016 the company will have to include in gross income (per para (m)).
Amount of proceeds R800 000
Amount of loan previously taxed (100 000)
Gross Income R700 000
5.2.19. Recoupment and other inclusions – Paragraph (n)
Para (n) includes in gross income any amounts required to be included in the taxpayer’s gross income.
The amount is deemed to have been received or to be accrued to the taxpayer.
In case of recoupments in terms of s8(4), it deems the amount recouped to be from a SA source even if
the recoupment may have been outside the Republic.
Example
In C: SARS v Kotze the taxpayer had received a reward of R200 000 for providing the police with
information regarding illegal dealings in diamonds. The Special Court held that the payment was not
made for services rendered to the police and therefor did not fall into gross income. The High Court
(Cape Provisional Division) held that the amount did constitute a payment in respect of services and as
a result did fall into his gross income.
 Do you think that the ruling of the High Court was fair, or would you rather agree with the
Special Court?
Solution
The following quote from Judge J Fox croft should give some insight as to why the High Court
considered the reward to be for services rendered:
“While I accept that the motive for the telephone call by respondent to hid friend in the police and his
request for advice was prompted by a fear that he might be drawn into suspicious conduct and that his
reputation might be damaged, he was certainly not rewarded for having been prompted by such a
motive. He was rewarded for having provided information which led to the arrest and conviction of the
persons who had approached him. If he had not provided the information, he would obviously not have
received the reward
5.2.20. Further illustrations
Example
35
Illustration 1
Fred Fortune is a retired doctor who, in March 2017, used his lifetime savings to purchase a rental
property in Cape Town. This was the first rental property Fred had ever owned. The property was
immediately let to tenants.
During August 2017, Fred received an unexpected phone call from the representative of a Middle
Eastern company. The company wanted to purchase Fred’s property and convert it into a small
boutique hotel, in time for an international congress that was being held in Cape Town and for the
upcoming holiday season. The company was prepared to offer Fred almost double what he had paid for
the property.
After thinking about the offer overnight, Fred decided to accept it, as he felt the offer was too good to
turn down. The sale of the property duly took place in August 2017.
Required:
Briefly discuss at least five relevant factors that the courts could apply in determining whether Fred
Fortune’s sale proceeds will, on a balance of probabilities, be included or excluded from his gross income
based on its revenue or capital nature. You may ignore the effect of capital gains tax
Solution
Any of the following factors could be applied to determine whether Fred Fortune’s sale proceeds will,
on a balance of probabilities, be included or excluded from his gross income.
Subjective factors:
His intention at the time of acquisition: (1)
- The property was originally purchased as a capital asset, which would generate investment
returns, in the form of rental income, over a long-term period. (1)
- On the basis of the information provided there is no evidence that Fred had a speculative intention
when he acquired the property. (1)
Change of intention: (1)
- Fred had no intention of selling the property prior to receiving the unexpected phone call offer.
(1)
- He did not embark on a profit-making scheme in order to sell the property. (1)
- Furthermore, a taxpayer who simply sells a capital asset for the best possible price has not
necessarily changed his intention and embarked on a profit-making scheme. (1) See CIR v Stott.
(1)
- Fred did not appear to change his original intention during the short period that he held the
asset. (1)
Objective factors:
The occupation of the taxpayer: (1)
- Fred is a retired engineer, and does not appear to be a property speculator. (1)
The period for which the asset is held: (1)
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- The property was held for a relatively short period, (1) which could indicate that it was purchased
for speculative purposes. (1)
The manner of acquisition: (1)
- Fred used his own funds to buy the property (1) which would tend to indicate that the property
was purchased as a capital investment. (1)
The manner of disposal: (1)
- The offer to purchase by the Middle Eastern company was fortuitous (1), and that would tend to
indicate that the property was disposed of as a capital investment. (1)
Continuity of transactions: (1)
- Fred has not repeatedly bought and sold properties (1) and that would tend to indicate that the
transaction was a disposal of a capital investment. (1)
It would appear that based on the above factors, Fred’s sale proceeds would, on a balance of
probabilities, be excluded from his gross income based on its capital nature. (1)
Summary
In this study unit, we introduced several amounts that the Act includes in the definition of gross income
and are to be treated as such by both the taxpayer and SARS.
Refer to pages 59 – 70 in your prescribed textbook for a comprehensive

explanation of the special inclusions
Read pages 59 -70 in your prescribed textbook and do the question in the
graded questions book.
37
Caselet:
Case 1 – Gross income
Facts:
Z works as a waitron for Casino Groups Inc. Z is tasked with serving customers
seated at the poker and blackjack gambling tables in the VIP Room. Z often
receives generous tips from customers. Casino Group Inc’s policy is that
employees may not report for duty with cash on their person without
authorisation from senior management and having declared it to the Security
Department. Tips received by employees must be declared and paid over to
the Casino Cash Desk upon receipt of the tip. Tips declared and paid over will
be held in safe custody by the casino in the casino’s bank account until
transferred into the employees’ bank accounts at month-end together with
the employees’ salaries. Employees whose services are terminated for any
reason will receive their tips together with their last salary payment. Casino
Groups Inc. paid R28 252, consisting of a net salary of R9 840 and tips of R18
412, into Z’s bank account on 25 August 2012. Z’s gross salary was R15 100.
Result:
Z’s gross salary of R15 100 and tips of R18 412 were received for services
rendered and accordingly must be included in ‘gross income’ under the
paragraph (c) of the definition of the term ‘gross income’.
* Gross income is a critical component of Z’s taxable income calculation and
the calculation of Z’s normal tax liability.
Case 2
Facts:
M, aged 20, is a student who earns money by working as a barman in one of
the private suites at ABC Stadium operated by the XYZ Rugby Union. During
June 2012, M received cash tips of R5 800 for services rendered. In addition,
the suite lessee gave M two season tickets to the value of R2 000 as a tip in
recognition of the excellent manner in which M took care of the lessee’s
guests.
Result:
M has received gross income in accordance with paragraph (c) of the de
nition of the term ‘gross income’. M’s income tax return must include the
cash tips (R5 800) and the monetary value of the two season tickets (R2 000).
(SAIT, 2016)
Think of the reasons why the special inclusions are included in the gross
income even though some of them would otherwise not form part of the
gross income.
38
Self-Assessment (Heading 5)
On 1 May 2017, Jacob withdrew R250 000 from his savings account in order
to purchase an annuity. He was 60 years old. In terms of the purchase annuity
contract, Jacob was to receive an annuity of R2 000 per month for life with
effect from 1 June 2017.
Required:
Calculate the taxable portion of the total annuities that Jacob received during
the 2018 year of assessment.
Answer the compulsory revision questions below. the module.
Question two
On 1 November 2017, Mary withdrew R400 000 from her savings account in
order to purchase an annuity. She was 65 years old. In terms of the purchase
annuity contract, Mary was to receive an annuity of R4 500 per month for ten
years with effect from 1 December 2017.
Required:
Calculate the taxable portion of the total annuities that Mary received during the
2018 year of assessment.
Question three
Jack, a chemical engineer, was seriously injured in a motor vehicle accident

during the 2018 year of assessment. As a result, he was not able to work again
and he became entitled to receive compensation from the Motor Vehicle
Assurance Fund for loss of future earnings.
Jack had the option of either receiving the compensation in a large, once-off
payment or, alternatively, in the form of smaller monthly payments for the rest
of his life. Jack elected to receive the compensation in monthly payments. He
received the first monthly payment in January 2018.
Required:
Briefly discuss, with reasons, whether Jack’s compensation will be included in his
gross income or not
Question four
Dr Perry Williams, a 39-year-old South African man and married out of

community of property, works at a government hospital and earns a salary.
39
Dr Williams also has an investment portfolio, which includes several blocks of

flats that he owns. He has appointed an estate agency to manage all the
administrative affairs relating to the flats.
For the 2018 year of assessment, the estate agency collected rental income on
his behalf and deducted the estate agency's administrative fees.
During November 2017, Dr Williams bought a lottery ticket. In February 2018, he

received a telephone call confirming he had won a cash prize.
Dr Williams also owned South African shares throughout the year of assessment.
On 1 February 2018, dividends were declared on these shares. Entitlement to
the dividends was obtained by all shareholders registered on 25 February 2018
and the dividends became payable on 15 March 2018.
Required:
Briefly discuss whether or not the above receipts or accruals should be included
or excluded from Dr Perry Williams’ gross income for the year of assessment
ended 28 February 2018. In your discussion of each receipt or accrual, refer only
to the most relevant requirement(s) of the gross income definition.
References
SILKE: South African Income Tax 2018: Stiglingh M; Koekemoer AD; Van Zyl L; Wilcocks JS; De Swardt
RD; 2018 LexisNexis
A Student’s Approach to Income Tax – Business Activities 2017: Bruwer L; Cass C; Cucciolillo D;
Koekemoer A; Oosthuzen A; Stedall C 2017 LexisNexis
40
STUDY UNIT 3: EXEMPT INCOME

This Study unit explains the exempt income and outlines the components of
Purpose
income that are not taxable.
 Identify amounts that are exempt from normal tax.

Learning
Outcomes  Recognize how the subtraction of exempt income fits into the overall
income tax framework
 Distinguish between an exemption and a deduction
Important terms
and definitions Exempt income- is any income that isn't subject to tax
Dividend – A share of profits paid to shareholders of a company at

the end of a financial year.
Interest A portion of the interest income earned by a natural

exemptions taxpayer that is not taxable.
5.3.1. 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 deducted from a taxpayer’s gross
income.
When calculating taxable income, you have to be sure that you subtract the exempt income from the
gross income to determine the income.
Once you have studied this section, you should be able to explain what makes up exempt income.
 Exempt dividends;
 Exempt interest income;
 Exemptions relating to education;
 Exemptions relating to employment
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5.3.2. EXEMPT INCOME

Exemption from the normal tax is granted for various reasons;
 Because of the special character of the taxpayer
 The special nature of the income or
 To prevent income from being taxed twice. Exemptions can be divided into two broad categories;
 Partial exemptions
 Absolute exemptions.
5.3.3. Partial Exemptions
The following exemptions are partial exemptions. Always remember that you can only exempt up to the
amount that has actually been received by the taxpayer, meaning that the exemption cannot cause a
net deduction:
1. Scholarships and bursaries (Employers to relatives of employees). Where the bursary is

granted to a relative of an employee it will only be exempt up to R60 000 (higher education)
or R20 000 (basic education) where the employee earns a maximum of R600 000
remuneration during that year of assessment. The bursary or scholarship will be fully taxable
where the employee earns remuneration exceeding R600 000.
2. South African interest received by residents. You have already been introduced to this
exemption in learning unit 1. Remember that a person 65 year or older gets a greater
“investment” exemption.
3. Foreign dividends. You need to learn that foreign dividends, which are not fully exempt,
qualify for a partial exemption from tax, in the form of a ratio exemption. The s10B(3) ratio is
25/45. In other words, 55,6% (25/45 x 100%) of these foreign dividends are exempt in the
hands of an individual.
4. Salaries and emoluments
Salaries payable to certain persons are exempt from normal tax as follows:
 A person who holds office in South Africa as an official of any government other than the
government of South Africa. Diplomats, consuls and ambassadors representing foreign
countries in South Africa qualify for this exemption.
 A domestic or private servant of a foreign diplomat referred to above
 A subject of a foreign state who is temporarily employed in South Africa
 Foreign employees of certain foreign government agencies or certain multinational
organisations providing foreign donor funding
 A pension that is payable to any former State President or Vice State President or his surviving
spouse is also exempt from normal tax.
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5. Bodies corporate, share block companies and other Associations Section 10(1) (e) exempts
Levies and A total of R50, 000 of any receipts and accruals other than levies received by
bodies corporate, share block companies and other associations of persons.
6. Amounts received as a war pension or as an award or benefit relating to compensation in

respect of diseases contracted by persons employed in mining operations
7. Disability pensions paid under section 2 of the Social Assistance Act 59 of 1992
8. Compensation paid in terms of the Workmen’s Compensation Act 30 of 1941
9. Pensions paid in respect of occupational injuries or diseases sustained by an employee before

1 March 1994
10. Any compensation paid by an employer in respect of the death of an employee
11. From 1 January 2012, any compensation paid in terms of s 17 of the Road Accident Fund Act
56 of 1996
 Example
Compile a summary of all the exemptions that relate to the type of income. Use the following format:
 Table 2-1: Exemptions due to the type of income
Type of income Any conditions that must apply Exempt amount
E.g. UIF None Fully exempt
12. Dividends
Dividends are, in general, exempt from normal tax in terms of s 10(1) (k). The following dividends are,
however, excluded from this exemption:
 Amounts distributed by a portfolio of collective investment scheme in property
 Dividends received by a share dealer in terms of a share buy-back
 Dividends received in respect of a restricted equity instruments
 Dividends received in consequence of a cession
 Dividends received in respect of borrowed shares
 Foreign dividends and dividends paid by a headquarter company.
Example
Mr Fuller, a South African resident who is 45 years old, holds 5% of the total equity shares of a foreign
company. The foreign company pays a dividend of R120 000 to Mr Fuller in the year ended 28 February
2015. The dividend was subject to foreign withholding tax of R9 600. Mr Fuller had other taxable
43
income of R285 000. His tax liability for the year ended 28 February 2015 would be calculated as
follows:
Table 2-2: Foreign dividends calculation
Other income R285 000
Foreign dividends R120 000
Total Gross income R405 000
S10B exemption: R120 000 x 25/40 (R75 000)
Taxable Income R330 000
Taxation: R55 957 + (R330 000 – R272 700) R73 147
Less: rebate (R12 726)
Tax payable R60 421
Less: S6quat rebate (R8 239)
R9 600 Limited to [R60 421 x (R120 000 – R75 000)]/R330 000
Net Tax payable R52 182
13. Employment of non-residents outside the Republic by the Government. Section 10(1)(p)
provides that any amount received by or accrued to:
 any person who is not a resident;
 for services rendered or work or labour done by him outside the Republic;
 for or on behalf of any employer in the national or provincial sphere of government, or

any municipality in the Republic, or any national or provincial public entity; and
 if not less than 80% of the expenditure of the entity is defrayed directly or indirectly from
funds voted by Parliament,
 will be exempt from taxation, provided that the amount is subject to income tax in his
country of residence. This exemption will not apply if this income tax is payable on his
behalf by the Government or the other institutions referred to.
14. Unemployment insurance benefit funds
Any benefit or allowance payable in terms of the Unemployment Insurance Act is exempt in terms of
section 10(1)(mB).
15. Insurance Policies
44
Any 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.
16. Scholarships and bursaries
Any bona fide scholarship or bursary granted to enable or assist any person in studying at a recognised
educational or research institution is exempt from normal tax in terms of section 10(1)(q).
Scholarships and bursaries are fully exempt from tax where they are awarded based solely on merit to
any applicant (and only for employees).
17. Interest
Where a person receives an amount of interest, it may qualify for one of the following exemptions;
 Residents – (natural persons only), subject to monetary limitations depending on the

person’s age.
 Non-residents – Only applicable if the person does not carry on business in the Republic
through a permanent establishment, or is not physically present in the country for longer
than 183 days
Re-organisation transactions – Only applicable if the holder and issuer of the debt instrument are part
of the same group of companies and the issuer is defined a deduction under s 23K.
Example
Mrs Maguire (a South African resident aged 55 years old) earned the following income during the year
ended 28 February 2015:
Table 2-3: Local interest income exemption
South African interest R54 000
Mrs Maguire’s income would be calculated as follows:
Gross income
South African interest R54 000
R54 000
Exempt Income:
- Local interest (R23 800 limited to actual interest received) (R23 800)
Income R30 200
18. Alimony received

45
Alimony received Section 10(1)(u) provides that any amount received by or accrued to a person from
his spouse or former spouse by way of alimony, allowance or maintenance for himself in terms of an
order of judicial separation or divorce is exempt from taxation if the proceedings were instituted after
21 March 1962 or in terms of any agreement of separation entered into after that date.
19. Employment
Various exempt amounts associated with employment are dealt with under this heading;
 Uniforms and uniform allowance
 Relocation benefits
 Broad-based employee share plan
 Equity instruments
 Stop-loss provision for share incentive
 Schemes Seafarers Outside South Africa
46
 Non-residents
 See your prescribed textbook for an explanation of each of these employment related
exemptions mentioned above.
5.3.4. Absolute exemptions
They are exemptions that are granted on all the receipts and accruals of the entity because of the
nature of the entity. For example, an educational institution
Absolute exemptions include the following;
 Government: The receipts and accruals of the government of the Republic in the national, provincial
or local sphere are exempt from normal tax (s 10(1) (a)).
 Political parties: The receipts and accruals of any political party registered in terms of the electoral
commission act 51 of 1996 are exempt from tax.
 Ships and aircraft: foreign owners or charterers. Section 33 imposes what is known as ‘liftings tax’ on
owners or charterers of ships or aircraft who are not residents but embark passengers or load
livestock, mail or goods in South Africa.
 Recreational clubs:
Certain receipts and accruals of a recreational club approved by the Commissioner will be exempt from
normal tax. These receipts and accruals must be derived in the form of:
 Membership fees or subscriptions paid by members from any business undertaking or trading
activity that is integral and directly related to the provision of social and recreational
amenities to its members
 Occasional fundraising is undertaken substantially with voluntary assistance without

compensation
 Any other source, if the receipts and accruals in respect of other sources are not in total more
than the greater of 5% of the total membership fees or R120, 000.
 Benefit, pension, pension preservation, provident, provident preservation and retirement annuity
funds, the receipts and accruals of any benefit, pension, pension preservation, provident, provident
preservation or retirement annuity fund, or a beneficiary fund defined in s 1 of the Pension Funds Act
number 24 of 1956 are exempt from normal tax.
 Special bodies and institutions such as:
 Specified research entities (s 10(1)(cA))
 Cooperative
47
 Close corporation Trust
 Water services provider
 Other specified institutions (1 10(1)(d)(iii) and (iv), (t), (zE) and (zI))
 A mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or
industries or local public association if approved by the Commissioner in terms of s 30B.
 Any company, society or other association of persons which was established to promote the
common interests of its members who carry on any particular kind of business, profession or
occupation.
Example
Mr King, aged 40, was ordinarily resident in South Africa for part of the 2015 tax year. He left SA during
the year and settled in the UK. It was accepted that he was ordinarily resident in the UK from the date
that he moved there. Mr King received interest of R10 000 per month on the last day of every month on
an SA money market account – therefore for 2018 tax year he received a total of R120 000 interest.
Discuss what exemptions, if any, Mr King will be entitled to have he left SA on:
a) 1 December 2014 or
b) 30 April 2014
Solution
Mr King will not qualify for the non-resident’s interest exemption in terms of S10 (1) (h) as he was
physically present in the country for more than 183 days during the 2018 tax year. He will, however,
qualify for the natural person’s S10 (1) (i) interest exemption. His income would, therefore, be
calculated as follows
Gross Income R120 000

Less: S10(1)(i) exemption (R23 800)
Income R97 200
a) Since Mr King spent more than 183 days outside the Republic, in the 2018 tax year he will qualify
for the S10 (1)(h) exemption. This exemption, will, however, only apply to interest that he earned
when he was a non-resident i.e. interest from 1 July 2012 onwards. He will also be able to make
use the of the S10 (1) (h) exemption available to natural persons for any interest income that is not
exempt in terms of S10 (1) (h). his income would be calculated as follows:

Less: S10(1)(h) exemption (R80 000)
R10 000 x 8months (1/07/1 to 28/02/2018

Less: S10(1)(i) exemption (R23 800)
Income R17 200
Example
John Jackson is a sole trader who operated as a building contractor. He is a resident of South Africa. He
was recently awarded a contract to erect a building in Mozambique. Mozambique is not a designated
48
country the contract will take 8 months to complete. John will spend the entire 8 months of the
contract in Mozambique at the construction site. He will not return to South Africa during this time (not
even a weekend)
Nine of his employees will be employed on the construction site in Mozambique for this time. They are
all residents of South Africa. Five of the employees agreed that they will not return to South Africa
during the duration of the contract. Four of the employees agreed to work on the contract, provided
that they are allowed to return to South Africa every weekend of the month
Required:
Answer the following questions:
a) Will John be taxed on the profit that he makes in Mozambique in South Africa?
b) How will his employees be taxed?
Solution
John Jackson is ordinarily resident in South Africa. John is, therefore, a resident of the Republic (as
defined) regardless of the fact that he will spend most of the year outside SA. John is therefore subject
to taxation in South Africa on his world-wide receipts and accruals. He will be taxed on the profit he
makes on his Mozambique contract. No exemption is available to him in terms of S10(1)(o), because he
is self-employed and not an employee
a) John’s nine employees are ordinarily resident in South Africa. They are therefore residents of the
Republic and will be subject to taxation in South Africa on their worldwide receipts and accruals.
The salary they earn while working in Mozambique is therefore included in gross income. This
salary may, however, be exempt from normal tax in South Africa provided all the conditions set out
in section 10(1) (o). To qualify for this exemption an employee…
 Must render his services outside South Africa
 These services must be for or on behalf of an employer
 He must be outside the Republic for a period or periods exceeding 183 full days in the
aggregate during a twelve-month period commencing or ending during the year of
assessment
 He must be outside the Republic for a continuous period exceeding sixty full days during this
twelve-month period; and
 Such services were rendered during such periods
The five ‘non-returning’ employees fulfil all the above conditions and will, therefore, qualify for this
exemption. This means that they will not be taxed in South Africa on the salaries that they earn while
they are working in Mozambique. The four ‘returning’ employees will not enjoy this exemption because
they will not satisfy the conditions of being ‘outside the Republic for a continuous period exceeding
sixty full days during this twelve-month period’. They will, therefore, be subject to South African
taxation on the salaries they earn while working in Mozambique.
49
Example
5.3.5. Summary
Although an amount is included in “gross income” in terms of the definition, in certain cases, owing to
its nature, it will be exempt from taxation in terms of the specific provisions discussed in this chapter.
This chapter focused 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 his gross income less exempt income. The concept of
“income” is important as the deduction of certain expenses is dependent on the amount of the
taxpayer’s income.
Refer to pages 74 - 115 in your prescribed textbook for a comprehensive

explanation of exempt income.
Read pages 74 - 115 in your prescribed textbook.
6. Caselet:
South African tax court upholds exemption from dividend withholding

tax under most favored nations clause of a treaty with South Africa
Executive summary
50
On 12 June 2019, the Tax Court of South Africa (the Court) ruled1 in favor of
the taxpayer on the application of the dividends article in the tax treaty
between the Netherlands and South Africa (the NL-SA Treaty).
Per article 10 of the NL-SA Treaty, corporate dividend distributions are

generally subject to a dividends tax of 5% (subject to certain conditions).
However, the Court has ruled that an exemption from dividends tax is
available by application of the “most favored nation clause” (MFN) included
in this dividend article. This judgment emulates the outcome of a recent
judgment of the Dutch Supreme Court on 18 January 2019.2
South African taxpayers should review whether they have paid dividends tax
on dividends paid to Dutch shareholders after 1 January 2016. South African
taxpayers should furthermore consider the impact of this judgement on any
historic, and future dividend distributions.
Since South Africa is renegotiating tax treaties that provide for 0%

withholding tax on dividend distributions, the window of applicability may be
limited.
Detailed discussion
Background
The NL-SA Treaty was concluded in 2005 and limits the taxation of dividends
at source to 5% if the recipient qualifies as the beneficial owner and holds
more than 10% of the shares in the entity paying the dividend. In addition,
the MFN clause in this treaty (amended by a Protocol in 2008) provides for an
automatic application of a lower dividend withholding tax rate if South Africa
and a third country conclude a tax treaty which provides for a lower dividend
withholding tax rate or an exemption. However, this MFN provision is only
applicable if the more beneficial tax treaty is concluded after the date of the
NL-SA Treaty, i.e., after the latest amendment by the 2008 Protocol.
The tax treaty between South Africa and Sweden (SA-SW Treaty) was signed
in 1995 and amended through a Protocol in 2012. The 2012 Protocol
introduced an MFN clause that does not contain any limitation regarding the
date on which the more beneficial tax treaty with a third state was concluded.
In this respect, the tax treaty concluded between South Africa and Kuwait (K-
SA Treaty), which entered into force in 2006, provides for an exemption of
dividend withholding tax. Since the Protocol to the SA–SW Treaty does not
contain a limitation in time with respect to the date of conclusion of the
referenced treaty with a third state (i.e., the K-SA Treaty in this case), this
automatically resulted in a full exemption under the SA-SW Treaty. This
position has been confirmed in South Africa through the issuance of several
advance tax rulings by the South African Revenue Service (SARS) providing for
the exemption of dividends tax on dividend payments from South African
companies to Swedish residents who hold more than 10% of the share capital
of those South African companies.
The Court’s ruling
51
Following the position outlined above, the Court ruled that the Protocol to
the SA-SW Treaty was a treaty concluded after the date of the NL-SA Treaty
within the meaning of the MFN clause, and dividends would therefore be
exempt from dividend withholding tax.
Although this judgment does not add to the jurisprudence on treaty

interpretation, several other important aspects are worth noting in the
development of international tax jurisprudence in South Africa.
First, by virtue of the force of statute held by treaties, the Court approached
the interpretation of these treaties under domestic legal principles, noting
that interpretation of treaties under principles of international private law
should only be undertaken as a secondary measure and where contextually
appropriate. To this end, the Court made a single reference to the judgment
of the Dutch Supreme Court handed down on 18 January 2019, which dealt
with identical (albeit inverted) facts, noting that it was not considered in this
instance. This reiterates the importance of approaching treaties in South
Africa through the lens of South African domestic legal principles.
Secondly, the Court interpreted these treaties under South African law of
contract as opposed to ordinary statutory principles which has not been seen
in higher South African courts.
Finally, the Court dismissed the notion of an “intention” being read into the
NL-SA Treaty, argued on the basis that the MFN clause had not been intended
to be triggered by MFN clauses in treaties concluded thereafter, making
reference to the SA-SW Treaty. The Court chose instead to rely on the plain
meaning of the words contained in the treaty.
Impact
This ruling provides an opportunity to apply a dividends tax exemption under

the NL-SA Treaty if the corporate shareholder holds at least 10% of the capital
of the company paying the dividends. It also provides an opportunity to apply
for a refund of dividends tax paid on or after 1 January 2016 under the NL-SA
Treaty refund mechanism.
It is important to note that South Africa has renegotiated treaties with 0%

withholding tax on dividend distributions in order to apply a 5% dividend
withholding tax rate, like it did in the Protocol amending the tax treaty
between South Africa and Cyprus (2015). This Protocol also contained a
provision based on which the adjustments will be retroactively applied from
1 April 2012 (the date of introduction of withholding taxation on dividends in
South Africa). In principle, this judgment should remain valid unless it is
overturned on appeal in a higher South African court, and as long as the SA-
SW Treaty provides for a dividend withholding tax exemption, which in turn
relies on the K-SA Treaty providing for a dividend withholding tax exemption.
Accordingly, South African taxpayers should: (i) review whether they have
paid South African dividend withholding tax after 1 January 2016; and
(ii) consider the impact of this judgment on future dividend distributions.
52
(Ernst and Young, 2019)
Reflect/analyse/think….
5.3.6. Self-Assessment
Your friend is a professional cricket player and you receive the following e-
mail from him:
“I need your advice on the following matter.
As you know, I am ordinarily resident in the Republic. I am an employee of the

United Cricket Board of South Africa. I have been selected to tour Pakistan,
India, England, Australia and New Zealand with the South African cricket
team. I earn a monthly salary from the South African Cricket Board and will be
paid my salary while “working” (playing cricket) in the abovementioned
countries. The South African Cricket Board is not regarded as an employer as
contemplated in section 9(2)(h) (one of the provisions of section 10(1)(o)).
The tour is for nine weeks in total. We are not allowed to return home (the
Republic) during this nine-week period. All nine weeks fall in the current year
of assessment.
Required:
Advise your friend whether the salary he earns while he is “working” outside
the Republic is exempt from income tax.
the module.
Answer the compulsory revision questions below.
The following taxpayers are uncertain whether or not the amounts listed below
constitute exempt income.
53
1. Simon Shabalala is a retired miner. During the current year of assessment, he

received the following amounts:
2. Pension received for past services rendered 120 000 Pension received for a
disease contracted during employment at the mine was R60 000. The R60 000
is payable under the law relating to the payment of compensation for diseases
contracted by persons employed in the mining industry.
3. Major Peter Sinclair received a war pension of R12 000 for the current year of
assessment.
4. 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.
5. During 1990, Pieter and Sandra Pietersen separated and divorced. Pieter pays
alimony to Sandra to finance her living costs. Pieter passed away on 31 July
2015. 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:
Alimony received from Pieter for the period before his death 40 000 Alimony
received from the trust R56 000
Required:
Discuss whether the above amounts are exempt from normal tax.
Solution
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.
References
54
RD; 2018 LexisNexis
Koekemoer A; OOsthuzen A; Stedall C 2017 LexisNexis
55
STUDY UNIT 4: THE GENERAL DEDUCTION FORMULA

This learning unit describes the general deduction formula and the criteria
Purpose
that disallow an item to qualify for a tax deduction.
Learning  You should have an understanding of the general deduction formula

Outcomes
 be able to identify expenses which are deductible in terms of the general
deduction formula;
Time
Deductible Any expenditure of a capital nature that is incurred

expenditure during the tax year in order to produce income for your
Important terms – business, such as operational expenses, assets
and definitions bought for the business and so on.
Pre-trade Costs such as advertising and marketing promotion,
costs – insurance, accounting and legal fees, rent, telephone,
licenses and permits, market research and feasibility
studies. This excludes capital costs, such as the
purchase of buildings and motor vehicles.
5.4.1. Introduction
In the process of determining the taxable income, the allowable deductions 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 any taxpayer would like to be able to deduct as
much of his 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.
Once you have studied this section, you should be able to describe the general deduction formula.

56
 Carrying on a trade;
 Prepaid expenditure;
 S23 prohibited deductions;
 Specific transactions.
5.4.2. The general deduction formula
S11 (a) of the Income Tax Act provides that ‘for the purposes of determining the taxable income derived
by any person from carrying a trade there shall be allowed as deductions from the income of such
persons so derived expenditure and losses actually incurred in the production of income, provided such
expenditure and losses are not of a capital nature.
Section 23(g) provides that no amount will be allowed as a deduction to if it was not laid out or
expended for the purposes of trade.
Therefore, the requirements for an expense to qualify for a deduction in terms of the general deduction
formula are:
 The taxpayer must be carrying on a trade

 The taxpayer must, in carrying on trade, derive income
 The amount claimed must constitute an expense or loss
 The expenditure or losses must be actually incurred during the year of assessment
 The expenditure or losses must be incurred in the production of the income
 The expenditure or losses must not be of a capital nature
 The expenditure or losses must to some extent have been paid out or expended out
or expended for the purpose of trade
In addition, the expenditure or losses must not be prohibited under S23. Expenses specifically provided
for under other sections of the Act must be claimed under those other sections.
57
5.4.3. The meaning of carrying on a trade
Section 11 permits a deduction only if the taxpayer is engaged in the carrying on of a trade. In its
opening words, s 11 provides as follows;
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…
The taxpayer must be carrying on a trade before any amount may be claimed as a deduction in terms of
s 11.
The term trade is define in s 11 as …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 as defined in the Patents Act 57 of 1978, or any design as defined in the Designs Act 195 of 1993,
or any trademark as defined in the
Trade Marks Act 194 of 1993, or any copyright as defined in the Copyright Act 98 of 1978, or any other
property which is of a similar nature.
Expenditure and losses are generally the only deductibles if incurred after the commencement of a
trade. Section 11A, however, allows for a deduction for qualifying expenditure and losses incurred
before the commencement of that trade once a trade is carried on. The following requirements must be
met for this pre-trade expenditure and losses to qualify for a deduction in terms of s 11A;
A trade must be carried on
 The expenditure or loss must have been incurred by that person before the
commencement of the trade
 The expenditure or loss must have been incurred in preparation for the carrying on
of that trade
 The expenditure must qualify as a deduction in terms of s 11 or 24J
 The expenditure or loss was not previously claimed or allowed as a deduction
Income
It is not necessary that activities result in profits in order for these activities to be classified as a trade. It
has been held in the courts, however, that a trade must produce some sort of commercial or business
benefit or reward.
Expense or loss
Losses generally refer to expenditure which is of an involuntary nature. Both expenditure and losses
refer not only to cash outflows but also to liabilities that must be settled by ways other than cash e.g
the handing over of shares or property. The cash equivalent of the shares or property disposed of would
represent the amount of the expenditure.
58
Example 4.1
Gladys Botha manufactures leather purses. Due to cash flow constraints, she was unable to pay for the
latest consignment of leather, costing R25 000. She 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 4.1
Gladys would be able to deduct the market value of the delivery motorcycle in respect of the purchase
of the leather (R28000). Expenses and losses do not only include amounts do not include amounts
payable in cash, as long as the consideration has a determinable money value.
5.4.4. Actually incurred
An expense is deductible in the year in which it actually incurred i.e the year in which it becomes
unconditionally due and payable, regardless of when it is actually settled. Where the expense incurred
during the year cannot be quantified, the expense will have to be estimated based on information
available.
Expenditure must be claimed as a deduction in the year in which it is incurred – it cannot be deducted
in any subsequent years and will be forfeited if not claimed in the year in which it is incurred.
Note that prepaid expenses may only be deducted in the year actually incurred unless the goods or
services paid for are supplied within six months after the tax year-end or the value of the goods or
services is less than R100 000 (2012: R80 000) in value. In either case, in terms of S23H, the prepaid
amount is fully deductible in the tax year it was paid.
S24M (2) provides that where a person acquires an asset during any year of assessment and the
consideration for that asset consists of or includes any amount which cannot be quantified then such
unquantified amount is deemed to be incurred in the year in which it becomes quantified (and not in
the year in which it is incurred)
Example 4.2
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 2015 to 31 March 2016 if the annual turnover exceeds
R500 000. His turnover for the current year of assessment amounted to R580 000. You are required to
discuss the deductibility of the above amounts for the current year of assessment (28 February).
Solution 4.2
The monthly rental of R10 000 is actually incurred and will be deductible. The rental based on annual
turnover exceeding R500 000 is dependent on a condition and there is no definite and absolute liability
to pay this amount, therefore it has not been actually incurred and will not be deductible in the current
year of assessment.
40
5.4.5. In the production of income
Although expenditure itself does not produce income, it is normally a consequence of certain actions
undertaken to produce income. The courts have held that in determining whether the expenditure is
incurred in the production of income, the purpose of the act entailing the expenditure must be looked
at. If it is performed for the purpose of earning income, then the expenditure attendant upon it is
deductible. Expenses must be incurred to produce income (as defined in the Act), therefore expenses
incurred to produce exempt income are not allowable.
5.4.6. Not of a capital nature
Capital receipts and accruals are excluded from gross income and equally capital expenses are not
allowable as deductions (apart from those specific capital allowances granted in terms of S11(e), S11(o),
S12 and S13.
5.4.7. Expended for the purpose of trade
Any expenditure which is not incurred for the purpose of trade may not be deducted in terms of the
general deduction formula. Therefore, where costs are incurred for a purpose other than trade i.e
private purpose, no deduction of these costs will be allowed. Where the costs are incurred only partly
for the purposes of trade, an apportionment must be made and only the portion of costs incurred for
the purposes of trade may be deducted.
Prepaid expenditure (s 23H)
Section 23H limits the number of deductions that may be claimed for prepaid expenditure during a
particular year of assessment
Section 23H can only apply if two conditions are met and none of the four exceptions listed in the
provisions is applicable. The two conditions which must be met are;
1. The expenditure must be allowable as a deduction in terms of the provisions of s 11(a), s

11(c), s 11(d), s 11A, s 11(w), s 11D (1) or s 28(2)(a) and
2. The expenditure must be in respect of:
 Goods or services
 Any other benefits.
5.4.8. Section 23 prohibited deductions
Section 23 provides that no deduction may be made in respect of the following matters, irrespective of
the fact that s 119A0 allows for a deduction;
 Expenditure incurred to provide exempt income (s 23(f))

 Non-trade expenditure (s 23(g)
 Notional interest (s 23(h))
41
 Deductions claimed against any retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits (s 23(i))
 Expenditure incurred by labour brokers and personal service providers (s 23(k))
 Restraint of trade (s 23(l))
42
 Expenditure relating to employment or an office (S 23(m))

 Government grants (s 23(n)
 Unlawful activities (s 23(o))
 The cession of policies by an employer (s 23(p))
 Expenditure incurred in the production of foreign dividends (s 23(q)
 Private maintenance expenditure (s23(a)
 Domestic or private expenditure (s23(c))
 Interest, penalties and taxes (s23(d))
 Provisions and reserves (s23(e)
Example 4.3
Domestic and private expenses cannot be deducted from your income in terms of Section 23
(b) of the Income-tax Act.
What is your definition of private and domestic expenses?
Solution 4.3
Private and domestic expenses include (but are not limited to) the following:
 School fees
 Expenditure on family holidays
 Rent, repairs and other expenses relating to your home (although if a portion of your home is
used exclusively and regularly for the purposes of trade this may be deductible in certain
circumstances)
 Employment of a domestic worker to look after your children or your house
If you are an agent or representative, and your remuneration is normally derived wholly or mainly in
the form of circumstances based on sales or turnover, then you may deduct entertainment expenditure
actually incurred in the production of this commission. There is no limit to the amount that you may
claim, however, you must be prepared to produce proof of this expenditure should SARS request it.
Home office expenditure may also be claimable provided work is performed mainly in this home office.
5.4.9. Prohibition against double deductions
Section 23B kicks in when an amount qualifies for a deduction or allowance in terms of more than one
provision of the Act or is otherwise taken into account in determining the taxable income of any person.
No amount or part of an amount may be allowed or taken into account more than once as a deduction,
an allowance or otherwise in the determination of a person’s taxable income (s 23B (1)).
5.4.10. Excessive expenditure
43
The Commissioner is entitled to disallow expenditure to the extent to which it is excessive. This can be
on the grounds that the expenditure is not actually incurred in the production of the income, as
required by s 11(a), or is not laid out or expended for the purposes of trade, as is required by s 23(g),
but is inspired by some other motive
5.4.11. Cost of assets and VAT
Section 23C (1) provides that, under certain circumstances, the VAT portion of an expenditure should be
excluded from the amount claimed as a deduction. This section states that if
 The taxpayer is a vendor as defined in s 1 of the Value-Added Tax Act, and
 He is or was entitled to a deduction of input tax under s 16(3) of that Act in any previous year
of assessment,
 The amount of the input tax must be excluded from the cost of the asset or the amount of the
expenditure.
5.4.12. Specific transactions
The rest of this study unit is devoted to the distinction between expenditure and losses that are
allowable in terms of the general deduction formula, and those that are not. You must read the
provisions given in this section of chapter 7 of your textbook.
Example 4.4
Socks (Pty) Ltd, a sock manufacturer, has the following income and expenses for the year ended 8
February 2018.
 Table 4-1: Deductions relating to specific transactions
Sales R800 000
Cost of sales (R300 000)
Salaries and wages (R200 000)
Pension fund and medical aid contributions on behalf of employees (R15 000)
Lease fees on factory premises and machinery (R100 000)
Vehicle costs (excluding wear and tear) (R12 000)
Accounting fees (R10 000)
In addition:
44
 On 1 January 2015, the company paid R20 000 to lease a billboard advertising their products
for a period of a year
 On 1 June 2014, Socks completed construction work costing R200 000. This work was required
in terms of Sock’s factory lease agreement and involved extending the premises. The lease
agreement stipulated that the work should cost R180 00. The lease commenced on 1 June
2013 for a 10-year period
 On 1 March 2013, Socks purchased a vehicle costing R150 000. This vehicle was stolen on 30
September 2014 and insurance proceeds of R100 000 were received
 Socks purchased new dyeing machines on 15 February 2015 at a cost of R40 000 and
immediately brought these machines to use
 The company paid a monthly annuity of R400 to the spouse of an ex-employee and R400 to
the child of the same ex-employee from 1 June 2014 onwards
 The company had a list of doubtful debts of R500. The commissioner had allowed an S11(j)
allowance of R1000 in the prior year
 On 1 November 2014, Socks purchased a part of a new factory from a property developer for
an amount of R1 500 000
You are required to determine the taxable income of Socks (Pty) Ltd for the year ended 28
February 2015 (ignoring VAT implications)
Solution
Socks (Pty) Ltd.’s taxable income must be calculated as follows:
 Table 4-2: An example of deductions relating to specific transactions
Gross income
Sales R800 000
Add back: prior year S11(j) allowance 1000
Allowable deductions
S11 (a) deductions:
Cost of sales (300 000)
Salaries and wages (200 000)
Lease fees on factory premises and machinery (revenue in nature) (100 000)
Vehicle costs (12 000)
Accounting fees (recurrent expenditure is allowed in practice) (10 000)
S11 (l) Fund contributions on behalf of employees (<10% of S& W) (15 0000)
45
Billboard expenses (not allowed as capital in nature i.e. will create an enduring (0)
benefit)
S11 (g) Leasehold improvements (limited to cost stipulated in lease) (15 000)
46
R180 000/9 years of lease remaining x 9/12 months
S11 (e) wear and tear on vehicle (17 500)
R150 000/5 years x 7/12 moths
S11 (o) disposal allowance (32 500)
Cost R150 000
Less: S11(e) (R17 500)
Less: proceeds (R100 000)

S12C: Special wear and tear on machinery used in process of manufacturing (16 000)
i.e. dyeing
R40 000 x 40% (4 year write off applies as machinery is new)

S11(m): Annuity to dependents of former employees (7 200)
2 x R400 x 9 months = R7 200 (no limit for current tax year)
S11(j): doubtful debts R5000 x 25% (1 250)

S13 quin – commercial building allowance: R1 500 000 x 55% x 5% (41 250)
Taxable income R 33 300
Example
5.4.13. Summary
In this chapter, the different components which make up the general deduction formula were
discussed. All these components or requirements must be present for an expense to be

explanation of the general deductions.
47
Read pages in your prescribed textbook and do the questions in the graded
questions book.
Caselet:
Include instructions here xxx
Question
Mr. James Glansbeek, an accounting officer, incurred the following

expenses:
48
1. James entered into an agreement that gave him the right to purchase
stationery for R12 000. This stationery normally costs R17 000. James has
not exercised the option by the end of the year of assessment.
2. James paid his gardener R3 000 per month to oversee his garden at his
private residence. James needs these services because his business keeps
him busy for 18 hours a day and therefore the garden had become
neglected.
3. James rents out a holiday house near Cape Town. He incurs the following
expenses on this property: Rates and taxes of R50 000, agent’s fees of
R10 000, and repairs of R5 000.
4. James paid a web designer R5 000 to design a website which would

enable James to advertise his business and provide information to his
current and prospective clients. The web designer also receives R500 per
month to update and maintain the web page
You are required to:
Discuss whether the above-mentioned expenses are deductible in

accordance with the general deduction formula.
Answer 4.1
Discussion of the deduction of certain expenses:
1. The stationery amounting to R12 000 is not an expense which has

actually been incurred until the date that James exercises his option
and decides to purchase the stationery at the option price. The
deduction will be included in the tax calculation in the year of
assessment in which the option is exercised and not when the option
agreement was entered into.
2. The R3 000 per month paid to the gardener does not fulfil the
requirement that the expense must be laid out for purposes of trade.
This expense is not connected closely enough to James’ trade. The
expense is therefore not deductible for income tax purposes. It is also
excluded by section 23(b) since it falls into the definition of a
“domestic expense’’
3. All the expenses are deductible for tax purposes. These expenses were
incurred to produce the rental income which is included in James’s
gross income. James will have to apportion any of the expenses if this
holiday house was used by him or his family, since the expense would
then not have been expended for purposes of trade.
49
4. The R5 000 is an expense which was actually incurred in the production

of income. This website expense will help James to obtain clients,
which in turn will produce income. The R5 000 was laid out for the
purposes of trade, but the general deduction requirement, which may
not be met, is whether this expense is of a capital nature. The setting
up of the website is a “once and for all” cost. It should also create an
enduring benefit. For these reasons, the website falls into the category
of “capital in nature” and is therefore not deductible for income tax
purposes. The monthly expense paid to maintain the website does not
create an enduring benefit and it will therefore be classified as an
expense of a revenue nature and is therefore deductible.
Question 4.2
As a renowned tax expert, a local newspaper has asked you to write a

weekly tax column. Readers of the newspaper send their questions to you,
which you answer weekly. You received the following questions:
Question 1
I successfully passed a cricket instructor’s course on 20 February 2016. I can

now “officially” give cricket lessons. From 25 to 28 February 2016, I
advertised my services in the local newspaper. I gave my first lesson on 3
March 2016. The course cost me R29 180 and I paid R1 470 for the
advertisement. Can I claim the amounts paid as a tax deduction?
 Question 2
My name is Mary. I sell cakes and tarts at the local cottage industry and for
parties. I granted a customer a discount of R500 on a cake bought during the
previous year of assessment because the bottom was burnt. Can I claim the
R500 as a tax deduction?
 You are required to:
Prepare an answer for each of the questions received.
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STUDY UNIT 5: INCOME AND EXPENSES OF INDIVIDUALS

This learning unit outlines the calculation of the normal tax payable by a
Purpose
natural person using the framework for the calculation of taxable income.
After studying this unit, you should be able to:
 Identify the types of income to accrue to an individual
Learning  Determine the taxable income and tax liability of individuals,

Outcomes including married persons
 Identify specific expenses allowed as deductions for individuals
 Apply the taxation principles on minors
Person – For the purposed of tax, a “person” includes any natural

person, public or local authority, company, trust, body of
Important terms persons (i.e. partnerships) and the estate of any
and definitions deceased or insolvent person.
Unemployment – UIF provides benefits for people who are out of work
Insurance Fund or unable to work because a chronic illness or pregnancy.
Contributions to UIF are compulsory and are made by
employers, employees and the government.
5.5.1. Introduction
In this chapter, we are going to look at the earning of investment income as well as the deductions that
can be claimed, for income tax purposes, by a person earning a salary.
After a person starts working and earning an income, he can eventually start saving some of the income
that he earns. This income can then be invested in different assets, for example, shares, fixed deposits
or even business ventures. The aim of the investment is to generate additional income. Remember that
the gross income definition includes all income received by residents of South Africa. South Africans can
also invest their money off-shore (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 his salary, a person earning a salary will also have expenses
that he 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. The Income Tax
Act 58 of 1962 (the Act) does, however, contain a number of provisions where the taxpayer is
specifically allowed to deduct certain private or domestic expenses. In terms of section 23(m), a person
51
earning only a salary may deduct only the expenses listed in the section. The same section prohibits all
other deductions for this “type” of the taxpayer.
When a person deals with the concept of “gross income”, the following questions arise
 Which portion of investment income must be included in gross income?
 Is there a difference between the taxation of South African investment income and foreign
investment income?
 How much can retirement fund contributions be claimed for tax purposes?
 Can donations made be claimed for tax purposes?
 Does it matter in which order the expenses are deducted?
 Are there any other private or domestic expenses that can be claimed?
 How much rebate is available against any foreign tax paid?
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Certain income is included in a taxpayer’s taxable income as a result of the “gross income” definition,
and some income that would not have been included by this definition is specifically provided for in the
Act by the specific inclusions provided for after the definition of gross income. In this unit selected
specific inclusions (and not the general definition of “gross income”), as they relate to the calculation of
a resident (individual) taxpayer’s taxable income, will be discussed.
 Assessed losses
 Normal tax payable
 deductions
 Taxation of married couples
5.5.2. South African income (section 1 – definition of “gross

income”)
As long as a person is defined as a “resident” of South Africa, he will be taxed on all income that is
earned in South Africa, for example, salary, interest received, and rental received, subject to the
definition of gross income.
5.5.3. South African dividends (section 10(1)(k)
All dividends received from South African companies that are subject to Dividends tax are exempt from
normal tax.
5.5.4. South African interest exemption (section 10(1)(i))
Where a taxpayer receives South African interest, the interest is subject to an exempt amount that is
dependent on the age of the taxpayer. Where the taxpayer is 65 years or older on the last day of the
year of assessment, the first R34 500 of the interest income received is exempt from tax. Where the
taxpayer is younger than 65 years of age on the last day of the year of assessment, the first R23 800 of
interest income received or accrued is exempt from tax.
5.5.5. Interest and dividends from tax-free investments

(section 12 T)
Interest and dividends received from tax-free investments are fully exempt from taxation
5.5.6. Foreign income

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Interest and dividends received from tax-free investments are fully exempt from taxation South African
residents are also taxed on foreign income. This chapter will discuss the following types of foreign
income:
 foreign dividends; and

 other foreign income (earned directly by the taxpayer).
Note that section 9D of the Act contains provisions relating to the taxation of income from controlled
foreign companies, but this fall outside the scope of this book. Section 9D can be found as an annexure
to this book. In this chapter, we will also discuss exemptions and rebates in respect of foreign income
 5.6.1 Foreign dividends (paragraph (k) of “gross income” and section 10B) and headquarter
company dividends
In terms of paragraph (k), foreign dividends are specifically included in “gross income”. This section
includes the gross amount of the foreign dividend (before the deduction of any withholding tax) in
“gross income”. It is important to note that foreign dividends are not subject to dividends tax (except
for dividends that are paid by dual-listed companies).
5.5.7. Definition of a foreign dividend (section 10B (1))
A foreign dividend is an amount that is paid or payable by a foreign company, where that amount is
treated as a dividend or similar payment in terms of the tax on income laws or the company laws of the
country in which that foreign company is incorporated, formed or established; or a dividend paid by a
headquarter company.
 5.7.1 Full exemptions (section 10B (2))
All foreign dividends are included in full in gross income; however, there are four reasons why a foreign
dividend could be exempt and not be subject to tax in South Africa:
 Participation exemption on equity shares – the foreign dividend on equity shares will be
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. There are some tax avoidance situations where a
taxpayer does not qualify for the exemption.
 For foreign dividends received before 1 April 2014, the exemption also applied to foreign
dividends received on shares other than equity shares.
 Same country participation exemption on equity shares – a controlled foreign company (CFC)
will be allowed to claim the participation exemption on dividends declared on equity shares
with no participation requirement if the foreign dividends are paid by a foreign company
which is in the same country as the CFC. There are some tax avoidance situations where a
taxpayer does not qualify for the exemption. This exemption is only applicable to companies.
Dividends received before 1 April 2014 were exempt in terms of this provision even if they
were from shares other than equity shares.
 Cash foreign dividends (not dividends in specie) in respect of JSE listed shares exemption –
these dividends will be taxed in terms of dividends tax.
 5.7.2 Partial exemption (section 10B (3))

52
If the foreign dividends received are more than the exemptions above or the exemptions listed above
do not apply, then there is a further partial exemption that will be applied to the remaining “taxable
dividends”. The exemption for individuals and trusts is calculated as the foreign dividends received,
multiplied by 26/40.
Steve earned the following investment income during the current year of assessment:
Taxable foreign dividends R26 200
Interest from foreign investments R 900
You are required to calculate how much foreign income will be included in Steve’s taxable income for
the current year of assessment.
In terms of section 23(q), deductions in respect of expenditure incurred in the production of income
from foreign dividends are not allowed. Residents will be entitled to a rebate or credit for direct foreign
taxes paid in respect of foreign dividends. The rebate is limited to the amount of foreign tax levied on
the dividends.
 Example
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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 withholding 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 foreign dividends for
the current year of assessment.
5.5.8. Other foreign income
A South African resident is taxed on all forms of foreign income (that is, his worldwide income). Where
foreign income is taxed in the foreign country and is included in South African taxable income, the
amount will have been subject to tax twice. In this case, the South African resident is entitled to claim a
rebate (reduction) against his South African tax. This foreign tax rebate is contained in section 6quat of
the Act (refer to 5.5). The rules cannot be dealt with yet as this rebate takes into account the specific
deductions that the taxpayer can claim, therefore it will be dealt with later in the chapter.
Sam Shoba (66 years old) and his wife (Sindy, 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:
Sam
Taxable foreign dividends R14 200
Interest from foreign investments R11 000
Interest from local investments (not tax-free investments) R38 500
Sindy
Taxable foreign dividends R400
Interest from foreign investments R1 500
Interest from local investments (not tax-free investments) R24 000
You are required to calculate Sam and Sindy’s taxable income for the current year of assessment
5.5.9. Specific deductions
Private or domestic expenses do not qualify for a tax deduction in terms of the general deduction
formula (section 11(a)) as they are not incurred in the production of income. Their inclusion is
specifically prohibited by section 23
The Act does, however, make provision for the deduction of the following expenses (these deductions
are permitted in terms of section 23(m) for salaried taxpayers):
 Legal expenses (section 11(c));
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These may only be deducted where the taxpayer actually incurs legal expenses in respect of any claim,
dispute or action arising in the course of the ordinary operations (employment) undertaken by the taxpayer.
 depreciation (wear-and-tear) of an asset (section 11(e));
Wear-and-tear may only be claimed in respect of an asset used for the purposes of earning salary income.
 bad debts (section 11(i));
Bad debts may only be claimed in respect of a salary that has not been paid if the taxpayer can prove that the
employer will never pay the amount and that it has already been included in taxable income in the current or
a previous year of assessment.
 provision for bad debts (section 11(j));
Where an employee can prove that there is a strong likelihood that an employer is not going to pay a salary
that has already been included in the taxpayer’s taxable income, the taxpayer is entitled to claim a provision
equal to 25% of the debt as a deduction. This provision must, however, be included in income in the following
year of assessment.
 premiums paid in terms of an insurance policy against the loss of income (sections 11(a));
With effect from 1 March 2015, section 23(m) no longer permits the deduction of insurance premiums paid
against the loss of income as a result of illness, injury, disability or unemployment. However, from the same
date, all pay-outs in terms of these policies will be tax-free (even where premiums were deductible in the
past).
 Entertainment expenses (section 11(a))
Entertainment expenses may only be deducted by an agent or representative who earns more than 50% of his
remuneration (income from employment) in the form of commission from sales. The expenses must be
incurred in the production of income and not of a capital nature, in terms of the general deduction formula
(section 11(a)).
Entertainment expenditure is not defined in the Act. It was previously described as expenditure incurred in
the provision of hospitality of any kind, which specifically included the following:
 food, drink or accommodation;

 a ticket or voucher entitling any person to admission to a theatre, exhibition or club, to
attend a show, display or performance or to use or enjoy any sporting, recreational or
another facility;
 a gift of goods intended for the personal use or enjoyment of any person;
 travel facility; and
 a voucher entitling the recipient or any holder of the voucher to exchange it for food,
drink or accommodation or for a ticket, voucher, gift, or travel facility as described above.
Deductions cannot be made in terms of section 11(a) for entertainment expenditure incurred by an employee
(or the holder of an office) for which the employee derives “remuneration” (as defined in the Fourth
Schedule), unless he is an agent or a representative normally earning commissions based on his sales or the
turnover attributable to him.
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An agent or representative who earns more than 50% of his remuneration (amount paid by employer) in the
form of the commission can claim all the entertainment costs he incurs in the production of income not of a
capital nature in terms of the general deduction formula (section 11(a)).
 home study expenses (sections 11(a) and 11(d));
A taxpayer who is forced by his employer to bear the cost of maintaining a home office as his central business
location may deduct legitimate expenses that comply with the requirements of section 11(a), or repairs in
terms of section 11(d). The deduction may be in respect of costs such as rental, repairs or expenses relating to
the office. Section 23(b) disallows any portion of these expenses if they are not expended for the purposes of
trade.
 contributions to pension funds (section 11(f);
Contributions made to a pension fund or provident fund are a type of forced saving. Every
month, employers set aside a prescribed amount of each employee’s income from employment and
contribute it to a pension or provident fund. In most instances, the employer will also contribute an amount
on behalf of each employee. When an employee retires, the fund will pay out all the contributions made to
the fund by the employer and employee, plus interest earned over the years. So, when an employee retires
and is no longer earning a salary, he will receive a monthly pension instead, based on the amount that was
contributed during his working years. In practice, employees are compelled to join the employer’s pension or
provident fund, if the employer has one.
Each month a percentage of the employee’s salary is deducted by the employer and paid over to the pension
or provident fund. The employer also takes these contributions into account when he determines the amount
of employees’ tax to be withheld from the employee’s salary or wage. In most cases, an employer will also
make a monthly contribution to the fund on behalf of the employee. The contributions to the fund are made
by the employee and the employer. In this section, we will be looking at how much of the employee’s
(taxpayer’s) contribution to the pension fund will be allowed as a deduction for tax purposes.
Refer to the Prescribed Textbook for further study of the following expenses
 contributions to retirement annuity funds (section 11(n));

 refund of an amount for services rendered or a refund in respect of a restraint of trade, where either
amount had been included in “gross income” (section 11(nA) and (nB)); and
 donations to public benefit organisations (section 18A).
These expenses are now discussed in the order that they are deducted when calculating taxable income.
5.5.10. Current year contributions to pension funds
Members contributing will receive a uniform deduction for contributions to a pension, provident or
retirement annuity fund.
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Deductible contributions will be limited to the lesser of:
➢ A monetary limit of R350 000; or
➢ 27.5% of the greater of:
= Remuneration as defined in the fourth schedule, excluding retirement lumpsum benefits and
severance benefits; or
= Taxable income as determined before allowing a deduction in terms of section 11 (k) and section 18A
donations excluding retirement lumpsum benefits and severance benefits
Contributions more than the annual limits may be rolled over to the future years, where the amounts
will again be deductible together with contributions made in that year, but subject to the limits
applicable in that year.
 Exercise Question
Gift Mabija (45 years old) had a taxable income of R300 000 during the current year of assessment
before donating the following amounts:
Donation to Natal University R800
Donation to AIDS crisis centre (public benefit organisation) R600
Donation to Trees for Africa (not a public benefit organisation) R500
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 during the year.
Order of deductions it is important to remember when calculating taxable income that certain
deductions must be deducted in a specific order in terms of the Act. The last items of any calculation of
taxable income must be:
 the assessed loss brought forward from the previous years of assessment;
 retirement annuity fund contributions (current and arrears); and
 donations to public benefit organisations.
The following information relates to Sam Jacombe (30 years old, unmarried) for the current year of
assessment:
Salary R270 000
Bonus (non-pensionable) R6 000
South African interest (not tax-free investments) R33 800
Medical fund contributions made by Sam (40%) R24 000 His employer pays 60% of the contributions to
the fund
Retirement annuity fund contributions – current R4 200
Pension fund contributions – current 8% of salary
57
Sam pays 100% of his contributions to all retirement funds.
Donation to public benefit organisations – official receipt received R800 Donation to non-public benefit
organisations – receipt received R300 Medical expenses not covered by the fund R5 340 You are
required to
(a) calculate Sam’s taxable income for the current year of assessment.
(b) calculate Sam’s taxable income for the 2017 year of assessment
5.5.11. Income of minors (Sec 7(3))
When a minor child or stepchild receives income in his own right, the income is subject to tax in his own
hands, unless s 7(3) or (4) applies.
Section 7(3) provides that if a parent makes any donation, settlement or other disposition to his minor
child or stepchild, thus resulting in income being received by that child or accrue to that child or being
expended for his maintenance, education or benefit or being accumulated for the child’s benefit, that
income is deemed to have been received by or accrued to the parent of that child.
Therefore, if a father donates an interest-bearing investment to his minor child, any interest derived on
this investment will be deemed to be income of the father in terms of s 7(3) and is therefore taxed in
the parent’s hands. By contrast, income from a donation made by a parent to a minor child is taxable in
the child’s hands, unless some other anti-avoidance provision is brought into effect, such as s 80A.
5.5.12. Foreign tax credit
Where foreign income is included in a resident’s taxable income, it has often been subject to tax in the
foreign country and subsequently is subject to double tax (where there is no double tax agreement with
South Africa and that country) as a result of it is included in gross income for South African income tax
purposes.
In such case, the Act makes provision for a rebate in respect of foreign taxes paid.
This rebate is deducted from South African normal tax. The section 6quat rebate only applies to
residents who have the following included in their taxable income:
 any income received from a source outside the Republic;
 any income included in taxable income as a result of the provisions of section 9D (controlled
foreign entities);
 any taxable capital gain in respect of an asset situated outside South Africa
 any amount (received from a source outside South Africa or the proportional amount in terms
of section 9D) which is deemed to accrue to a resident in terms of section 7;
 any capital gain that is attributed to a resident in terms of the special attribution rules in the
Eighth Schedule; or
58
 any amount that represents the capital of a trust in respect of which a resident acquires a vested right.
Other countries sometimes tax income received by South African residents from a South African source as if the
income fell under their jurisdiction. This often happens with fees received from the rendering of services.
Certain deductions, which apply specifically to individuals, are discussed in this study unit. Where an individual is
carrying on a trade, deductions may also be allowed in terms of the general deduction formula, the special
deduction provisions or one or more of the capital allowances.
An assessed loss from one trade carried on by the taxpayer may be set off against taxable income from another
trade carried on by the same taxpayer.
Although employment is included in the definition of ‘trade’ in s 1, taxpayers may not, in terms of s 23(m),
deduct any s 11 expenditure, loss or allowance relating to any employment or office in respect of which
remuneration is received, apart from the following expenditure;
 Contributions to pension or retirement annuity funds which may be deducted under s
 Allowances or expenditure deductible under s 11(c), 11(e), 11(i) or 11(j)
 Deductions allowed under s 11(a)
 Deductions allowed under s 11(nA) or (nB)
 Any deduction allowable under s 11(a) or (d).
 You must study the various examples given in chapter 10 of your textbook.
5.5.12. Taxation of married couples
Each spouse in a marriage is taxed separately on his or her taxable income for a particular year of assessment
unless one of the deemed inclusion rules of s 7(2) or 7(2A) applies.
Marriage, separation, divorce or the death of a spouse during the year will, therefore, have no effect on the
determination of the normal tax liability of an individual unless s 7(2) or 7(2A) applies. A spouse who dies during
the year of assessment will have a period of assessment of fewer than 12 months and will qualify for
proportional s 6(2) rebates only.
The word ‘spouse’ is defined in s 1 of the Act and includes marriages recognized in terms of custom or religion as
well as live-together unions of a permanent nature. In the absence of proof to the contrary, the last-mentioned
type of marriage or union is deemed to be out of community of property.
 See the examples given in the relevant chapter of your textbook.
59
5.5.13. Separation, divorce and maintenance orders
A change in marital status during a year of assessment does not affect the tax situation of an individual unless
there is an application of s 7(2) or (2A). Each of the former spouses is responsible for the return of his or her
own income tax for the year. A separate assessment is raised on each spouse, covering their independent
incomes, and each is liable for his or her own tax.
Where alimony or maintenance payments are made by A in respect of a spouse or former spouse B and any
children in terms of an order of divorce or judicial separation granted in consequence of proceedings
instituted or under a written agreement of separation entered into after 21 March 1962, the following
applies;
1. The party who pays the alimony or maintenance (A) is not entitled to have his or her taxable
income reduced by the amount paid (s 21)
2. The party receiving the alimony or maintenance (B) is not liable for tax on this amount.
5.5.14. Antedated salaries and pensions
Section 7A provides for the spread, in arrears, of an antedated salary or pension.
An antedated salary or pension is an amount of salary or pension that becomes payable to a person, with
retrospective effect, in respect of a period ending on or before the date on which the grant has become
effective (s 7(A (1)).
If the period in respect of which the payment is made (the accrual period) commences before 1 March of the
current year of assessment, the taxpayer can elect to spread the taxability of the payment.
If the accrual period commenced not more than two years before 1 March of the current year of assessment,
the antedated salary or pension will be apportioned over the total accrual period on the basis of the number
of months in each year of assessment.
If the accrual period commenced more than two years before 1 March of the current year of assessment, the
antedated salary or pension will be deemed to have been received or accrued in three equal instalments. One
third will be taxed in each of the current and previous two years of assessment. The previous two years’
assessments will, therefore, be reopened and reassessed.
 Study the examples in your textbook.
5.5.15. Amendments in respect of the 2013 year of assessment
The deduction system for medical aid contributions was converted into a credit system with effect from 1
March 2015. A new 6A rebate, known as the medical scheme fees tax credit, must be deducted from the
normal tax payable by a taxpayer who is a natural person, unless the taxpayer is entitled to a 6(2)(b) rebate
for taxpayers 65 years or older (s 6A (1)).
60
The medical scheme fees tax credit applies in respect of fees paid by the taxpayer to a registered
medical aid fund or scheme.
The amount of the medical scheme fees tax credit must be;
 R257, if fees are paid in respect of the taxpayer

 R514, if fees are paid in respect of the taxpayer and one dependent
 R514, if fees are paid in respect of the taxpayer and one dependent, plus R172 in respect of fees
paid in respect of each additional dependent for each month in which those fees are paid. (s 6A
(2)(b)).
Fees paid by the estate of a deceased person are deemed to have been paid by the person on the day
before his or her death and fees paid by the employer of the person is, to the extent that the amount
has been included in the income of that person as a taxable benefit in terms of the Seventh Schedule,
deemed to have been paid by that person.
For the purposes of s 6A, a dependent in relation to a taxpayer means a dependent as defined in s 1 of
the Medical Schemes Act 131 of 1998.
Example
Here can add more information, summarise the key learning from the example and link back to the
topic and a Concluding sentence.
5.5.16 SUMMARY
The study unit focused on taxpayers who are natural persons and looked at the types of income that
these persons earn and the tax implications of each, including the expenses incurred in getting that
income that is allowed as deductions. Section 11, 23A and the fringe benefits were, therefore,
necessary in order to understand the treatment of these items for tax purposes. It is important to note
that the retirement contributions addressed herein are the latest ones as amended, with effect from 1
March 2016.

explanation of natural persons taxation.
61
Read pages from 141 in your prescribed textbook and do questions in the
graded questions book
Caselet:
The following information is relevant to Samirah, a South African resident,

during the 2017 tax year.
 Samirah received an annual salary of R 312 600 and a

travel allowance of R 54 000 from her employer, Storm
(Pty) Ltd. Her employer included 80 % of her travel
allowance when calculating her employee’s tax payable.
 In the prior tax year, Samirah received a salary of R 280

000 and a travel allowance of R 48 000.
 Samirah paid annual retirement annuity contributions of R

42 500.
 Samirah was the main member of a medical aid fund

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and her husband and her two minor children were

listed as dependents. Her employer paid her monthly
contributions of R 4 380.
 Her employer provided her with a 4-roomed house
in which to live during the tax year. This house was
furnished and her employer paid for electricity
used. Storm (Pty) Ltd owns the house and
Samirah had no interest in the house.
 Samirah drove one vehicle during the 2017 tax year,
this vehicle had a cost of R 210 000 (including VAT).
The odometer readings were as follows:
1/03/2016 41 887
28/02/2017 62 135
- According to Samirah’s logbook 10 675km of her travelling

related to business.
 Samirah paid a tax consultant R 1 500 to prepare her tax

return.
 Samirah purchased a laptop costing R 12 660 on 1
November 2016. Samirah used this laptop when
visiting clients. The accepted write off period for the
laptop is 3 years.
 She received Dividends from her JSE share
portfolio of R 32 618. She earned foreign
dividends of R 9 146. There was no foreign tax
levied on these dividends.
 Samirah had additional medical bills of R 38 477
that were not covered by her medical aid fund.
 She earned interest on her SA money market of R 24
687.
 Samirah received an annuity of R 1 950 per month.
She purchased this annuity for an amount of R 80
000 on 1 October 2015. The annuity is to be paid
monthly for a period of 4 years.
 Samirah turned 35 years old on 20 January 2017.
You are required to calculate Samirah's tax liability for the year ended 28
February 2017.
REFERENCES
RD; 2018 LexisNexis
63
The following information is relevant to Daniella Song, a South African

resident (aged 40), during the 2015 tax year.
 Daniella received an annual salary of R 360 000 and a bonus of R 30

000 from her employer, Banks Ltd.
 Her employer provided her with the use of a motor vehicle which
was purchased for R 228 000 (including VAT). There is no
maintenance plan on the vehicle and her employer covers all vehicle
costs. Her employer expected her to use the vehicle equally for
business and private purposes.
 Daniella kept a logbook which showed that of the total 15 620 km

travelled by her during the year, 10 870 km related to business
travel.
 Her employer paid her monthly medical aid contributions of R 2

240. Daniella is the main member of the medical aid and her
husband is a dependant on her medical aid.
 Daniella contributes R 70 000 to an independent retirement annuity

fund.
 Daniella has receipts for donations to Public Benefit Organisations

totalling R 25 000.
 Daniella received dividends from her JSE share portfolio of R 20 000

and foreign dividends of R 6 000.
 She earned interest of R 14 000 on a local money market account.
 On 1 September 2014, she bought a flat and immediately rented

this out. She earned R 60 000 in rental income during the year and
incurred the following expenses:
1. Repairs and maintenance R 6 000
2. Rates & electricity R 8 000
3. Bond interest R 44 000
She purchased furniture costing R 30 000 on 1 September 2014 to be used by

the tenant in the flat.
Required:
(a) Calculate the annual employee’s tax that will be deducted by Daniella’s
employer using the 2015 sliding scale (NOTE: her employer does not take
her RAF into account but does take her donations into account).
(b) Calculate Daniella’s tax owing to SARS or refund due by SARS for the year
ended 28
64
February 2015 if employee’s tax as per (a) above was paid by her during the
year.
STUDY UNIT 6: THE TAX RETURNS

This learning unit outlines the tax returns that are submitted by tax payers as
Purpose part of the reconciliation of their tax obligations

Learning  Complete ITR12 and ITR14 tax returns on e-filing and
Outcomes manually
EMP201 is a payment declaration in which the employer

Important terms declares the total payment together with the
and definitions allocations for PAYE, SDL, UIF and/or ETI
EMP501 is a report that has all of your staff earnings required
by SARS. The report needs to be submitted twice a
year and it must be submitted before you can issue
IRP5s certificates to your staff
5.6.1. Introduction
SARS has one comprehensive income tax return for individuals, that is, the Personal Income Tax Return
(ITR12). This return is dynamic when completed via e-filing. It can expand or contract depending
on the complexity of a taxpayer's income tax affairs. The ITR12 will come pre-completed with the
taxpayer’s personal information in addition to being pre-populated with their tax contributions and tax
deductions for the year of assessment based on the IRP5/IT3(a) certificates provided by employers.
Taxpayers will then simply have to complete the remaining relevant portions of the form and submit
this to SARS.
Once you have studied this section, you should be able to explain how tax returns are used to enhance
tax payers to meet their tax obligations.

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 Documents used to submit a tax return
 IRP5s
 EMP 201
 EMP 501
5.6.2. Necessary documentation to submit a tax return
The following documentation is required in order to complete an individual tax return:
 Your banking details

 Your IRP5 and or IT3(a) certificates
 Certificates from financial institutions in respect of investment income received
and capital gains/losses- IT3(b) and IT3(c)
 Medical aid certificate showing contributions for the year as well as details of
any additional medical expenditure incurred
 S18A donation certificates
 Tax-free savings- IT3(s) certificate
 Certificate from your retirement annuity fund showing annual contributions
 Information relating to travel expenditure
 Information relating to capital gains
 Schedules of income and expenses for any additional sources of income that is,
rental, business etc
 Statement of assets and liabilities as at year end of the current year of assessment
5.6.3. More information on Tax Returns
All the relevant material for this study unit has been derived directly from the SARS through their
sites;
www.sars.gov.za and
www.sarsefiling.co.za
You should visit these sites to familiarize yourself with some of the provisions and any
further information and guidance.
The specific guidelines on who is expected to register for income tax, how to register and
how to complete the income tax return have given in the documents that have been
prepared by SARS.
5.6.4. Methods of filing an income tax return

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A taxpayer can submit an income tax return manually through any one of the SARS
branches, through the internet via the SARS e-filing portal or through a self-help terminal
at some of the SARS branches.
Study the SARS guidelines and visit the two SARS sites whose links have been given to you
above.
5.6.5. Summary
In this study unit, the practical element of submitting tax returns was discussed in
detail, including the EMP201.
Example
Refer to pages xxxx in your prescribed textbook for a comprehensive

explanation of xxxx.
Read pages xxx in your prescribed textbook and do xxxx
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Caselet: xxxxx
xxxxxxxx
Include instructions here xxx
1. xxx
References
RD; 2018 LexisNexis
Create an e-filing profile on the SARS website and capture the total PAYE, SDL
and UIF amounts as calculated in study unity 5 previously.
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STUDY UNIT 7: FRINGE BENEFITS AND ALLOWANCES

This learning unit discusses the other components of remuneration which
Purpose need to be included in the taxable income.
 Apply the provisions of the Act, the Seventh Schedule and the
Learning VAT Act in respect of fringe benefits in both practical calculation
Outcomes questions and theoretical advice questions
 demonstrate your knowledge with regard to fringe benefits by
means of an integrated case study.
Time
Important terms Fringe An employee "fringe benefit" is a form of pay other than
and definitions benefits money for the performance of services by employees
5.7.1. Introduction
The remuneration packages of employees can consist of a combination of a cash salary, fringe benefits
and allowances and advances. Benefits or assets given by employers to employees, in a form other than
cash, eg-the use of company car are defined as taxable benefits in s 1 of the Seventh Schedule and are
generally referred to as fringe benefits. The taxable value of fringe benefits (referred to as the ‘cash
equivalent’) is included in gross income through the application of par (i) of the definition of ‘gross
income’ in s 1 of the Act. Paragraph (c) of the definition of gross income (see chapter 4) is subject to par
(i) of the same definition (proviso (i) to par (c)). It is therefore important to determine whether the
Seventh Schedule excludes a benefit or gives a nil-value to it. If the Seventh Schedule excludes a
benefit, it means that par (c) can still be considered. If the Seventh Schedule gives a nil value to a
benefit, it means that par (c) cannot apply.
The taxation of allowances and fringe benefits will be covered in this study unit
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 Allowances
 Seventh schedule benefits
5.7.2. Allowances – S8(1)
An allowance is often given to employees in order to cover any expenses that they incur as a result of
their employment. The employer must add the full amount of the allowance to the income, except for
travel allowances of which either 80% or 20% must be added, in order to calculate the amount of the
remuneration for the calculation of employee’s tax.
The taxable portion of the allowance will eventually be equal to the allowance received less any
deductions which the taxpayer may claim against the allowance in respect of business expenses
incurred
5.7.3. Travel allowance – S8(1)(b)
An employer can pay two types of travel allowance:
 a fixed travel allowance, which means that the employee receives the same amount as an
allowance monthly, irrespective of how many kilometres he or she travels for business
purposes, or
 a reimbursive travel allowance or advance based on the actual distance travelled for business
by the receiver of the allowance or advance. The employee therefore first travels for business
and then claims the reimbursive allowance based on actual data.
5.7.4. Fixed travel allowance
Where a fixed allowance or advance is paid monthly, the portion of the allowance that is expended for
business purposes is effectively tax-free. Only that part associated with private use will, therefore, fall
into the recipient’s taxable income. Travelling between the recipient’s place of residence and his or her
place of employment is not regarded as business travel (s 8(1)(b)(i)). Expenses for business purposes
can only be claimed if the taxpayer keeps an accurate log book of his business travels. Any motor car
can be used for this purpose (please note the exception discussed above if the travel allowance is
received in respect of a par 7 company car). The Act does not define the term ‘motor car’ and students
must attach the normal dictionary meaning to it, and not the meaning given to the word ‘motor car’ in
the VAT Act.
The portion of the allowance or advance expended for business purposes is calculated in one of two
ways:
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 Actual business kilometers travelled during the year multiplied by the deemed rate per
kilometer.
 Actual business kilometers travelled during the year multiplied by the actual rate per kilometer
as supported by accurate records kept.
The table of rates prescribed from 1 March 2018 is provided in the prescribed textbook (Appendix
C)
Where the expenditure claimed is based on accurate data, s 8(1)(b)(iiiA) states that
 In the case of a vehicle that is leased (financial lease or operating lease), the total payments for
the year may not exceed the amount of the fixed cost in the table in Appendix C for the
category of vehicle used, and
 ln any other case, the wear-and-tear must be determined over a period of seven years from the
date of acquisition of the vehicle. The cost of the vehicle is currently limited to R560 000 and
the finance charges must be limited to an amount as if the original debt had not exceeded R560
000. Please note that the five-year period of wear-and-tear in Interpretation Note No. 47,
therefore, does not apply.
The value of the vehicle is used to determine the correct amounts for the three components of the
deemed rate per kilometer from the table in Appendix C.
The ‘value’ of the vehicle (see Appendix C) is:
 the original cost, including VAT but excluding any finance charges, where the vehicle was
acquired under a bona fide agreement of sale or exchange
 the cash value as contemplated in the definition of ‘cash value’ in s 1 of the VAT Act if it was
held by the recipient of the allowance under a lease contemplated in par (b) of the definition of
‘instalment credit agreement’ in s 1 of the VAT Act, or was held by him under a financial lease,
or
 The market value of the vehicle at the time when the recipient first obtained it or the right of
use of it, plus VAT on the market value, in any other case.
The deemed rate per kilometer is determined as the sum of the following three components:
5.7.5. The fixed cost component
This is the fixed cost divided by the total kilometers travelled in the vehicle (for both private and
business purposes) during the period in which the travel allowance was received. The fixed cost
component represents the cost of wear-and-tear, interest, license and insurance for both private and
business kilometers for a full year of assessment. It must, therefore, be apportioned on a daily basis
(365 or 366 days) to calculate the fixed cost for the period if the travel allowance is received for less
than the full year. Thereafter it is divided by the total kilometers travelled during the period that the
travel allowance was received in order to calculate a cost per kilometer.
 The fuel cost component: This is the fuel cost per the table (where the recipient of the
allowance has borne the full cost of the fuel used in the vehicle).
 The maintenance cost component: The maintenance cost per the table (where the recipient has
borne the full cost of maintaining the vehicle including the cost of repairs, servicing, lubrication
and tyres).
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 Example
Mr X owns a motor vehicle that cost him R120 000, inclusive of VAT but exclusive of any finance
charges. He received a travel allowance of R1 600 a month from his employer during the year of
assessment. He travelled 22 000 km in the vehicle during the 2016 year of assessment of which 4 000
km was travelled for business purposes. Mr X kept an accurate log book. The following actual costs
(which include VAT where applicable) were incurred by Mr X:
Fuel costs R8 000
Maintenance costs 4 000
Insurance 2 400
Finance costs 12 000
License cost 400
Calculate the taxable amount of the travel allowance to the greatest benefit of Mr X.
5.7.6. Reimburse travel allowance
 Visit the prescribed textbook
5.7.7. Subsistence allowances S8(1)(c)
A subsistence allowance may be granted to cover personal subsistence and incidental costs when an
employee is required to spend at least one night away from his usual place of residence in South Africa
for business purposes. Only the portion of the allowance that exceeds the amounts that can be claimed
as set out below is included in the recipient’s taxable income (s 8(1)(a)(i)(bb)). For the purpose of
determining the taxable portion of the allowance, the recipient is deemed to have expended the
following amounts:
 The expenditure actually incurred in respect of accommodation, meals or other incidental

costs, but limited to the amount of the allowance paid, if proved to the Commissioner.
 Where the recipient has not provided proof of actual expenditure, an amount based on the
following rates applies in respect of meals and incidental costs for each day or part of a day
that the recipient is required to be away from his usual place of residence in South Africa,
but limited to the amount of the allowance paid:
For travel within South Africa
 R109 per day if the allowance is granted to defray incidental costs only, or
 R353 per day if the allowance is granted to defray the cost of meals and incidental
costs. For travel outside South Africa and if the allowance covers the cost of meals and
incidental costs, an amount per day determined in terms of the table in Appendix F (or
Notice 98 of GG 38476 dated 25 February 2015) for the country where the
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accommodation is situated. See chapter 19 for a discussion of the s 25D translation

rules for foreign exchange amounts.
Any expenditure borne by the employer (other than the granting of the allowance) cannot be seen as
part of the employee’s actual or deemed expenditure (s 8(1)(c)(ii)(aa)). The requirement that the
recipient must be away from his usual place of residence in South Africa implies, first, that he must have
a usual place of residence in order to qualify for the application of this provision. It cannot apply if, for
example, he receives a subsistence allowance after he has given up his usual place of residence in order
to move to a new place of residence. Secondly, the provision cannot apply if his usual place of residence
is not in South Africa. An employee can only claim expenditure against a subsistence allowance if the
allowance is paid on an ad hoc basis. A deduction will not be allowed if an employee’s remuneration
package is structured to include a fixed amount for subsistence purposes. It is essential that the
taxpayer must actually have received a subsistence allowance before any relief can be claimed under
the provisions of s 8(1)(c).
5.7.8. Employees’ tax
No employees’ tax is deducted from a subsistence allowance (subsistence allowances are excluded from
the definition of ‘remuneration’ in the Fourth Schedule (par (bA)(ii)). Any unexpended portion will be
subject to normal tax on assessment. The full allowance (100%) must, however, be reflected on the IRP
5 (usually as non-taxable), even if it does not exceed the deemed expenditure on subsistence.
If the employee has not, however, by the last day of the month following the payment of a subsistence
allowance, either spent a night away from his usual place of residence or paid the allowance back to his
employer, it will not be seen as a subsistence allowance. It will then be deemed that he has received a
payment for services rendered (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in
the Fourth Schedule) and must be included in gross income in terms of par (c). The amount will then
also be remuneration (in terms of par (a) of the definition), and employees’ tax must be deducted. The
full amount must then be shown as part of the salary on the IRP 5.
 Example
Mr X is obliged to spend two days and one night away from his usual place of residence for business
purposes during the 2016 year of assessment. He receives an allowance of R1 580 from his employer.
Calculate the taxable amount of the allowance assuming that:
(a) Mr X travels within South Africa and is able to prove that he incurred an actual expenditure of R1
650 on meals, accommodation and other incidental costs.
(b) The employer pays for Mr X’s accommodation in South Africa and Mr X pays R350 for meals and other
incidental costs, but he does not keep the documentation to prove this expenditure.
(c) The employer pays for Mr X’s accommodation in Angola and Mr X pays the equivalent of R700 for
meals and other incidental costs, but he does not keep the documentation to prove this expenditure.
Assume the exchange rate is US$1 = R10.
5.7.9. Other allowances – S8(1)(a)(ii)
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S8(1)(a)(ii) deals with other allowances. The general principle is that allowances are included in gross
income and, where the recipient is an employee who does not earn income mainly in the form of
commissions from sales, S23(m) applies. This section restricts the deductions that may be claimed by
salaried employees.
5.7.10. Entertainment allowance
A person who is an agent or representative whose remuneration is derived mainly in the form of
commission based on sales (at least 50% of his remuneration) may, upon completion of the annual
income tax return deduct entertainment expenses incurred for business purposes against commission
income earned (this is not limited to the amount of any allowance received)
5.7.11. Computer allowance
When an employee receives an allowance from his employer to cover the cost of using his personal
computer for business purposes, the amount paid for such allowance must be included in the gross
income of the employee, but a deduction may be claimed for the wear and tear of the computer to the
extent to which the computer is used for business purposes. Salaried employees are allowed to claim a
S11(e) allowance on assets used for business purposes in terms of S23(m). This wear and tear allowance
is calculated at 331/3 % per annum on the cost of the computer hardware and 50% per annum on the
cost of the computer software. Commission earners are entitled to a S11(e) deduction provided they
use their computers for business purposes.
5.7.12. Cell phone allowance
An employee may reimburse an employee for the use of a private cell phone to the extent that the cell
phone is used for business purposes.
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5.7.13. Home office allowance
If an employee is required to work mainly (more than 50% of the time) from home and he has a room which is
specifically equipped and is used regularly and exclusively for this purpose, it is general practice to pay such an
employee a home office allowance. This allowance is fully taxed in the hands of the employee, but he may claim
expenses relating to the office on a pro- rata basis using the following formula:
Total household expenditure x Area used exclusively for business purposes / Total area of the residence
The deduction is not limited to the allowance received.
5.7.14. Seventh Schedule benefits
Paragraph (i) of the definition of gross income in s 1 of the Act includes the cash equivalent (as determined in the
Seventh Schedule) of the value of a taxable benefit (as defined) in gross income. The definition of ‘taxable benefit’
excludes certain benefits, namely
 benefits that are exempt in terms of s 10
 certain benefits provided by a benefit fund
 lump sum benefits from a Provident Fund, Provident Preservation Fund, or benefit fund
 s 9(2)(g) and (h) benefits (services rendered for government and the holding of a public office), and
 SBs.
Paragraph 2 describes the different types of taxable benefits and the cash equivalents of the various taxable
benefits are then determined in terms of par 5 to 13.
Note The Act contains ‘no value’ provisions in respect of each type of taxable benefit. This means that the specific
benefit is a par (i) fringe benefit, but that the cash equivalent thereof is in effect Rnil. Such ‘no value’ benefits need
therefore not be included in gross income in terms of par(c).
An employee is deemed to have been granted a taxable benefit by his employer in respect of his employment if
one of the specified types of benefits is granted to the employee as
 A benefit or advantage of or by virtue of his employment, or
 A reward for services rendered or to be rendered by him to his employer.
The concepts of ‘employer’, ‘employee’ and associate institution are all defined in part 1. Since an employer-
employee relationship is a pre-requisite to the application of the Seventh Schedule, these definitions need to be
studied.
Students must study the following Seventh Schedule benefits that have been explained in the prescribed textbook;
 Benefits granted to relatives of employees and others
 Consideration paid by the employee
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 Employer’s duties
 Assets acquired at less than the actual value (paras 2(a)n and5)
 Use of sundry assets (paras 2(b) and 6)
 Right of use of motor vehicles (paras 2(b) and 7)
 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8)
 Residential accommodation (paras 2(d), 9 and 10A)
 Holiday accommodation (paras 2(d) and 9)
 Free or cheap services (paras 2(e) and 10) Low-interest loans (paras 2(f) and 11)
 Housing subsidies (paras 2(g), (gA) and 12
 Discharge or payment of obligation (paras 2(h) and 13)
 Medical aid contributions (paras 2(i) and 12A)
 Costs relating to medical services (paras 2(j) and 12(B)
 Benefits in respect of insurance policies (paras 2(k) and 12C)
5.7.14. Right to acquire marketable securities
Section 8A read with par (i) of the definition of gross income in s 1 provides that gains made by a director or
employee by virtue of the exercise, cession or release, whole or in part, of a right to acquire any marketable
security must be included in gross income. This inclusion will be applicable if the right was obtained by the
taxpayer as a director or former director of a company or in respect of services rendered or to be rendered by him
as an employee to an employer.
The taxpayer is deemed to have made again by the exercise of a right to acquire a marketable security if its market
value at the time he exercised his right exceeds the sum of the consideration given by him for the security and the
consideration given by him for the right or the granting of the right. For this purpose, the market value of the
marketable security is taken to be the sum that a person having the right freely to dispose of the security might
reasonably expect to obtain for it in a sale on the open market (s8A(2)(a)).
It is this amount that will be included in the taxpayer’s income as a gain. (s8A (3) (a)).
 See additional notes and the example of an employee’s tax in relation to the right to acquire
marketable securities given in your textbook.
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5.7.15. Broad-based employee share plans
An employee who acquires shares from an employer for a consideration that is less the market value thereof is, in
the absence of s 8B, treated as having received a fringe benefit to the extent of the shortfall, all of which is
taxable in the hands of the employee.
The gain made by a person from the disposal of any qualifying equity share or any right or interest in a qualifying
equity share within five years from the date of grant is included in his/her income in terms of s 8B (1). The date of
grant is the date on which the granting of the equity share is approved by the directors of the Employer Company
or some other person or body of persons with comparable authority.
If the employee sells the shares after this five-year period, the employee’s gins will generally be of a capital nature
and will, therefore, attract capital gains tax in terms of the Eighth Schedule.
The amount received by an employee in the form of a qualifying equity share is exempt in terms of s 10(1) (nC).
For a share to be a ‘qualifying share’, that share must satisfy two requirements. These requirements are;
 The person must acquire the share in terms of a broad-based employee share plan
 The total qualifying equity shares acquired by the person under the plan may not exceed
$50,000 in market value in the current year and the four immediately preceding years of
assessment.
The aim of this section is to ensure real participation by the employees and therefore the following conditions
must have satisfied in terms of a broad-based employee share-plan;
 Equity shares in that employer or in any company that is an associated institution as defined
in the Seventh Schedule in relation to the employer, are acquired by the employee for a
consideration that does not exceed the minimum consideration required by the Companies
Act. The employer must, therefore, offer the shares to the employee free for a minimal
consideration.
 At least 80% of all employees that are employed by that employer on a permanent basis on
the date of grant are entitled to participate
 The employees who acquire the equity shares are entitled to all dividends and full voting
rights in relation to those shares
No restrictions have been imposed in respect of those equity shares.
 Study the example on ‘employees’ tax’ given in relation to the broad-based employee share plan in
the prescribed textbook.
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5.7.16. Taxation of directors and employees at the vesting of

equity instruments
Section 8c deals with taxation on the vesting of equity instruments in directors and employees.
The term ‘equity instrument’ in s 8C (7) covers the following;
 A share
 A member’s interest in a company
 Share options
 Any financial instrument that is convertible to a share or member’s interest
 Any contractual right or obligation the value of which is determined directly or indirectly with
reference to a share or member’s interest.
The equity instruments must have been obtained by reason of his service or office as director or from
any person as a result of an agreement with his employer by virtue of the fact that he held any
restricted qualifying equity instruments, or as a restricted equity instrument during the period of his or
her employment by or office of director of any company from that company or any associated
institution in relation to that company, or any person employed by or that is a director of that company
or any associated institution in relation to that company.
 Example
Calculate the taxable value of each of the following fringe benefits received by Mr Adam for the year
ended 28 February 2015
Due to the fact that Mr Adam’s employer was experiencing cash flow problems, he decided instead of
giving Mr Adam a cash bonus to rather give him the following:
a) A copy machine with a market value of R2 300. The company had leased this machine for the
past year at R300 per month and acquired it by making a final payment of R250 on the day it
was given to Mr Adams’
b) A watch from trading stock. Mr Adam’s employer had purchased the watch in 2003 at a cost
of R3 200, but due to changes in technology, he was not able to sell it and the estimated
market value of the watch is now only R1 000
c) He also provided Mr Adam’s with a computer which he can take home and use for private
purposes from September 2014. The computer will, however, remain on the asset register of
the company. The book value of the computer was R8 000 and his employer had paid R7 500
for the computer 12 months ago.
 Solutions:
a) Copy machine (at market value) R2 300
b) Watch (lower of cost or market value) R1 00
c) Computer (R7 500 x 50% x 15%) R 563
The total value of fringe benefits received R3 853

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 Example
For the year ended 28 February 2018, Mr Henry is given the use of a motor vehicle by his employer. The
motor vehicle costs his employer R228 000 including VAT). Mr Henry kept a log book which showed that
he travelled 20 000 km in total for the tax year of which 15 000 km were for business purposes. The
value of the fringe benefit (i.e. the value of the private use) which will fall to be taxed in Mr Henry’s
name.
 Solution
Will be calculated as follows:
Calculate total fringe benefit: R228 000 x 3.5% x 12 months = R95 760
Calculate business travel: 15 000 km/ 20 000 km x R95 760 = R71 820
Calculate the taxable value of the fringe benefit = R95 760 less R71 820 i.e. business portion
= R23 940
Therefore, an amount of R23 940 will be included in Mr Henry’s taxable income for the year ended 28
February 2015.
Calculate the amount of the deduction which each of the following persons may claim from travel
allowances received in the 2015 tax year:
a) Mr A kept accurate detailed records:
- Cost of vehicle R100 000
- Total Km travelled 41 232 Km
- Business Km travelled 34 520 Km
- Total costs incurred during the year:
- Instalments on hire purchase agreement R30 000
- Interest on hire purchase R8 000
- Fuel costs 13 820
- Services 14 120
- Tyres 2 600
- Insurance and licenses 6 960
- Repairs 14 600
b) Mr B kept a logbook
- Cost of vehicle R85 000
- Km reading on 1 March 2014 124 789 Km
- Km reading on 28 February 2015 166 089 Km

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- Business Km travelled 29 430 Km
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 Solution:
a) Value of vehicle R 100 000
Total Km travelled 41 232

Business Km travelled 34 520
Cost:
Repairs and maintenance R31 320 (14 120 + 2 600+ 14 600)
Fuel 13 820
Insurance and licenses R6 960
Instalments R30 000
R82 100
Therefore:
Business costs: total cost / total Km travelled x business Km travelled
= R82 100/ 41 232 x 34 520
= R68 735.25
Example
5.7.17. Summary
In this study unit, we discussed the provisions of the law on how fringe benefits are taxed. The key issue here is that most
of these fringe benefits are to be included in one’s gross income, and therefore, be, their effect on taxable income can be
seen when one applies the Framework to determine normal tax liability.

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Caselet: xxxxx
Xxxxxxxx
Explain the taxation of directors and employees at the vesting of equity

instruments.
Add concluding sentence….
REFERENCES
SILKE: South African Income Tax 2018: Stiglingh M; Koekemoer AD; Van Zyl L; Wilcocks JS; De Swardt RD; 2018
LexisNexis
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A Student’s Approach to Income Tax – Business Activities 2017: Bruwer L; Cass C; Cucciolillo D; Koekemoer A;
Oosthuzen A; Stedall C 2017 LexisNexis
XYZ Ltd grants 2 500 of its shares to each of its permanent employees on 23
February 2015.
The shares are trading at R5,50 each on the date on which the grants are
approved. The employees paid R1 per share, being the nominal value thereof.
No restrictions apply to these shares, except that these shares may not be
sold before 23 February 2020 unless the employee is retrenched or resigns. If
an employee leaves the employment of XYZ Ltd before 23 February 2020, the
employee must sell all 2 500 shares back to XYZ Ltd at the market value of the
shares on the date of departure. XYZ Ltd appoints a trust to administer all the
shares administered under the plan.
Mr A, an employee of XYZ Ltd, resigns on 15 January 2021 and subsequently
disposes of his shares on the open market for R16 250.
Mr B, an employee of XYZ Ltd, resigns on 1 February 2017. The market value

of the equity shares was R5 on 1 February 2017. Mr B sold his shares back to
XYZ Ltd as agreed by the parties.
Discuss the tax consequences of the above transactions. Assume that XYZ has
a February year-end.
STUDY UNIT 8: RETIREMENT BENEFITS

Purpose This learning unit describes taxation of retirement benefits.
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Learning
Outcomes  The taxation of retirement benefits
 The distinction between lump sum from employers and lump
sum from funds
Important terms lump sum is any amount payable by a retirement fund to a member
and definitions benefit or former member in consequence of his or her
membership or past membership in that specific
retirement fund.
5.8.1. Introduction
The taxability of lump sum benefits received by an employee from a fund or an employer at retirement, death or
resignation is determined by par (d), (e), (eA) and (f) of the gross income definition in s 1 and the Second Schedule in the
Act.
Based on their treatment,
 Lump sums can be divided between;
 Lump sums from employers
 Lump sums from funds.
The main difference between lump sums from funds and lump sums from an employer is that the net amount of a lump
sum from the fund is included in gross income, while the gross amount received from an employer is included in gross
income.
 Benefit fund
 Lump sum benefit
 Retirement funds
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5.8.2. Lump sums from employers
Lump sums received from an employer are included in gross income of a taxpayer either in terms of par (d) or par (f) of
the gross income definition.
Lump sums from an employer must meet the requirements of the definition of severance benefits before it can be taxed
in terms of the new tax table applicable to severance benefits.
Paragraph (d) of the definition of gross income in s 1 includes in gross income any amount, including any voluntary
award, received or accrued in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of
any office or employment or of any appointment to any office or employment.
Amounts that meet the requirements of the definition of severance benefits will also be included in gross income in
terms of par (d).
Lump sums from benefit funds must also be included in gross income in terms of par (d).
Ordinarily, an amount accruing to a deceased taxpayer would accrue only after the date of death, and then to someone
other than the deceased. The second proviso makes it clear that the amount must be included in the deceased’s gross
income for the period ending on his death.
Payments received by an employee from his employer on the termination of his employment, in consideration for his
undertaking not to engage in certain employment or a certain occupation in a defined area for a specified period of time
do not fall within par (d) as these constitute receipts of a capital nature, but are included in gross income as defined in s
1 in terms of par (cA) of that definition. The amount is received as consideration for the employee’s acceptance of a
restraint of trade and not for the relinquishment, termination, loss, repudiation, cancellation or variation of any office or
employment.
5.8.3. Fund benefits definition of gross income and Second Schedule
Paragraph (e) of the definition of gross income in s 1 includes in a person’s gross income any retirement fund lump sum
benefit or retirement fund lump sum withdrawal benefit but excludes an amount included under par (eA).
A lump sum benefit is defined in part 1 of the Second Schedule and includes
 An amount determined by the commutation of an annuity or portion of an annuity payable by or

provided in consequence of membership or past membership of any fund, and
 Any fixed or ascertainable amount other than an annuity payable by or provided in consequence of
membership or past membership of any fund whether in one amount or in instalments other than any
amount deemed to be income accrued to a person in terms of s 7(11).
The Second Schedule draws a distinction between a benefit derived by a taxpayer who
 Retires from a fund or dies, or

 Resigns or withdraws from a fund.
Five types of funds are affected by the provisions of the Second Schedule, namely
 Pension funds (PF)

 Pension preservation funds (PPF)
81
 Provident funds (PF2)

 Provident preservation funds (PPF2)
 Retirement annuity funds (RAF).
The Second Schedule sets out various rules to determine the allowable deduction against lump sum benefits from funds.
The taxable portion of the lump sum received during the year is included in gross income (par 2(1) (a) and 2(1) (b) of the
Second Schedule)
The actual lump sum received from the fund is therefore not included in gross income, 0nly the taxable portion thereof is
included.
See the diagram that summarises the calculation of the taxable amounts of retirement lump sums given in your textbook.
The textbook also gives several examples that you must read.
5.8.4. Amendments in respect of the 2013 year of assessment
The funds to which transfers can be made that qualify for par 6(1) (a) deductions were amended with effect from 1
March 2012. The basic philosophy for permitted transfers between retirement savings funds is to permit the transfer of
less restrictive funds to equal or more restrictive funds.
The amendment accordingly permits all fund transfers to retirement annuity funds. The funds to which transfers can be
made that qualify for par 6(1) (a) deductions can be summarized as follows;
 Table 8-1: Treatment of lumpsum from retirement
Fund from which pre-retirement lump sum is Fund to which specific transfer can be made
received
PF PF, PPF, RAF
PPF PF, PPF, RAF
PF2 PF, PPF, PF2, PPF2, RAF
PPF2 PPF, PF2, PPF2, RAF
RAF RAF
 Study the relevant chapter in your textbook in the prescribed textbook.
Example
82
5.8.5. Summary
In this study unit, we discussed the tax treatment of retirement benefits as required by the Act and the relevant
Schedules.

Caselet: xxxxx
xxxxxxxx
83
What is the difference between lump sums from employers and lump sums
from funds?
________________________________________________________________
________________________________________________________________
______________
Define a lump sum benefit per the Second Schedule.
________________________________________________________________
________________________________________________________________
______________
What are the four types of income that the rating concession refers to?
________________________________________________________________
________________________________________________________________
______________
a) X
b) X
c) X
d) X
e) X
84
STUDY UNIT 9: PREPAID TAX

This Learning unit describes employee tax as well as provisional as prepaid
Purpose
tax.
 The concept of provisional tax and the calculation thereof

Learning
Outcomes  The taxpayers who are liable for registration as Provisional taxpayers
 The dates upon which the first, second and third provisional tax
payments are due to SARS
85
Important terms Provisional It is a method of paying the income tax liability in advance,
and definitions tax to ensure that the taxpayer does not remain with a
large tax debt on assessment.
5.9.1. Introduction
Employees’ tax, comprising Pay As You Earn (PAYE and Standard Income Tax on Employees (SITE) is required to be
withheld monthly from remuneration paid or payable by an employer to an employee in terms of the Fourth Schedule to
the Act. The employer pays over the tax withheld to the Commissioner within seven days after the end of the month it
was withheld. The monthly deductions are merely called employees’ tax. It is only at the end of an employee’s tax
period that the employer must divide the employees’ tax between SITE and PAYE.
The employees’ normal tax liability is reduced by the employees’ tax that has been deducted from his remuneration
during the year. The employees’ tax is not an additional tax but merely upfront payments of an employee’s normal tax.
The amount of employees’ tax to be withheld is calculated on the balance of remuneration in terms of par 2(4).
The assessment issued to him will show the final amount of tax payable after the deduction of employees’ tax.
See the diagrammatic representation of the process of calculating an employee’s tax in the
relevant chapter of your prescribed text book.
 PAYE
 Prepaid tax
 Provisional tax
 Basic amount
86
5.9.2. Pay as You Earn (PAYE)
PAYE is the amount of employees’ tax deducted from the annual equivalent of net remuneration paid or payable by an
employer to an employee in standard employment during a particular tax period.
The balance of the employees’ tax withheld is called PAYE.
5.9.3. Fourth Schedule
In order to ensure better cash flow for SARS and to facilitate the collection of taxes, taxpayers are required to make
advance payments for a particular year of assessment.
The two methods provided for the making of advance payments are:
 Provisional taxpayers are required to make advance payments, known as provisional tax payments, on the
account, of their estimated liability for normal tax for a particular year of assessment. The provisional payments
of normal tax are made on all taxable income other than remuneration as it is defined in par 1.
 Employers are required to withhold employees’ tax from remuneration paid by an employer to an employee.
The employer pays over the tax withheld on behalf of the employee to SARS.
On assessment date, the taxpayer’s normal tax liability is reduced by the provisional tax payments made by him for the
year of assessment and employees’ tax deducted from his remuneration during the year.
With certain exceptions, all provisional taxpayers are required to make two obligatory estimates of taxable income for
each year of assessment.
 The first of these estimates must be made on or before the last day of the sixth month of the year
 The second estimate must be made on or before the last day of the year of assessment.
All taxpayers may make a further voluntary provisional tax payment or payments for the purpose of avoiding or reducing
a liability for interest that would arise should their first two obligatory payments be inadequate.
5.9.4. Liability to pay provisional tax
An obligation is imposed upon every person who is a provisional taxpayer to apply to the Commissioner for registration
as a provisional taxpayer within 30 days after the date upon which he becomes a provisional taxpayer.
A provisional taxpayer is defined in par 1 as someone who falls into one of the following categories
 A person who derives by way of income an amount that does not constitute remuneration as defined in par 1
or an allowance or advance under s 8(1) (par (a)). A person who derives all his income by way of remuneration,
allowances and advances would thus not be required to be a provisional taxpayer.
87
 A company (par (b))
 Any person who is notified by the Commissioner that he is a provisional taxpayer (par (c)).
Public benefit organisations, recreational clubs, a body corporate, share block company or association of persons and
persons exempt from the payment of provisional tax are specifically excluded for being provisional taxpayers (par (aa) to
(dd)).
The following persons are exempt from the payment of provisional tax (par 18(1)
 Non-resident owners or charterers of ships and aircraft who are required to make payments under s 33 (par
18(1)(b)
 A natural person under the age of 65 years who does not derive income from the carrying on of a business
 A natural person who on the last day of the year of assessment will be over the age of 65 years.
5.9.5. Estimates of taxable income
During every period in which provisional tax is or may be payable, every provisional taxpayer must submit an estimate of
his total taxable income for that year of assessment to the Commissioner. The estimate must be done in the form
prescribed by the Commissioner.
The form must also show the provisional tax for the period, Less
 Any provisional tax previously paid for the year of assessment
 Any employees’ tax deducted by the provisional taxpayer’s employer during the period from remuneration
included in the estimated taxable income, and
 Certain amounts of foreign tax paid on income from sources outside South Africa that are allowed as a rebate.
5.9.6. Payments of provisional tax
Payments of provisional tax are required to be made in accordance with the provisions of the Fourth Schedule. Any
provisional tax payments made by a taxpayer will be deemed to have been made against his liability for taxes. Provisional
tax can therefore not be set off against, for example, a donations tax liability.
5.9.7. Amount and rate of provisional tax to be paid
In order to determine the amount of provisional tax he is required to pay, a provisional taxpayer must estimate his
liability for normal tax for a particular year of assessment.
This normal tax is required to be calculated at the relevant rate applicable to that year of assessment (par 17(3)).
88
A provisional taxpayer may estimate his liability for normal tax in accordance with the provisional tax tables prescribed
by the Commissioner, but if he wishes to make an independent calculation, he may do so.
The tax tables should have regard to the following
 Tax rates
 Rebates
 The rebate on foreign taxes paid on income, and
 Any other factors which may influence the probable normal tax liability (par 17(5)).
 See the example given in your textbook. Set-off on assessment
The following amounts must be set off against the taxpayer’s liability for normal tax as assessed by the Commissioner;
Employees’ tax deducted or withheld by a taxpayer’s employer during a year of assessment
Provisional tax paid by him for the same year.
 Example 9.1
Indigo Products employs the following five people at the monthly salaries indicated:
 Table 9-1: Example of employee’s tax determination
Employee Age Monthly salary (basic salary only; no allowances, bonuses,

fringe benefits or allowable deductions included at this stage)
Crenshaw 35 R 7000
Shongelwa 45 R 3 000
Jones 66 R 16 000
Osama 68 R 23 750
Pillay 34 R 37 000
The monthly tax payable by each employee (if we assume that their earnings for each month of the tax year remain the
same) will be calculated as follows (using the 2015 sliding scale)
 Table 9-2: Solution to employee’s tax determination
Employee Monthly Annual Calculation of tax payable Tax payable

Salary equivalent
Crenshaw 7 000 84 000 (18% of R84 000) – R12 726 R2 394 p.a. or
R199.50 p.m.
Shongelwa 3 000 36 000 (18% of R36 000) – R12 726 R0
89
Jones 16 000 192 000 R31 419 + 25% (R192 000 – R174 R15 945.50 p.a.
550) – R12 726 – R7110 or R1 328.79 p.m.

Osama 23 750 285 000 R55 957 + 30% x (R285 000 – R39 811 p.a. or R3
317.58 p.m.
R272 700) R12 726 – R7110
Pillay 37 000 444 000 R87 382 + 35% x (R444 000 – R97 948.50 p.a.
R377 450) – R12 726 or R8 162.38 p.m.
The average and marginal tax rates of each employee are as follows:
 Table 9-3: Marginal and effective tax rates calculation
Employee Marginal tax Average (Effective) tax rate

rate
Crenshaw 18% R2 394 / R84 000 = 2.85%
Shongelwa 18% 0%
Jones 255 R15 945.50 / R192 000 = 8.30%
Osama 30% R39 911 / R258 000 = 13.97%
Pillay 35% R97 948.50 / R444 000 = 22.06%
SARS publishes tax deduction tables that can be found on the SARS website, or obtained free of charge from
any SARS office. The manual tables and guidelines for employers include weekly, fortnightly, monthly and
annual deduction tables, showing the amount of employees’ tax to be withheld for each level of
remuneration. The tax rebates have already been taken into account in the complication of the manual tables;
therefore no further calculation is necessary.
 Solution
By using the 2015 deduction tables provided on your Cd, the monthly tax payments by the employees of
Indigo Products can be calculated as follows:
 Table 9-4: Monthly tax determination
Employee Age Monthly salary (R) Monthly tax payable as per tax table (R)
Crenshaw 35 7000 200
Shongelwa 45 3000 0
90
Jones 66 16 000 1 327
Osama 68 23 750 3 317
Pillay 34 37 000 8 163
Note
The calculation of employee’s tax is based on the ‘Balance of Remuneration’ (otherwise known a
taxable income)
The balance of remuneration format: Remuneration:
 Table 9-5: Determination of balance of remuneration of an employee
Salary +
Bonus or 13th cheque +
Overtime +
Commission +
Leave encashment +
Medical aid contribution paid on behalf of the employees +
Housing allowance 100% +
Cell phone allowance 100% +
Computer allowance 100% +
Either 80% or 20% of the car (travel) allowance +

Either 80% or 205 of the tax value of the use of a motor vehicle
SARS value placed on fringe benefits:
e.g. Low-interest loans
Deduct:
91
Employee’s pension fund contributions (limited in terms of S11 (k)) +
Employee’s retirement annuity fund contributions (limited in terms of S11 (n)*)
Premiums on insurance policies to cover the loss of earnings (at the option of the
employer) +
Donations (limited to 5% of employee’s remuneration after deducting the above)
Equals: the balance of remuneration
 Example 9.2
Busiswe Dube is 67 years old. Her income and expenses for the 2018 year of assessment were as
follows:
 Table 9-6: Determination of an employee’s tax who has other income
Pensions received 184 000

Interest on fixed deposit 35 500
Rental income from property in china (not 1) 60 000
Income from part-time employment 33 000
(she was taxed at a rate of 25% on this income)
Expenses for the year of assessment:
Medical aid fun contributions (note 2) 24 000
Additional medical expenses not covered by medical aid 9 700
Rental expenses (all deductible for normal tax purposes 19 100
Notes:
1. Busiswe paid a non-refundable foreign tax of R1 800 in China. This tax qualifies for the S6 quat
rebate.
2. Busiswe is the main member of her medical aid and her husband is a dependent
Assume an interest exemption threshold of R23 800 for taxpayers under 65, and R34 500 for taxpayers
65 years and older
 Required:
a) Calculate the total employee’s tax that Busiswa would have paid during the current year of
assessment on her pension fund remuneration and income from part-time employment
b) Assume that Busiswa has not paid any provisional tax for her first or second provisional tax
payment, and calculate what the amount is that she will be required to pay as a third
provisional payment in order to prevent interest charges in terms of S89quat.
 Solution:
a) Total employee’s tax that Busiswe paid during the 2013 year of assessment:
 Table 9-7: Determination of employee’s tax
Pension:
Pension received R
184 000
92
Balance of remuneration 184 000

Tax on standard remuneration (less rebates) 16 970
Part-time employment (not standard employment) 8 250
Employee’s tax @25%
Total employee’s tax (R16 970 + R8 250) 25 220
b) Calculation of third provisional tax payment:
 Table 9-8: Provisional tax determination
Pension 184 000
Interest (34 000 – 33 000) 1000

Rent received (60 000 – 19 100) 40 900
Part-time employment 33 0000
258 900
Less: total medical expenses (tax payer is 67 years old) (27 700)
Taxable income 231 200
Less: prepaid taxes 28 770
First provisional payment-
Second provisional payment-
Foreign tax paid (1 800)
Employee’s tax on pension (16 970)
Employee’s tax on part-time employment (8 250)
Third provisional payment owing 1 750
Example 9.3
We will now use the sliding scale and information from the payroll of Events (Pty) Ltd (which is
summarised in illustration below) to:
- Complete the missing figures in the table below (make use of the 2015 sliding scale to
determine the PAYE deductions);
- Calculate the Employee Tax Incentive (ETI); and then
- Complete the abbreviated EMP201 return that follows
NOTE: All seven employees mentioned in the table below are below the age of 65. The maximum UIF
funding remuneration is set at R14 872, and none of the employees is eligible for the 13th cheques or
bonuses.
Part-time staff are non- permanent employees (for EMP201 purposes)
 Illustration
Table 9-9: Illustration of employee’s tax calculation
Salary Car Commission PAYE/SDL UIF PAYE

allowance
March 2014 remuneration remuneration deduction
93
Full-time
staff
1 2 600 n/a n/a ? ? ?
2 5 000 1 200 1 800 ? ? ?
3 9 000 2 000 2 000 ? ? ?
4 14 000 n/a n/a ? ? ?
5 5 400 n/a 800 ? ? ?
Part-time
staff
6(worked 20 2 400 n/a n/a ? ? ?

hrs)
7(worked 40 6 000 n/a n/a ? ? ?
hrs)
Total
1. Employee 1?is a qualifying
? employee?with regards to the
? ETI ? ?
2. The employer expects employees 2 and 3 to use their cars equally for business and private
purposes
3. Employee 4 also has the full use of a company car. This car was purchased by the company for
R68 400 (including VAT). The vehicle does not have a maintenance plan and the employer is
satisfied that at least 80% of the use of the car will be for business purposes.
 Solution
The completed table is as follows (note: all employees are younger than 65):
 Table 9-10: Solution to employee’s tax calculation
March salary Car commission PAYE/SDL UIF PAYE

2014 allowance
remuneration remuneration deduction
Full-time
staff
1 2 600 n/a n/a 2 600.00 2 600.00 0.00
2* 5000 1 200 1 800 7 760.0 5 960.00 336.30
3** 9 000 2 000 2000 12 600.00 10 600.00 1 207.50
4*** 14 000 n/a n/a 14 478.80 14 478.80 1 545.68
5 5 400 n/a 800 6 200.00 5 400.00 55.50
Part-time
staff
94
6(worked 20 2 400 n/a n/a 2 400.00 n/a 600.00

hrs)
7(worked 40 6 000 n/a n/a 6000.00 6 000.00 1 500.00

hrs)
Total 44 400 3 200 4 600 52 038.80 45 038.80 5 244.98
*Taxable value of the car allowance: 80% of R1 200 = R960
**Taxable value of car allowance: 80% of R 2000 = R1 600
***Fringe benefit value of company car for Employee = R68 400 x 3.5% x 20% = R478.80
The ETI is calculated as follows:
Qualifying employee’s monthly remuneration is between R2 001 and R4000 i.e. ETI is R1000.
The completed EMP201 is as follows: UIF = R45 038.80 X 2% = R900.78 SDL = R52 038.80 X 1% =
R520.39
 Example 9.4a
Lindi Ngcobo, aged 56, received her IRP6 from SARS indicating that her basic amount is R140
000. Lindi accepts the basic amount as her estimated taxable income. Her employer deducted
employees’ tax amounting to R5 420 from her salary for the first six months of the year. Lindi was a
dependent on her husband’s medical aid i.e. she was not entitled to claim a medical fees scheme tax
credit
The amount that Lindi has to pay as her first provisional payment for the 2015 year can be calculated as
follows;
i. Taxable income /basic amount R 140 000

ii. Tax payable according to 2015 tax sliding scale less rebate R12 474
iii. Gross tax for the first provisional payment [amount in (ii) x 50%] R6 237
iv. Deduct: prepaid taxes: (R5 420)
v. Employees’ tax paid thus far R*5420
vi. Foreign taxes paid nil
= Net 1st provisional tax payment due R1 817
*NOTE: Although the basic income amount is based on the taxable income of the previous year, the
employees’ tax paid in the current year can be used in the calculation. If the employees’ tax paid
exceeds the gross amount due to the first payment, the net amount due is nil.
For the 1st provisional tax payment, the taxpayer will face no penalties for using the Basic amount
provided by SARS, regardless of the that this may be less than his estimated taxable income .it would
obviously be in a tax payer’s best interest to accept the basic amount if this is lower than his estimated
taxable income as this would result in a lowest 1st provision tax payment however ,the taxpayer should
be aware that he will have to make up this shortfall in later provisional tax payments.
95
5.9.9. Late submission and payment penalties and interest
*there is no penalty if the first provisional tax return is not submitted on time
*where the first provisional tax payment is not made within the first six months of the year, a penalty of
10% will be levied on the tax outstanding.
*in addition, S89bis provides that interest at the prescribed amount must be levied on the outstanding
amount
 Example 9.4b
This learning example follows directly from example 9.4a.
Lindi estimates her taxable income for the current year of assessment to be R150 000. Her basic
amount as per SARS is R140 000. Her employer deducted employees’ tax amounting to R8 420 during
the course of the year. Lindi paid foreign tax amounting to R200. Lindi had made the first provisional
payment of R1 817
The minimum amount that Lindi must pay as her second provisional payment for the 2015 tax year can
be calculated as follows
1. Determine the lower of 90% of taxable income (90% x R 150 000= R 135 000) and basic (R 140 000) i.e.
R135 000.
2. Calculate provisional tax payment due based on an estimated income of R 135 000:
i. Estimated taxable income R135 000
ii. Tax payable according to 2015 tax sliding scale less rebate R 11 574
iii. Deduct: prepaid taxes: (R 9 437)
iv. Employees’ tax paid thus far R 8 420
v. Foreign tax paid R 200
vi. 1st provisional tax payment R 817

vii.
= Net 2nd provisional tax payment due R 2 137
Therefore, Lindi would be able to pay R 2 137 as her second provisional tax payment without incurring
penalties (provided that she pays the balance of tax due by 30 September 2015).
5.9.10. Late submission and payment penalties and interest
*if the IRP6 is not submitted by the last day of the tax year, a penalty of 20% will be levied on the
difference between normal tax payable for the year and the sum of prepaid taxes (employees tax and
the 1st provisional tax payment).
*If the 2nd provisional tax payment is made after 28/29 February, SARS may levy a penalty of 10% on
the tax not paid on time
96
*in additional, S89bis provides that interest at the prescribed rate will be payable on the outstanding
amount.
 Your textbook gives a tabular summary of the material that has been covered in this study.
You must study this summary.
97
TAXATION 2B. Educor ©
Example
5.9.11. Summary
This study unit showed how prepaid taxes are treated on the date of assessment.
Refer to pages 281 – 298 in your prescribed textbook for a comprehensive

explanation of provisional tax.
Read pages 281 - 298 in your prescribed textbook and do the questions in the
graded questions book.
Caselet: xxxxx
xxxxxxxx
98
What is the difference between SITE and PAYE?
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
______________________
Who is a provisional taxpayer?
__________________________________________________________________
__________________________________________________________________
You should study the summary given in chapter 11 of your textbook.
You are a professional accounting consultant. Your client, Mrs Tsanwa (aged
61) estimates that her taxable income for the year ended 28 February 2020 will
be R 998 000. Her basic income according to SARS is R 856 000. She does not
like paying tax and paid R nil for her 1st provisional tax payment. She is
exerting pressure on you to submit a 2nd provisional tax return with a low
estimated taxable income of R 600 000.
Required:
i. Provide reasons to Mrs Tsanwa why this is not in her best interest.
ii. Also calculate how much provisional tax you recommend she should
pay.
99
100
7. REFERENCES
Ernst and Young, 2019. taxinsights.ey.com. [Online]

Available at: https://taxinsights.ey.com/archive/archive-news/south-african-tax-court-upholds-
exemption-from-dividend-withholding.aspx
[Accessed 14 July 2020].
SAIT, 2016. SAIT Compendium 2016 Volume2. [Online]

Available at: https://juta.co.za/uploads/SAIT_Compendium_2016_Volume2/files/basic-
html/page650.html
[Accessed 18 July 2020].
RD; 2018 LexisNexis
101
102
8. VERSION CONTROL
Initials Version Date Description of

Amendments
AGC 1.1.2019 19/06/2019 Creation of template
CVG 1.2.2019 28/05/2019 Content development
AGC 1.3.2019 6/06/2019 Formatting and T&L
CVG 1.4.2019 03/07/2019 Improving flow of
content
EM 1.5.2020 20/07/2020 Content review
103

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5.2.10. Lease Premium – Paragraph (g).........................................................................................18

5.5.2. South African income (section 1 – definition of “gross income”) ......................................51

5.7.12. Cell phone allowance..........................................................................................................74

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2. OUR TEACHING AND LEARNING METHODOLOGY

Damelin strives to promote a learning-centred and knowledge-based teaching and learning

• An outcomes-oriented approach implies that the following categories of outcomes are

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Study group / Online forum discussion

3. INTRODUCTION TO THE MODULE

Assessment Commented [AC3]: Let them know what is expected of

Formative assessment: Commented [AC4]: Heading 4

You may also be asked to blog / post your responses online.

Planning Your Studies

Unit Number Hours

At the end of a guide – all resources used (all units) should

i. Silke: South African Income Tax 2018

LexisNexis - ISBN: 9780409124910

ii. Graded Questions on Income Tax in South Africa Mitchell,

K.I. & Mitchell, L.D. 2018

LexisNexis - ISBN: 978040912897

Commented [AC7]: Update accordingly

Unit 2: Gross Income - Special inclusions

Unit 3: Exempt income

Unit 4: The general deduction formula

Unit 5: Income and expenses of individuals

Unit 6: The tax returns

Unit 7: Fringe benefits and allowances

Unit 8: Retirement benefits

Unit 9: Prepaid tax

STUDY UNIT 1: GROSS INCOME

Income Tax – A tax imposed on all taxpayers; calculated on the taxable

In this unit, we will cover:

 Amounts in cash or otherwise;

5.1.2. Components of gross income.

There are three parts to the definition of gross income:

There is need to determine whether an individual is a resident or not because

Gross income xxx

Less: Exempt income (xxx)

Less: Deductions (xxx)

Add : Taxable portion of capital gains xxx

Taxable Income xxx

Taxable liability as per tax table xxx

Less: Rebate (xxx)

Net normal tax payable xxx

Less: Pre-paid taxes (xxx)

Net tax due/(refundable) xxx

Gross income R188 000

Exempt Income (dividends received) 13 000

Allowable deductions (pension fund contributions) 6 500

Employees’ tax paid to SARS during the year 19 800

Gross income R188 000

Less: Exempt income (dividends receive) (13 000)