SILKE - South African Income Tax 2022

Silke: South African Income Tax
2022
2022
Professor Madeleine Stiglingh (volume editor)

DCom (UP) CA (SA)
Professor Alta Koekemoer
PhD (UP) CA (SA)
Professor Linda van Heerden

MCom (Taxation) (UP) CA (SA) LLB (Unisa)
Professor Jolani S Wilcocks
MCom (Taxation) (UP) CA (SA)
Professor Pieter van der Zwan
MCom (Taxation) (UP) CA (SA)
Assisted by:
Associate Professor David Warneke (BDO) Doria Cucciolillo (BDO)
Karen Stark Herman Viviers
Wessel Smit Evádne Bronkhorst
Rudi Oosthuizen Piet Nel
Annelize Oosthuizen Liza Coetzee
Onkarabetse Mothelesi Alicia Heyns
Nompumelelo Monageng Neo Molefi-Kau
Herman van Dyk Andrea Herron
Maryke Wiesener Lizelle Bruwer
Ilinza Maree Juanita Dos Santos-Venter
Craig Miller Nadia Bauer
Juanita Botha Leanie Groenewald
Angela Jacobs Cor Kraamwinkel
Marese Lombard Keith Engel
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Editor: Mandy Jonck

Technical Editor: Maggie Talanda
Preface
The objective of the authors and publishers of Silke: SA Income Tax is to provide a book that sim-
plifies the understanding and application of tax legislation in a South African context for both students
and general practitioners.
This is the 24th edition of the book. This edition is up to date with the amendments that were issued in
Bill format or that were promulgated during 2021. As far as income tax is concerned, most of the
amendments apply to the 2022 year of assessment, that is, years of assessment ending on 28 Feb-
ruary 2022 for persons other than companies, and financial years ending during the period of
12 months ending on 31 March 2022 for companies. Nevertheless, some amendments may have
other effective dates.
In this edition we again attempt to assist the students preparing for the qualifying examination of
chartered accountants. All the discussions in the book that fall outside the 2023 syllabus of the Initial
Test of Competence (ITC) are shaded in the headings of the relevant paragraphs. We have also
included a new chapter, chapter 35, that is aligned with the tax morality, strategy and risk manage-
ment competencies of the SAICA 2025 Competency Framework. Students preparing for the Tax
Professional qualification should, however, still include the shaded sections in their preparation.
This edition is, again, a collaborative effort by several authors and co-workers. The task of producing
a book of this nature so early is made so much more difficult by the fact that the amending legislation
is, regrettably, not only becoming increasingly complex, but is promulgated so late in the year.
We appreciate any suggestions that you may offer for improvement, since we continue to strive
to produce a work that will be useful to general practitioners and students without sacrificing accur-
acy or quality.
Madeleine Stiglingh
Alta Koekemoer
Linda van Heerden
Jolani Wilcocks
Pieter van der Zwan
January 2022
v
Contents
Page
Preface ......................................................................................................................................... v
1 General principles of taxation .............................................................................................. 1
2 Taxation in South Africa ....................................................................................................... 11
3 Gross income ....................................................................................................................... 25
4 Specific inclusions in gross income..................................................................................... 59
5 Exempt income .................................................................................................................... 77
6 General deductions.............................................................................................................. 123
7 Natural persons .................................................................................................................... 149
8 Employment benefits............................................................................................................ 195
9 Retirement benefits .............................................................................................................. 249
10 Employees’ tax ..................................................................................................................... 281
11 Provisional tax ...................................................................................................................... 321
12 Special deductions and assessed losses ........................................................................... 339
13 Capital allowances and recoupments ................................................................................. 383
14 Trading stock ....................................................................................................................... 495
15 Foreign exchange ................................................................................................................ 517
16 Investment and funding instruments.................................................................................... 551
17 Capital gains tax (CGT)........................................................................................................ 601
18 Partnerships ......................................................................................................................... 697
19 Companies and dividends tax ............................................................................................. 715
20 Companies: Changes in ownership and reorganisations .................................................... 761
21 Cross-border transactions ................................................................................................... 821
22 Farming operations .............................................................................................................. 899
23 Turnover tax system ............................................................................................................ 933
24 Trusts .................................................................................................................................... 941
25 Insolvent natural persons ..................................................................................................... 969
26 Donations tax ....................................................................................................................... 977
27 The deceased and deceased estate ................................................................................... 1001
28 Transfer duty ........................................................................................................................ 1045
29 Securities transfer tax........................................................................................................... 1053
30 Customs and excise duty..................................................................................................... 1059
31 Value-added tax (VAT) ......................................................................................................... 1065
32 Tax avoidance ...................................................................................................................... 1157
33 Tax administration ................................................................................................................ 1179
34 COVID-19 tax relief measures ............................................................................................. 1235
35 Tax morality, strategy and risk management ....................................................................... 1241
Appendix A: Tax monetary thresholds ......................................................................................... 1249
Appendix B: Rates of tax and other information .......................................................................... 1254
Appendix C: Travel allowance ..................................................................................................... 1257
Appendix D: Expectation of life and present value tables ........................................................... 1257
Appendix E: Write-off periods acceptable to SARS .................................................................... 1260
Table of cases .............................................................................................................................. 1263
Special court cases ...................................................................................................................... 1267
Table of provisions ....................................................................................................................... 1269
Subject index ................................................................................................................................ 1277
vii
1 General principles of taxation
Evádne Bronkhorst and Madeleine Stiglingh
Outcomes of this chapter

After studying this chapter, you should be able to:
l define and understand the concept of taxation
l describe the components of taxation
l evaluate tax policy by applying the principles of a good tax system.
Contents
Page
1.1 Overview ............................................................................................................................ 1
1.2 Tax base ............................................................................................................................. 2
1.3 Tax rate structure and incidence ....................................................................................... 2
1.4 Principles of taxation .......................................................................................................... 5
1.4.1 The Equity Principle .............................................................................................. 5
1.4.2 The Certainty Principle .......................................................................................... 7
1.4.3 The Convenience Principle ................................................................................... 7
1.4.4 The Economic Efficiency Principle ........................................................................ 7
1.4.5 The Administrative Efficiency Principle ................................................................. 8
1.4.6 The Flexibility Principle .......................................................................................... 8
1.4.7 The Simplicity Principle ......................................................................................... 8
1.5 Conclusion ........................................................................................................................... 10
1.1 Overview
There is a relationship between a government and its citizens that is referred to as the social compact.
In this social compact, a citizen has the responsibility to pay taxes, and a government has the
responsibility to deliver certain goods and services in return.
Taxes can be defined as compulsory payments that are imposed on citizens to raise revenue in order
to fund general expenditure, such as education, health and housing, for the benefit of society as a
whole.1
In deciding on the appropriate level of taxation to be imposed, the government of a country formu-
lates a tax policy. Policies are those courses of action taken by governments to ensure that their
objectives are achieved.2
To formulate an appropriate tax policy, governments have to make decisions about the tax base
(see 1.2), the tax rate structure and the incidence of the tax liability (see 1.3). All of the aforemen-
tioned should be guided by the general principles of taxation (see 1.4). The following figure illustrates
these components of tax policy.
_________
1 Steyn T, Franzsen R and Stiglingh M ‘Conceptual framework for classifying government imposts relating to the tax burden
of individual taxpayers in South Africa’ International Business & Economics Research Journal (2013) vol 12(2) 242
accessed 2013-11-18 available from http://repository.up.ac.za/bitstream/handle/2263/21199/Steyn_Conceptual(2013).pdf?
sequence=1.
2 Merriam-Webster Policy (2013) accessed 2013-11-18 available from http://www.merriam-webster.com/dictionary/policy.
1
Silke: South African Income Tax 1.1–1.3
× =
Tax base Tax structure Tax incidence
(par. 1.2) (par. 1.3) (par. 1.3)
Definition Rate structure Tax liability
Tax principles
(par. 1.4)
1.2 Tax base

The tax base is the amount on which tax is imposed. This amount is usually determined by legislative
provisions that provide guidance on what should be included and excluded from the tax base. The
amounts included in the tax base do not necessarily correlate with our normal understanding of
economic income. For example, when you receive interest income of R30 000, your bank balance
and your economic income increase by R30 000. If tax legislation provides that R20 000 of your
annual interest income is tax free, then only R10 000 (R30 000 – R20 000) of the interest income will
be included in the tax base that is subject to tax. Evidently, economic income will not always be
equal to the amount subjected to tax.
While a specific tax base will be defined within each piece of legislation, a tax base is broadly based
on income, wealth or consumption:
l An income tax base includes income earned or profits generated by taxpayers during a year of
assessment.
l A wealth tax base consists of the value of assets or property of a taxpayer.
l A consumption tax base encompasses the amount spent by taxpayers on goods and services.
After determining the tax base, a percentage or unit is applied to this amount to determine the tax
liability.
1.3 Tax rate structure and incidence

The tax rate is sometimes expressed as a percentage, for example where tax is imposed at 15% on
the value of a transaction. Other times it can be expressed as an amount per unit, for example where
excise taxes are imposed on each packet of cigarettes consumed in a country.
The following terminology is important in understanding tax rates:
l Marginal tax rate: This is the tax rate that will apply if the tax base increases by one rand.
l Statutory tax rate: This is the tax rate that is imposed on the tax base as determined in accord-
ance with relevant legislation.
l Average tax rate: The average tax rate represents the rate at which tax is paid with reference to
the total tax base of a relevant taxpayer. This is determined by dividing the total tax liability by the
total tax base (i.e. Total tax liability / Total tax base). The tax liability and the total tax base are
determined having regard to relevant legislative provisions.
l Effective tax rate: The effective tax rate can be determined by dividing the tax liability by the total
profit or income. The effective tax rate is often used as a measure to compare the effective tax
liabilities of different taxpayers.
2
1.3 Chapter 1: General principles of taxation
Example 1.1. The average tax rate vs. the effective tax rate
Melody earned interest income of R28 500 and net rental income of R28 500. Suppose the
applicable tax rate is 39%.
Interest income
The average tax rate = Total tax liability / Total tax base
If we assume that R23 800 of the interest income will not be taxable, the tax base will be R4 700
(R28 500 – R23 800).
Melody’s tax liability would then be R1 833 (R4 700 × 39%).
The average tax rate for Melody’s interest income is 39% (R1 833/R4 700).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R1 833. The total interest income is R28 500. The effective tax rate is
therefore 6,4% (R1 833/R28 500).
Net rental income
The average tax rate = Total tax liability / Total tax base
Assuming the net rental income is fully taxable, the total tax base will be R28 500.
Melody’s tax liability would then be R11 115 (R28 500 × 39%).
The average tax rate for Melody’s net rental income is 39% (R11 115/R28 500).
The effective tax rate = Total tax liability/Total profit or income
The tax liability will still be R11 115. The total profit equals R28 500. The effective tax rate is
therefore 39% (R11 115/R28 500).
The above can be summarised as follows:
Description Interest income Net rental income
Income before tax R28 500 R28 500
Less: Tax (R1 833) (R11 115)
Income after tax R26 667 R17 385
Average tax rate 39% 39%
Effective tax rate 6,4% 39%
An analysis of the average tax rate (39%) incorrectly creates the impression that the relative after
tax income for both investments should be similar. However, in reality the after tax income of the
interest-bearing investment exceeds the after tax income of the property investment. This conclu-
sion is reflected in the effective tax rate, i.e. the effective tax rate of the interest income (6,4%) is
significantly lower than the effective tax rate of the net rental income (39%).
Tax rates are usually determined with reference to one or more of the following structures:
l Progressive tax rate structure: The tax rate increases as the tax base increases.
l Proportional tax rate structure: The tax rate does not change in line with the tax base (a flat rate
tax).
l Regressive tax rate structure: The tax rate increases as the tax base decreases.
The type of tax structure elected by policymakers would depend on a number of aspects, one of
which is the policy objectives to be achieved. Governments that aim to achieve wealth redistribution,
usually prefer progressive tax rates.
3
Silke: South African Income Tax 1.3
Example 1.2. Tax rate structure analysis
Miss Clules generated a total profit before tax of R720 730. Her tax practitioner determined that
the amount that should be subjected to tax is R700 730 (i.e. the taxable income).
Assume that the following tax rate table applies:
Taxable amount Rate of tax Tax Bracket
Exceeding R467 500 but not R110 739 plus 36% of the amount by which Tax Bracket 1
exceeding R613 600 taxable amount exceeds R467 500
exceeding R782 200 taxable amount exceeds R613 600
exceeding R1 656 600 taxable amount exceeds R782 200
Exceeding R1 656 600 R587 593 plus 45% of amount by which Tax Bracket 4
taxable income exceeds R1 656 600
Using this information, determine the following:

l the tax base
l the tax liability
l the marginal tax rate
l the statutory tax rate
l the average tax rate
l the effective tax rate, and
l if the tax rate structure is progressive, proportional or regressive.
SOLUTION
l The tax base
The tax base is the amount that should be subjected to tax. In this case it is the taxable
income of R700 730.
l The tax liability
Based on the tax tables provided, Miss Clules will be liable for tax of R197 315,70 [R163 335
+ {39% × (R700 730 – R613 600)}].
l The marginal tax rate
The marginal tax rate will be the tax rate that will be imposed on one additional rand.
Miss Clules’ taxable income is R700 730. Currently, her taxable income falls within Tax
Bracket 2. If her taxable income increased by R1 (to R700 731), her taxable income would
still fall within Tax Bracket 2 and she would continue to be taxed at 39%. Therefore, the
marginal tax rate is 39%.
l The statutory tax rate
The statutory tax rate is the legislated rate. It differs from the marginal tax rate in that it is not
the rate that will be imposed on the next rand, but rather the rate that will be imposed on the
current taxable income. As Miss Clules’ current taxable income of R700 730 falls within Tax
Bracket 2, the statutory tax rate is 39%.
l The average tax rate
The average tax rate can be stated as: Total tax liability / total tax base. In this case the tax
base is represented by the taxable income of R700 730. Therefore the average tax rate is
28,2% (R197 315,70 / R700 730).
l The effective tax rate
The effective tax rate can be stated as: Tax liability / total profit. Miss Clules’ profit before tax
is R720 730. Her tax liability will still be R200 951,70. Therefore the effective tax rate is 27,4%
(R197 315,70 / R720 730).
l The tax rate structure
The tax rate structure applied to Miss Clules’ taxable amount is progressive, because, as her
taxable income increases, the tax rate also increases.
There is a common misconception that the person liable for tax is the person required to pay the tax.
This is not always the case. Sometimes the person actually paying the tax, does so on behalf of the
person liable to pay the tax. For example, in many countries, employers withhold and pay employ-
ment/payroll taxes to the revenue authorities. It is actually the employee who is liable to pay these
4
1.3–1.4 Chapter 1: General principles of taxation
taxes. However, the actual payment is made by the employer on behalf of the employee. In this
example, the tax burden is borne by the employee, even though it is paid by the employer. This is
known as the incidence of taxation, i.e. who bears the true burden of a tax.
In designing tax policy, it is important for policymakers to determine on whom the burden of the tax
will fall. For example, say a specific country wants to focus on the upliftment of lower-income
households by ensuring that these households pay less tax than higher-income households. If the
government decides to increase fuel levies resulting in increased fuel prices, transporters of fruit and
vegetables may then be compelled to increase their prices in order to cover the higher fuel prices.
This will result in an increase in the prices of fruit and vegetables. This will negatively affect all
consumers, including lower-income households. Therefore, the increase in the fuel levy also had the
unintended consequence of shifting the tax burden to lower-income households.
Another element that policymakers should consider when designing tax policy, is the principles of
taxation.
1.4 Principles of taxation

While there is no perfect tax policy, tax policy can be benchmarked against the commonly accepted
principles of a good tax system.
The principles of a good tax system are generally referred to as:
l The Equity Principle: Tax should be imposed according to one’s taxable ability or capacity.
l The Certainty Principle: The timing, amount and manner of tax payments should be certain.
l The Convenience Principle: Taxes should be imposed in a manner or at a time that is convenient
for taxpayers.
l The Economic Efficiency Principle: Tax should be designed in a manner not unduly influencing
economic decision-making.
l The Administrative Efficiency Principle: The tax system should be designed in such a manner as
to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities.
l The Flexibility Principle3: A good tax system should be designed in such a manner that it
accounts for changing economic circumstances.
l The Simplicity Principle4: A tax should be designed in a manner that is easy to understand and
apply.
The priority of application of these principles would depend on the policy objective to be achieved.
For instance, the redistribution of wealth would require a focus on the Equity Principle to ensure that
the tax policy facilitates redistribution of wealth to lower-income households.
Whatever the order of application, these principles function like a ‘tax ecosystem’. Therefore, there
cannot be an isolated focus on only one principle as this may result in policy failure. For instance,
where a tax deduction is granted to lower-income taxpayers based on the Equity Principle, the
purpose may be defeated if a high administrative burden is imposed on taxpayers desiring to claim
such deduction. Insufficient focus on the Administrative Efficiency Principle has, therefore, negatively
impacted the ability to apply the Equity Principle.
The following sections will analyse the principles of taxation in more detail.
1.4.1 The Equity Principle

According to the Equity Principle, tax should be imposed according to one’s taxable ability or
capacity. The Equity Principle is based on the concept of fairness. A tax should be fair and should
also be perceived to be fair. If a tax is perceived to be unfair, it could negatively impact taxpayers’
willingness to comply.
What is considered to be fair, may be different for each person. Therefore, while the Equity Principle
is an important tax policy principle, its implementation may prove to be challenging. A person’s
_________
3 While the Flexibility Principle is not part of the principles established by Adam Smith, this principle is recognised inter-
nationally as an important modern tax policy design principle.
4 While the Simplicity Principle is not part of the principles established by Adam Smith, this principle is recognised inter-
nationally as an important modern tax policy design principle.
5
economic capacity is at times influenced by personal choices. The decision to smoke, for example,
could result in the payment of more taxes (internationally, cigarettes are generally subjected to taxes
such as value-added tax and excise tax). Should a person be penalised just because such person
exercises his or her free will to satisfy certain desires? How should one then determine what is
regarded as fair and what is not?
Equity is underpinned by the ‘ability-to-pay principle’ and the ‘benefit principle’.5 In terms of the
ability-to-pay principle, the tax liability imposed on a taxpayer should take into account the economic
capacity of the taxpayer (that is, how much can a taxpayer afford to pay?). The ‘benefit principle’
indicates that equity is established where a taxpayer pays tax in proportion to the benefit received
from a government (via tax revenue spending).
The Equity Principle can further be subdivided into vertical and horizontal equity:6
l Vertical equity is achieved where a taxpayer with a greater economic capacity (or ability to pay)
bears a greater burden of tax than a taxpayer with a lesser ability. For example, where Thabelo
earns taxable income of R500 000 per annum and Dumisane earns R250 000, Thabelo should
pay a greater amount of tax relative to Dumisane in order to establish vertical equity.
l Horizontal equity is achieved where taxpayers with equal economic capacity bear an equal tax
burden. For example, let us assume Thabelo is paid R5 000 in cash for services rendered and
Dumisane receives a laptop with a market value of R5 000 for services rendered. To establish
horizontal equity, both should be subjected to tax on the R5 000 (that is, the value of consider-
ation for services rendered).
Example 1.3. The Equity Principle

Zinkandla Republic has decided that citizens should pay toll fees for the privilege to use certain
public roads. These fees will then be used to maintain the roads. Toll fees will be based on
kilometres travelled between certain points on certain public roads. No special rates are avail-
able to any specific class of road user. Zinkandla Republic has three provinces: Zum-Zum
Province, Beki Province and Dela-Dela Province. Zum-Zum Province is by far the key economic
contributor and its roads carry the most traffic. The wealthier citizens also tend to reside in Zum-
Zum Province.
Would it be equitable if Zinkandla Republic introduces toll fees only in Zum-Zum Province?
SOLUTION
l Vertical equity
Based on the ability-to-pay principle, the proposed system will not achieve vertical equity.
Toll fees will not be based on a road user’s ability to pay/economic capacity but on the
kilometres travelled on certain public roads. In other words, a road user that has an annual
economic income of R1 500 000 and that travels 240 kilometres weekly, will pay exactly the
same toll fees as a road user earning R100 000 per annum, travelling the same number of
kilometres.
The proposed system is more closely aligned with the benefit principle, because the road
users that receive the greatest benefit pay the most toll fees. For example, if Sandile uses the
relevant road each day, she will pay more toll fees than Khanyi who only uses the road once
a month. Evidently, the benefit principle does not consider a specific road user’s ability to pay.
l Horizontal equity
Based on the ability-to-pay principle, horizontal equity will not be achieved. Toll fees will not
be levied according to a road user’s ability to pay, but on the number of kilometres travelled
on designated public roads. Taxpayers with the same ability to pay might be required to
travel different distances on designated public roads and would therefore not have to pay
the same amount of toll fees.
Based on the benefit principle, horizontal equity will be achieved as far as Zum-Zum
Province is concerned. The toll fees liability increases in line with the increase in the benefit
from using certain public roads. Therefore, if two different citizens both use specific public
roads five times a week, they will both be required to pay the same amount of toll fees
because they both received the same benefit.
However, horizontal equity is not achieved on a national level, because road users in Beki
Province and Dela-Dela Province are able to use public roads free of charge.
_________
5 Smith A The wealth of nations vol 2 (1947) JM Dent & Sons Ltd: London at 307–308.
6 Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 10.
6
1.4.2 The Certainty Principle

According to the Certainty Principle, the timing, amount and manner of tax payments should be
certain. Uncertainty about aspects such as how to apply the relevant legislative principles, or how
and by when the legislator will introduce new legislation or amend existing legislation, may have a
profound impact on the economy of a country.
Taxpayers cannot act on promises alone, only on what is embodied in law. Therefore, it is imperative
that tax policy be finalised and certain long before its implementation and that it is managed in a
transparent manner to facilitate the creation of certainty. Furthermore, legislative provisions and
procedures should be transparent and applied in a consistent manner.7
1.4.3 The Convenience Principle

According to the Convenience Principle, taxes should be imposed in a manner or at a time that is
convenient for taxpayers. The Convenience Principle is all about making it easy for taxpayers to
comply with tax legislation and to pay their tax liabilities.8
For example, requiring taxpayers to physically visit the offices of the revenue authorities weekly to
complete their tax returns and to submit all the supporting documentation would contradict the
Convenience Principle. Allowing taxpayers to comply with their tax obligations via the Internet in the
comfort of their own homes would support the Convenience Principle and could possibly increase
taxpayer compliance. Another example of the application of the Convenience Principle is the
inclusion of value-added tax in the retail selling prices of goods and services. Just imagine buying
groceries at a retail store and then having to queue at an in-store revenue authority office to declare
and pay the required taxes!
1.4.4 The Economic Efficiency Principle

According to the Economic Efficiency Principle, a tax is regarded as economically efficient if it does
not unduly influence a person’s economic decision-making.9 Economic efficiency plays an important
role in preserving the tax base. Where a tax is inefficient, taxpayers would be motivated to change
their behaviour in an effort to avoid paying the tax. For example, where interest income is more
heavily taxed than dividend income, some taxpayers might elect to rather invest in dividend-bearing
investments in order to reduce their tax burden. Consequently, there would be a decrease in tax
revenue collected and governments would have to seek alternative avenues to satisfy their revenue
needs.
A tax that is not economically efficient is not always negative from a policy perspective, especially
when it encourages desired behaviour. For example, should taxes levied on alcohol increase, it could
encourage reduced alcohol consumption, and also generate indirect social benefits, such as less
domestic violence and road accidents.
Example 1.4. Economic efficiency

The Democratic Republic of Green is proud of the rich biodiversity its country has to offer. It is a
destination of choice for international travellers and therefore environmental conservation is one
of its top priorities. As part of the country’s conservation efforts, the Green Revenue Authority has
introduced a tax on liquids in plastic bottles. Liquids in glass bottles will remain tax free.
Dr Teddi is very upset. She has two small children and never buys cold drinks in glass bottles in
fear of one of them breaking a glass bottle and accidentally cutting themselves with the broken
glass. To avoid paying tax, she no longer buys cold drink in plastic bottles. She now buys cold
drink in glass bottles and pours it into re-usable plastic cups.
Is this tax economically efficient?
_________
7 Davis Tax Committee, First Interim Report on Macro Analysis – Full Report (2014), ch 5, accessed 2018-11-10, available
from: https://bit.ly/2SWpMG2.
8 Smith A The wealth of nations vol 2 (1947) JM Dent & Sons Ltd: London at 307–308.
9 Black P, Calitz E and Steenekamp T Public Economics, (5th ed 2011) Oxford: Oxford University Press ch 11.
7
SOLUTION
The imposition of a tax on liquids in plastic bottles has caused Dr Teddi to change her behaviour,
i.e. she now buys cold drink in glass bottles where she previously only bought cold drink in
plastic bottles. Therefore, the tax system is not economically efficient because it has caused
behavioural change.
However, in this specific example, the intended policy outcome called for a tax system that is not
economically efficient, as the Democratic Republic of Green wanted to encourage behavioural
change.
It should be noted that even though the intention was to institute behavioural change, in reality
this may not always happen. Some consumers may continue with the undesired behaviour
because of their specific preferences.
1.4.5 The Administrative Efficiency Principle

According to the Administrative Efficiency Principle, the tax system should be designed in such a
manner as to not impose an unreasonable administrative burden on the taxpayer and the revenue
authorities. A tax system should therefore cost much less to implement and maintain than the tax
revenue it is able to generate.
From a revenue authority’s perspective, administrative efficiency relates to aspects such as the
number of internal controls required to be in place to audit taxpayers’ information, the design of the
organisational structure and the number of personnel required to ensure that the provisions of the
different tax Acts are complied with.
From a taxpayer’s perspective, administrative efficiency can relate to anything from keeping
supporting documents in the prescribed format, the frequency with which tax and other returns have
to be submitted to the revenue authority and the hiring of a tax practitioner to assist with the
completion of tax returns.
1.4.6 The Flexibility Principle

According to the Flexibility Principle, a good tax system should be designed in such a manner that it
accounts for changing economic circumstances. The Flexibility Principle is also referred to as tax
buoyancy, which is a measure of the responsiveness of tax revenue to changes in economic
growth.10 The global economy brings with it rapid changes. A tax system can quickly become out-
dated or even obsolete if it does not remain aligned with the dynamic economic and trade
environment. For example, the introduction of electronic commerce has resulted in an increase in the
cross-border sale of goods via the Internet. This has required governments to give more thought to
aspects such as which country has the right to tax the revenue generated from goods sold over the
Internet.
1.4.7 The Simplicity Principle

According to the Simplicity Principle, a tax should be designed in a manner that is easy to under-
stand and apply. Tax legislation and its application should be simple enough so that a relatively
knowledgeable taxpayer would be able to understand and apply it.11
It is therefore important that governments consider the Simplicity Principle in determining how many
taxes should be implemented, what items should be excluded from a specific tax base and how
many supplementary materials should be issued in addition to primary legislation.
_________
10 Davis Tax Committee, First Interim Report on Macro Analysis – Full Report (2014), ch 5, accessed 2018-11-10, available
from: https://bit.ly/2SWpMG2.
11 BusinessDictionary.com Taxation principles (2013), accessed 2013-11-21, available from: http://www.businessdictionary.
com/definition/taxation-principles.html.
8
Example 1.5. Comprehensive example
Mr Politik has been tasked with designing a tax on food products that have been classified as
unhealthy by the World Health Organization. His preliminary research indicated that unhealthy food
products in Group A are mostly consumed by low-income households, unhealthy food products in
Group B by mid-income households and unhealthy food products in Group C by high-income
households. The intended ‘unhealthy food tax’ has been communicated to the media. However,
because the different options had not been analysed in detail yet, the media statement was very
brief and did not include much detail. This caused the media to speculate on the design and
impact of the proposed tax. This caused a lot of unrest among South African consumers.
Mr Politik appointed you as a consultant to assist with the policy design required to implement
the ‘unhealthy food tax’. He has drafted the following options and requested that you comment
on whether or not his proposals are in line with the principles of a good tax system:
Option 1
All relevant unhealthy food products will be subjected to a consumption tax of 10% of the sales
price. Consumers will be required to keep records of their consumption and file tax returns
annually that account for their consumption of these food products.
Option 2
All relevant unhealthy food products will be subjected to a consumption tax of 10%. Suppliers will
be required to add the tax to the sales prices of the unhealthy food products and to file a monthly
tax return. The tax return should separately indicate the total tax attributable to the unhealthy
food products in the relevant categories.
Option 3
Unhealthy food products in Group A, Group B and Group C will be subjected to a consumption
tax of 2%, 5% and 12% respectively. Suppliers will be required to add the tax to the sales prices
of the food products and to file a monthly tax return. The tax return should separately indicate the
total tax attributable to the unhealthy food products in the relevant categories.
SOLUTION
Equity
l Options 1 and 2
A consumption tax of 10% on food products in Categories A, B and C represents a regres-
sive tax rate structure. This is because the tax amount would constitute a greater portion of a
low-income consumer’s total income than of a high-income consumer’s income.
This would be equitable from a horizontal perspective as the tax liability increases in line with
the benefit obtained, i.e. the more food consumed, the greater the tax liability. However, this
tax rate structure does not consider the consumer’s ability to pay. Low-income households
will be expected to pay exactly the same amount of tax as high-income households. There-
fore, the proposed tax rate structures do not achieve vertical equity.
l Option 3
Different rates are imposed on different food product categories based on the income-earning
capacity of the consumers. Therefore, consumers with a greater ability to pay would be
expected to bear a higher tax burden than those having a lesser ability. Because the tax liability
increases as the income earned increases, vertical equity is achieved.
Horizontal equity is achieved within a specific category, i.e. if Thuli purchases an unhealthy
food product included in Category A, for example full-cream milk, and Tlale purchases an
unhealthy food product included in Category A, for example potato chips, both will be
subjected to the same tax rate. However, horizontal equity is not achieved for purchases in
different categories. Suppose Tlale purchases cheddar cheese that is included in Cat-
egory C. The cheddar cheese has the same fat content as the full-cream milk purchased by
Thuli that is included in Category A. Despite the aforementioned, the cheddar cheese is
subjected to a higher tax rate than the full-cream milk even though they both have the same
fat content. Horizontal equity would have been achieved if both the cheddar cheese and the
full-cream milk were subjected to the same tax rate.
It is important to note that the implications of this proposal would depend greatly on the
accuracy of the assumptions on which the categorisation of the food products was based.
The tax rate structure may also become regressive where a low-income taxpayer decides to
purchase food products included in Category C. The general expectation would be that this
would be the exception to the rule, as the preliminary research proved that low-income
consumers prefer food products in Category A.
continued
9
Certainty
The Certainty Principle has not been sufficiently adhered to. The media statements were made
before a detailed analysis of the impact of the proposed options was performed. This has
caused speculation among consumers, resulting in uncertainty.
Convenience
Options 2 and 3 will be more convenient than Option 1. The consumers are effectively those who
bear the economic burden of the tax. By including the proposed tax in the retail sales price of the
unhealthy food products, no administrative burden will be imposed on the taxpayers. Under
Option 1, the consumers would be required to account for all purchases of unhealthy food
products to determine the tax payable. Not only would this result in an increase in the number of
taxpayers that the Revenue Authority would have to administer, it would also be inconvenient for
consumers. Arguably, most businesses already have systems in place to track the sales of food
products. Existing systems could be amended to cater for the new tax. Should Option 1 be
implemented, consumers would most likely have to keep record of purchases manually, which
would be onerous and prone to errors.
Economic efficiency
The proposed tax is not economically efficient. Consumers might be motivated to consume food
products that do not fall within Categories A, B and C in an attempt to avoid paying tax. While
inefficient, it could be argued that this inefficiency is positive as it could motivate the consumers
to avoid food products classified as unhealthy. A healthier lifestyle might improve the health of
consumers, thereby indirectly reducing the pressure placed on the public health system.
Option 3 would result in the greatest economic inefficiency between the different categories of
unhealthy food products. The reduction in consumption of unhealthy food products included in
Category C could be relatively more when compared to those included in Categories A and B, as
a result of the higher tax rate. Similarly, the reduction in the consumption of unhealthy food
products included in Category B could be relatively more than those included in Category A, for
the same reason.
Administrative efficiency
The systems proposed under Options 2 and 3 appear to be more administratively efficient than
the one proposed under Option 1. It would be reasonable to assume that there are far more
consumers than there are suppliers of unhealthy food products. Therefore, the Option 1 system
would take up much more of the Revenue Authority’s capacity as far as the processing and audit
of returns are concerned. Consumers would also most likely not have sophisticated record-
keeping systems in place, while most suppliers would probably already have record-keeping
systems in place for accounting purposes. It would, therefore, also be less burdensome for the
taxpayers if Option 2 or 3 is implemented.
Flexibility
For all of the options, the proposed tax appears to be flexible. Because the tax is expressed as a
percentage of the sales prices of the relevant unhealthy food products, the tax will automatically
increase in line with the sales prices. Therefore, where inflationary pressures result in an increase
in sales prices, the tax will automatically be adjusted in line with inflation.
Simplicity
Generally, the proposed tax could be perceived as being relatively simple. However, if con-
sidered in the context of other taxes already being imposed on certain foods (such as the imposi-
tion of value-added tax on certain food products at 0% and on others at 15%), the introduction of
another tax on unhealthy food products introduces complexity. Should Option 3 be implemented,
the proposed tax would introduce even more complexity because the different categories of
unhealthy food products will be subjected to different tax rates (i.e. 2%, 5% and 12%).
1.5 Conclusion
Evidently, tax policy design is by no means a simple process as there is no ‘one-size-fits-all’ solution.
While the principles of taxation may provide useful guidance in designing tax policy, in practice their
application is much more challenging. Tax policy cannot be customised in accordance with
individuals’ wants and needs. It has to take into account different income groups, international trade
relations, other laws and regulations, the current and anticipated economic environment, and many
other factors.
10
2 Taxation in South Africa
Alta Koekemoer

l explain the legislative process in South Africa
l identify the national taxes levied in South Africa
l describe how the tax Acts are administered
l explain how tax law is interpreted
l illustrate how tax legislation is interpreted by performing a normal tax calculation.
Contents
Page
2.1 Overview ............................................................................................................................. 11
2.2 Taxation in South Africa...................................................................................................... 12
2.2.1 Brief history of taxation in South Africa ................................................................. 12
2.2.2 The legislative process ......................................................................................... 12
2.2.3 Current tax legislation ........................................................................................... 13
2.2.3.1 Normal tax .............................................................................................. 14
2.2.3.2 Withholding Tax (Fourth Schedule, ss 9(2)(b), 10(1)(h), 10(1)(i),
10(1)(l), 10(1)(lA), 35A, 47A–47K, 49A–49H, 50A–50H, 64D
and 64E) ................................................................................................ 14
2.2.3.3 Turnover tax (ss 48–48C) ...................................................................... 15
2.2.3.4 Dividends tax (ss 64D–64N) ................................................................. 15
2.2.3.5 Donations tax (s 54) .............................................................................. 16
2.2.3.6 Value-added tax .................................................................................... 16
2.2.3.7 Transfer duty .......................................................................................... 16
2.2.3.8 Estate duty ............................................................................................. 16
2.2.3.9 Securities transfer tax ............................................................................ 16
2.2.3.10 Customs and excise duties and levies .................................................. 16
2.2.3.11 Unemployment insurance contributions ................................................ 17
2.2.3.12 Skills development levies....................................................................... 17
2.3 Administration of tax legislation.......................................................................................... 17
2.4 Interpretation of tax law ...................................................................................................... 17
2.4.1 Tax legislation........................................................................................................ 18
2.4.2 Judicial decisions .................................................................................................. 19
2.4.3 Rules of interpretation .......................................................................................... 20
2.5 Illustrating the components of normal tax and the interpretation of tax law in
South Africa .............................................................................................................................. 21
2.5.1 The incidence of normal tax .................................................................................. 21
2.5.2 The rate structure of normal tax ............................................................................ 21
2.5.3 The tax base of normal tax for natural persons and companies .......................... 22
2.1 Overview
This chapter provides an overview of the national taxes imposed in South Africa. While the focus of
this book is predominantly on the Income Tax Act 58 of 1962, the taxes imposed by the Income Tax
Act 58 of 1962 are, however, not the only taxes levied in South Africa. In South Africa, different types
of taxes are levied based on income, wealth and consumption (see discussion on tax base in chap-
ter 1 (par 1.2)).
The chapter starts with a background to taxation in South Africa in general (see 2.2). In this chapter,
we also look at how tax law is administered in South Africa (see 2.3) and how it is interpreted (see 2.4).
Lastly, normal tax will be used as an example to analyse the tax components (set out in chapter 1) and
to illustrate the interpretation of tax law and the calculation of normal tax in South Africa (2.5 and 2.6).
11
2.2 Taxation in South Africa
2.2.1 Brief history of taxation in South Africa

Taxation has been around in South Africa since the 1600s, when transfer duty was imposed on
property transferred by sale and customs taxes were imposed on goods imported into the Cape
Colony. Often the taxes were imposed on a colonial level based on the colonies existing at the time,
namely the Cape Colony, the Orange Free State, Natal and the Transvaal. South Africa inherited most
of its earlier tax practices from the Netherlands and Britain. This resulted in a proliferation of
requirements. Most of these taxes were subsequently nationalised in an attempt to simplify these
requirements.1
While income tax has been levied since the 1800s, it was only when amendments were made in the
early 1900s that income tax was transformed into the format we know today.2 Important contributors
to the transformation of South Africa’s tax system were:3
l The Commission of Enquiry into Fiscal and Monetary Policy in South Africa (‘the Franzsen
Commission’) – issued two reports in 1968 and 1970 respectively;
l The Commission of Inquiry into the Tax Structure of the Republic of South Africa (‘the Margo
Commission’) – issued one report in 1986;
l The Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa (‘the Katz
Commission’) – issued nine interim reports during 1994–1999; and
l The Davis Tax Committee inquiring into the role of the tax system in promoting ‘inclusive growth,
employment, development and fiscal sustainability’ in order to make recommendations to the
Minister of Finance – issued 25 reports from 17 July 2013 to 27 March 2018.4
Since the reviews conducted by these commissions and committee, there have been significant
changes in the South African tax system.
2.2.2 The legislative process

South Africa’s tax policy has come a long way since the 1600s. The Constitution of South Africa,
1996, ensures that a thorough and transparent process is followed to introduce new legislation and to
amend existing legislation. The legislative process generally commences with the issuing of a Green
Paper, followed by the White Paper, the Draft Money Bill and, finally the Act of Parliament. A Green
Paper is a policy document intended for public discussion, and it sets out a Government Depart-
ment’s general view of the matter under consideration. In South Africa, National Treasury is the
Government Department that deals with tax laws. The public is allowed to comment on the Green
Paper. The National Treasury then considers any public comments received and may elect to adjust
the Green Paper for these comments. The adjusted Green Paper is then issued in the form of a White
Paper. A White Paper represents a more refined version of the Green Paper. A White Paper may also
be subjected to further discussions and commentary prior to it being transformed into a draft set of
legislation known as a Draft Money Bill.5
A Draft Money Bill should be prepared and submitted by the National Treasury to the Minister of
Finance. Once Cabinet approval has been obtained, the Draft Money Bill must be reviewed by the
State Law Advisers to ensure that it does not contradict the Constitution and other existing laws, and
that there are no technical errors. Upon obtaining the approval of the State Law Advisers, the Draft
Money Bill is then introduced by the Minister of Finance in Parliament to the National Assembly and
the National Council of Provinces.6 The Draft Money Bill is then published in the Government Gazette
for public comment. A consultative process is applied, and amendments are made where required.
Only after the Draft Money Bill has successfully passed through Parliament, will it be submitted for
assent by the President. Once assented by the President, the Draft Money Bill becomes an Act of
Parliament and becomes binding on one of the following dates:
l the date the Act is published in the Government Gazette
___________
1 De Kock MH Economic History of South Africa Juta & Co. Ltd (1924) at 300.
2 Ibid at 422–425.
3 ‘Polity Fifth interim report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa – basing
the South African income tax system on the source or residence principle – options and recommendations’ (1997)
<http://www.polity. org.za/polity/govdocs/commissions/katz-5.html.> (accessed 2013-06-12).
4 Tax Review Committee The Davis Tax Committee (2018) <http://www.taxcom.org.za/> (accessed 2018-11-20).
5 Parliament of the Republic of South Africa How a law is made (2013) < http://www.parliament.gov.za/live/content.php?
Item_ID=1843> (accessed 2013-11-18).
6 The National Assembly and the National Council of Provinces are collectively referred to as the Houses of Parliament.
12
2.2 Chapter 2: Taxation in South Africa
l the date determined in accordance with the Act, or

l the date as indicated in the Government Gazette.7
The legislative process is depicted in Figure 2.1.
Figure 2.1: The legislative process in South Africa
Act of
Parliament
Draft Money Bill
White Paper
Green Paper
2.2.3 Current tax legislation

Table 2.1 provides an overview of the current national taxes levied in South Africa, categorised
according to the tax base (see 1.2). It also refers to the specific paragraph in this chapter where a
brief summary is provided as well as the chapter in this book where the particular tax is dealt with in
detail.
Table 2.1: National taxes in South Africa
Tax Base
Legislation Tax Type Tax Base Silke Chapter
Category
Income Tax Act 58 of Normal tax (2.2.3.1) Taxable income Main focus of
1962 the book
Withholding tax Gross amount payable to
(2.2.3.2) non-resident / beneficial Income Chapter 21
owner
Turnover tax (2.2.3.3) Taxable turnover Chapter 23
Dividends tax (2.2.3.4) Gross amount of dividend Chapter 19
Donations tax (2.2.3.5) Value of property
disposed of under a
Wealth Chapter 26
donation or deemed
donation
Value-Added Tax Act Value-added tax* Taxable supplies of goods
Consumption Chapter 31
89 of 1991 (2.2.3.6) and services
continued
___________
7 The Department of Justice and Constitutional Development (South Africa) The legislative process (2004) <http://www.
justice.gov.za/legislation/legprocess.htm> (accessed 2014-11-15).
13
Tax Base
Legislation Tax Type Tax Base Silke Chapter
Category
Transfer Duty Act Transfer duty* (2.2.3.7) Value of property acquired
40 of 1949 or property value
Chapter 28
enhancement via
renunciation of rights
Wealth
Estate Duty Act 45 of Estate duty (2.2.3.8) Dutiable amount of estate
Chapter 27
1955
Securities Transfer Securities transfer tax* Taxable amount of
Chapter 29
Tax Act 25 of 2007 (2.2.3.9) transferred security
Customs and Excise Customs duties* Imported goods
Act 91 of 1964 (2.2.3.10)
Excise duties and Specified goods Consumption Chapter 30
levies* manufactured and/or
(2.2.3.10) consumed in South Africa
Unemployment Unemployment Remuneration
Insurance insurance
Chapter 10
Contributions Act 4 of contributions
2002 (2.2.3.11) Income
Skills Development Skills development Remuneration
Chapter 10
Levies Act 9 of 1999 levy (2.2.3.12)
*These taxes are also classified as indirect taxes and are levied on transactions as opposed to direct taxes
(without the *) that are levied on a person.
All references in this book to the ‘Act’ are references to the Income Tax Act 58
Please note! of 1962 (referred to as the Act), and all references to sections and Schedules
are references to sections and Schedules to the Act, unless otherwise specified.
2.2.3.1 Normal tax

Normal tax is imposed by the Act and is commonly referred to as income tax.
2.2.3.2 Withholding tax (Fourth Schedule, ss 9(2)(b), 10(1)(h), 10(1)(i), 10(1)(l), 10(1)(lA), 35A,
47A–47K, 49A–49H, 50A–50H, 64D and 64E)
Withholding tax is also a tax imposed by the Act. It is a tax that is withheld at source. Withholding tax,
therefore, places a responsibility on a person that owes an amount of money to another person, to
withhold an amount of tax from the amount owed to that other person. Only the net amount is then
paid to that other person (normally a non-resident). The tax withheld by the payer of the amount must
be paid over to the South African Revenue Service (SARS) on behalf of the recipient. The final liability
for the amount of tax rests on the person receiving the amount. The withholding tax can be the full or
partial tax liability in respect of the specific amount. Several taxes on income are required to be
withheld on payment in South Africa in order to ensure the convenience of the collection of these
taxes and for the person who has to pay the tax.
(a) Taxes withheld on payments of remuneration by employers to employees
The duty of an employer (as defined) to withhold employees’ tax from any remuneration (as defined)
paid to an employee (as defined) and to pay it over to SARS, makes this a withholding tax. Employ-
ees’ tax is not a final tax but rather a prepayment of normal tax and is deducted from normal tax
payable in the calculation of the final normal tax due by or to the natural person on assessment. The
calculation of employees’ tax is contained in the Fourth Schedule. Employees’ tax is discussed in
chapter 10. The amount to be paid over is subject to relief in terms of the Employment Tax Incentive
Act 26 of 2013 that will cease on 28 February 2029. The Employment Tax Incentive Act provides relief
to all ‘eligible employers’ in respect of ‘qualifying employees’ to encourage employers to hire young
and less experienced work seekers in an effort to reduce unemployment in South Africa.
(b) Taxes withheld on payments of dividends by companies to beneficial owners
Dividends tax is also a withholding tax and is payable on the amount of any dividend paid by a
resident company or non-resident company that is listed on a recognised stock exchange in South
Africa, such as the JSE, to a beneficial owner (as defined – s 64D). It is payable in respect of cash
dividends and dividends in specie (s 64E). Dividends tax is a final tax. It applies in respect of
payments to both resident and non-resident beneficial owners. Dividends tax is discussed in detail in
chapter 19.
14
(c) Taxes withheld on payments to non-residents

Withholding tax is often used by countries to collect income tax in respect of amounts derived by
non-residents from a local source due to the ease of collection. The withholding taxes are withheld by
a resident paying an amount to a non-resident and are paid over to SARS by the resident on behalf of
the non-resident. The resident is, therefore, merely a middleman; the tax liability is that of the non-
resident. Take note that a reduced rate for withholding taxes may apply depending on the relevant
applicable double taxation agreement between South Africa and the other country. The Act provides
for four types of payments made by a resident to a non-resident which are subject to a withholding
tax. There is no withholding tax on service fees paid to a non-resident.
l Withholding tax on payments to non-resident sellers of immovable property: s 35A (see chapter 21)
A non-resident who sells immovable property in South Africa will be liable for withholding tax of
7,5%, 10% or 15% on the selling price received or accrued by the non-resident who is a natural
person, company and trust, respectively. This withholding tax is different from the other three
withholding taxes applicable to amounts payable to non-residents. The reason why it is different
is because it is not a final withholding tax, but it reduces the normal tax payable by the non-
resident taxpayer in the calculation of the final normal tax due by or to that taxpayer.
l Withholding tax on royalties: ss 49A–49H (see chapter 21)
A non-resident who receives a royalty from a resident or to whom a royalty accrues from a source
in South Africa will be liable to 15% withholding tax on the gross royalty received (ss 49A–49H).
Royalties or similar amounts that have been subject to withholding tax are exempt from normal
tax (s 10(1)(l)). The effect of this exemption is that the withholding tax is a final tax in South Africa
on such royalty income for qualifying non-residents. The possibility exists that a lower rate may
apply due to the application of a double taxation agreement between South Africa and the other
country.
l Withholding tax on interest: ss 50A–50H (see chapter 21)
Withholding tax is payable at a fixed rate of 15% of the amount of any interest received by or
accrued to any non-resident person from a source in South Africa (s 9(2)(b)). The interest which
is subject to a withholding tax may be exempt from normal tax (ss 10(1)(h) and 10(1)(i)). This
withholding tax is also a final tax.
l Withholding tax on payments to foreign entertainers and sportspersons: ss 47A–47K (see
chapter 21)
Withholding tax is payable at a fixed rate of 15%. Amounts received by or accrued to any foreign
entertainer or sportsperson that have been subject to withholding tax are exempt from normal tax
(s 10(1)(lA)). This withholding tax is also a final tax.
2.2.3.3 Turnover tax (ss 48–48C)

Turnover tax is incorporated in the Sixth Schedule to the Act. Sections 48 to 48C has been included
in the Income Tax Act and links the Sixth Schedule with the Act. It provides for an elective turnover
tax for micro-businesses with an annual turnover of R1 million or less. Turnover tax is a tax calculated
on the taxable turnover of a registered micro business, and not on its taxable income. This method
eliminates the need for keeping detailed records of expenditure. An important feature of the turnover
tax regime is that the imposed tax liability is aligned with the tax liability under the current income tax
regime, but on a simplified base, with reduced compliance requirements.
2.2.3.4 Dividends tax (ss 64D–64N)

Dividends tax is also a tax imposed by the Act. Because of the method of collection, dividends tax
can also be considered a withholding tax (see 2.2.3.2). Dividends tax is payable at a fixed rate of
20% on the amount of any dividend paid by a resident company or a non-resident company that is
listed on a recognised stock exchange in South Africa, with certain exceptions like headquarter
companies, oil and gas companies and international shipping companies. Take note that a reduced
rate for withholding taxes may apply depending on the relevant applicable double taxation agree-
ment between the countries. The ‘beneficial owner’ (as defined in s 64D) remains liable for the divi-
dends tax, although it is the company that deducts the 20% withholding tax on any dividend paid.
Where a dividend in specie is declared, it is the resident company that is liable for the dividends tax.
This withholding tax is a final tax in South Africa on such dividends. This means that there will be no
need to submit an annual return of income if such dividends are the only income received by the
taxpayer (see chapter 19).
15
2.2.3.5 Donations tax (s 54)

Donations tax is another tax imposed by the Act. In order to prevent the avoidance of estate duty
through the gratuitous distribution of property while the resident is still alive, donations tax is imposed
by s 54 of the Act. Donations tax is a tax on the gratuitous transfer of wealth (property) and not a tax
on income. Donations tax is levied on the value of all donations, other than those specifically exempt,
made by a donor who is a resident.
Donations tax is calculated at a fixed rate of 20% on the cumulative value of donations not exceeding
R30 million, and at a fixed rate of 25% on the cumulative value of donations exceeding R30 million.
An annual exemption of up to R100 000 of the value of all donations made during the tax year is
available to a taxpayer that is a natural person and, in the case of a company, an exemption of up to
R10 000 in respect of the value of all casual gifts. Although donations tax is not a tax on income, it
has been incorporated into the Income Tax Act for administrative convenience.
2.2.3.6 Value-added tax

Value-added tax (VAT) is imposed by the Value-Added Tax Act 89 of 1991. Output tax is levied at
15% (since 1 April 2018) on the supply of goods or services by a registered VAT vendor in South
Africa. Prior to 1 April 2018, the rate was set at 14%. In terms of s 65 of the VAT Act, all quoted and
advertised prices are deemed to include VAT. In certain instances, an enterprise registered as a VAT
vendor may claim the VAT it has paid, back from SARS in the form of input tax. VAT is an indirect tax
with the total direct cost being borne by the final consumer, as the consumer cannot claim the
amount back from SARS. VAT is also levied on certain goods and services imported into South
Africa.
2.2.3.7 Transfer duty

Transfer duty is levied in terms of the Transfer Duty Act 40 of 1949 on the cost price of fixed property
using a sliding scale (0%, 3%, 6%, 8%, 11% and 13%). It is a wealth tax payable by the purchaser on
the acquisition of property as defined in section 1(1) of the Transfer Duty Act (generally, fixed
property situated in South Africa).
2.2.3.8 Estate duty

A tax called ‘estate duty’ is levied in terms of the Estate Duty Act 45 of 1955. It is levied on the
dutiable value of the estate of a deceased person at a fixed rate of 20% of the dutiable value that
does not exceed R30 million and 25% of the amount that exceeds R30 million. An abatement of
R3,5 million is available against the net value of the estate, while a deceased spouse’s unused
abatement may be carried forward to a surviving spouse. The purpose of estate duty is to tax the
transfer of wealth from the deceased estate to the beneficiaries. It is usually the estate that is liable
for the estate duty. In some cases, however, the beneficiaries could be held liable for the estate duty
on the property they received.
2.2.3.9 Securities transfer tax

Securities transfer tax is imposed by the Securities Transfer Tax Act 25 of 2007 at the rate of 0,25% of
the taxable amount of the transferred security (generally, the value of any shares purchased). It is
payable by the purchaser on the transfer of both listed and unlisted shares in companies incorpor-
ated in South Africa, as well as on the transfer of shares of foreign companies listed on any recog-
nised stock exchange in South Africa. It is also payable on the transfer of members’ interests in a
close corporation. No securities transfer tax is payable on the issue of shares.
2.2.3.10 Customs and excise duties and levies

Two taxes are imposed in terms of the Customs and Excise Act 91 of 1964:
l Customs duties are imposed on the importation of goods into South Africa with the aim of
protecting the local market.
l Excise duties and levies are imposed on certain luxury or non-essential goods manufactured
and/or consumed in South Africa.
Certain parts of the Customs and Excise Act 91 of 1964 will be replaced by the
Customs Duty Act 30 of 2014, the Customs Control Act 31 of 2014 and the
Please note! Customs and Excise Amendment Act 32 of 2014. The effective dates of said
Acts were not known at the time of writing.
16
2.2–2.4 Chapter 2: Taxation in South Africa
2.2.3.11 Unemployment insurance contributions

Unemployment insurance contributions are determined with reference to remuneration of specified
employees as per the Unemployment Insurance Contributions Act 4 of 2002. The purpose is to
provide relief to employees during short periods of unemployment. The amount contributed by the
employee is deducted from the employee’s gross remuneration. Contributions are made by both the
employer and employee in equal parts (1% of gross remuneration is paid by each). The maximum
monthly salary for determining the unemployment insurance contribution per month moved to
R17 711,58 from 1 June 2021. The calculation of the unemployment insurance contribution is discus-
sed in detail in chapter 10.
2.2.3.12 Skills development levies

Skills development levies are determined with reference to the remuneration of specified employees
as per the Skills Development Levies Act 9 of 1999. Contributions are made by employers only. The
calculation thereof is discussed in detail in chapter 10.
2.3 Administration of tax legislation

SARS is the government department dealing with South African tax administration. SARS was founded
in terms of the South African Revenue Service Act 34 of 1997, as a sovereign organisation, in charge of
managing the South African tax system and customs service. The Commissioner of SARS is
responsible for carrying out the function of collecting taxes and ensuring compliance with tax laws
(s 2(1)). Administrative requirements and procedures for purposes of the performance of any duty,
power or obligation, or the exercise of any right in terms of the tax laws are regulated by the Tax
Administration Act 28 of 2011 (see chapter 33). In essence, SARS is responsible for administering the
relevant tax Acts drafted and legislated by the National Treasury.
The Constitution of the Republic of South Africa, 1996 requires national legislation to be enacted to
give effect to the taxpayer’s right to ‘administrative action’ that is lawful, reasonable and procedurally
fair. The legislation must also provide for the review of ‘administrative action’, to impose a duty on the
state to give effect to these rights and to promote efficient administration (s 33(3) of the Constitution).
In order to give effect to this, the Promotion of Administrative Justice Act 3 of 2000 (PAJA) was
promulgated. In terms of PAJA, ‘administrative action’ is any decision made by SARS or any failure of
SARS to make a decision that adversely affects the rights of any person and that has a direct external
effect. Examples of the decisions made by the Commissioner of SARS that constitute administrative
action include the issuing of an assessment, the disallowance of an objection, a denial of a refund
under the VAT Act, etc. In such instances, SARS is subject to the provisions of PAJA that requires the
administrative action to be procedurally fair. In determining the fairness of the administrative action,
the following should be taken into account (s 3 of PAJA):
l Was adequate notice provided?
l Was there a reasonable opportunity to make representation?
l Did SARS provide a clear statement of the administrative action?
l Was adequate notice given of the right of review?
l Was adequate notice given of the right to request reasons?
Where a taxpayer believes that he has not been dealt with fairly, he can commence with procedures
as specified in PAJA. In the end, PAJA provides taxpayers with the means to fair administrative
action.
2.4 Interpretation of tax law

In carrying out its function of collecting taxes and ensuring compliance with tax laws, the tax laws of
South Africa need to be interpreted by SARS. Furthermore, in terms of s 102 of the Tax Administration
Act, the burden of proof lies with the taxpayer to claim an exemption, non-liability, deduction,
abatement, set-off or exclusion. The interpretation of tax law is therefore important for both SARS and
the taxpayer. The Constitution of the Republic of South Africa, 1996, is the supreme law of South
Africa. Any law (including an Act) that is inconsistent with it is invalid. No provision in any tax Act can
therefore contravene the provisions of the Constitution or the Bill of Rights contained in Chapter 2 of
the Constitution. All interpretations of tax legislation must, in terms of s 39(2) of the Constitution,
promote the spirit, purport and objects of the Bill of Rights. Constitutional matters are heard in the
Constitutional Court, and its judgments are binding on all other courts.
17
The two most important sources of tax law are tax legislation and judicial decisions. These two
sources of tax law are interpreted according to certain rules of interpretation (see 2.4.3).
2.4.1 Tax legislation

When interpreting tax legislation, the taxing statutes (briefly discussed in 2.2.3), as well as the regula-
tions promulgated in terms of these acts, double taxation agreements, the definitions in the Tax
Administration Act and the Interpretation Act, are essential. Interpretation Notes and Binding General
Rulings are also useful in providing guidance regarding the interpretation of tax legislation by the
Commissioner of SARS.
Regulations
Section 107(1) of the Act enables the Minister of Finance to make regulations regarding certain
matters, namely
l the duties of all persons engaged in the administration of the Act
l the limits of areas within which such persons are to act
l the nature and contents of the accounts to be rendered by a taxpayer in support of returns
rendered under the Act and the manner in which such accounts must be authenticated
l the method of valuation of annuities or of fiduciary, usufructuary or other limited interests in
property.
These regulations are published in the Government Gazette and have the same power as legislation.
An example is the motor vehicle rate per kilometre (s 8(1)(b)(ii) and (iii)).
Double taxation agreements
Agreements to avoid the imposition of double taxation when residents of a country transact in another
country may be entered into by the governments of the respective countries. Once published in the
Government Gazette, following its approval by Parliament, a double taxation agreement (DTA) has
the effect of law (s 108(2)). This means that where any provision of the Act, as discussed in the rest of
this book, is applied to a transaction to which the double taxation agreement also applies, the double
taxation agreement must be considered as if it forms part of that provision. Where there is a conflict
between the Act and the double taxation agreement, the double taxation agreement takes preference
over the Act.
Definitions
When interpreting the words of tax legislation, it is important to note that the main source of definitions
is contained in the first section of a tax Act, i.e. s 1. At times, a specific section or subsection can also
contain definitions that apply within a particular context.
All sections in the Act are subject to their provisos unless the context indicates otherwise. Similarly,
the definitions set out in s 1(1) are all subject to their provisos. With regard to the meaning of certain
terms in tax legislation, the following also needs to be considered:
l If there is a definition in the Tax Administration Act but not in the Act, then the definition in the Tax
Administration Act will also apply for the purposes of the Act unless the context indicates
otherwise (s 1(2) of the Act). This also applies to other tax acts, for example, the VAT Act.
l If there is a definition in the Act but not in the Tax Administration Act, then the definition in the Act
also applies for purposes of the Tax Administration Act unless the context indicates otherwise
(preamble to s 1 of the Tax Administration Act).
l If there are inconsistencies between the Tax Administration Act and the Act, the Act prevails
(s 4(3) of the Tax Administration Act).
The Interpretation Act

If a term used in the Income Tax Act is not defined in another tax act, it is necessary to look at the
Interpretation Act 33 of 1957 for guidance. If a term is clearly defined in the Income Tax Act and there
are no ambiguities, the provisions of the Income Tax Act apply. The provisions of the Interpretation
Act, therefore, only apply if the Income Tax Act does not define a term or ambiguities exist in the
Income Tax Act. Certain terms, for example ‘person’, are defined in both the Income Tax Act and the
Interpretation Act. If a definition is given in the Income Tax Act that differs from the definition given in
the Interpretation Act, the definition in the Income Tax Act takes precedence, unless the context
indicates otherwise.
18
If a term is not defined within primary legislation or the Interpretation Act, the normal dictionary
meaning of the word may indicate its meaning. If the meaning is still uncertain or incomplete relevant
case law is examined in order to understand the meaning of the term used (see 2.4.2).
Interpretation Notes and Binding General Rulings

In addition to the regulations, SARS publishes Interpretation Notes (previously Practice Notes of
which some still apply) that set out its interpretation of various provisions of the Act. These Inter-
pretation Notes do not form part of tax legislation. For example, Interpretation Note No. 3 deals with
the interpretation of the term ‘ordinarily resident’ used in the definition of a resident (if a natural
person) in s 1(1) of the Act. These Interpretation Notes are simply SARS’s interpretation regarding the
relevant provisions and do not have the force of law, unless if they are binding private or class
rulings. Interpretation Notes serve only as guidelines. If challenged in courts of law, they may be
overthrown. A taxpayer may therefore challenge the practice of SARS as set out in a particular Inter-
pretation Note. It appears that an Interpretation Note does not bind the Commissioner, unless it con-
tains a statement that it is a Binding General Ruling in which instance the Commissioner is bound to
its interpretation. An example of an Interpretation Note that states it is a Binding General Ruling is
Interpretation Note No. 47 (see discussion below). Although not necessarily binding, Interpretation
Notes are relevant when considering the application of tax legislation.
The Advance Tax Ruling system provides for the issuing of Binding General Rulings (BGRs). BGRs
are issued on matters of general interest or importance in order to promote clarity, consistency and
certainty regarding the Commissioner’s application or interpretation of the tax law relating to these
matters. For example, in BGR7, dealing with s 11(e) of the Act, SARS makes it clear that SARS inter-
prets ‘value’ for purposes of the s 11(e) allowance to be the actual cash cost incurred. According to
BGR7, ‘value’ is not the market value unless the asset is acquired by way of a donation, inheritance,
as a distribution in specie or from a connected person. Although BGR7 (and Interpretation Note
No. 47) suggest that a taxpayer will have to use ‘cost price’ in the context of a s 11(e) allowance a
BGR is not binding on the taxpayer. The taxpayer may, therefore, still decide to use market value as
‘value’ where the market value exceeds the actual cost incurred. In such an instance, the taxpayer
may, however, have to defend his decision in court at a later stage.
The courts have also indicated that the SARS interpretation notes will not be binding on them when
interpreting tax legislation. It was held in a constitutional court case, Marshall NO and Others v
CSARS, that the practice generally prevailing by SARS as set out in an interpreration note or practice
note is evidence of the unilateral practice by SARS and not by the taxpayer. There are two litigating
parties in a court case, the taxpayer and SARS, and the courts cannot only have regard to the unilateral
practice of one party. Instead, the courts must interpret the meaning of legislation objectively and in line
with constitutionally compliant principles (see 2.4.3). It is submitted that where the interpretation note or
practice note has been recognised by SARS and the taxpayer, for example Practice Note No. 31, the
courts may consider the interpretation note or practice note when interpreting legislation.
2.4.2 Judicial decisions

In South Africa, judgments of the courts are an important source of tax law.
When will a tax case be heard in a court of law?

Where a taxpayer is aggrieved with his assessment, he may appeal if his objection has been dis-
allowed. The Tax Administration Act provides for the following appeal route:
Tax Board Ö Tax Court Ö Provincial Divisions of the High Court Ö Supreme Court of Appeal.
The Tax Board deals with appeals where the amount of tax in dispute does not exceed R1 000 000.
The party against whom was decided in the Tax Board hearing can appeal to the Tax Court. The Tax
Court is not a court of law. It has no inherent jurisdiction as is possessed by the Supreme Court of
Appeal. It is bound by a decision of the Provincial Divisions of the High Court and the Supreme Court
of Appeal, although it is not bound by its own decisions. A decision by the Tax Court is only binding on
the parties to the specific case. Although the Commissioner is bound by earlier decisions of the
Supreme Court of Appeal, he is not bound by a decision by the Tax Court given in an earlier case,
since, although the Tax Court is a competent court to decide on an issue between the parties, it is not
a court of law.
Provincial Divisions of the High Court are generally bound by their own decisions; however, they are
not bound by decisions of other provincial divisions. The Tax Court is bound by decisions of the
Provincial Divisions of the High Court in terms of the principle of legal precedence (see the
discussion of the meaning of this term below).
19
The Supreme Court of Appeal is not bound by the decision of any Provincial Division. It is bound by
its own decisions and will generally follow any previous decision it has given. All subordinate courts
are bound by the decisions of the Supreme Court of Appeal in terms of the principle of legal
precedence. Prior to February 1997, the High Court was called the Supreme Court and the Highest
Court of Appeal was called the Appellate Division of the Supreme Court. In this book, the courts are
referred to by the name by which they were known at the time of the hearing of the relevant case.
The legal precedence principle

The English stare decisis rule is accepted in South Africa. This rule entails the principle of legal
precedence, meaning that the rule of law established in a previous judgment is binding upon a lower
court and that courts of equal rankings must follow their own previous decisions. This implies that
there is a hierarchy of courts that can be summarised as follows: a decision of the Provincial Divisions
of the High Court binds the Tax Court, and a decision of the Supreme Court of Appeal binds the
Provincial Divisions of the High Court and the Tax Court.
What part of the decision creates legal precedence?

The part of the decision that creates precedent is the ratio decidendi. The ratio decidendi of a case is
the reason or ground for the decision of a court. This becomes a principle of law that may have to be
applied in future cases where the facts are similar, depending on the authority of the court that gave
the decision. However, in passing judgment, the court may make certain observations that do not
affect the reason for the decision. These obiter dicta are not binding on any court, even if these pas-
sing remarks originate in the Supreme Court of Appeal. It may, however, in the future have persua-
sive authority in another court.
Can income tax decisions of foreign countries create legal precedence?

The courts have frequently pointed out that the income tax decisions of other countries must be
cautiously approached, owing to differences in the basis of taxation applicable in foreign countries.
In referring to such decisions, therefore, one must always bear in mind that they may be based upon
a differently worded statute from the statute under consideration. They may, however, be valuable
and may influence South African courts, particularly when they deal with a point of law that also
occurs in the South African Act.
2.4.3 Rules of interpretation
The strict literal approach

The strict literal or textual approach originated from the English law and is also known as the ‘golden
rule of interpretation’. In terms of this rule, the interpreter primarily concentrates on the literal meaning
of the words of the provision that must be interpreted to determine the purpose of the legislator.
When the statute is expressed in clear, precise and unambiguous words, the court is not entitled to
do otherwise than interpret those words in their ordinary and natural sense. It, therefore, makes sense
to equate the grammatical meaning of the words to the intention of the legislator. A literal approach
is, thus, always the starting point. If the text is, however, ambiguous or unclear, or if a strict literal
meaning will be absurd, the literal meaning may be departed from. In such a case, the purposive
approach may be more appropriate to use. Case law that supports the strict legal approach includes
Partington v The Attorney General (1869 House of Lords) and Cape Brandy Syndicate v IRC (1921
King’s Bench).
The purposive approach

The purposive or contextual approach determines the purpose of the legislation by taking into
account all surrounding circumstances and resources. The Constitution of South Africa, 1996, has
supreme authority and, through ss 39(1) and (2), indicates that the purpose underlying the statute
must be sought.8 This means not merely seeking the ‘intention of Parliament’ but also considering the
history of the provision, its broad objectives, the constitutional values underlying it and its interrela-
tionship with other provisions.9 Case law that supports the purposive approach includes Glen Anil
Development Corporation Ltd v SIR (1975 A) and CSARS v Airworld and Another (70 SATC 48).
___________
8 Goldswain, GK ‘Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes’ Meditari 16(3) (2012), at 31.
9 Goldswain, GK ‘Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the
interpretation of fiscal statutes’ Meditari 16(3) (2012), at 52.
20
2.4–2.5 Chapter 2: Taxation in South Africa
An objective approach
In a more recent decision (Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA
593 (SCA)) the judge (Wallis JA) warned against the use of an expression such as “the intention of
the legislature” if the sole purpose is an enquiry into the mind of the legislature. The meaning that the
members of Parliament or other legislative body attributed to a particular legislative provision should
not carry more weight than the language of the provision. When interpreting legislation, the emphasis
should be on considering both the context and the words of the provision, with neither dominating the
other. One should furthermore not impose one’s own views as to what would have been sensible for
others to intend. The process of interpretation should be an objective process.
The contra fiscum rule

The contra fiscum rule is also in agreement with the spirit and purport of the Bill of Rights. This rule
means that where a provision of the Act is open to more than one interpretation, the court must follow
the interpretation that favours the taxpayer. The practical application of this rule is illustrated with
regard to s 6A(3A) in par 7.2.2 (see discussion before the “Remember” block).
The substance over form rule

If problems of interpretation arise in relation to the true meaning of an agreement or a transaction, the
courts will be concerned with the substance rather than the form of the agreement or transaction.
2.5 Illustrating the components of normal tax and the interpretation of tax law in
South Africa
In chapter 1 it became clear that, in applying its tax policies, Government will decide on a tax base
(see 1.2), a tax rate structure (see 1.3) and the incidence of the tax liability, which are all guided by
the general principles of taxation (see 1.4). The different taxes and levies implemented in South
Africa are set out in chapter 2 (see 2.2). These taxes and levies are interpreted using tax legislation
and judicial decisions (see 2.4).
The Act currently calls for the annual payment of an income tax, which is referred to as ‘normal tax’
(s 5(1)). Normal tax will now be used as an example to analyse the tax components (as set out in
chapter 1) and to illustrate the interpretation of tax law in South Africa (described in chapter 2).
2.5.1 The incidence of normal tax

The incidence of tax refers to the liability of tax. Normal tax is imposed upon any ‘person’ (s 5(1)).
According to the definition of ‘person’ in s 1(1), a ‘person’ specifically includes trusts, estates of
deceased persons, insolvent estates, and a portfolio of a collective investment scheme. It does,
however, specifically exclude a foreign partnership. Although not specifically included, a natural
person is considered a ‘person’ (in terms of the broad understanding of a person per dictionary
definition). The definition of ‘person’ in the Interpretation Act also includes any ‘body of persons,
whether incorporated or unincorporated’. This means that irrespective of whether specifically referred
to in the definition of person in s 1(1) of the Act, all companies, close corporations and even partner-
ships are considered persons for income tax purposes. Clearly, a partnership can be regarded as a
person for normal tax purposes (an unincorporated body of persons). The Act, however, deems the
income of the partnership to be received by the partners individually (s 24H). For income tax pur-
poses, the partnership is, therefore, not taxed as the individual partners are the taxpayers. For VAT
purposes, however, a partnership is considered a person and liable for registration as a VAT vendor.
The collection of normal tax is facilitated through a system of employees’ tax, provisional tax and
withholding tax payments. While an employer is obliged to withhold the employees’ tax, the
employee, as a ‘person’, carries the burden of the tax. Payments of employees’ tax and provisional
tax are deducted from the normal tax payable in the calculation of the final normal tax due by or to
the person. Withholding tax paid by non-residents in respect of the sale of immovable property in
South Africa is similarly taken into account for non-resident persons.
2.5.2 The rate structure of normal tax

The tax rate structure for normal tax varies in accordance with the different persons subject to normal
tax.
The same progressive rate structure is used to calculate the normal tax of natural persons, deceased
estates, insolvent estates and special trusts. This progressive rate structure ranges from 18% to 45%.
21
It is applied to taxable income and increases as the taxable income increases. Taxable income
excludes the taxable income from lump sum benefits and severance benefits of natural persons
(separate tax tables and a cumulative tax system are used to tax such amounts – see chapter 9).
Special trusts include:
l trusts created solely for the benefit of persons with disabilities as defined in s 6B(1), and
l testamentary trusts created for relatives of the deceased person of whom the youngest, at the
end of any year of assessment of the trust, is under 18 years of age (for more detail see 24.3.2).
A fixed rate structure is prescribed for trusts other than special trusts (currently 45%) and for
companies (currently 28%). The current company tax rate of 28% (with the exception of ‘small
business corporations’ as defined in s 12E) applies in respect of years of assessment ending on or
before 31 March 2022. The tax rate of 28% has been applicable to companies since years of
assessment ending on or after 1 April 2008. Prior to this, the rate was set at 29%. The company tax
rate reduces to 27% with effect from years of assessment ending on or after 1 April 2022. For normal
tax purposes, close corporations are included in the definition of ‘company’ and are taxed in the
same way as companies (s 1(1)). References in this book to companies include close corporations,
unless otherwise specified.
The tax rates are determined annually. The Minister of Finance announces the rate of tax chargeable
in respect of taxable income in the annual national budget. This announcement includes an indication
of the date or dates from which the changes take effect (s 5(2)(a)). This change in tax rates comes
into effect on the dates announced and applies for a period of 12 months from that date. The change
in tax rates is, however, subject to Parliament passing legislation giving effect to the announcement
within that 12-month period (s 5(2)(b)). This legislation is normally in the form of Acts amending the
rates and monetary amounts.
Rebates
All natural persons are entitled to deduct a primary rebate (a saving of normal tax) from the normal
tax per the tax table calculated on taxable income. Natural persons who are or would have been
65 years of age or older on the last day of the year of assessment are further entitled to deduct a
secondary rebate from their normal tax payable. Natural persons who are or would have been
75 years of age or older on the last day of the year of assessment are further entitled to deduct both a
secondary and a tertiary rebate (s 6(2)). If the individual is a resident whose taxable income includes
amounts from countries other than South Africa, the s 6quat rebate for foreign taxes must also be
deducted in determining the normal tax payable (see chapter 21).
Tax relief
In order to promote investment, growth and job creation in South Africa, certain companies could
qualify for normal tax relief in the form of lower tax rates. In line with South Africa’s tax objectives,
relief measures were introduced to stimulate the economic development of selected regions (s 12R),
to promote the development of ‘small business corporations’ (as defined in s 12E) and to stimulate
certain activities, for example, s 11D allowances to encourage research and development activities in
South Africa.
2.5.3 The tax base of normal tax for natural persons and companies
The tax base is the amount on which tax is imposed. With normal tax, the tax base is the ‘taxable
income’ of a person for a ‘year of assessment’.
Year of assessment
The year of assessment always ends on the last day of February, except in the case of companies,
when it ends on the last day of the financial year of the company. The financial year of a company
can end on the last day of any of the 12 months in a calendar year. The 2022 year of assessment of a
company with a financial year ending on 30 June will generally, for example, begin on 1 July 2021
and end on 30 June 2022 (the date of the end of the financial year, therefore, indicates which year of
assessment it is). The year of assessment is commonly referred to as the ‘tax year’. A broken period
of assessment arises when a taxpayer is born, dies or is declared insolvent during a year of
assessment.
22
Taxable income of a natural person

The calculation of the taxable income and normal tax liability of a natural person is shown in the
framework below. In light of the different tax tables applicable to natural persons, chapter 7 suggests
a subtotal method in a comprehensive framework using three different columns in order to determine
the normal tax payable by natural persons. Columns 1 and 2 in that framework contain all the lump
sum benefits and severance benefits, and column 3 contain all other income of a natural person. The
framework in Table 2.2 provides a broad overview of the determination of the taxable income of
column 3 of that comprehensive framework and the normal tax payable (on the taxable income in
column 3) by a natural person. Refer to chapter 7 for a complete and detailed framework that incor-
porates all taxes payable by a natural person.
Table 2.2: Framework for calculating ‘taxable income’ and ‘normal tax payable’
Gross income (definition in s 1(1)) (Note 1) ...................................................................... Rxxx
Less: Exempt income (ss 10, 10A–10C and certain sections in s 12) .......................... (xxx)
Income (definition in s 1(1)) .............................................................................................. Rxxx
Less: Deductions and allowances (ss 11–19, ss 21–24P, excluding s 11F and s 18A) (xxx)
Less: Assessed loss (ss 20–20B).................................................................................. (xxx)
Rxxx
Add: Other amounts included in taxable income (for example s 8(1)(a)) ..................... xxx
Rxxx
Add: Taxable capital gain (s 26A)................................................................................. xxx
Rxxx
Less: Deductions in terms of s 11F (retirement fund contributions) .............................. (xxx)
Rxxx
Less: Deductions in terms of s 18A (donations to PBO) ............................................... (xxx)
Taxable income (definition in s 1(1)) (Note 2) .................................................................. Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3
(see chapter 7) ................................................................................................................. Rxxx
Less: Tax rebates and tax credits .................................................................................... (xxx)
Normal tax payable .......................................................................................................... Rxxx
Note 1: Gross income

The determination of ‘gross income’ is the first step in the calculation of a taxpayer’s taxable income.
The term ‘gross income’, is defined in s 1(1) of the Act. For a resident, ‘gross income’, in relation to a
year or period of assessment, means the total amount, in cash or otherwise, received by or accrued
to or in his favour, excluding receipts and accruals of a capital nature. For a non-resident, gross
income, in relation to a year or period of assessment, means the total amount, in cash or otherwise,
received by or accrued to or in his favour from a source within South Africa, excluding receipts and
accruals of a capital nature. Residents are therefore subject to normal tax on their worldwide income,
whereas non-residents are subject to normal tax in South Africa only on their income from sources
within South Africa. The residence of a taxpayer is thus crucial in determining his liability for South
African normal tax. (Remember also to consider double taxation agreements when dealing with
cross-border transactions.) Some of the terms used in the definition of ‘gross income’, such as
‘amount’, ‘received or accrued’ and ‘of a capital nature’, are not clearly defined for normal tax
purposes in the Act, dictionaries, the Tax Administration Act or in the Interpretation Act. In order to
obtain a clear understanding of these terms, one has to resort to judicial decisions (see chapter 3 for
a discussion of case law on these terms).
Note 2: Taxable income
The term ‘taxable income’ is also defined in s 1(1) of the Act. ‘Taxable income’ is the aggregate of the
following amounts:
l The amount remaining after deducting all the amounts allowed to be deducted or set off from
‘income’ (‘income’ is defined as the ‘gross income’ remaining after deducting all ss 10 and 10A–C
exemptions). Most of the deductions and set-offs are to be found in s 11, which should be read
with s 23.
l All amounts to be included or deemed to be included in taxable income in terms of the Act. The
unexpended portions of s 8(1)(a) allowances are also included in taxable income. The taxable
capital gain, as determined in terms of the Eighth Schedule for a year of assessment, is required
to be included in taxable income in that year of assessment (s 26A).
23
There is no separate Capital Gains Tax (CGT) system in South Africa. Although
the term CGT is used in the spoken language, it is not a separate type of tax, and
Please note!
no amount is subject to capital gains tax. The taxable capital gain is included in
taxable income and is subject to normal tax.
Taxable income of a company

The above framework is not used in the calculation of the taxable income of companies. The financial
statements submitted to SARS by a company together with the annual return (ITR14) are used as a
basis for the calculation of the taxable income of the company. The calculation starts with the
accounting profit or loss before tax per the Statement of Profit or Loss and Other Comprehensive
Income (SPLOCI), and this figure is adjusted with the differences between the accounting and tax
treatment of all the incomes and expenditures (item for item) in order to calculate the taxable income.
There is no specific sequence in which the items need to be considered, except that the s 18A
deduction for donations to public benefit organisations will always be the last deduction for a
company due to the limitation placed on the deductible amount by the section.
The tax treatment of an income item is determined by ascertaining whether the item meets all the
requirements of the definition of ‘gross income’ and whether any s 10 exemption is applicable to it.
The tax treatment of an expense item is determined by ascertaining whether the item meets all the
requirements of one of the sections in the Act allowing an amount as a deduction. It is very important
to determine whether the adjustment (the difference between the accounting and tax treatment of an
item) must increase or reduce the profit before tax. The following process is suggested:
Firstly, determine the effect of the accounting treatment of the item on the profit before tax; in other
words, did the item increase or reduce the profit before tax? Then apply the adjustments as follows:
Debit adjustments:
(1) If the accounting treatment increased the profit before tax, and a smaller amount or no amount
must be included in gross income in terms of the tax treatment, deduct the adjustment from the
profit before tax.
(2) If the accounting treatment reduced the profit before tax, and a greater amount is allowable as
deduction in terms of the tax treatment, deduct the adjustment from the profit before tax.
Credit adjustments:
(3) If the accounting treatment reduced the profit before tax, and a smaller amount or no amount is
allowable as a deduction in terms of the tax treatment, add the adjustment to the profit before
tax.
(4) If the accounting treatment increased the profit before tax, and a greater amount must be
included in gross income in terms of the tax treatment, add the adjustment to the profit before
tax.
No adjustment:
(5) If the accounting treatment and the tax treatment are the same, no adjustment needs to be
made (it may, however, be required to be shown by students when answering assessments).
(See Example 19.1 in chapter 19 (par 19.2.2) for a suggested framework to calculate the taxable
income of a company and an example of a basic company tax computation.)
24
3 Gross income
Jolani Wilcocks
Assisted by Alicia Heyns

l demonstrate an in-depth knowledge of each requirement of the definition of ‘gross
income’
l determine whether a natural person or a person other than a natural person is a
resident for income tax purposes
l apply the principles of relevant case law in order to illustrate the meaning of the
terms used in the definition of ‘gross income’
l demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish
between capital and income for purposes of the definition of ‘gross income’.
Contents
Page
3.1 Overview (the definition of ‘gross income’ (s 1)) ................................................................ 26
3.2 Resident and non-resident ................................................................................................. 27
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1) .......... 27
3.2.2 Residence of persons other than natural persons (par (b) of the definition
of ‘resident’ in s 1) ................................................................................................. 31
3.2.3 Change of residence, ceasing to be a controlled foreign company or
becoming a headquarter company (s 9H) .......................................................... 33
3.3 Amount in cash or otherwise .............................................................................................. 37
3.4 Received by or accrued to................................................................................................. 38
3.4.1 Meaning of ‘received by’ ....................................................................................... 38
3.4.2 Meaning of ‘accrued to’ ........................................................................................ 41
3.4.3 Valuation of receipt or accrual .............................................................................. 42
3.4.4 Unquantified amounts (s 24M).............................................................................. 42
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N) ......................... 43
3.4.6 Blocked foreign funds (s 9A) ................................................................................ 43
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus
disposal of a right to future income (prior cession) .............................................. 43
3.4.8 Time of accrual of interest payable by SARS (s 7E) ............................................. 45
3.5 Year or period of assessment (ss 1(1), 5, 66(13A)–(13C)) ............................................... 46
3.6 Receipts and accruals of a capital nature ......................................................................... 46
3.6.1 Nature of an asset................................................................................................. 47
3.6.2 Intention of a company ......................................................................................... 48
3.6.3 Business conducted with a profit-making purpose .............................................. 48
3.6.4 Selling an asset to best advantage ...................................................................... 49
3.6.5 Realisation of a capital asset ................................................................................ 49
3.6.6 Change of intention............................................................................................... 50
3.6.7 Mixed purpose ...................................................................................................... 51
3.6.8 Secondary purpose .............................................................................................. 51
3.6.9 Realisation company ............................................................................................ 52
3.6.10 Damages and compensation ............................................................................... 53
3.6.11 Isolated transactions............................................................................................. 54
3.6.12 Closure of a business and goodwill ..................................................................... 54
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes ... 54
3.6.14 Debts and loans .................................................................................................... 54
3.6.15 Gambling .............................................................................................................. 55
3.6.16 Horse-racing ......................................................................................................... 55
3.6.17 Gifts, donations and inheritances ......................................................................... 55
25
Page
3.6.18 Interest ............................................................................................................... 55
3.6.19 Restraint of trade ............................................................................................... 55
3.6.20 Share transactions ............................................................................................. 56
3.6.21 Subsidies ........................................................................................................... 57
3.1 Overview (the definition of ‘gross income’ (s 1))

The basic framework for calculating a person’s taxable income is:
Gross income Rx
Less: Exempt income (x)
Income Rx
Less: Deductions and allowances (x)
Taxable income Rx
The starting point for calculating a person’s taxable income, is to determine the person’s ‘gross
income’. This term is defined as follows in s 1:
“gross income”, in relation to any year or period of assessment, means—
(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour
of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such person from a source within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature…
The definition continues to include specific amounts in ‘gross income’. These amounts are referred to
as specific inclusions and are discussed in chapter 4.
All the requirements of the definition of ‘gross income’ must be complied with for an amount to qualify
as gross income. In summary, these requirements are
l in the case of a resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such resident
– during a year or period of assessment
– excluding receipts or accruals that are of a capital nature.
l in the case of a non-resident:
– there must be an amount, in cash or otherwise
– that is received by or accrued to or in favour of such non-resident
– during a year or period of assessment
– from a source within South Africa
– excluding receipts or accruals that are of a capital nature.
The worldwide receipts and accruals derived by a ‘resident’ as defined in s 1 are included in his or
her gross income. Residents are therefore taxed on a residence-based tax system. For non-residents
(persons who are not ‘residents’, as defined) only receipts and accruals derived from sources within
the Republic are subject to tax in South Africa, with certain exceptions. Non-residents are therefore
taxed on a source-based tax system. Liability for South African normal tax is therefore dependent
either upon the place of residence of a person (in the case of a resident) or, in the case of a non-
resident, upon the source of the income. The principles that should be applied when determining the
source of a non-resident’s income are discussed in chapter 21.
Although capital receipts and accruals are excluded from a person’s gross income under the above
general definition, certain receipts and accruals will be included as specific inclusions (listed in para-
graphs (a) to (n) of the gross income definition in s 1(1) even though they may be of a capital nature
(see chapter 4). If capital receipts and accruals are not included in gross income, a portion of these
amounts may still be subject to income tax by the inclusion of taxable capital gains in taxable
income. This is referred to as capital gains tax and is discussed in chapter 17.
Some of the terms in the definition of ‘gross income’ are defined in the Act. However, the meaning of
most of these terms have been the subject of various court cases. These terms and their interpre-
tations from the most relevant court cases are discussed below.
26
3.2 Chapter 3: Gross income
3.2 Resident and non-resident

The concept of ‘residence’ is fundamental to the residence-based system of taxation. The residence
of a person is determined in terms of the definition of ‘resident’ in s 1. The definition of ‘resident’
distinguishes between natural persons and persons other than natural persons.
The definition of ‘resident’ specifically provides that a person is not a resident if that person is
deemed to be exclusively a resident of another country in terms of a double tax agreement (DTA).
This means that if a DTA between South Africa and another country is in place, one should first
consider whether the taxpayer is deemed to be exclusively a resident of the other country under the
DTA, before considering whether the person is a resident under the definition of ‘resident’.
3.2.1 Residence of natural persons (par (a) of the definition of ‘resident’ in s 1)

A natural person is a ‘resident’ if he or she is either ordinarily resident in the Republic or meets the
requirements of the physical presence test.
Ordinarily resident
The term ‘ordinarily resident’ is not defined in the Act and the interpretation given by the courts must
be followed.
In the case Cohen v CIR (13 SATC 362) (1946 AD 174), the taxpayer, who was a South African
resident at the time, was requested by his employer to work in the USA. The taxpayer and his family
lived in New York for a period of 20 months. During this period neither the taxpayer nor his family
returned to South Africa. The court had to consider whether the taxpayer ordinarily resided in South
Africa during this time. In ruling that the taxpayer ordinarily resided in South Africa at the time, the
court established three important principles:
l The first is that a person’s ordinary residence would be the country to which he would naturally
and as a matter of course return from his wanderings. When compared to other countries in
which a person may live, a person’s ordinary residence is the person’s usual or principal resi-
dence, or the person’s real home.
l The second is that one should not only consider the person’s actions during the year of assess-
ment to determine whether he is ordinarily resident in a particular country. The person’s mode of
life outside the year of assessment under consideration should also be considered.
l The third is that physical absence during the full year of assessment is not decisive. A person
could be absent from a country for the entire year and still qualify as ordinarily resident in that
country.
In CIR v Kuttel (54 SATC 298) (1992 (3) SA 242 (A)), the taxpayer held a majority interest in a South
African company. The taxpayer agreed with his fellow shareholders to move to New York to open an
office for the company from where he could oversee the company’s American business. After being
granted a permanent residence permit in the USA, the taxpayer emigrated from South Africa to the
USA with his family. The taxpayer rented a house in the USA, established church membership,
opened banking accounts, acquired an office, bought a car and registered with social security.
Following his move, apart from visits to South Africa and other countries, the taxpayer lived and
worked in the USA. During the 31-month period under consideration, the taxpayer made nine visits to
South Africa, staying for up to two months at a time. The visits were to attend to his business interests
and family matters. The taxpayer on average spent just over one-third of the time in South Africa.
During his visits to South Africa, the taxpayer stayed in a house owned by a company in which he
and his wife were the sole shareholders. The house was not let and was available whenever the
taxpayer wanted to live in it. In applying the principle formulated in Cohen v CIR, that a person is
ordinarily resident where he has his usual or principle residence, that is what may be described as
his real home, the court held that the taxpayer was not ordinarily resident in South Africa. The court
held that there was no evidence which indicated that the taxpayer did not set up his usual or
principle residence in the USA. The court also held that the fact that the taxpayer kept his house in
South Africa was in no way inconsistent with his usual or principal residence or home having been in
the USA. He could not take all his assets to the USA because of exchange control regulations and,
by investing in a house, the taxpayer made the most advantageous arrangement in the circum-
stances for the substantial assets he retained in South Africa. This, however, did not mean that the
taxpayer ordinarily resided in South Africa.
27
SARS published Interpretation Note No. 3 (Issue 2) (June 2018) in which the concept of ‘ordinarily
resident’ as referred to in relation to a natural person in the definition of ‘resident’ is discussed.
According to SARS, the question of whether a natural person is ordinarily resident in a country is one
of fact and each case must be decided on its own merits, taking into consideration principles
established by case law. It is not possible to lay down any clearly defined rule or period to determine
ordinary residence. The circumstances of the natural person must be examined as a whole, taking
into account the year of assessment concerned and that person’s mode of life before and after the
period in question. The purpose, nature and intention of a taxpayer’s absence must be established
and considered as part of all the facts to determine whether the taxpayer is ordinarily resident.
According to SARS, the following factors, although not exhaustive, will be considered as a guideline:
l an intention to be ordinarily resident in the Republic
l most fixed and settled place of residence
l habitual abode, meaning place where the person stays most often, and his present habits and
mode of life
l place of business and personal interests of the person and his family
l employment and economic factors
l status of individual in the Republic and in other countries, meaning whether he or she is an immi-
grant, work permit periods and conditions, etc.
l location of personal belongings
l nationality
l family and social relations (schools, places of worship, sports or social clubs, etc.)
l political, cultural or other activities
l application for permanent residence or citizenship
l period abroad, purpose and nature of visits, and
l frequency of and reasons for visits.
Beginning and ending of being ‘ordinarily resident’

A natural person who became ordinarily resident will be a resident from a specific date. A taxpayer
immigrating to the Republic will therefore be treated as being ‘ordinarily resident’ in the Republic from
the day on which he becomes ordinarily resident in the Republic and not for the full year of assess-
ment in which he becomes ordinarily resident. For the period from the beginning of the year until the
day before he becomes ordinarily resident, he will be seen as a non-resident for tax purposes.
Interpretation Note No. 3 determines that a natural person who emigrates from the Republic to
another country will cease to be a resident from the date that he emigrates. This means that the day
on which the natural person flies to the other country (leaves the Republic) is the first day that he will
be regarded as a non-resident.
The first proviso to the definition of ‘resident’ confirms this principle by determining that where any
person that is a resident ceases to be a resident during a year of assessment, that person must be
regarded as not being a resident from the day on which that person ceases to be a resident. A tax-
payer emigrating from the Republic will therefore, for example, be taxed as a resident in the Republic
from the beginning of the year until the day before he ceases to be ordinarily resident in the Republic
(emigrates), and will be taxed as a non-resident from the day he ceases to be ordinarily resident in
the Republic (emigrates) till the end of the year of assessment. A person therefore ceases to be
ordinarily resident on the day he or she emigrates, meaning on the day he or she boards the aircraft.
In terms of s 9H(2)(b), the year of assessment of a resident who ceases to be a resident is deemed to
have ended on the date immediately before the day on which he or she ceases to be a resident, and
in terms of s 9H(2)(c), the next succeeding year of assessment is deemed to have started on the day
on which the resident ceases to be a resident. This means, for example, that if a natural person
emigrates on 1 October 2021, his 2022 year of assessment as resident will be from 1 March 2021 to
30 September 2021, and his 2022 year of assessment as non-resident will be from 1 October 2021 to
28 February 2022.
Physical presence
A natural person who is not at any time during the relevant year of assessment ‘ordinarily resident’ will
be a ‘resident’ if he is physically present in the Republic for certain periods, that is, if he meets the
requirements of the so-called ‘physical presence’ test. This test therefore only applies to a person
who is not ordinarily resident in the Republic at any time during the year of assessment (referred to
28
here as ‘the current year of assessment’) but is physically present in the Republic for a period or
periods
l exceeding 91 days in aggregate during the current year of assessment, and
l exceeding 91 days in aggregate during each of the five years of assessment preceding the
current year of assessment, and
l exceeding 915 days in aggregate during the five years of assessment preceding the current year
of assessment (par (a)(ii) of the definition of ‘resident’ in s 1).
The effect of the definition of a ‘resident’ is that a natural person who is not ordinarily resident in the
Republic can, in terms of the physical presence test, only become a resident for tax purposes in the
current year of assessment after a period of five consecutive years of assessment during which the
person was physically present in the Republic for the qualifying periods.
The following rules apply to the ‘physical presence test’:
l for the purposes of determining the number of days during which a person is physically present
in the Republic, a part of a day is included as a day
l a day spent in transit through the Republic is not included as a day, provided that the person
does not formally enter the Republic through a port of entry
l the more than 91 days and more than 915 days’ periods of physical presence in the Republic
need not be continuous. If a person is present for several periods which in aggregate exceed 91
or 915 days, the requirement will be met.
A person who is deemed to be exclusively a resident of another country for the

purposes of a double taxation agreement between the governments of the
Republic and that other country will not be a resident of the Republic, even
Please note! though he meets the qualifying requirements of being a resident (par (a) of the
definition of ‘resident’). This rule will, in many cases, render the physical pres-
ence test irrelevant since the rules in double taxation agreements are more
similar to the ordinarily resident test.
Beginning and ending of being a resident in terms of the physical presence test
A person will be a resident with effect from the first day of the relevant year of assessment (that is, the
sixth year) during which all the requirements of the physical presence test are met.
A person who is a resident in terms of the physical presence test will cease to be a resident from the
day that he or she ceases to be physically present in South Africa if the person remains physically
outside South Africa for a continuous period of 330 full days immediately after this date.
The period of at least 330 full days required to terminate a person’s residence must be continuous
and meeting this proviso will therefore stretch over two years of assessment. The at-least-330-days
exception only applies if a person is already a resident in terms of the physical presence test, which
means he must have been physically present in the Republic for more than 91 days in the year that
he ceases to be physically present. The at-least-330-continuous days of absence will commence only
on the day after the period of more than 91 days has been met, and he then ceases to be physically
present.
Paragraph 4.4 of Interpretation Note No. 4 (Issue 5) (August 2018) confirms that a natural person,
who is a resident by virtue of the physical presence test, ceases to be a resident from the day when
the person leaves the Republic. The 330 days of absence therefore starts on the day after the person
leaves the Republic.
If a person, who is ordinarily resident in the Republic, is physically absent for a

continuous period of at least 330 days, for example in order to study in a foreign
Please note!
country, he will not cease to be a resident, as the physical presence test does
not apply to a person who is ordinarily resident in the Republic.
29
Example 3.1. Temporary secondment to the Republic
Craig, a civil engineer and ordinarily resident outside the Republic, was temporarily seconded to
the Republic by his employer on 1 November 2015 to oversee a major contract that was
expected to last for two years. Due to unforeseen problems on the contract, Craig eventually left
the Republic and returned home only on 30 November 2021. He was physically present in the
Republic throughout the seven-year period except for returning home for his annual leave
(35 days) each calendar year from 2017 to 2021.
Is Craig resident in the Republic during the years of assessment ending 29 February 2016 to
28 February 2022?
SOLUTION
As Craig was not ordinarily resident in the Republic at any time during his secondment, he will
be resident only if he meets the requirements of the physical presence test.
Year of Number
Period physically present
assessment of days
2016 1 November 2015 to 29 February 2016 (no annual leave taken) .... 122
2017 Entire year of assessment except for 35 days annual leave........... 330
2022 1 March to 30 November 2021 ....................................................... 275
2016 year of assessment

Craig is present in the Republic for more than 91 days in this year of assessment but not in each
of the five prior years of assessment. He is therefore not resident in terms of the physical pres-
ence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the prior
year but not in each of the four years prior to that. He is therefore not resident in terms of the
physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the two
immediately prior years, but not in the three years prior to that. He is therefore not resident in
terms of the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the three prior years, but not in the two years prior to that. He is therefore not
resident in terms of the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment and in the four
immediately prior years, but not in the year prior to that. He is therefore not resident in terms of
the physical presence test.
Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the five prior years and in aggregate for more than 915 days in the five prior
years. He is therefore resident in terms of the physical presence test from 1 March 2020, the first
day of the year of assessment.
Craig also met the requirements of the physical presence test during the 2022 year of assess-
ment. He will remain a resident for South African tax purposes until he is no longer physically
present in the Republic for more than 330 consecutive days that commence immediately after
30 November 2021. Since Craig leaves the Republic on 30 November, he will, in terms of Inter-
pretation Note No. 4, cease to be a resident from the day that he leaves the Republic. He there-
fore ceases to be a resident on 30 November 2021. His 2022 year of assessment as a resident
will therefore, in terms of s 9H(2)(b), end on 29 November 2021 and he will be taxed in the
Republic as a resident for the period 1 March 2021 to 29 November 2021. Craig will be taxed as
a non-resident in the next succeeding year of assessment, that is, from 30 November 2021 to
28 February 2022.
30
Example 3.2. Emigration

Thabiso was born in the Republic. He emigrated to Argentina on 1 July 2015. The periods that he
was inside and outside of the Republic were as follows:
In the Republic Outside the Republic
2016 year of assessment ................................................. 101* 265
2017 year of assessment ................................................. 280 85
Assume that the 101 days spend in the Republic in 2016 were before Thabiso emigrated.
Calculate and explain whether Thabiso is a resident or a non-resident for each of the 2016, 2021
and 2022 years of assessment, respectively.
SOLUTION
2016
Thabiso is ordinarily resident in the Republic until 30 June 2015. He is therefore a resident from
1 March 2015 to 30 June 2015 and his 2016 year of assessment as resident ends on 30 June
2016 (in terms of s 9H(2)(b)). Thabiso becomes a non-resident on 1 July 2015 and his 2016 year
of assessment as non-resident is from 1 July 2016 (in terms of s 9H(2)(c)) to 29 February 2016.
2021
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2021 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2020, 2019, 2018 and 2017 years of assess-
ment but not during the 2016 year of assessment after becoming a non-resident. Thus the
>91 days requirement is only met for four years.
3 The third requirement that Thabiso must be in the Republic for >915 days in total during the
five years of assessment preceding the current year of assessment is therefore not
considered, as the second requirement has not been met.
Therefore, Thabiso is a non-resident.
2022
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2022 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2021, 2020, 2019, 2018 and 2017 years of
assessment.
3 Thabiso is in the Republic for >915 days in total during the 2017 to 2021 years of assess-
ment.
Therefore, Thabiso is a resident.
Interpretation Note No. 25 (Issue 3) (issued on 12 March 2014) clarifies, with the
use of examples, the application of the physical presence test in the year of
Please note!
assessment that a natural person, who is not ordinarily resident on the Republic,
dies or becomes insolvent.
3.2.2 Residence of persons other than natural persons (par (b) of the definition of ‘resident’
in s 1)
A person other than a natural person (for example a company, close corporation or trust) is defined
as being ‘resident’ if it
l is incorporated, established or formed in the Republic, or
l has its place of effective management in the Republic (par (b) of the definition of ‘resident’ in s 1).
Where a company is incorporated, established or formed
There is no definition in the Act of the terms ‘incorporated’, ‘established’ or ‘formed’. A company that
is formed and incorporated in South Africa in terms of s 13 of the Companies Act 71 of 2008 is clearly
a resident because of its formation and incorporation in the Republic, irrespective of where it is man-
aged or where it carries out its business. As a result of being a resident, the company is liable for tax
in South Africa on its worldwide receipts.
31
Remember
A person who is deemed to be exclusively a resident of another country for the purposes of a
double taxation agreement between the governments of the Republic and that other country will
not be a resident of the Republic, even though he meets the qualifying requirements of being a
resident (par (b) of the definition of ‘resident’). This rule will, in many cases, render the place of
incorporation irrelevant since the rules in double taxation agreements usually refer to the place
of effective management.
Where a company is effectively managed

The Act does not define the expression ‘place of effective management’. According to Interpretation
Note No. 6 (Issue 2) (issued on 3 November 2015), SARS regards the place of effective management
as the place where key management and commercial decisions that are necessary for the conduct of
its business as a whole are in substance made. This approach is consistent with the OECD’s com-
mentary on Article 4 of the Model Tax Convention regarding the term ‘place of effective management’.
All relevant facts and circumstances must be examined to determine the place of effective manage-
ment. A company may have more than one place of management, but it can only have one place of
effective management at any one time. If a company’s key management and commercial decisions
affecting its business as a whole are made at a single location, that location will be its place of
effective management. However, if those decisions are made at more than one location, the com-
pany’s place of effective management will be the location where those decisions are primarily or pre-
dominantly made.
Certain activities of foreign investment entities should be disregarded when

determining whether their place of effective management is in South Africa (2nd
proviso to the definition of ‘resident’). Certain foreign investment funds make
use of local fund managers when investing in South African assets or in other
African assets. The South African fund manager is usually given an investment
fund mandate (or a sub-mandate for a certain portion of the fund). The foreign
investment fund typically pays the South African fund manager a management
fee. The purpose of disregarding certain activities of a foreign investment entity
when determining whether its place of effective management is in South Africa,
is to ensure that the activities of the local fund manager do not cause the entire
entity to be subject to income tax in South Africa. The management fees and
performance fees earned by the local fund manager will remain subject to tax in
South Africa.
A foreign investment entity is a person other than a natural person that complies
with all of the following requirements (definition of ‘foreign investment entity’ in
s 1):
l it should not be incorporated, established or formed in South Africa
l its assets should consist solely of a portfolio of one or more of the following
that are held for investment purposes:
– amounts in cash or that constitute cash equivalents
Please note! – financial instruments that are issued by a listed company or by the South
African Government
– if the financial instruments are not issued by a listed company or by the
South African Government, they must be traded by members of the
general public and a market for that trade exists
– financial instruments which values are determined with reference to the
financial instruments mentioned above
– rights to receive any of the above assets
l 10% or less of the entity’s shares, units or other form of participatory interest
are directly or indirectly held by persons that are residents; and
l the entity should have no employees, directors or trustees that are engaged
in managing the entity on a full-time basis.
The activities of a foreign investment entity that should be disregarded when
determining whether its place of effective management is in South Africa, are
the following activities carried on by a financial service provider as defined in
s 1 of the Financial Advisory and Intermediary Services Act in terms of a licence
issued to that financial service provider under s 8 of that Act:
l a financial service as defined in s 1 of the Financial Advisory and Inter-
mediary Services Act, or
l any service that is incidental to a financial service contemplated above
where the incidental service is in respect of a financial product that is
exempted from the provisions of the Financial Advisory and Intermediary
Services Act as contemplated in s 1(2) of that Act.
32
Residence of estates, trusts, clubs and associations

Estates, trusts and other entities are resident in the Republic if they are incorporated, established or
formed or have their place of effective management in South Africa. The place of incorporation,
establishment or formation is a matter of fact, and each case must be decided on its own merits. If
the executors, administrators or trustees are resident in South Africa or if the entity is administered
from South Africa, the entity is resident in South Africa. For example, if the trustees of a trust meet to
attend to the affairs of the trust in South Africa, the trust is resident in South Africa. The place where
the assets of the entity are effectively managed is crucial.
3.2.3 Change of residence, ceasing to be a controlled foreign company or becoming a

headquarter company (s 9H)
Section 9H triggers an exit charge through either a capital gain or an income gain when a person
(other than a company) who is a resident ceases to be a resident during any year of assessment. A
deemed disposal at market value of all the assets that this section provides for, arises.
Market value means the price which could be obtained upon a sale of that asset
between a willing buyer and a willing seller dealing at arm’s length in an open
Please note! market (s 9H(1)).
For purposes of this section, the market value of any asset must be determined
in the currency of the expenditure incurred to acquire the asset (s 9H(7)).
In the case of a company that is a resident that ceases to be resident, or becomes a headquarter
company during any year of assessment, or if a controlled foreign company (CFC) ceases to be a
CFC in relation to any resident during any foreign tax year of the CFC (see chapter 21 where the
provisions of s 9H that relate to CFCs will be discussed), similar capital or income gains will arise due
to the deemed disposal at market value of all the assets and shares this section provides for. A
dividend in specie for the purposes of dividends tax (s 64EA(b)) is also deemed to have been
declared in the case of a company that is a resident that ceases to be resident or becomes a head-
quarter company.
An asset for the purposes of this section means an asset as defined in par 1 of
the Eighth Schedule (s 9H(1)). The definition of ‘asset’ in the Eighth Schedule is
very wide and also includes rights in assets. The wide definition of ‘asset’ has
the consequence that s 9H is applicable to both capital assets and income
assets. Certain assets are excluded from the deeming provisions of s 9H
(s 9H(4)), namely:
l immovable property situated in the Republic that is held by the person
l any assets which will, after the person ceases to be a resident or a CFC,
Please note! be attributable to a permanent establishment of that person in the Republic
l any s 8B qualifying equity shares that were granted to that person less
than five years before the date on which that person ceased to be a resi-
dent
l any s 8C equity instruments which had not yet vested at the time that the
person ceased to be a resident, or
l any right of that person to acquire any marketable security contemplated in
s 8A.
There is no deemed disposal of these assets under s 9H.
33
Event Persons other than companies cease to Company ceases to be resident or becomes
be resident a headquarter company (otherwise than by
way of becoming a resident)
Deemed disposal l All assets except those in s 9H(4) l All assets except those in s 9H(4)
l At market value l At market value
l To a person who is a resident on l To a person who is a resident on the
the date immediately before the date immediately before the day on
day on which he or she ceases to which the company ceases to be a resi-
be a resident (s 9H(2)(a)(i)) dent or becomes a headquarter com-
pany (s 9H(3)(a)(i))
Deemed l Reacquisition of all assets except l Reacquisition of all assets except those
reacquisition those in s 9H(4) in s 9H(4)
l At market value l At market value
l On the day on which he or l On the day on which the company
she ceases to be a resident ceases to be a resident or becomes a
(s 9H(2)(a)(ii)) headquarter company (s 9H(3)(a)(ii))
End of year of On the date immediately before the On the date immediately before the day on
assessment day on which he or she ceases to be a which the company ceases to be a resident
resident (s 9H(2)(b)) or becomes a headquarter company
(s 9H(3)(c)(i))
Commencement of On the day he or she ceases to be a On the day on which the company ceases
next succeeding resident (s 9H(2)(c)) to be a resident or becomes a headquarter
year of assessment company (s 9H(3)(c)(ii))
For the purposes of Companies that cease to be resident or

s 64EA(b) a become headquarter companies are deem-
dividend is deemed ed to have declared and paid a dividend
to have been that consists solely of a distribution of an
declared to the asset in specie of the difference between
persons holding l the market value of all the shares in that
shares in the company on the day immediately before
company in the day on which the company ceases to
accordance with be a resident or becomes a headquarter
their effective in- company, and
terest in the shares
(s 9H(3)(c)(iii)) l the sum of the contributed tax capital of
all the classes of shares in the company
on the same date
Capital gain dis- If a capital gain on the disposal of equity
regarded in terms shares was disregarded in terms of par 64B
of par 64B of the of the Eighth Schedule (see chapter 17)
Eighth Schedule in within three years before a company ceases
respect of the to be a resident, that capital gain is deemed
disposal of equity to be a net capital gain derived by the
shares company from that capital gain during the
year of assessment that the company
ceases to be a resident (s 9H(3)(e))
Foreign dividend If any foreign dividend was exempt in terms
exempt in terms of of s 10B(2)(a) from normal tax within three
s 10B(2)(a) years before a company ceases to be a
resident, that foreign dividend is deemed to
be received or accrued by the company
during the year of assessment that the
company ceases to be a resident and such
foreign dividend is not exempt in terms of
s 10B(2) (s 9H(3)(f))
continued
34
Event Persons other than companies cease to Company ceases to be resident or becomes
be resident a headquarter company (otherwise than by
way of becoming a resident)
Deemed dividend If a person holds at least 10% of the equity
in specie in terms shares and voting rights in a company that
of s 9H(3)(c)(iii) that l ceases to be a resident, and
is exempt in terms l the dividend in specie, deemed to have
of s 64FA been declared by the company in
s 9H(3)(c)(iii), is exempt from dividends
tax (in terms of s 64FA),
that person must be deemed to have
l disposed of those shares to a resident
at their market value on the day before
the company ceases to be a resident
and
l reacquired the shares at market value
on the day that the company ceases to
be a resident (s 9H(3A))
This deemed disposal aims to ensure that
the person (shareholder) does not subse-
quently enjoy the participation exemption
(s 10B(2)(a) – see chapter 5) in respect of
value that accumulated while the company
was a resident
The effect of s 9H(2)(b) and (c) (if it is a natural person) and s 9H(3)(c)(i) and (ii) (if it is a company) is
that a taxpayer should submit two income tax returns in the year a natural person emigrates or a
company ceases to be a resident or becomes a headquarter company (one as a resident and one as
a non-resident or as a headquarter company, in the case of a company that becomes a headquarter
company). The operational procedures that need to be followed with regard to the two years of
assessment in s 9H(2)(b) and (c) (and s 9H(3)(c)(i) and (ii) in the case of a company) are, however,
unclear because SARS’ system does not allow two tax returns to be submitted for the two years of
assessment within the year of emigration. It is suggested that if a natural person emigrates (or a
company with a February year-end ceases to be a resident or becomes a headquarter company) on
1 October 2021, the 2022 year of assessment as resident will be from 1 March 2021 to 30 September
2021 and the 2022 year of assessment as non-resident will be from 1 October 2021 to 28 February
2022.
Since the SARS eFiling system currently does not allow for two tax returns to be
submitted, in practice, two taxation schedules (calculations) will be completed,
one for the period pre-emigration (using the residence-based tax system
(meaning being taxed on worldwide income) and one for the period from
Please note! emigration (as a non-resident using the source-based tax system). However, one
tax return will have to be completed on the SARS system (using the residence-
based principles and the source-based principles). As a result, in practice, it will
not be possible for the rebates to be apportioned and the full rebate will be
allowed in the case of natural persons in the year covering the period of emi-
gration.
Example 3.3. Section 9H

Mrs Juanita Loots (66 years old) is a retired widow and a ‘resident’ of the Republic. Her husband
passed away recently. All of her children reside in Australia and they suggested that she
relocates to Australia for them to take care of her. Mrs Loots decided to emigrate to Sydney,
Australia, on 1 June 2021. She was, however, informed that she requires a tax clearance certifi-
cate for her emigration request to be approved. She contacted you for advice to ensure that all
her tax affairs in South Africa are in order and informed you that she has an assessed capital
loss of R250 000 relating to the previous year of assessment. Mrs Loots owned the following
assets on 31 May 2021:
Asset description Market value on 31 May 2021 Note
Fixed deposit R500 000 1
Listed shares R800 000 2
Unlisted shares R1 000 000 3
Krugerrands R300 000 4
continued
35
Notes
1. Mrs Loots invested in a fixed deposit from ABC Bank for an amount of R500 000 on the birth
of her first grandchild in 2012. She would like to contribute to the future tuition fees of her
grandchildren and invested in the fixed deposit for this reason. The interest earned on the
fixed deposit is paid to Mrs Loots monthly and is therefore not reinvested. Section 24J is also
not applicable to the fixed deposit.
2. Mrs Loots is an avid investor and enjoys reading up on the local stock exchange in her spare
time. Her investment philosophy entails investing in high-quality companies over the long
term. She is not a follower of speculation and is therefore not considered to be a share
dealer.
The following information pertains to the listed shares:
Valuation date value: Market value:
Purchase date Purchase price
1 October 2001 31 May 2021
5 January 2001 R150 000 R180 000 R800 000
Mrs Loots did not incur any further cost relating to the listed shares since the acquisition
date.
3. The investment in listed shares consists of an investment in Holdco Limited (‘Holdco’).
Mrs Loots owns a 10% interest in the equity shares of Holdco. She acquired this interest for a
total cost of R800 000 during 2018. On her recommendation, Mrs Loots’ son also acquired a
10% interest in the equity shares of Holdco during 2018. Holdco is a holding company and a
‘resident’ of South Africa. Holdco owns the following assets on 31 May 2021:
l Current bank account in the amount of R1,2 million
l 80% equity interest in Propco Ltd, a property company of which the only asset is com-
mercial fixed property situated in South Africa. The commercial fixed property had a
market value of R10 million on 31 May 2021.
4. Mrs Loots is a collector of old coins. To add to her collection, she obtained Krugerrands for
an amount of R200 000 during 2008. She is not a trader in old coins.
Advise Mrs Loots on the capital gains tax consequences in the RSA that her emigration to
Australia might have.
You can assume that Mrs Loots did not make any other capital disposals for the 2022 year of
assessment.
SOLUTION
Deemed disposal
In terms of s 9H(2)(a), Mrs Loots is deemed to have disposed of all her assets (except s 9H(4)
assets) at market value on the day immediately before she emigrates (31 May 2021), and to have
reacquired all of those assets (except s 9H(4) assets) on the date of emigration (1 June 2021) at
market value.
The deemed disposal provision will therefore result in the following capital gains for Mrs Loots:
Fixed deposit:
A fixed deposit does not represent currency and is therefore an ‘asset’ as defined in the Eighth
Schedule. Mrs Loots is therefore deemed to have disposed of the fixed deposit on 31 May 2021.
The deemed disposal resulted in the following capital gain:
Proceeds (market value on 31 May 2021) ................................................................... R500 000
Less: Base cost............................................................................................................ (500 000)
Capital gain .................................................................................................................. Rnil
Listed shares:
The listed shares were purchased on 5 January 2001 and are therefore a ‘pre-valuation date’
asset. Hence only capital growth realised after 1 October 2001 is subject to capital gains tax.
The base cost of the listed shares is the valuation date value of R180 000 on 1 October 2001.
The deemed disposal of the listed shares on 31 May 2021 resulted in the following
capital gains:
Base cost (value on 1 Oct 2001).................................................................................. (180 000)
Capital gain .................................................................................................................. R620 000
continued
36
3.2–3.3 Chapter 3: Gross income
Unlisted shares:
The deemed disposal of the unlisted shares resulted in the following capital gain:
Proceeds (market value on 31 May 2021) ................................................................... R1 000 000
Less: Base cost............................................................................................................ (800 000)
Capital gain .................................................................................................................. R200 000
Krugerrands:
Krugerrands represent coins of gold and platinum and are therefore an ‘asset’ for purposes of
the Eighth Schedule. As a result there is a disposal of the Krugerrands on 31 May 2021 in terms
of s 9H.
The deemed disposal resulted in the following capital gain:
Less: Base cost............................................................................................................ (200 000)
Capital gain .................................................................................................................. R100 000
Taxable capital gain:

Mrs Loots’ emigration resulted in the following taxable capital gain for the 2022 year of assess-
ment:
Sum of capital gains (R620 000 + R200 000 + R100 000) .......................................... R920 000
Less: Annual exclusion ................................................................................................ (40 000)
Total capital gain.......................................................................................................... R880 000
Less: Assessed capital loss ......................................................................................... (250 000)
Net capital gain ............................................................................................................ R630 000
Taxable capital gain (R630 000 × 40%) ...................................................................... R252 000
Mrs Loots’ emigration to Australia will result in a taxable capital gain of R252 000 to be included in
her taxable income for her 2022 year of assessment as a resident ending on 31 May 2021 in
terms of s 26A.
3.3 Amount in cash or otherwise

It is not only the receipt or accrual of an amount of cash that should be included in a person’s gross
income. The value of non-cash items should also be included.
In Lategan v CIR (2 SATC 16) (1926 CPD 2013) the taxpayer, a wine farmer, sold wine that he made
during the year of assessment for a specific amount. Part of this amount was paid in cash to him
before the end of the year of assessment and the balance was paid in instalments during the follow-
ing year. The court had to decide whether the full amount qualified as the ‘total amount’ for purposes
of the definition of gross income, or only the part that he received in cash. The court held that the
word ‘amount’ should be given a wider meaning than merely referring to money, and must include the
value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which has
a money value.
Remember
In the Lategan case the court ruled that where a taxpayer acquired a right during a year of
assessment to receive instalments of an amount during subsequent years, the present value of
that right at the end of that year should be included in the taxpayer’s gross income. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount is included in the person’s gross income and
not the present value as what was decided in the Lategan case.
In CIR v Butcher Bros (Pty) Ltd (13 SATC 21) (1945 AD 301) the taxpayer owned a building that was
leased to a tenant for a period of 50 years, which the tenant could renew for a further period of
49 years. In terms of the lease agreement the tenant was required to demolish the existing buildings
and build a new theatre which was worth substantially more than the original buildings. Upon termin-
ation of the lease, the buildings and improvements would revert to the taxpayer without com-
pensating the tenant for the costs incurred relating to the buildings and improvements. The court was
asked to rule on whether the improvements to the land qualified as an ‘amount’ received by or that
accrued to the taxpayer for purpose of the definition of ‘gross income’. The court held that no amount
37
was received by or accrued to the taxpayer by the end of the year of assessment, because the
improvements did not have an ascertainable money value at the time.
Remember
The Act was amended after the Butcher Bros case by including par (h) in the definition of ‘gross
income’. This specific inclusion in gross income now provides that improvements to leasehold
property should be included in the gross income of a lessor. This paragraph also specifies how
the amount should be determined – see chapter 4.
In CSARS v Brummeria Renaissance (Pty) Ltd (2007 (SCA) the investors in a retirement village did
not compensate the taxpayer (the developer) in cash for the construction and supply of the
residential units. Instead, the investors granted interest-free loans to the taxpayer as consideration for
the acquisition of the life-interests in the units. The court held that the right to use the loan capital
interest-free was a right that had an ascertainable monetary value. Even though this right could not
be transferred or actually turned into money, the court held that this does not mean that the right
does not have a monetary value. The test that should be applied to determine whether a right has a
monetary value is therefore an objective test and not a subjective test.
*
Remember
l Interpretation Note No. 58 (Issue 2) explains the principles that the court applied in the
Brummeria Renaissance case.
l The Interpretation Note confirms that the principles applied in this case would only apply in
instances where an interest-free loan is granted in exchange (quid pro quo) for goods sup-
plied, services rendered or any other benefit granted.
l The court in the Brummeria Renaissance case did not decide on how the right to an interest-
free loan should be valued. SARS applied the weighted-average prime overdraft rate of
banks to the average amount of interest-free loans in possession of the taxpayer in the
relevant year of assessment. Since the valuation of the right was not in dispute, the court
neither accepted nor rejected this approach.
l Binding General Ruling 8 (Issue 2) sets out the formula for calculating the monetary value of
the right of use of the interest-free loan to be included in the borrower’s gross income. The
monetary value of the right to use the interest-free loan in the year in which it is granted and
paid is determined by multiplying the loan amount by the present value of R1 per year for the
lifetime of the life-right holder and the weighted-average prime overdraft rate determined for
the relevant year of assessment. The amount so calculated is then reduced by 93,1%. This is
a once-off calculation of the amount to be included in the gross income of the borrower in the
year of assessment in which the borrower becomes entitled to the right to use the loan.
3.4 Received by or accrued to

An amount must either be received by or it must accrue to a taxpayer during a year of assessment to
be included in the taxpayer’s gross income for that year. If a taxpayer did not receive an amount or if
an amount did not accrue to the taxpayer, the amount is not gross income and therefore not subject
to income tax.
The fact that the value of an asset increased over time does not mean that the value should be
included in its owner’s gross income. The increased value might have an ascertainable monetary
value, but until the asset is sold, the increased value is not received by and has not accrued to the
owner.
Similarly, the interest that a person would have received had he invested an amount of money in an
interest-bearing account instead of keeping it in a safe, cannot be included in the person’s gross
income because the person did not receive the interest and neither did it accrue to him.
The terms ‘received by’ and ‘accrued to’ are not defined in the Act. The most relevant court cases
wherein the meaning of these terms were considered are discussed below.
3.4.1 Meaning of ‘received by’

In Geldenhuys v CIR (14 SATC 419) (1947 (3) SA 256 (C)) the taxpayer and her husband, who
carried on business as farmers, executed a mutual will under which the surviving spouse was to
enjoy the fruits and income of the joint estate for his or her lifetime and their children to be the heirs of
the estate. A number of years after her husband’s death, the taxpayer, with her children’s consent,
decided to sell a flock of sheep which was included in her and her late husband’s joint estate. The
38
number of sheep sold was less than the number of sheep at the time of her husband’s death. She
invested the proceeds from the sale in a bond in her favour. The court was required to rule on
whether the amount received from the sale of the flock should be included in her gross income. The
court held that the taxpayer only had the right of use of the flock (that is, she was the usufructuary of
the flock), and since the number of sheep at the date of sale was smaller than at the date when her
usufruct commenced, there was no surplus offspring to which she was entitled. The whole of the
proceeds realised belonged to the heirs. Although the taxpayer received the proceeds from the sale
of the flock, she did not become entitled to the money, and it should therefore not be included in her
“gross income”.
An amount received by a taxpayer on behalf of another person is therefore not gross income for the
taxpayer.
Deposits
The taxpayer in Pyott Ltd v CIR (13 SATC 121) (1945 AD 128) was a biscuit manufacturer. Their
biscuits were sold in tin containers for which the taxpayer charged a fee. The fee was refunded to a
customer if the tin container was returned in good condition. At the end of the relevant year of
assessment, the taxpayer deducted an amount from its gross income as a provision for containers
still to be returned. The court was asked to rule on whether the amount that the taxpayer deducted
should have been included in its gross income. The court ruled that the amount that the taxpayer
received for the sale of the containers should be included in its gross income at its face value
because it was an amount of cash received by the taxpayer. The taxpayer was not entitled to exclude
the amount it was still going to refund customers from its gross income. The court also made an
important observation that the taxpayer, according to the court, correctly conceded that the
proceeds from the sale of the tin containers were not in any way ‘trust moneys’. The court noted that if
it was, it would not form part of the taxpayer’s income. See similar decisions in Brooks Lemos Ltd v
CIR (1947 AD) and Greases (SA) Ltd v CIR (1951 AD) (the so-called ‘deposit cases’).
The principle from the Pyott case is that a deposit received qualifies as gross income if the taxpayer
receives the amount on its own behalf and for its own benefit. If an amount is received as trust money
and the taxpayer is not the beneficial owner, but merely the trustee, the amount does not qualify as
gross income because the taxpayer does not receive it on its own behalf and for its own benefit.
Interpretation Note No. 117 (issued on 17 May 2021) that sets out the types of deposits and their tax
treatment, highlights further that the substance of each transaction must be considered when
deciding if a deposit qualifies as gross income.
A deposit is not a loan. Rental deposits (distinguishable from up-front rental payments and lease
premiums) and security deposits, usually held in trust and refundable at the end of the contract, are
not received by the taxpayer ‘on his own behalf for his own benefit’. These deposits are distinguish-
able from other types of deposits like returnable container deposits that are usually received by the
taxpayer ‘on his own behalf for his own benefit’.
The use of a separate bank account is not sufficient to indicate the true nature of a deposit, if a
taxpayer keeps a deposit in a separate bank account but with no intention of refunding the deposit; it
is ‘received by’ the taxpayer and constitutes gross income in his hands. If, however, a deposit is held
in trust in a separate bank account by the taxpayer, acting as trustee, the deposit is not ‘received by’
him and not gross income.
If the provisions of the Consumer Protection Act (68 of 2008) apply to a deposit,
the tax implications must be calculated taking into account the requirements of
Please note!
the Consumer Protection Act (see the discussion under ‘Gift cards’ below).
Example 3.4. Advance payments
1. A man lets his house and in terms of the contract of lease receives the rent in advance for two
years.
2. A hotelier receives a non-refundable deposit in terms of a contract to reserve accommodation
for a later date.
Indicate when these amounts will be taxable.
39
SOLUTION
1. The total amount of rent (for the two years) constitutes gross income for the year in which it is
received.
2. The deposit is taxable in the year of receipt.
Gift cards
In ITC 1918 (2019) (81 SATC 267) the taxpayer, a high street retailer of clothes and other
merchandise, offered gift cards to customers. The court had to decide when the revenue from the
‘sale’ (issuing) of the gift cards constituted gross income: upon receipt or only when the gift card is
redeemed, or if not redeemed, upon expiry of the gift card. Prior to the 2013 year of assessment, the
taxpayer included the amounts received for the issuing of gift cards as gross income and claimed an
allowance for future expenditure against the income (s 24C allowance (see chapter 14). Amounts
received for gift cards were also kept in a separate account.
After the promulgation of the Consumer Protection Act, the taxpayer changed its tax treatment for
amounts received from the issuing of gift cards. The taxpayer now excluded the amounts received in
respect of the issuing of gift cards from gross income. The taxpayer’s primary argument was that the
amounts were not received for its own benefit, but for the benefit of the gift card holder who would
redeem the card in the future. The taxpayer’s second argument was that, under the Consumer
Protection Act, the consideration paid for a gift card was the property of the bearer until the supplier
redeemed the card in exchange for goods or services or the card expired (which would be after
three years unless the card reflected a longer period).
The court rejected the first level of the taxpayer’s argument and held that keeping the receipts for
unredeemed gift cards in a separate identifiable bank account did not mean that the retailer
(taxpayer) did not hold the money on its own behalf and for its own benefit. However, the position
changed as a result of the introduction of the Consumer Protection Act. This Act provided the
‘cognisable legal context’ that requires the taxpayer to take and hold the receipts for the card bearers
and to refrain from applying the receipts as if they were its own property. Accordingly, the gift card
receipts were ‘received by’ the taxpayer, not for its own benefit, but to be held for the card bearer.
The receipts should not be included in the taxpayer’s gross income until the gift card is redeemed or,
if not redeemed, when the gift card expires.
Illegal income
In CIR v Delagoa Bay Cigarette Co Ltd (32 SATC 47) (1918 TPD 391) the taxpayer operated an illegal
lottery. The taxpayer sold cigarettes at an amount much higher than the normal selling price of the
cigarettes and the difference was distributed to the holder of a lucky coupon. The relevance of this
case is that the court found that whether the business carried on by the taxpayer was legal or illegal
is not material for the purpose of determining whether its income should be subject to tax. The
receipts and accruals from illegal activities will therefore still be included in the taxpayer’s gross
income.
In MP Finance Group CC (in liquidation) v CSARS (69 SATC 141) (2007 (SCA) the taxpayer operated
an illegal investment pyramid scheme. It promised significant returns on investors' money. Some
investors received repayment of their investments plus returns, but the majority received less or
nothing and the operators of the scheme used some of the money for their own benefit. Throughout
the tax years in question, the operators of the scheme knew that it was insolvent, that it was
fraudulent and that it would be impossible to pay all investors what they had been promised.
The court had to rule on whether the amounts invested in the scheme qualified as gross income for
the taxpayer. The taxpayer argued that it never received the funds within the meaning of the definition
of ‘gross income’ because it was legally obliged to refund the deposits to the investors.
In ruling that the deposits qualified as gross income for the taxpayer, the court made the following
important findings:
l An illegal contract is not without all legal consequences; it can, indeed, have fiscal conse-
quences.
l Notwithstanding the fact that the taxpayer was legally obliged to refund the deposits to the invest-
ors, and therefore not entitled to retain the amounts, the taxpayer ‘received’ the deposits within
the meaning of the definition of ‘gross income’ because the deposits were accepted with the
intention of retaining them for the taxpayer’s own benefit.
40
Interpretation Note No. 80 confirms the application of the principles of the

MP Finance case to the receipt of money stolen through robbery, burglary or
Please note!
other criminal means. The issue is not whether the victim intended to part with
the money, but rather whether the thief intended to benefit from it.
3.4.2 Meaning of ‘accrued to’

It is not only amounts ‘received by’ a taxpayer that are included in gross income, but also amounts
that accrue to a taxpayer. ‘Accrued to’ means that the taxpayer became entitled to an amount. In
other words, at the time that a taxpayer obtains a vested right to a future payment, the amount
accrues to the taxpayer.
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd (52 SATC 9) (1990 (2) SA 353 (A)) the taxpayer was a
retailer that sold goods to its customers for cash and on credit. The credit sales were made under the
taxpayer’s six-months-to-pay revolving credit scheme. The court had to decide whether the
instalments not yet payable and outstanding at the end of a particular year of assessment, accrued to
the taxpayer and should be included in its gross income.
The court, in applying the principles that were established in the Lategan case (see 3.3), held that an
amount does not have to be due and payable to the taxpayer for it to accrue to the taxpayer. The tax-
payer acquired a right during the year of assessment to claim payment of an amount in the future.
Since the right vested in the taxpayer in the year of assessment, it accrued to the taxpayer in that
year. And since the right can be turned into money (that is, it has an ascertainable monetary value),
the right qualifies as an ‘amount’ and should be included in ‘gross income’.
Remember
Similarly to the Lategan case, the court in the People’s Stores case said that since it is the right to
receive payment in the future that accrued to the taxpayer (and not the amount itself), it is that
right that has to be valued. The court said that the right to receive future payments does not
necessarily have the same value as the cash amount, since it is affected by its lack of immediate
enforceability. The court held that the right should be valued at its present value. However, a
proviso was added to the definition of ‘gross income’ in s 1, which provides that where a person
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
year. This means that the face value of the amount should now be included in a person’s gross
income despite the decisions in the Lategan and People’s Stores cases.
The taxpayer in CIR v Witwatersrand Association of Racing Clubs (23 SATC 380) (1960 (3) SA 291 (A))
was an association formed by a number of horse racing clubs. The taxpayer decided to hold a horse
racing event for the benefit of two charities. The court had to consider whether the proceeds from the
race should be included in the taxpayer's gross income.
The taxpayer argued that in organising the event, it entered into a number of contracts on behalf of
the charities. However, the court found, based on the facts presented, that it was the taxpayer, and
no one else, that was liable to pay the expenses incurred in holding the event; and that the race was
conducted by the taxpayer itself as principal, and not as an agent for the clubs or for the charities.
The court held that the proceeds from the race were gross income for the taxpayer because it was
the taxpayer, and no one else, who became entitled to the proceeds of the race. The court also said
that although the taxpayer was not going to keep the proceeds from the race for itself, but pay it to
the two charities, the taxpayer was not thereby relieved from liability for tax. A moral obligation to
hand over the proceeds to the charities did not destroy the beneficial character of the receipt of those
proceeds by the taxpayer.
The court in the Witwatersrand Association of Racing Clubs case found that the
taxpayer did not act as agent on behalf of the charities. If the taxpayer had, in
Please note! fact, acted as agent on behalf of the charities, the proceeds from the event
would have accrued to the charities, because the association would not have
been entitled to the amounts.
In Mooi v SIR (35 SATC 1) (1972 (1) SA 674 (A)) the taxpayer’s employer granted him an option to
acquire shares in the company at a specific price. The option was, however, subject to certain condi-
tions, including that the construction of the company’s mine should be completed and that the
taxpayer should still be an employee at the time the option is exercised. The taxpayer accepted the
option during a specific year and exercised the option more than three years later. When the option
41
was exercised, the value of the shares was more than the option price. The court was required to
consider whether the difference between the price of the shares when the option was exercised and
the option price should be included in the taxpayer's gross income. The court made the following
important findings:
l In applying the principle established in the Lategan case (see 3.3), the court said that to deter-
mine the ‘amount’ in the case of a right, one has to establish the value of the right.
l The taxpayer argued that the right accrued to him when the option was granted and the value of
the right at that time should be included in his gross income. However, the court found that the
right granted to the taxpayer was a contingent right, as it was subject to the conditions mentioned
above. The right only accrued to the taxpayer when the conditions were fulfilled and the right
became exercisable.
l Since the taxpayer was not a share-dealer, the amount was of a capital nature. However, par (c)
of the definition of ‘gross income’ specifically included ‘any amount, including any voluntary
award, received or accrued in respect of services rendered or to be rendered’ in the taxpayer’s
gross income, despite being of a capital nature.
An amount accrues to a taxpayer when the taxpayer becomes entitled to the

Please note! amount (Lategan and People’s Stores cases), but only when that entitlement is
unconditional (Mooi case).
3.4.3 Valuation of receipt or accrual

Valuing an amount received presents little difficulty, since the value of the receipt is the amount that
has been received during the year of assessment. The difficulty lies with the valuation of amounts that
have accrued to a taxpayer in a year of assessment, but which are still outstanding at the end of the
year of assessment.
In CIR v People Stores (Walvis Bay) (Pty) Ltd (1990 (A), the court had to decide how the outstanding
amounts should be valued at year-end. The court was asked to consider whether the amounts should be
included at their face value (as they appeared in the records), or whether the amounts had to be
discounted by the inclusion of their present value (remember that the value of money decreases over
time). The court held that the present (discounted) value of the outstanding amounts had to be included.
However, the legal position was changed shortly after this decision by virtue of an amendment to the Act,
which introduced a proviso to the definition of ‘gross income’ in s 1.
The proviso provides that when
l a person has become entitled to an amount during the year of assessment, and
l that amount is payable on a date or dates falling after the last day of that year,
the face value (and not the present value) of that amount shall be deemed to have accrued to the
person during such year.
Example 3.5. Value of accrual
A taxpayer sold and delivered goods on 26 February 2022 for R30 000. Payment is only due two
years later. Assume that the present value of the R30 000 receivable at the end of the year of
assessment during which the taxpayer sold the goods (28 February 2022) is R18 000 after two
years. Calculate the amount to be included in gross income in the 2022 year of assessment.
SOLUTION
An amount of R30 000 (and not the discounted present value of R18 000) will be included in the
gross income of the taxpayer in the year of assessment in which the sale was concluded (2022
year of assessment), as he became entitled to the amount of R30 000, even though the physical
receipt thereof will only occur later.
3.4.4 Unquantified amounts (s 24M)

If an asset is disposed of for a consideration that consists of or includes an amount that cannot be
quantified in that year of assessment, the unquantified amount is deemed not to have accrued to that
person in that year of assessment. The unquantified amount accrues to that person in the year when
it becomes quantifiable (s 24M(1)).
42
Example 3.6. Unquantified amount
A farmer sells his mealie crop to a co-operative for R2 000 per ton on 15 February 2022 (in terms
of a contract with no suspensive conditions). Assume that the farmer delivers the crop to the co-
operative on 27 February 2022, but that the actual quantity thereof is only established on
3 March 2022. Indicate when the selling price will be included in gross income.
SOLUTION
In view of the fact that the amount, which has already accrued to the farmer according to the
general principles, is an unquantified amount at year-end (28 February 2022), it will be deemed
not to have accrued to the farmer in the 2022 year of assessment. The amount of the mealie crop
will only be included in the farmer’s gross income in the 2023 year of assessment when it is
quantified.
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N)
A special accrual rule applies to profit participation sales of equity shares. This applies where the
consideration for the shares is determined with reference to the future profits of the company. The
accrual of the consideration in the seller’s hands is deferred to the extent and until the amounts
become due and payable (s 24N(1)). This rule essentially allows profit participation sales of equity
shares to be subject to normal tax only to the extent that the consideration becomes due and
payable. Similar rules apply to the purchaser (s 24N(2)).
These rules apply when all of the following features are present (s 24N(2)):
l More than 25% of the amount payable for the shares in a company becomes due and payable
after the end of the seller’s year of assessment.
l The amount payable for the shares must be based on the future profits of that company (the so-
called ‘profit participation requirement’).
l The value of the equity shares, that have in aggregate been disposed of during the year to which
s 24N applies, exceeds 25% of the total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument (see
chapter 16) that is payable on demand and is readily tradable in the open market.
3.4.6 Blocked foreign funds (s 9A)

A special rule applies where a person’s income includes an amount that accrued to him from a
foreign country, where that country imposes currency or other restrictions which prevent the amounts
from being remitted to South Africa during the year of assessment. These amounts are referred to as
blocked foreign funds. These amounts must be deducted from that person’s income in that year of
assessment (s 9A(1)), and are deemed to be amounts received by or accrued to the person in the
following year of assessment (s 9A(2)). See also Interpretation Note No. 63 (Issue 2)). The effect of
this section is that the taxation of blocked foreign funds is delayed to the year of assessment in which
the restrictions are lifted.
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus disposal
of a right to future income (prior cession)
Once income has been received by a person for his own benefit or it has accrued to him in terms of
the definition of ‘gross income’ in s 1, the ultimate disposal of the income by that person would not
affect his liability for taxation in respect of such receipt or accrual.
If, for example, a dishonest employee embezzles the day’s takings, his act can in no way destroy the
accrual in favour of the employer. The amount forms part of the employer’s gross income the moment
that it has been received. The subsequent loss thereof does not mean that it is no longer gross
income in the employer’s hands.
The same principle applied in the Witwatersrand Association of Racing Clubs case (see 3.4.2). The
taxpayer undertook to hand over the net proceeds of a race meeting to two charitable organisations
but had to pay tax in respect of the profits that were received. The horse-racing association donated
43
the proceeds only after they were received by it for its own benefit. The accrual of the income and the
resulting tax liability (in the hands of the association) would have been avoided if the race meeting
had been arranged in terms of a contract which stated that all of the proceeds would be for the
account of the charitable organisations and that the association would only act as an agent of the
charitable organisations. The amounts would then have been received in favour of and on behalf of
the charitable organisations.
The question of the disposal of profits frequently arises when a business is sold during a year of
assessment, and where a seller disposes of all the benefits of the profits earned for the current year
of assessment to the purchaser. The sale to the purchaser cannot alter the seller’s liability for tax on
amounts that have already accrued to him.
Example 3.7. Disposal of income after accrual
The owner of a business disposes of his business on 29 December 2022 (together with the right
to the profits as from 1 March 2022). Indicate whether the original owner (seller) will be liable for
tax on the profits for the period 1 March 2022 to 29 December 2022.
SOLUTION
The profits for the period 1 March 2022 to 29 December 2022 will still accrue to the original
owner. The disposal of the profits after the accrual thereof does not influence the original owner’s
tax liability in respect thereof. The new owner will, however, be liable for tax in respect of the
profits from 30 December 2022.
There is, however, a significant difference between the disposal of income after it has accrued to a
person, and the disposal and cession by him of a right under which income will accrue only in the
future. When income is disposed of after it has already accrued to the party who is disposing of it, it
remains taxable in his hands. Alternatively, when a right to future income is disposed of, the income
will in future accrue to the recipient of the right, provided that the right to such income has been
properly ceded to such recipient (Van der Merwe v SBI (1977 A)). Cession simply means that one
person (the transferor, or cedent) transfers his rights to another person (the cessionary). Delivery of
rights occurs through cession. It should, however, operate in such a way that the transferor divests
himself totally of any right to claim the income when that income accrues in the future (ITC 265 (1932)).
The cession of income in respect of an asset of which the cedent retains ownership will in terms of
the definition of gross income accrue to the cessionary, although the ownership has been reserved
(ITC 1378 (1983)). For example, the rental income of a property may be ceded without transferring
the ownership of the property. Section 7(7) of the Act is, however, specifically designed to deem the
income received by the cessionary in such cases to be included in the gross income of the cedent
(owner of the property).
Confusion is sometimes created if a cedent, after he has properly ceded his right to future income to
a cessionary, still physically received the income, where after he duly paid it over to the cessionary. It
is important to note that the cedent, in such a case, received the income on behalf and for the benefit
of the cessionary. The mere fact that the cedent received the money physically does not mean that
he received it for his own benefit or that the amount had accrued to him (SIR v Smant (1973 A),
CSARS v Cape Consumers (1999 C)).
Example 3.8. Disposal of income before accrual
Lesedi wrote a book. He sold the book, including all the potential future rights to royalties, to
Faith. The rights were properly ceded to Faith. Indicate the tax implications of the receipt of the
royalties for Faith.
SOLUTION
Faith will be subject to tax on all future royalties (given that the amount in the hands of Faith
complies with all the other requirements of gross income).
If the publishers paid the royalties to Lesedi (subsequent to the valid cession), where after
Lesedi paid them over to Faith, the royalties would still be taxable in Faith’s hands. Lesedi merely
received it on behalf of Faith (the new ‘owner’ of the rights).
44
It is, however, possible to cede a right to future income in an attempt to avoid a potential tax liability.
There are certain anti-avoidance provisions in the Act which are specifically designed to counteract
such avoidance. For example, par (c) of the definition of ‘gross income’ provides that the considera-
tion that a person receives for services rendered by such person will be included in his gross
income, although it may have been received by or accrued to another person. The person who per-
forms services can therefore not evade his tax liability by ceding his right to future income in respect
of such services to another person. Section 7 also contains specific provisions that direct that income
disposed of to a spouse or minor child would still be taxable in the hands of the disposing spouse or
parent (see chapter 7 for further discussion). Furthermore, the application of the general anti-
avoidance measures could result in the cession being ignored for tax purposes (see chapter 32). A
cession of income in order to achieve a tax advantage will therefore not always be successful.
Securities sold cum or ex income rights

Securities, such as shares, debentures or government stocks, are often sold together with a right to a
dividend or interest: the purchaser would then be entitled to receive any forthcoming dividend or in-
terest. The general principles, as discussed above, would be applicable to assess which party
should be liable for the taxation in respect of such dividends or interest.
If the income has already accrued to the seller prior to the sale, it is taxable in his hands. The mere
fact that the purchaser will receive the income is irrelevant. If the income accrues only after the sale,
when the buyer is already the owner of the security, it is taxable in the buyer’s hands. There can be
no question of apportioning the income relating to the period up to the date of sale to the seller and
the income relating to the period after the date of the sale to the buyer. The full income is taxable in
the hands of either the seller or buyer, whichever one of them is entitled to it. This general principle
may, however, be regulated by specific anti-avoidance provisions within the Act, for example, s 24J
may deem interest to accrue on a day-to-day basis, irrespective of the fact that the actual interest is
received in other specified periods (see chapter 16). In such a case the interest should be appor-
tioned between the seller and the buyer.
Example 3.9. Cum and ex income rights
Assume that on 10 June 2021 Lethabo sold shares to Amahle on which a dividend had been
declared on 15 May 2021, payable on 9 June 2021 to holders of shares registered on 1 June
2021. Accept that Lethabo had not yet received the dividend. Discuss whether the dividend
received will be gross income in the hands of Lethabo.
SOLUTION
It is submitted that the dividend is gross income in the hands of Lethabo, since it accrued to him
on 1 June. Even if the shares were sold cum dividend (in other words inclusive of the dividend),
that is, it was agreed on in the contract that Amahle was to receive the dividend, Lethabo is the
party to whose gross income the dividend would be added. He merely disposed of the dividend
after it had accrued to him.
The position would have been different if Lethabo sold the shares prior to the date of accrual of
the dividend and if it was agreed between the parties that Amahle would be entitled to the forth-
coming dividend. The dividend would then have to be included in the gross income of Amahle.
3.4.8 Time of accrual of interest payable by SARS (s 7E)

Where a person becomes entitled to an amount of interest that is payable by SARS in terms of any
tax Act, the amount is deemed to accrue to the person on the date on which the amount is paid
(s 7E). This rule, which applies from 1 March 2018, overrides the general rule that an amount is
included in a person’s gross income at the earlier of receipt or accrual. The effect of this rule is that
interest payable by SARS is only included in the recipient’s gross income when the amount is actually
paid and not when the person becomes entitled to it. The circumstances under which a person
becomes entitled to interest payable by SARS are discussed in chapter 33.
If, at the time when this section became effective (from 1 March 2018), interest
payable by SARS was previously, in whole or part, included in the taxpayer’s
Please note! gross income on the accrual basis, only that portion not previously taxed will be
taxable under s 7E. The taxpayer bears the onus of proving that the interest, or a
portion thereof, has previously been included in gross income (Binding General
Ruling No. 53 (issued on 22 June 2020)).
45
Interest that was previously received from SARS (under s 7E) and that is later repaid to SARS by the
taxpayer will, to the extent that it was previously included in his taxable income, be deductible from
the taxpayer’s income in the year of assessment that it is repaid by the taxpayer (s 7F – see chap-
ter 6).
Please note! The accrual of other amounts of interest is provided for in s 24J (see chapter 16).
3.5 Year or period of assessment (ss 1(1), 5, 66(13A)–(13C))

A ‘year of assessment’ is defined in s 1 as a year or other period in respect of which any tax or duty
leviable under the Act is chargeable. An amount is only income and subject to taxation in a relevant
year if it has been received by or accrued to a taxpayer during that year of assessment. Each year of
assessment stands on its own. When rates of tax or special provisions change from one year to the
next it becomes important from the point of view of both the taxpayer and SARS to ensure that all
amounts received or accrued during a particular year of assessment are included in the assessment
for that year.
Remember
For income tax purposes, a year of assessment of a person differs from a calendar year.
The 2022 year of assessment of a natural person and a trust generally extends from
1 March 2021 until 28 February 2022. The 2022 year of assessment of a company is its financial
year ending during the 2022 calendar year.
The ‘year of assessment’ of all natural persons and trusts generally runs from 1 March of one year to
the last day of February of the following year (s 5(1)(c)). The Commissioner may accept accounts to a
date other than the last day of February, if satisfied that the whole or some portion of the natural
person or trust’s income cannot be conveniently returned for any year of assessment (s 66(13A)).
Interpretation Note No. 19 (Issue 5) (issued 18 November 2020) provides guidance on the Commis-
sioner’s discretionary powers granted under s 66(13A). The discretionary powers granted to the
Commissioner are not subject to objection and appeal (s 66(13A) read together with s 3(4)(b)).
A company’s year of assessment is its financial year (s 1(1)). If a company does not close its financial
accounts on the last day of its financial year, the Commissioner may accept financial accounts for a
period ending on a day other than the last day of the company’s financial year (s 66(13C)). Inter-
pretation Note No. 90 (Issue 2 (issued 18 November 2020)) provides guidance on the Commis-
sioner’s discretionary powers granted under s 66(13C).
3.6 Receipts and accruals of a capital nature

The general definition of ‘gross income’ in s 1(1) excludes receipts and accruals of a capital nature.
This, however, does not mean that receipts and accruals of a capital nature are entirely free from
income tax. Certain receipts and accruals are included in the specific inclusions (listed in paras (a) to
(n)) of the gross income definition in s 1(1) even though they may be of a capital nature (see chap-
ter 4). If capital receipts and accruals are not included in gross income, a portion of these amounts
may still be subject to income tax by the inclusion of taxable capital gains in taxable income. This is
referred to as capital gains tax and is discussed in chapter 17.
The Act contains no definition of the term ‘capital’ and as was mentioned in WJ Fourie Beleggings v
C:SARS (2009 SCA) ‘[w]hether a receipt or an accrual should be regarded as capital or revenue is
probably the most common issue which arises in income tax litigation’. The courts have laid down a
number of guidelines that should be considered when determining whether an amount is of a capital
nature or not. But, as the court said in the WJ Fourie Beleggings case, ‘it has not been possible to
devise a definite or all-embracing test to determine whether a receipt or accrual is of a capital nature,
despite the regularity with which the issue has arisen. At the same time, and although common sense
has been described as “that most blunt of intellectual instruments”, it remains the most useful tool to
use in deciding the issue’. Although a decisive test does not exist, the following important principles
have been established over the years:
l The burden of proof that an amount is of a capital nature is on the taxpayer (s 102 of the Tax
Administration Act). The taxpayer must, for example, prove that an asset was acquired for the
purpose of investment and not for the purpose of resale at a profit, if the proceeds are to be
regarded as being capital in nature.
46
l The inquiry as to whether an amount is of an income or a capital nature is a question of fact, which
has to be decided on the merits of each case. Although the court will consider the guidelines
which have been laid down in earlier decisions, it will have regard to the totality of all the relevant
facts and circumstances of each case.
l The most important test used by the courts in deciding whether a receipt in respect of the disposal
of an asset is income or capital in nature is the intention of the taxpayer. Generally, the proceeds
will be income in nature if the asset was acquired with the purpose of selling it at a profit.
However, if the asset itself was acquired and held, not for the purpose of resale at a profit, but to
produce income from that asset such as rent, interest or dividends, then the proceeds on the
disposal of the asset will be capital in nature. Another person could acquire the same asset, but
with the intention to sell it at a profit. The proceeds on sale of the asset by such person will then
be income in nature (CIR v Visser (1937 TPD)).
l The taxpayer’s own evidence (the ipse dixit of the taxpayer) about his intention and his credibility
will be considered by a court. Due to subjectivity, self-interest, the uncertainties of recollection
and the possibility of mere reconstruction, the evidence given by the taxpayer will not be
decisive. The court will test that evidence against the surrounding facts and circumstances (in
other words, objective factors) in order to establish a taxpayer’s true intention (CIR v Nussbaum
(1996 (A)).
l All receipts and accruals must be categorised as being either of a capital or of an income nature.
An amount cannot be both ‘non-capital’ and ‘non-income’ (Pyott Ltd v CIR (1945 AD)), but a
single receipt may be apportioned between its capital and income elements (Tuck v CIR
(1988 A)).
l The intention of a company’s shareholders could be attributed to the company itself (Elandsheuwel
Farming (Edms) Bpk v SIB (1978 (A)).
l Amounts received will be revenue if they qualify as receipts made by an operation of business in
carrying out a scheme for profit-making. For a receipt to be of a revenue nature, it is not sufficient
for the taxpayer to be carrying on a business. The business should be conducted with a profit-
making purpose as well (CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)).
l A person is entitled to realise an asset to the best advantage and to accommodate the asset to
the exigencies of the market in which he was selling. The fact that he did so could not alter what
was an investment of capital into a trade or business for earning profits (CIR v Stott (1928 AD)).
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature (CIR v Nel
(1997 (T)); CIR v Richmond Estates (Pty) Ltd (1956 (A)); John Bell & Co (Pty) Ltd v SIR (1976 A);
Natal Estates Ltd v CIR (1975 (A)).
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of, or embarked upon a scheme for profit,
using the asset as his stock-in-trade (Natal Estates Ltd v CIR (1975 (A)).
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset (COT v Levy (1952 (A)).
l Where a taxpayer who intends to invest in an asset, has a secondary, profit-making purpose when
the asset is purchased and sold, the proceeds will be of an income nature (CIR v Nussbaum
(1996 (A)).
l Where a taxpayer received an amount as compensation for the cancellation of a contract, the
court held that one should distinguish between a contract, which is a means of producing
income, and a contract directed by its performance towards making a profit. Compensation for
cancelling the first would be of a capital nature and the latter of a revenue nature (WJ Fourie
Beleggings v C:SARS (2009 SCA)).
The above principles and court cases are discussed in more detail below.
3.6.1 Nature of an asset

In CIR v George Forest Timber Company Limited (1 SATC 20) (1934 AD 516) the taxpayer was a
company that acquired land with a natural forest for business purposes. The taxpayer felled a
quantity of trees each year which were sawn up in its mill and sold as stock-in-trade. The court had to
consider whether the receipts from the sale of the timber were of a revenue or capital nature. The
court found that in selling the timber the company did not realise a capital asset but created and sold
a new product. The court said that, as a general rule, capital, as opposed to income might be said to
47
be wealth used for the purpose of producing fresh wealth. The court distinguished between fixed and
floating capital, with the substantial difference being that floating capital was consumed and
disappeared in the very process of production, while fixed capital did not. Fixed capital produced
fresh wealth but remained intact. The receipts from selling the timber were found to be from the sale
of floating capital and not of a capital nature.
In CIR v Visser (1937 TPD) the taxpayer acquired mining options on certain farm properties. The
options, however, lapsed before the taxpayer could start searching for mineral deposits on the farms.
Although the options lapsed, the taxpayer had persuasive influence over the farmers in the area and
was convinced that he could acquire the options again if he wished to do so. The taxpayer then
entered into an agreement with another person whereby the taxpayer agreed to assist the other per-
son in obtaining the mining options in exchange for shares in the other person’s company. The court
had to decide whether the shares that the taxpayer received were of a capital nature and therefore
excluded from his gross income. The court came to the following conclusions:
l The nature of the transaction and the taxpayer’s intention when he entered into this transaction
should be considered.
l The taxpayer’s intention in regard to any particular transaction, although not necessarily con-
clusive, is always of the utmost importance in deciding whether the profit made on the sale of an
asset is income or merely the enhanced value of a capital asset.
l The taxpayer’s intention is not necessarily determined by what he says his intention was, but by
the inference as to the intention to be drawn from the facts of the case.
l If we consider the economic meaning of ‘capital’ and ‘income’, the one excludes the other.
‘Income’ is what ‘capital’ produces or is something in the nature of interest or fruit as opposed to
principal or tree. This economic distinction is a useful guide, but its application is often difficult, for
what is principal or tree in one person’s hands may be interest or fruit in the hands of another.
l ‘Income’ may also be described as the product of a person’s wits and energy. The consideration
received by the taxpayer was a product of his wits and energy and therefore of an income nature.
3.6.2 Intention of a company

In Elandsheuwel Farming (Edms) Bpk v SIB (1978 (A)) the taxpayer was a company that acquired a
property that was used for farming purposes. One of its shareholders carried on farming activities on
the property for about four years. The farm was then leased to other tenants who used the property
for farming purposes. About six years after the company acquired the property, its shareholders sold
their shares in the company. The price of the company’s shares was based on the value of the
property as agricultural land. The new shareholders were property developers. At that time another
developer was purchasing land in the area at a price significantly more than what the new share-
holders paid for their shares in the company. A year later, the company sold the property to a local
municipality at a significant profit. The court had to rule on whether the proceeds on the sale of the
property were of a capital nature and therefore excluded from the company’s gross income. The
court came to the following conclusions:
l The new shareholders derived a scheme to make a substantial profit by acquiring the shares in
the company at a price based on the agricultural value of the land and then to sell the land to the
municipality for township development.
l The shareholders’ intentions should be attributed to the company itself.
l After the new shareholders acquired control of the company, the company’s purpose with
regards to the land changed to that of trading stock.
l The profit realised on sale of the land was of a revenue nature and should be included in the
company’s gross income.
3.6.3 Business conducted with a profit-making purpose

In CIR v Pick ‘n Pay Employee Share Purchase Trust (1992 (A)) the taxpayer was a trust established
by the Pick ’n Pay group of companies to administer a share purchase scheme for the benefit of
employees of the group. The trust was created and maintained to enable employees to purchase
shares in Pick ’n Pay, their employer company. It purchased shares in order to make them available
to employees entitled to them. In terms of its constitution, it was compelled to repurchase shares from
employees who were required to forfeit their holdings. The court had to consider whether the
proceeds on the sale of shares were of a capital nature for the trust. The court held that:
l Although there are a variety of tests the courts have laid down for determining whether or not a
receipt is of a revenue or capital nature, they are guidelines only. There is no single infallible test
of invariable application.
48
l The amounts received by the trust will be revenue if they qualify as receipts made by an
operation of business in carrying out a scheme for profit-making.
l For a receipt to be of a revenue nature, it is not sufficient for the taxpayer to be carrying on a
business. The business should be conducted with a profit-making purpose as well.
l Transactions involving shares are no different from any other transaction and the capital or
revenue nature of a receipt should be determined in the same way as other assets.
l While the trustees might have contemplated the possibility of profits, it was not the purpose of
either the company in founding the trust, or of the trustees, to carry on a profit-making scheme.
l Any receipts accruing to the trust were not intended or worked for but purely fortuitous in the
sense of being an incidental by-product.
l The receipts were of a capital nature.
3.6.4 Selling an asset to best advantage

In CIR v Stott (1928 AD) the taxpayer was a surveyor and architect. On a number of occasions, he
purchased land when he had funds to invest. During a particular year he derived profit from the sale
of plots of land which were subdivided from two properties. The taxpayer acquired the first property
as a seaside residence. The property was larger than what he required, but was only for sale as a
whole. After building a cottage on the land, the taxpayer subdivided half the property into small plots
and sold it. The second property was a small fruit farm which was subject to a long-term lease when
acquired. After the tenant defaulted, the taxpayer subdivided the property into plots and sold it.
According to SARS, the taxpayer embarked on a scheme of profit-making when he subdivided the
land into plots and sold it. In considering whether the receipts from the sale of land were of a revenue
or capital nature, the court held that:
l The intention with which a taxpayer acquired an article is an important factor to consider and
unless some other factor intervened to show that when the article was sold it was sold in
pursuance of a scheme of profit-making, it was conclusive in determining whether the receipts
were capital or gross income.
l The taxpayer acquired each of the properties as an ordinary investment using surplus funds.
There was no evidence to show that the taxpayer, at any time after purchasing the properties,
considered dealing with them as a part of a business of buying and selling land.
l The mere fact that the land was subdivided into plots rather than sold as a whole could not by
itself alter the character of the proceeds derived from the land from capital to revenue.
l The fact that the taxpayer, as a surveyor, knew somewhat more than the ordinary public about the
value of land made no difference.
l Every person who invested his surplus funds in land or stock or any other asset was entitled to
realise such asset to the best advantage and to accommodate the asset to the exigencies of the
market in which he was selling. The fact that he did so could not alter what was an investment of
capital into a trade or business for earning profits.
l The receipts were of a capital nature.
3.6.5 Realisation of a capital asset

Proceeds from the sale of capital assets should be subjected to the same tests applicable to other
assets when being classified as of either an income or a capital nature.
In CIR v Nel (1997 (T)) the taxpayer had purchased Krugerrands with the intention of holding them as
a long-term investment as a hedge against inflation. Although the Krugerrands steadily escalated in
value over the years and, despite the fact that he had many opportunities to sell them, he never did
so. Urgently and unexpectedly needing to purchase a motor car for his wife, he reluctantly realised
one third of the coins to pay for the vehicle. The taxpayer made a gain on the disposal of the Kruger-
rands, which he considered as being of a capital nature. The court held that
l The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature.
l The evidence showed clearly that the taxpayer’s purpose in selling the Krugerrands was not to
make a profit, but to realise a capital asset.
The court therefore accepted the capital nature of the proceeds on the basis that the Krugerrands
were purchased, as it were, for ‘keeps’ and that the disposal of some of them was due to some
unusual or special circumstances.
49
In CIR v Richmond Estates (Pty) Ltd (1956 (A)) the taxpayer was a company that was formed to
control the investments and savings of its sole shareholder and director. The company's memoran-
dum of association empowered it to trade with and invest in land. For some time, the company made
profits from trading in land and from receiving rent from properties that were let. Due to legislative
changes, it became difficult for the company to purchase land in the particular area in which it traded
in land, and the shareholder decided that the company would cease trading in land and develop the
properties to receive rental income. This decision was not recorded in a formal resolution of the com-
pany. Two years later the shareholder became aware of further legislative changes that, according to
the shareholder, would have had a negative impact on the value of the properties. Due to this, the
company sold the properties and realised a substantial profit. In considering whether the profit
realised from the sale of the properties was of a capital or income nature, the court concluded as
follows:
l The company’s intention with the properties changed from trading stock to capital assets when it
decided to develop the properties to receive rental income.
l The fact that the change of intention from trading stock to capital was not recorded as a formal
resolution of the company’s directorate, but evidenced only by the sole shareholder's statements,
was no reason for concluding that the taxpayer's intention did not change.
l The capital assets were sold due to the pending legislative changes that would negatively impact
the value of the properties. The mere decision to sell a capital asset at a profit does not per se
mean that the profit is of an income nature.
l The proceeds from the sale of the properties were of a capital nature.
3.6.6 Change of intention

In John Bell & Co (Pty) Ltd v SIR (1976 A) the taxpayer, a company, operated a textile business from
premises that it owned. After the business relocated to other premises, the directors of the company
decided in principle to sell the original premises. Considering the property market was not perform-
ing well at that point in time, the directors decided to wait until the market had improved. In the mean-
time, the property was rented out (for a period of 11 years) and thereafter, once the market had
improved, the property was realised at a profit. The court emphasised the principle that a taxpayer is
entitled to realise his property to his best advantage, and therefore decided that there was no factual
evidence that indicated that the taxpayer had had a change of intention to use the property as
trading stock. The court held that something more than merely selling the asset is required in order to
metamorphose the character of the asset and so render its proceeds gross income. The taxpayer
must embark on some scheme for selling such assets for profit and use the assets as his stock-in-
trade.
In Natal Estates Ltd v CIR (1975 (A)) the taxpayer, a company, owned a large piece of land north of
Durban. It carried on business as a grower and miller of sugar cane and a manufacturer of sugar.
Throughout the years the directors of the company were aware of the possibility that the local author-
ities could expropriate the property for public development. The directors of the company appointed
town planners and surveyors to investigate possible residential development on the land. It was
decided to wait until the market was better developed and the project was temporarily suspended. A
newly elected board of directors decided to proceed with the project. Consulting engineers and
architects, as well as financial advisors and marketers, were appointed to the project. The taxpayer
proceeded with the development bit by bit and started to sell developed land directly to the public
and to investors. SARS assessed the taxpayer’s receipts from the sale of land as being revenue in
nature. The court held that:
l Although the original intention with which a taxpayer acquired an asset is an important factor, it is
not necessarily decisive because a taxpayer’s intention can change.
l The mere decision to sell an asset at a profit is not an indication that a taxpayer that acquired an
asset with an investment purpose changed its intention. Something more is required.
l From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of using the land as his stock-in-trade or
embarked upon a scheme of selling the land for profit.
l A change of intention implies something more than the mere decision to sell an asset of a capital
nature.
l The court considered the fact that the taxpayer had gone over to the business of township
development on a grand scale and held that the company changed its intention to sell the land at
a profit. Consequently, the proceeds of the sales formed part of the company’s gross income and
were subject to normal tax.
50
The following paragraph from C:SARS v Founders Hill (Pty) Ltd (2011 SCA)
explains the concept of ‘crossing the Rubicon’ referred to in the Natal Estates
case:
‘In 49 BC when Julius Caesar crossed the Rubicon – a small river dividing Cisal-
pine Gaul (a province of Rome) from Italy – committing an act of treason in so
Please note! doing (for no Roman general was allowed to enter Italy with his army without the
consent of the Roman Senate), he intended to defy the Senate and in effect to
declare civil war in Rome. Little did he foresee (I suspect) that his act would
come to be a symbol of passing a point of no return in the general sense, and
that it has, in South Africa, become a tax mantra in cases that attempt to discern
the distinction between capital gains and taxable income upon a disposal of
property.’
3.6.7 Mixed purpose

In COT v Levy (1952 (A)) the taxpayer argued that the proceeds realised on the sale of shares in a
company were of a capital nature. The taxpayer acquired 25% of the shares in the company and was
also one of its four directors. The company was formed to acquire and develop land in an area that
was thought likely to develop. The taxpayer had an open mind when he bought the shares as to what
would be the best thing to do with the property. Although he hoped that the property and therefore
the shares would appreciate in value, he was really interested in obtaining a good revenue from the
property and agreed with the other shareholders to develop the property to obtain a better return
from it. Three years after the taxpayer acquired the shares another person purchased all the shares
from the four shareholders. The taxpayer made a substantial profit from the sale. The court had to
consider whether the taxpayer correctly treated the proceeds from the sale of the shares as being of
a capital nature. The court found that:
l Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset.
l Based on the evidence before the court, the court found that the taxpayer’s dominant intention in
acquiring the shares was to hold the shares as an income-earning investment. The taxpayer
never at any time attempted to sell the shares and only sold the shares when someone made him
an offer. The taxpayer accepted the offer with a view to realise his investment.
l The proceeds from the disposal of the shares were of a capital nature.
3.6.8 Secondary purpose

In CIR v Nussbaum (58 SATC 283) (1996 (4) SA 1156 (A)), a case considered by the Appellate
Division of the High Court, the taxpayer inherited listed shares. With active and careful investment, he
built a substantial portfolio of listed shares over a number of years. For the three years of assessment
under consideration, SARS assessed the taxpayer's profits from the sale of shares as being of a
revenue nature. The taxpayer testified that over the years he used surplus income to consistently add
shares to the portfolio he inherited. When he purchased shares, he did so with an intention to
produce dividend income and to protect his capital from inflation. He never purchased shares for a
profitable resale. He would only sell a share if a better dividend yield could be achieved with other
shares, or where his shares in a specific company distorted the balance he aimed to achieve in his
portfolio.
For the three years under consideration, the taxpayer testified that his approach was decidedly
different. He turned 60 and decided to build up readily available cash resources to meet expected
future medical expenses and to buy a house. Over this period, he sold shares ‘bit by bit’ in order to
invest the proceeds in fixed interest investments. His criteria for deciding which shares to sell were
the same as in prior years. He only sold shares with a poor dividend yield, regardless of whether he
would realise a profit or loss on the sale.
SARS argued that, for the years under consideration, the taxpayer changed his intention towards his
shares and had gone over to holding them, if not also buying them, with a dual purpose. Although his
main aim was still investment, his secondary purpose was to use his portfolio as stock-in-trade and to
sell shares for profit whenever he felt it appropriate to do so.
In considering whether the receipts from the disposal of shares were revenue or capital in nature, the
court held that:
l It had to consider whether the sale of shares amounted to the realisation of capital assets or the
disposal of trading stock in the course of carrying on a business.
51
l Although the scale and frequency of the taxpayer's share transactions are not conclusive, they
are of major importance. In this case, the taxpayer entered into a significant number of share
transactions, which were almost, without exception, profitable. His annual profits from selling
shares substantially exceeded his annual dividend income.
l The taxpayer ‘farmed’ his portfolio diligently as evidenced by the number, frequency and profit-
ability of sales, especially of short-term shares.
l Although the taxpayer testified that his intention with buying and selling shares was to invest in
shares, the court held that if one looks beyond the taxpayer's version of his intention to all the
facts, it is clear that the profits in question were not merely incidental to the taxpayer's investment
activities. The taxpayer had a secondary, profit-making purpose when he purchased and sold the
shares.
l Since the taxpayer purchased shares for investment purposes, but contemplated dealing with the
shares for the purpose of making a profit, it cannot be argued that the profit from the sale of
shares is merely incidental. Since the taxpayer had no absolving dominant purpose, the profit
gained from his secondary purpose was of a revenue nature.
3.6.9 Realisation company

The taxpayer in Berea West Estates (Pty) Ltd v SIR (38 SATC 43) (1976 (2) SA 614(A)) was a com-
pany that was formed for the purpose of selling land. At the time of forming the company, the land
was held by a deceased estate and a trust. The administration of the deceased estate had been
running for 22 years and due to a number of reasons the estate could not be wound up. The
executors were pressed to finalise the estate and for this reason the deceased estate and the trust
transferred the land to a company so that the company could sell the land. The beneficiaries of the
deceased estate and the trust became the shareholders of the company and the proceeds from
selling the land were to be distributed to them. Prior to transferring the land to the company, the
executors of the deceased estate obtained approval to establish townships on the land. The town-
ships were only proclaimed after transferring the land to the company, but were subject to building
roads and a water supply before the individual plots could be sold. At the time the company was
formed, there were no obvious buyers for the land as a whole and the company decided to develop
the land so that it could be sold as individual plots. Over a period of 20 years the company devel-
oped a part of the land, sold the plots, and then used the money to develop a further area. The court
had to consider whether the receipts from selling the plots were of a capital nature. The court held
that:
l Where a company is formed with the purpose to sell an asset (that is, a realisation company) and
does so at best advantage, it does not mean that the company traded for profit.
l In deciding whether a company was merely acting as a realisation company or was carrying on
the business of trading for profit, one is entitled to look at the facts leading up to the company’s
incorporation, and to its memorandum and articles, and to its subsequent conduct.
l The court had to consider whether, on all the evidence, the taxpayer deviated from its original
intention and went over to trading for profit, and in that sense whether a change of intention had
taken place.
l The fact that the taxpayer incurred a considerable amount of expenses in developing the
property over a period of 20 years was undoubtedly a factor to be taken into account, but should
not be considered in isolation. The taxpayer had to sell a very large piece of undeveloped land
and could only do so by subdividing the land and developing the property, which involved
spending a lot of money. But this does not in itself mean that the taxpayer was trading for profit.
l The facts of this case should be distinguished from the Natal Estates case where the taxpayer,
with its elaborate and sustained scheme and expertise, did much more than merely realising a
capital asset to the best advantage. In the Natal Estates case, the taxpayer carried on a business
of selling land for profit on a grand scale, using the land as its stock-in-trade, which was not the
same in this case.
l The taxpayer, a realisation company, merely sold the land at best advantage and did not change
its original intention to that of trading for profit. The receipts from selling the plots were of a capital
nature.
In CSARS v Founders Hill (Pty) Ltd (2011 SCA) the taxpayer was formed to acquire and realise sur-
plus land owned by AECI Ltd, which it held as a capital asset. The purpose of the taxpayer, as was
52
evident from its memorandum of association, was to realise the land at best advantage. The court
had to consider whether the receipts from the sale of land were of a capital nature and held that:
l It is an established principle in South African law that a taxpayer is entitled to realise an asset to
best advantage, and, in doing so, its receipts will be capital in nature. However, this principle
only applies to capital assets and the mere fact that a taxpayer refers to an asset as a capital
asset does not make it one.
l The taxpayer was formed solely for the purpose of acquiring the property as stock-in-trade and
then conducted business in trading in the property.
l Calling a company a ‘realisation company’ (and limiting its objects and restricting its selling
activities in respect of the assets transferred to it) is not itself a magical act that inevitably makes
the profits derived from the sale of the assets of a capital nature. The court distinguished this
case from the Berea West case where it said that there was a real justification for the formation of
the realisation company (in addition to the purpose of realising the assets) without which the reali-
sation of the asset would have been difficult, if not impossible. Where a company was formed
solely for the purpose of facilitating the realisation of property that could not otherwise be dealt
with satisfactorily, the profit achieved on sale would be of a capital nature and would not be
taxable.
l The taxpayer's profits were gains made by an operation of business in carrying out a scheme for
profit-making and was therefore revenue derived from capital productively employed and must
be taxable income.
3.6.10 Damages and compensation

In WJ Fourie Beleggings v C:SARS (2009 SCA) the taxpayer conducted business as a hotelier. The
taxpayer concluded an agreement whereby it would accommodate a substantial number of persons
over an extended period of time. For a number of reasons, this contract was cancelled and the tax-
payer received an amount of money in settlement of all claims it might have arising from the early
termination of the contract. The court had to consider whether the settlement amount received was of
a revenue or capital nature. The taxpayer argued that the contract itself amounted to an asset that
formed part of its income-producing structure and that the settlement amount had been paid for the
loss or ‘sterilisation’ of this income-earning asset and should be regarded as capital. The court held
that:
l There is a fundamental distinction between a contract that is a means of producing income and a
contract directed by its performance towards making a profit.
l Although the taxpayer stood to earn a great deal from the contract that was to form the major
source of its income during the period it lasted, this did not transform the contract into part of the
taxpayer's income-producing structure.
l The taxpayer's income-producing structure was made up of its lease of the hotel and the use to
which the hotel was put. The contract under consideration was concluded as part of its business
of providing accommodation. It was therefore a product of the taxpayer's income-earning
activities, not the means by which it earned income.
l The contract under consideration could not be construed as being an asset of a capital nature
forming part of the taxpayer's income-producing structure. That being so, the amount paid to the
taxpayer on termination of the contract was not capital in nature.
In Stellenbosch Farmers' Winery Ltd v CIR (2012 SCA) the taxpayer received compensation for the
premature termination of a distribution agreement. In terms of the distribution agreement, the
taxpayer had the exclusive right to distribute certain whiskeys in South Africa for a period of 10 years.
The sale of these products made a significant contribution to the taxpayer’s profit during this time.
Due to a corporate structural change of the company that granted the distribution right, the taxpayer
agreed to receive a lump sum payment on early termination of the exclusive distribution agreement.
The court had to consider whether the amount received was of a capital nature. The court held that:
l The exclusive distribution rights that the taxpayer had in terms of the distribution agreement were
a capital asset. As a result of the termination, the taxpayer therefore lost a capital asset.
l Since the taxpayer did not carry on the business of the purchase and sale of rights to purchase
and sell liquor products, it did not embark on a scheme of profit-making. The compensation that
the taxpayer received for the impairment of the taxpayer's business by the loss of its exclusive
distribution right was a receipt of a capital nature.
l The nature of a receipt for income tax purposes is not determined by the accounting treatment
thereof.
53
3.6.11 Isolated transactions

As mentioned above, the frequency of a particular transaction may provide a useful guide in dis-
tinguishing between income and capital. If the same type of transaction were concluded continu-
ously, it would be obvious that there was a scheme of profit-making and the proceeds would then be
income in nature and therefore subject to normal tax. Yet an isolated or once-off transaction is not
necessarily of a capital nature. The real test depends upon the intention behind the transaction and
on whether a scheme of profit-making is involved. A speculation in futures was held to be subject to
normal tax even though it was an isolated transaction. The court found that, although this transaction
was different from the taxpayer’s normal transactions, it was within the scope of his business (ITC 43
(1925)).
3.6.12 Closure of a business and goodwill

The proceeds derived from trading stock realised in the course of winding up a business are of an
income nature and will be included in the taxpayer’s gross income. It does not matter that the busi-
ness has been sold ‘lock, stock and barrel’, and no enquiry needs to be made as to whether the
proceeds were derived in the ordinary course of trade. Whatever amount is derived by the taxpayer
as a result of the disposal of the stock is in the nature of income and forms part of his gross income.
An amount received for the sale of the goodwill of a business is a receipt of a capital nature. This
will be the case if the seller originally bought the business in order to derive income from the carrying
on of that business, rather than for the purpose of reselling it at a profit. If the goodwill is a fixed
amount, it is capital in nature. It does not matter whether it is payable in one sum or in periodic instal-
ments.
The consideration for the sale of goodwill may, however, take the form of an annuity. In this instance
the annual payment is taxable in terms of par (a) of the definition of ‘gross income’ in s 1(1).
The sales agreement should therefore contain a clear distinction in respect of the amount of the
purchase price representing the trading stock (income), the amount of the purchase price represent-
ing the business assets (capital), and the amount of the purchase price representing the goodwill
(capital, unless paid in the form of an annuity).
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes

The same tests as are applied to any other asset should be applied to determine whether a copy-
right, invention, patent, trademark, formula or secret process is of an income or a capital nature. The
outcome will depend upon the facts of each case.
Amounts received for the disposal of copyrights, patents, trademarks and similar assets by a person,
who originally acquired and has held such assets as an income-producing investment, are of a
capital nature. However, if the assets were acquired for the purposes of a profitable resale in a profit-
making scheme, their proceeds would be of an income nature.
3.6.14 Debts and loans

If debts are bought with the intention of collecting them at a profit, the receipt thereof is income in
nature. Some finance houses buy debts at a discount and then proceed to collect the outstanding
amount at a profit. This represents a profit-making scheme and the profit made on the collection of
the debts is therefore income in nature.
It may, however, happen that a profit made on the collection of debts is capital in nature. What often
occurs in practice is that a person buys a business as a going concern and, in terms of the agree-
ment, is required to buy the debts owing to the seller. If a greater amount is collected than what was
paid for the debts, the profit is capital in nature. Here the debts are not acquired with the intention of
deriving a profit therefrom. They are part and parcel of the business bought – the intention is to gen-
erate a profit with the business, not to generate a profit from the collection of the debts.
When a taxpayer sells his business, inclusive of his debtors book, the amount received for the sale of
the debtors would generally be of a capital nature, notwithstanding the fact that a profit was derived
from the sale (of the debts).
54
3.6.15 Gambling
If gambling activities are systematically undertaken, to the extent that they become a business or
scheme of profit-making, the proceeds are income in nature and therefore part of gross income
(Morrison v CIR (1950 A)).
If, however, the gambling activities are undertaken as a means of entertainment or hobby, the pro-
ceeds are capital in nature.
Remember
The intention of the gambler will again determine the capital or income nature of the proceeds.
Was his intention to entertain himself by gambling? If so, the proceeds will be capital in nature
and not part of his gross income. The gambler will, however, have to convince SARS that this
was indeed his true intention.
Amounts derived by racehorse owners and trainers are subject to normal tax where betting is a
regular practice.
It would be difficult for a professional punter and racehorse owner to distinguish his jackpot winnings
from his other betting activities. His winnings are subject to normal tax, because these activities are
so closely related to his business (ITC 214 (1931)).
In practice, SARS includes the results of betting transactions systematically carried on in gross
income. It is not the practice to tax ordinary punters on the proceeds of betting when they engage in
betting as a means of entertainment, but persons closely connected with racing and possessing
special knowledge, for example owners, trainers and jockeys, will usually be subject to normal tax on
the results of regular betting.
In terms of the practice of SARS, a bookmaker is liable to normal tax on his gambling activities if they
may be regarded as forming part and parcel of his business. His winnings from sweepstakes, lotte-
ries and racing jackpots would be included in his income.
3.6.16 Horse-racing
Racing stakes (prizes for the winners of the horse races) won by racehorse owners are subject to
normal tax in practice, if the activities carried on are undertaken for gain or in pursuance of a scheme
of profit-making, rather than a hobby.
3.6.17 Gifts, donations and inheritances

A lump sum or an asset received by way of a gift, donation or inheritance is capital in nature.
If the inherited asset is sold, that receipt is also capital in nature, unless the asset is sold in pursu-
ance of a profit-making scheme or as part of a business carried on.
Remember
Intention may change – the recipient of an inherited asset may decide not to consider that asset
as part of his capital structure. He may decide to dispose of the asset in pursuance of a scheme
of profit-making.
3.6.18 Interest
Interest derived from a loan or investment of money is income in nature.
Remember
The capital investment is the ‘tree’ and the interest is the ‘fruit’ thereof.
3.6.19 Restraint of trade

Payments received in respect of a restraint of trade are capital in nature.
In this instance, a person usually undertakes not to exercise a trade, profession or occupation in a
specified area for a defined period of time in return for some compensation. What he is selling is his
ability to generate further income; in other words, his capital structure. This represents the sterilisation
55
of a capital asset and is capital in nature (Taeuber and Corssen (Pty) Ltd v SIR (1975 A)). These pay-
ments are, however, expressly included in the gross income of certain taxpayers in certain circum-
stances in terms of par (cA) or par (cB) of the definition of ‘gross income’ in s 1 (see chapter 4).
It has been held that a consideration received by a garage proprietor from an oil company for under-
taking to become a one-brand petrol station, that is, to sell only the products of the oil company, is a
capital receipt. The court concluded that the garage owner in this case sold his right to also trade in
other products or brands. This represented a capital asset (ITC 772 (1953)).
3.6.20 Share transactions

Profits on share transactions are not only subject to normal tax if the frequency and volume of the
number of transactions are so great as to constitute the carrying on of a business. The intention with
regard to which shares are held will determine whether the proceeds on the sale thereof would be
classified as capital or income in nature. Like any other assets, shares may be trading stock. Profits
and losses resulting from share transactions are of an income nature if the shares were acquired for
the purpose of resale at a profit (Anglovaal Mining Limited v CSARS (2009 SCA)).
Conversely, shares may be held for a long period with the intention to derive dividend income. If
these shares were then disposed of, the proceeds would be capital in nature. Even where the
taxpayer initially acquired the shares for purposes of investment, but with the ‘secondary purpose’ to
dispose of the shares at a profit if the dividend yield was unsatisfactory, the judiciary has taken the
view that the proceeds would be classified as income in nature (CIR v Nussbaum (1996 A)).
In the case, CSARS v Capstone 556 (Pty) Ltd (2016 SCA), the taxpayer disposed of shares in a
company that was acquired to rescue a major business in the retail sector. The court had to consider
whether the proceeds of the sale of shares were of a capital or revenue nature. The taxpayer’s
intention at the time of acquisition of the shares was to make a strategic investment in a leading
company in the furniture industry as part of a large-scale ‘rescue operation’ (and this was over-
whelmingly supported by the objective evidence). It was clear from the evidence that the taxpayer’s
decision to sell the shares was not foreseen (even though the shares were sold less than five months
after the acquisition date), as the circumstances that prevailed at the time of sale were materially
different from the circumstances prevailing when the obligation was incurred. The court held that it
was clear from the evidence that the first and primary purpose of the acquisition of the shares was to
rescue a major business in the retail furniture industry by a long-term investment of capital. The court
held that this involved commitment of capital for an indeterminate period involving considerable risk
and only a very uncertain prospect of a return and that this was consistent with an investment of a
capital nature that was realised sooner than initially expected because of skilled management and
favourable economic circumstances. It was not a purchase of shares as trading stock for resale at a
profit and the proceeds were therefore held to be of a capital nature.
For equity shares that are held by the taxpayer for at least three years, the receipt on the disposal of
the shares is deemed to be capital in nature (s 9C – see chapter 14).
At times, it is difficult to establish the intention underlying certain share transactions, as illustrated by
the following discussion of specific cases:
Employees’ share trusts

A controversial line of cases deals with the position of trusts created by employers as vehicles for
share purchase schemes designed to benefit their employees.
In CIR v Pick ’n Pay Employee Share Purchase Trust (1992 A), the court held that the trust had no
intention of carrying on a business in shares, but operated ‘primarily as a conduit for the acquisition
of shares by employees entitled to them in terms of the scheme’s rules’. It had no profit motive and
did not act as a normal trader in shares would. Even if in a broad sense it was carrying on a busi-
ness, it was not a business carried on as part of a scheme of profit-making. While the trustees might
have contemplated the possibility of profits, it was neither their purpose to seek out profits, nor were
profits inevitable. The trust’s receipts were therefore not intended or worked for, but purely fortuitous,
a by-product of the trust’s activities. Consequently, the proceeds were therefore capital in nature.
Portfolio in a collective investment scheme
There is no reason in principle why units held by a taxpayer in a portfolio of a collective investment
scheme should not be investigated for their income or capital characteristics in the same way as
shares. Therefore, if they are acquired and held for the purposes of a profitable resale in a scheme of
profit-making, any profits realised or losses suffered upon their disposal will be of an income nature.
56
3.6.21 Subsidies
If a subsidy takes the form of a contribution towards the producer’s cost of production of a certain
commodity, it is submitted that it is of an income nature. The subsidy becomes part of the floating
capital of the producer.
If the subsidy is paid as a contribution towards the cost of fixed capital assets, it is capital in nature.
For example, the Government may contribute towards the cost of a new factory or plant and
machinery. This is a capital receipt that is not subject to normal tax, unless specifically stated other-
wise by the Act.
Certain Government grants are exempt from normal tax (see chapter 5).
57
4 Specific inclusions in gross income
Linda van Heerden

l identify or explain which amounts should specifically be included in ‘gross income’,
even though they may be of a capital nature, and support your opinion with the rele-
vant authority
l demonstrate your knowledge in a practical case study (both in a calculation question
and a theoretical advice question).
Contents
Page
4.1 Overview ............................................................................................................................. 59
4.2 Annuities (paras (a) and (d)(ii) of the definition of ‘gross income’, ss 10(1)(gA), 10A
and par 2(4) of the Fourth Schedule) ................................................................................. 60
4.3 Maintenance payments (par (b) of the definition of ‘gross income’, ss 7(11) and
10(1)(u)) .............................................................................................................................. 62
4.4 Services (paras (c) and (n) of the definition of ‘gross income’, ss 8B, 8C, 10(1)(gC),
(nA) to (nE), (o) and (q) and s 57B) ................................................................................... 64
4.5 Restraint of trade (paras (cA) and (cB) of the definition of ‘gross income’) ...................... 67
4.6 Services: Compensation for termination of employment (par (d) of the definition of
‘gross income’ and s 10(1)(gG)) ........................................................................................ 68
4.7 Fund benefits (paras (e) and (eA) of the definition of ‘gross income’) .............................. 70
4.8 Services: Commutation of amounts due (par (f) of the definition of ‘gross income’) ........ 70
4.9 Lease premiums (par (g) of the definition of ‘gross income’, s 11(f) and (h)) ................... 70
4.10 Compensation for imparting knowledge and information (par (gA) of the definition of
‘gross income’, s 9(2)(e) and (f))........................................................................................ 71
4.11 Leasehold improvements (par (h) of the definition of ‘gross income’, s 11(h)) ................. 71
4.12 Taxable (fringe) benefits (paras (c) and (i) of the definition of ‘gross income’) ................ 72
4.13 Proceeds from the disposal of certain assets (par (jA) of the definition of ‘gross
income’, ss 8(4)(a), 22(8) and 26A) ................................................................................... 73
4.14 Dividends (par (k) of the definition of ‘gross income’, ss 10(1)(k) and 10B) ..................... 73
4.15 Subsidies and grants (par (l) of the definition of ‘gross income’ and par 12(1) of the
First Schedule) ................................................................................................................... 73
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA) of the definition of
‘gross income’) ................................................................................................................... 73
4.17 Government grants (par (lC) of the definition of ‘gross income’ and s 12P) ..................... 73
4.18 Key-man insurance policy proceeds (par (m) of the definition of ‘gross income’) ........... 74
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments (par (n) of the
definition of ‘gross income’, ss 7, 8C and 24I) ................................................................... 74
4.20 Amounts received in terms of certain short-term insurance policies (s 23L(2)) ................ 74
4.1 Overview
Receipts and accruals can be included in gross income in terms of the general definition of ‘gross
income’ (see chapter 3), or in terms of the specific inclusions listed in paras (a) to (n) of the definition
of ‘gross income’ in s 1(1) of the Act. Contrary to the exclusion of receipts or accruals of a capital
nature from the general definition of ‘gross income’, these specific inclusions are included in gross
income even though they may be of a capital nature. The other elements of the general defin-
ition also apply to the specific inclusions, except where otherwise stated. It is specifically provided
59
that the specific inclusions as listed do not limit the scope of the general definition of ‘gross income’.
Any amounts not included in terms of paras (a) to (n) can therefore still be included in gross income
in terms of the general definition. It is submitted that the specific inclusion provisions do enjoy priority
over the general definition, even though the Act does not contain a similar provision in this regard,
like s 23B(3), that deals with the precedence of the specific provisions for deductions over s 11(a). All
other amounts that must be included in a taxpayer’s income in terms of any other provision of the Act,
for example ss 7(3) or 8C, are effectively included in the taxpayers’ gross income through par (n).
All references to paragraphs in this chapter are references to paragraphs of the ‘gross income’
definition (s 1(1)).
The authority for the inclusion of an amount in gross income is either a reference
to the specific paragraph of the definition of gross income (in the case of a spe-
cific inclusion), or the general definition of gross income. Although the use of
Please note!
the subtotal method in chapter 7 facilitates the calculation of taxable income
and the total tax liability, reference to the column in which an amount must be
included is not authority for the inclusion of an amount in gross income.
The specific inclusions in gross income are now discussed separately.
4.2 Annuities (paras (a) and (d)(ii) of the definition of ‘gross income’, ss 10(1)(gA),
10A, and par 2(4) of the Fourth Schedule)
Paragraph (a) specifically includes in gross income any amount received or accrued by way of
l an annuity
l a ‘living annuity’
l an ‘annuity amount’ as defined in s 10A(1).
Paragraph (a) specifically excludes an amount received or accrued from the proceeds of a policy of
insurance where the person is or was an employee or director of the policy holder (par (d)(ii) –
see 4.6). This exclusion aims to eliminate a possible double inclusion in gross income in respect of
compulsory insurance annuities for the benefit of employees and their dependents. Such annuities
are therefore dealt with solely in terms of par (d)(ii). This exclusion under par (a) is to the benefit of
the taxpayer. This is because the inclusion under par (d)(ii) means that the compulsory insurance
annuity income may be exempt (in terms of s 10(1)(gG)) due to the wording ‘any amount received by
or accrued’.
Annuities (except s 10A annuity amounts) are not divided into capital and income and are taxable in
full under par (a), irrespective of whether the receipts or accruals are of a capital nature. Para-
graph (a), however, does not override the source rules. The source of annuities is determined by the
place where the contract was concluded (as held in Boyd v CIR (1951 AD), the fons et origo is the
formal act giving rise to the annuity).
Annuities
There is no definition of the term ‘annuity’ in the Act, but the meaning of the term has been discussed
in case law. The main characteristics of an annuity, listed in ITC 761 (1952) and confirmed in KBI en
’n ander v Hogan (1993 AD), are
(1) It is an annual payment (this would probably not be defeated if it were divided into instalments).
(2) It is repetitive: payable from year to year for, at any rate, a certain period.
(3) It is chargeable against some person.
An annuity may arise in a variety of ways:
l It may be bought from an insurance company.
l It may be granted by way of a donation or bequest, through a trust or otherwise.
l It may be received as consideration for the sale of a business, or an asset, or for the surrender of
a right.
The following are examples of amounts that do, or do not, constitute annuities:
l The annual payment of instalments due, in terms of a transaction of a capital nature with a definite
ascertainable price, is not an annuity and falls outside the scope of par (a).
l Annual voluntary amounts payable in terms of a discretion are not annuities, but rather individual
gifts and capital in nature.
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4.2 Chapter 4: Specific inclusions in gross income
l A pension paid by an employer to the widow of a deceased employee, terminable at the will of
the employer, cannot be regarded as an annuity. However, a life pension payable to the widow
by an employer who has bound himself to pay the pension for life would constitute an annuity.
l A contractual obligation or an obligation in terms of a trust deed to make regular monthly or
annual payments for life or for a fixed period would constitute an annuity.
l Fixed annual amounts payable out of the residue of an estate in terms of a will constitute an
annuity. These amounts would constitute annuities, whether they were payable for a specified
number of years or for the lifetime of the recipient. Even if there were variations in the amounts of
the annual payments because of certain contingencies, they would still constitute annuities. It is
immaterial whether the annuity is payable out of the income or the capital assets of the estate.
In KBI en ’n ander v Hogan (1993 AD) the taxpayer, a fireman, instituted an action for a lump sum
compensation from the Motor Vehicle Assurance Fund after being seriously injured in a collision. The
Fund undertook to pay his claim for loss of future earning capacity by way of monthly instalments.
The issues were whether these payments constituted an annuity and, if so, whether the Fund should
deduct employees’ tax from them. The Fund’s undertaking made no mention of a lump sum as pay-
ment for the taxpayer’s loss of future earning capacity; moreover, the payment of each instalment
was conditional on proof that he was still alive. The Fund’s delictual obligation to compensate him
was replaced by a contractual obligation to pay the instalments while he lived, without creating a
liquid or determinable debt capable of being reduced by those instalments. The payments met all the
characteristics of an annuity, and for that reason it also followed that employees’ tax had to be
deducted, no matter what the contractual arrangements provided.
The definition of the term ‘remuneration’ in par 1 of the Fourth Schedule includes amounts payable to
any person by way of any amount referred to in par (a) of the definition of the term ‘gross income’.
Any person paying any annuity to another person is therefore an employer paying ‘remuneration’ and
must withhold employees’ tax thereon in terms of par 2(4) of the Fourth Schedule.
Annuities from funds
When a member retires from any retirement fund (pension fund, pension preservation fund, provident
fund, provident preservation fund or retirement annuity fund), the member is only allowed to take one-
third of the member’s retirement interest as a lump sum benefit. The other two-thirds are reinvested to
ensure a future income and is paid out in the form of annuities (see chapter 9).
A member can either invest the two-thirds in a guaranteed life annuity or a living annuity. The main
differences between life annuities and living annuities are as follows:
Life annuities
l Life annuities can offer the assurance that you will not outlive your capital.
l Life annuities provide an income for life, with annual increases.
l Not all types of life annuities will guarantee that the increases in income will keep up with inflation.
l Life annuities will not leave capital for your dependants to inherit once you die – you only receive
the annuities while you are alive.
Living annuities
l Living annuities are market-linked and will fluctuate depending on the performance of its under-
lying investment portfolio.
l You can choose how much you want to draw as income annually. (Pensioners are obliged by law
to take an income from between 2,5% and 17,5% per year.)
l If the drawdown rate remains below the growth rate of the investment portfolios, you will likely
have capital remaining to leave as an inheritance once you die.
The term ‘living annuity’ is defined in s 1(1) and means the right of a member or former member of
any retirement fund (see chapter 9), or his or her dependant or nominee, to an annuity purchased or
provided on or after the retirement date of that member. These annuities can be purchased from
another person (for example another fund) or can be provided by the fund to which the member
belongs. The value of the annuity is determined solely by reference to the value of the assets speci-
fied in the annuity agreement and held for paying the annuities (par (a) of the definition of ‘living
annuity’). The amount of the annuity is determined according to a method or formula prescribed by
the Minister of Finance, and it is not guaranteed by the person from which it is purchased or the fund
that provides it (paras (b) and (d) of the definition of ‘living annuity’). That formula provides for pay-
ments on a monthly or other agreed basis, at a rate of between 2,5% and 17,5% per annum calcu-
lated on the reducing balance of capital. The practical working of such annuity agreement is like an
61
investment account and the possibility therefore exists that the funds (the value of the assets) are
depleted before the person receiving the annuities dies.
The full remaining value of the assets specified in the annuity agreement may be paid as a lump sum
when the value of those assets become less than an amount prescribed by the Minister of Finance
(par (c) of the definition of ‘living annuity’). The current prescribed amount is R125 000 (Government
Notice No. 619 dated 1 June 2020). On the death of the member or former member, the value of the
assets may be paid as an annuity and/or lump sum to a nominee or the deceased’s estate (par (e) of
the definition of ‘living annuity’).
Paragraph (eA) to the definition of ‘living annuity’ provides that, in anticipation of the termination of a
trust, the value of the assets must be paid to the trust as a lump sum pursuant to that termination.
This is to accommodate the fact that a trust cannot ‘die’ like a natural person (in par (e)). Before the
amendment, if a trust that was initially nominated as the owner of a living annuity upon the death of
the original annuitant was subsequently terminated, such trust was unable to make payments to its
nominees. Paragraph (eA) rectifies this problem.
Please see chapter 9 for a discussion of the s 10C exemption in respect of qualifying annuities.
Annuity amounts
An ‘annuity amount’ is defined as an amount payable by way of an annuity under an ‘annuity contract’
(as defined) and in consequence of the commutation or termination of an annuity contract (s 10A).
These annuity amounts are bought from insurers in return for a lump sum cash consideration (pur-
chased annuity).
In terms of the annuity contract, the insurer guarantees to pay an annuity until the death of the
annuitant or the expiry of a specified term.
An annuity amount under s 10A is divided into capital and income. The total annuity amount is in-
cluded in gross income in terms of par (a) and the capital part, determined by a formula (s 10A(3)), is
exempt from tax (s 10A(2)).
4.3 Maintenance payments (par (b) of the definition of ‘gross income’, ss 7(11) and
10(1)(u))
Section 15(1) of the Maintenance Act of 1998 confirms that maintenance orders for the maintenance of
a child are directed at the enforcement of the common law duty on parents to support children who are
unable to support themselves. A parent’s duty to support a child does not cease when the child
reaches a particular age, but it usually does so when the child becomes self-supporting. Majority is
not the determining factor here. Spouses also have a reciprocal duty to support one another. Sec-
tion 7 of the Divorce Act of 1979 makes provision for our courts to grant maintenance orders. In our
law, the words ‘support’, ‘maintenance’ and ‘alimony’ are used interchangeably although the term
‘alimony’ is seldom used. The support that a divorced person gives his or her spouse is invariably
called ‘maintenance’. For ease of reference, only the word ‘maintenance’ will be used in the discus-
sion that follows.
Maintenance payments are normally paid monthly from the after-tax income of the paying spouse. Up
until 2006 the tax implications were as follows:
l In respect of any divorce on or before 21 March 1962, the paying spouse was entitled to a de-
duction for such payments. All amounts received by a spouse or former spouse (the receiving
spouse) by way of maintenance for such spouse or any child were included in the gross income
of such spouse in terms of par (b) of the definition of gross income. The tax liability regarding
maintenance payments therefore rested on the receiving spouse.
l In respect of any divorce after 21 March 1962, the paying spouse was not entitled to a deduction
for such payments. All amounts received by a spouse or former spouse (the receiving spouse) by
way of maintenance for such spouse or any child, were included in the gross income of such
spouse in terms of par (b) of the definition of gross income. The receiving spouse qualified for an
exemption in terms of s 10(1)(u) for all such amounts, and therefore the receiving spouse had no
tax liability regarding maintenance payments.
From 2007 to 2009, various amendments were made to the Pension Funds Act, the Maintenance Act,
and the Divorce Act, giving effect to the so-called ‘clean break’ principle. The clean break principle
entails that parties should (if circumstances permit) become economically independent of each other
as soon as possible after a divorce. The various amendments opened the possibility to issue a mainte-
nance order or a divorce order against the minimum individual reserve (the balance of all the mem-
ber’s contributions plus growth over his or her whole period of membership) of a member of a retire-
ment fund.
62
A ‘maintenance order’ is defined in the Maintenance Act and means any order for the payment,
including the periodical payment, of sums of money towards the maintenance of any person issued by
any court in the Republic. This wide definition does not limit the source from which the payments are
made, and therefore includes both maintenance payments made from the after-tax income of the
paying spouse and amounts deducted from the minimum individual reserve of the member spouse in
terms of a maintenance order.
The aforementioned amendments led to the introduction of, and amendments to, s 7(11) in the Act and
par 2(1)(b)(iA) of the Second Schedule from 2007 to 2009. Section 7(11) only affects the tax implications
of a deduction from a member’s minimum individual reserve in terms of a maintenance order (and not
in terms of a divorce order). A reduction from a member’s minimum individual reserve in terms of a
divorce order is taxed as a retirement fund lump sum withdrawal benefit in the hands of the receiving
spouse (par 2(1)(b)(iA) of the Second Schedule) (see chapter 9).
Numerous amendments were also made to par (b) of the definition of gross income and s 10(1)(u) in
the same period. These sections and paragraphs must be read together to determine the current tax
implications of maintenance payments. As explained below, the combined effect of the amendments
may inadvertently have caused an uncertainty regarding the normal tax implications of payments for
the maintenance of a child made from the after-tax income of the paying spouse.
Maintenance payments made from amounts deducted from the minimum individual reserve of a mem-
ber spouse (the paying spouse)
Section 7(11) currently applies in respect of all amounts, once-off and periodical, deducted from the
minimum individual reserve in terms of a maintenance order for the maintenance of both a former
spouse and a child. Such deduction(s) from the minimum individual reserve means that the paying
spouse will no longer be taxed on that amount when he or she retires or withdraws from the retire-
ment fund, but s 7(11) ensures that the tax implications of such reduction will remain in the hands of
the member whose minimum individual reserve is reduced. The member of the fund (being the pay-
ing spouse, and not the receiving spouse) must include the sum of the following amounts deducted
from his or her minimum individual reserve in his or her income:
l the amount by which the minimum individual reserve of the member was reduced in terms of the
maintenance order, and
l the employees’ tax withheld by the fund in respect of the aforementioned amount.
The 2009 Explanatory Memorandum stated: ‘[t]he proposed amendment treats all pre-retirement
withdrawals from retirement savings as income accrued to the member (as opposed to the recipient)
if the withdrawal stems from a maintenance order under section 37D(1)(d)(iA) of the Pension Funds
Act.’ Due to this deemed accrual for the paying spouse, the receiving spouse need not include such
amounts for the maintenance of the spouse or a child in gross income in terms of par (b)(i) or (ii) of
the definition of gross income.
The full amount included in the member’s income in terms of s 7(11) (the aforementioned sum) is
‘remuneration’ as defined (par (f) of the definition of ‘remuneration’ in the Fourth Schedule) and the
fund is therefore an employer. The fact that the employees’ tax deducted from the minimum individual
reserve also constitutes ‘remuneration’ creates a ‘tax-on-tax’ effect. The fund must therefore deduct
employees’ tax in respect of s 7(11) amounts by following the special steps laid out in Interpretation
Note No. 89 (see chapter 10).
Maintenance payments made from the after-tax income of the paying spouse
Paragraph (b)(i) of the definition of gross income currently includes any amounts payable to a spouse
or former spouse (the receiving spouse) under any judicial order or written agreement of separation
or under any order of divorce, by way of maintenance for such spouse. These amounts are payments
made from the after-tax income of the paying spouse because if maintenance payments for a spouse
are made via deductions from the minimum individual reserve of the member spouse, it is deemed to
accrue to the member spouse in terms of s 7(11). The receiving spouse qualifies for an exemption in
terms of s 10(1)(u)(i) for all such amounts.
Paragraph (b)(ii) of the definition of gross income currently includes amounts payable to the taxpayer
(usually the receiving spouse) ‘in terms of a maintenance order for the maintenance of a child as con-
templated in s 15(1) of the Maintenance Act’. Similarly, these amounts are payments made from the
after-tax income of the paying spouse because if maintenance payments for a child are made via
deductions from the minimum individual reserve of the member spouse, it is deemed to accrue to the
member spouse in terms of s 7(11). The accompanying exemption for such amounts (contained in
s 10(1)(u)(ii) up until 2008) was, however, deleted in 2009. The 2009 Explanatory Memorandum
63
provided the following explanation for this deletion: ‘[t]his exemption is no longer necessary because
section 7(11) fully re-allocates the amount from the recipient to the member.’
It is submitted that it was incorrect to claim that the exemption in s 10(1)(u)(ii) was no longer neces-
sary since s 7(11) only re-allocates maintenance payments made via deductions from the minimum
individual reserve of the member spouse to the member spouse. Maintenance for a child paid from
the after-tax income of the paying spouse should still be exempt in the hands of the receiving spouse
because the paying spouse has already been taxed on the income from which it is paid. It is submit-
ted that, until a new exemption clearing up this position is enacted, the exemption in s 10(1)(u)(i)
should be interpreted widely to allow an exemption for all maintenance payments paid from the after-
tax income of the paying spouse for the maintenance of both the receiving spouse and any child.
This was the position in s 10(1)(u) up until 2006, before all the amendments were made, and it is
submitted that the receiving spouse must still have no tax liability regarding such maintenance pay-
ments.
4.4 Services (paras (c) and (n) of the definition of ‘gross income’, ss 8B, 8C,
10(1)(gC), (nA) to (nE), (o) and (q) and s 57B)
Amounts received or accrued in respect of services rendered or to be rendered, or any employment
or the holding of an office, for example salaries paid to employees, are included in gross income
(par (c)). Voluntary awards in respect of services rendered, for example annual bonuses made ex
gratia, are specifically included. If the amount is awarded to an employee in respect of services
rendered, it is included in gross income, irrespective of whether it is payable under a contract of
service. In Stevens v CSARS (2006 SCA) an ex-gratia payment was made by a company to a tax-
payer to compensate the taxpayer for the loss of a share option when the company went into volun-
tary liquidation. It was held that the payment was directly linked to the taxpayer’s services and
employment, and such receipt therefore fell within par (c).
There must be a causal relationship between the amount received and the services rendered or to be
rendered. The words ‘in respect of’ therefore mean that the income was only received because the
services were rendered (CIR v Crown Mines Ltd (1923 AD)). The causal relationship need not be a
direct relationship (ITC 1439 (1987)). The causal relationship does not only exist in an employee-
employer relationship. If a person is, for example, paid for information relating to stolen diamonds
given to the police, the payment is made ‘in respect of’ services rendered and the amount will be
included in gross income in terms of par (c) (CSARS v Kotze (2002 (C)).
Awards for services rendered are taxable in the year of their receipt or accrual, irrespective of the
period to which the services relate. ‘Services rendered’ does not mean services rendered during the
year of assessment but refers to the total period, long or short, of the services of the taxpayer. The
reference to ‘services rendered or to be rendered’ means that the recipient is liable for tax on the full
amount received by or accrued to him, even though the services were rendered in a previous year of
assessment or will be rendered only in a later year of assessment. The full amount of a salary paid in
advance is included in gross income even though the services are rendered in a later year. If an
amount is paid to an employee for concluding a contract of service, it is paid as a consideration for
the rendering of future services and falls within gross income.
Exclusions from par (c) and provisos to par (c)

Amounts referred to in ss 8(1), 8B and 8C
Not all amounts paid ‘in respect of’ services rendered are included in gross income in terms of
par (c). It is specifically stated that the ambit of par (c) excludes ‘an amount referred to in’ s 8(1)
(allowances and advances), 8B (broad-based employee share plans) and 8C (equity instruments). It
is unclear whether the words ‘an amount referred to in s 8(1)’ refers to the gross amount paid as an
allowance, or to the net amount, being the gross amount paid as an allowance less any portion
thereof that is exempt from normal tax in terms of s 10(1).
The reason for this uncertainty is that s 8(1)(a)(i) provides that any amount paid or granted by a
principal (for example an employer) to a recipient (the person receiving the amount, for example an
employee) as an allowance or advance must be included in the taxable income of the recipient. Any
portion of an allowance or advance to the extent that the allowance or advance, or a portion thereof,
is exempt from normal tax under s 10(1) is, however, specifically excluded from such amount to be
included in taxable income.
The first viewpoint regarding the meaning of the words ‘an amount referred to in s 8(1)’ is that it refers
to the gross amount paid as an allowance. By excluding the portion of an allowance or advance to
64
the extent that the allowance or advance, or a portion thereof, is exempt under s 10(1) from the
amount to be included in taxable income in terms of s 8(1)(a)(i), it can be reasoned that s 8(1) is in
effect not applicable to the gross amount of such allowances. For example, if an allowance is fully
exempt (like a special uniform allowance in terms of s 10(1)(nA)), viewpoint one means that the gross
amount of such allowance cannot be included in taxable income in terms of s 8(1). However, before
any amount can be exempt in terms of s 10(1), there must be an inclusion in gross income. Viewpoint
one submits that this inclusion of the gross amount of the allowance is in terms of par (c) because the
allowance is received in respect of services rendered. This is supported by the fact that an employer
who pays such a special uniform allowance that is exempt in terms of s 10(1)(nA) to an employee,
must still show the full allowance on the IRP5 of the employee (under code 3709 ‘uniform allowance –
non-taxable’). It is in effect SARS who allows the exemption in terms of s 10(1).
A second viewpoint is that the words ‘an amount referred to in s 8(1)’ refers to the net amount of the
allowance paid. It can be reasoned that, since par (c) of the gross income definition specifically
excludes ‘any amount referred to in section 8(1)’ from the ambit of par (c), par (c) cannot be applic-
able to any portion of an allowance or advance to the extent that the allowance or advance, or a por-
tion thereof, is exempt under s 10(1). This means that only s 8(1)(a)(i) can apply to such allowance or
advance, or portion thereof, that is exempt.
The two viewpoints lead to different disclosures in the comprehensive framework for natural persons
in chapter 7, and it is suggested that both options should be accommodated when assessing stu-
dents:
l Viewpoint one: Include the gross amount of a fully exempt allowance in ‘gross income’ in terms of
par (c) and claim the exemption in terms of s 10(1) under ‘exempt income’ in the calculation of
‘income’ as defined.
l Viewpoint two: Include an amount of Rnil in ‘taxable income’ in terms of s 8(1)(a)(i) (after subto-
tal 3 in the comprehensive framework), with complete disclosure of both the gross amount of the
allowance received and the exemption in terms of s 10(1).
All gains made by a person in terms of s 8B (broad-based employee share plan) or s 8C (equity instru-
ments) are included in the income of the person in terms of those sections. All gains referred to in
ss 8B and 8C are consequently not included in gross income in terms of par (c). Please remember
that any amounts included in ‘income’ in terms of any other provision of the Act are effectively included
in gross income in terms of par (n). Please see chapter 8 for a detailed discussion of the s 8(1) allow-
ances and advances, s 8B and s 8C.
Amounts included in terms of par (i) of the gross income definition (proviso (i) to par (c))
Benefits or advantages that are included in gross income in terms of par (i), that is, any taxable
(fringe) benefit in terms of the Seventh Schedule, are also excluded from par (c) (proviso (i) to
par (c)). Receipts in terms of par (c) are subject to par (i) (proviso (i) to par (c)). This means that if a
‘taxable benefit’ in terms of the Seventh Schedule is received, par (c) will not apply since par (i)
already applies. It is therefore important to determine whether a benefit is a ‘taxable benefit’, and also
whether the Seventh Schedule excludes a specific type of benefit as a taxable benefit, or merely
states that no value must be placed on it. Taxable benefits are benefits or advantages contemplated
in par 2 of the Seventh Schedule given by employers to employees by virtue of employment or as a
reward for services rendered or to be rendered, in a form other than cash.
The definition of ‘taxable benefit’ in the Seventh Schedule specifically excludes certain benefits
granted to an employee. This means that the Seventh Schedule does not apply to such benefit and
that it cannot be included in gross income in terms of par (i). It can, however, still be included in
gross income in terms of par (c), being an amount received in respect of services rendered. Any
benefit, the amount or value of which is exempt from tax in terms of s 10 (for example relocation
expenses paid by the employer that are exempt in terms of s 10(1)(nB)), is, for example, specifically
excluded from the definition of ‘taxable benefit’ in the Seventh Schedule. Such benefits or amounts
can therefore not be included in gross income in terms of par (i). As mentioned earlier, it can be
included in gross income in terms of par (c) but will be exempt in terms of s 10 again.
If the Seventh Schedule states that no value must be placed on a benefit (for example if the employer
continues to pay the employee’s contributions to the medical scheme after retirement in
par 12A(5)(a)), it means that there is still a taxable benefit (as defined) and that it must be included in
gross income in terms of par (i), even though the cash equivalent of the taxable benefit is Rnil.
Paragraph (c) can consequently not apply to such a no-value taxable benefit.
Amounts received by reason of services rendered by another person (proviso (ii) to par (c))
If a person (A) receives an amount in respect of services rendered by another person (B), the amount
is expressly included in the gross income of the person who renders the services (B) (proviso (ii) to
65
par (c)). This anti-avoidance provision prevents the employee or officeholder from trying to avoid tax
by diverting his salary or rewards for services to other taxpayers, such as family members. The effect
of the proviso is that no matter who receives the remuneration, the person who rendered those ser-
vices remains liable for normal tax thereon.
With effect from 1 March 2022, the new s 57B is linked to this proviso. It has come to Government’s
attention that some taxpayers have devised schemes aimed at undermining the donations tax provi-
sions. These schemes entail a service provider (for example, an employee or independent contrac-
tor) ceding the right to receive an asset for services rendered or to be rendered to an employer prior
to the employee becoming entitled to that asset. It is generally ceded to a family trust before services
are rendered.
In these instances, the service provider may be able to circumvent donations tax in terms of s 54 as
this right to receive an asset would have been ceded to the trust before the services are rendered
and a value can be attached to it. The argument is that the service provider is simply disposing of a
worthless spes and is therefore not liable for donations tax at the time the services have been ren-
dered and the employer transfers the asset to the cessionary. Moreover, the service provider will not
be entitled to the asset and cannot be regarded as having disposed of it in terms of the Eighth
Schedule.
Section 57B addresses this two-legged transaction. The implications of the transaction between the
employer and the employee are stipulated in s 57B(2)(a), and that of the transaction between the
employee and the other person in s 57B(2)(b). Section 57B provides that
l the disposal by the employee of the right to the asset to another person prior to becoming entitled
thereto must be disregarded (s 57B(2)(a))
l the employee is deemed to have acquired the asset from the employer for an amount equal to the
amount included in the employee’s gross income under proviso (ii) to par (c) or under par (i)
(s 57B(2)(a)), and
l the employee is deemed to have disposed of the asset to the other person by way of a donation
for the same amount and the other person is deemed to have acquired the asset for the same
amount (s 57B(2)(b)).
Long service awards (proviso (vii) to par (c))
The current practice of employers is to grant employees a wider range of awards than non-cash
assets in recognition for long service (as defined in par 5(4) of the Seventh Schedule). With effect
from 1 March 2022, the new proviso (vii) to par (c) ensures that such awards in recognition of long
service can include cash amounts. To the extent that the aggregate of such cash amount together
with all amounts determined under paras 5(2)(b) (acquisition of an asset), 6(4)(d) (right of use of an
asset) and 10(2)(e) (free or cheap services) of the Seventh Schedule awarded to an employee for
long service do not exceed R5 000, such cash amount will not be included in gross income in terms
of par (c).
Example 4.1. Amounts received or accrued in respect of services rendered
Discuss whether the following amounts are included in gross income by virtue of par (c) of the
definition:
l a pension or retirement allowance received by an ex-employee from an employer, whether
payable in terms of a service contract or awarded voluntarily by an employer
l an amount received on retirement in lieu of accumulated leave
l a salary received in lieu of the notice required to be given by the employer in terms of the
service agreement
l a prize won by an employee for excellent services rendered
l a climatic allowance received by a public servant or employee
l an allowance paid by an employer to an employee for the upkeep of the garden of a house
belonging to the employer but occupied by the employee
l amounts received by way of ‘tips’, however small the service might be.
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4.4–4.5 Chapter 4: Specific inclusions in gross income
SOLUTION
The pension will be included by virtue of par (c) since the causal relationship to services ren-
dered exists and voluntary awards are specifically included.
The amount in respect of accumulated leave will be included by virtue of par (c) since leave is a
benefit that accrues in respect of services rendered.
The salary in lieu of the notice required will be included by virtue of par (c) since it is payable
under a service contract.
The prize won will be included by virtue of par (c) because of the causal link to excellent services
rendered. Although it might be seen as an amount of a capital nature, the specific inclusions are
included in gross income even though they may be of a capital nature.
The climatic allowance will not be included by virtue of par (c) but will be included in taxable
income in terms of s 8(1) being an allowance.
The allowance for the upkeep of the garden will not be included by virtue of par (c) but will be
included in taxable income in terms of s 8(1) being an allowance.
Amounts by way of tips are voluntary amounts but will be included by virtue of par (c) because the
causal relationship to services rendered exists and voluntary awards are specifically included.
Leave is a condition of service and accrues to the employee as the services are
rendered. Accumulated leave is paid out because a benefit has accumulated in
respect of services rendered. In terms of the Guide for Employers in respect of
Employees Tax 2022 (PAYE-GEN-01-G03), leave pay (including accumulated
Please note! leave payments) does not form part of a severance benefit (see 4.6). It is a
payment in respect of services rendered and must be included in gross income
in terms of par (c) of gross income. The employees’ tax on such leave payments
must be calculated in the same manner as employees’ tax on a bonus (and it is
also seen as variable remuneration in terms of s 7B). See chapters 10 and 12
for detail on s 7B.
The employee is liable for tax on the full amount paid to him, even when the Commissioner has dis-
allowed a portion of the payment made to the employee as a deduction to the employer (for
example because the requirements of s 11(a) are not met). The taxability in the hands of the receiver
and the deductibility in the hands of the payer are therefore independent of each other.
Most receipts or accruals in respect of services will fall under both the general
‘gross income’ definition and par (c), but the amount cannot be included in
Please note!
terms of both provisions. It can only be taxed once. Specific provisions override
general provisions.
4.5 Restraint of trade (paras (cA) and (cB) of the definition of ‘gross income’)
A company’s or a person’s right to trade freely is an incorporeal asset (ITC 1338 (43 SATC 171)) and
compensation paid for the restriction or loss of such right is a receipt of a capital nature. Restraint of
trade payments received by a person who
l is or was a ‘labour broker’ without a certificate of exemption, or
l is or was a ‘personal service provider’, or
l is or was a ‘personal service company’ or ‘personal service trust’
are specifically included in gross income (par (cA)).
Restraint of trade payments received by the above-mentioned persons will therefore be included in
gross income irrespective of whether it is of a capital nature or not. Restraint of trade payments of a
capital nature received by companies and trusts that are not personal service providers will not form
part of gross income (Interpretation Note No. 7).
Restraint of trade payments received by any natural person, which are related to any past, present or
future employment or the holding of an office, are specifically included in gross income (par (cB)).
Even though such payments may relate to employment, it is received for the acceptance of a restraint
67
of trade and not in respect of the termination or variation of any office or employment. It consequently
does not fall within par (d).
A restraint of trade payment received by a natural person that does not relate to employment, for
example if a natural person sells his business as sole proprietor and the buyer places a restraint of
trade on him, will not be included in gross income since it is capital in nature.
The payer of the restraint of trade payment will be allowed to claim a deduction
under s 11(cA) provided that the recipient is taxed under par (cA) or (cB). The
Please note!
receipt is taxed immediately and in full in the hands of the receiver, but the de-
duction in the hands of the payer must be spread over a certain period – see
chapter 12.
4.6 Services: Compensation for termination of employment (par (d) of the definition
of ‘gross income’ and s 10(1)(gG))
Paragraph (d) includes any amount received or accrued in respect of the termination or variation of
any office or employment (this also includes death as a reason for the termination) (par (d)(i)). It also
includes amounts received because of employer-owned policies of insurance that pay out or are
ceded as provided for (par (d)(ii) and (d)(iii)). Since paragraph (d) specifically excludes annuities
contemplated in par (a), the words ‘any amount’ effectively refers to lump sum amounts (except for
compulsory insurance annuities contemplated in par (d)(ii)). Amounts received from employer-owned
policies of insurance (par (d)(ii) amounts) are, in turn, specifically excluded from par (a). This means
that all amounts (annuities and lump sums) from such policies of insurance will be included in gross
income in terms of par (d). Lump sums from employer-owned policies of insurance consist of amounts
paid out (par (d)(ii) amounts) or ceded (par (d)(iii) amounts) to the employee or director and any of
their dependants or nominees. All such amounts are deemed to be received by or accrued to the
employee or director and not by the dependant or nominee (proviso (cc)). The effect is that the
employee or director must include all such amounts in his or her gross income, even though a de-
pendant or a nominee receives such amount, or such policy is ceded to him or her. All such amounts
are exempt in terms of s 10(1)(gG) if the requirements of that section are met.
Voluntary amounts are also specifically included, and a voluntary amount therefore does not need to
be paid in terms of a contract. The words ‘any amount . . . received or accrued’ indicate that the
gross amount of such a lump sum received or accrued is included in gross income. Students often
incorrectly claim the deductions claimable against lump sum benefits in terms of the Second Sched-
ule against lump sums in terms of par (d). No allowable deduction is claimable against lump sums in
terms of par (d).
Any lump sum award from a retirement fund is excluded in terms of proviso (aa) and is specifically
included in gross income in terms of par (e). If an employee receives a lump sum in respect of the loss
or variation of any office or employment (par (d)(i)) from an employer that is not a retirement fund, it
must be determined whether the amount also meets the requirements of the definition of ‘severance
benefit’. This classification is important since it will determine in which column of the comprehensive
framework for natural persons in chapter 7 the amount must be included, and in terms of which tax
table the normal tax thereon must be calculated.
The courts have not exhaustively defined the word ‘employment’ in the context of par (d). The domin-
ant criterion in a determination of whether any situation constitutes employment for this purpose is that
of control of the employee (‘servant’) by the employer (‘master’). In other words, the employer must
have control of the conduct of the work in which the employee is employed, and a duty must rest on
the employee to carry out that work in accordance with the instructions of the employer as given from
time to time (SIR v Somers Vine, 29 SATC 179). Like par (c) (see 4.4), the words ‘in respect of’ require
a causal or direct relationship between the amount received and the employment or office. It must be
clear that the amount is received in consequence of the service or office.
The word ‘office’ has been interpreted to mean a position that
l generally carries with it some remuneration
l has an existence independent of the person who fills it, and
l will, usually, be filled by successive holders.
A director of a company therefore clearly holds an office. A firm of attorneys that receives a monthly
retainer fee will typically not hold an ‘office’ (SIR v Somers Vine, 29 SATC 179).
68
Any par (d) amount that becomes payable in consequence of a person’s death is deemed to accrue
to the deceased immediately prior to his or her death (proviso (bb)). Such amount is included in the
deceased’s gross income for the period ending on the date of his or her death. This has the effect of
extinguishing any normal tax consequences for the actual recipient of that benefit.
The following amounts are examples of par (d)(i) amounts:
l an amount determined with reference to the unexpired portion of his contract received by an
employee from his employer for breach of his contract of employment
l a payment made by a company to its managing director in consideration of his resignation from
the company
l a payment made by a company to its managing director in consideration of his agreeing to
accept a smaller salary in the future or to surrender his future rights to a pension
l compensation paid to a prospective employee because of the failure of his prospective employer
to conclude a contract of employment
l an amount received by a director for surrendering his right to a permanent directorship
l an amount of compensation paid in respect of the death of any person arising out of and in the
course of his employment and to which the s 10(1)(gB) exemption will apply
l an asset given to an employee at retirement as a final benefit from his employer.
Insurance payouts received by employers are included in gross income under

Please note! the provisions of par (m) – see 4.18. Paragraph (d)(ii) and (iii) are aimed at in-
surance payouts received by or ceded to employees or directors.
Severance benefits
The concept ‘severance benefit’ (as defined in s 1(1)) includes both lump sums received from an
employer and an associated institution in relation to that employer. It specifically excludes a retire-
ment fund lump sum benefit, a retirement fund lump sum withdrawal benefit, as well as the two pol-
icies of insurance in terms of par (d)(ii) and (iii). Therefore, only lump sums in respect of the
termination or variation of any office or employment (par (d)(i) amounts) and lump sums received in
commutation of amounts due under a contract of employment or service (par (f) amounts – see 4.8
below) can be severance benefits. To be a severance benefit, the amount must be received by way
of a lump sum (in terms of par (d)(i) or (f)) and one of the following three requirements must be met:
(a) the person is 55 years of age, or
(b) the person has become permanently incapable of holding his or her office or employment due to
sickness, accident, injury, or incapacity through infirmity of mind or body, or
(c) the person’s employer has ceased to trade or made a general or specific reduction in personnel*.
* If the person’s employer is a company and he or she at any time held more than five per cent of the
issued share capital of or members’ interest in the company, any amount received due to the em-
ployer ceasing to trade or a personnel reduction will not be a severance benefit. Such an amount will
still be included in gross income in terms of par (d)(i) but will be taxed in terms of the progressive tax
table for natural persons (and will be included in column 3 (and not in column 1) of the comprehen-
sive framework in chapter 7).
Any severance benefit paid after the death of a person is deemed to have accrued to such person
immediately prior to his or her death (proviso to the definition of severance benefit). The severance
benefit is therefore included in the deceased’s gross income for the period ending on the date of his
or her death.
The taxability of the two types of par (d)(i) amounts can be summarised as follows:
Type Taxability
Paragraph (d)(i) amounts that do not meet the require- Include in gross income in column 3 of the compre-
ments of the definition of severance benefit hensive framework (see chapter 7) and tax in terms of
the progressive tax table applicable to the taxable
income of natural persons
Paragraph (d)(i) amounts that meet the require- Include in gross income in column 1 of the compre-
ments of the definition of severance benefit hensive framework (see chapter 7) and tax in terms of
the separate tax table applicable to severance benefits
(see 9.2.1)
69
Students are advised to keep severance benefits in a separate column (together with retirement fund
lump sum benefits) in the calculation of the taxable income of a natural person. This will facilitate
remembering that the normal tax payable on such amounts is calculated separately in terms of the
specific tax tables applicable to such amounts. It will also facilitate the calculations of some deduc-
tions as explained in chapter 7. See chapters 7 and 9 for complete details regarding the three col-
umns of the subtotal method and the comprehensive framework.
4.7 Fund benefits (paras (e) and (eA) of the definition of ‘gross income’)
Both a ‘retirement fund lump sum benefit’ and a ‘retirement fund lump sum withdrawal benefit’ are
included in gross income (par (e)). The taxable amounts to be included in gross income are calculat-
ed in terms of par 2(1) of the Second Schedule (as indicated by the definitions of these two terms in
s 1(1)). See chapter 9 for a detailed discussion on these retirement fund benefits.
The taxable portion of lump sum benefits from funds is included in gross income
and not the gross lump sum benefit received. The taxable portion means the
balance remaining after the deduction of the allowable deductions in terms of
Please note!
paras 5 and 6 of the Second Schedule from the gross amount of the lump sum
benefit. The ‘net amount’ of lump sum benefits from funds are therefore includ-
ed in gross income. The same amount included in gross income is also ‘remu-
neration’ for employees’ tax purposes (see chapter 10).
Amounts included in terms of par (eA) are excluded from par (e). Lump sums from State or Local
Authority pension funds and State or Local Authority provident funds (public sector funds) are taxed
on a favourable basis (see chapter 9). Until 28 February 2021, a member of a provident fund was
able to take his or her total retirement interest as a lump sum instead of only one-third, like in the case
of a pension fund. Paragraph (eA) aims to discourage members of State or Local Authority pension
funds to transfer their benefits to a provident fund of the same employer to increase the lump sum
benefit.
If fund benefits are transferred from such a pension fund to such a provident fund, two-thirds of the
amount transferred are included in the gross income of members who remain in the service of the
same employer (par (eA)). Two-thirds of the amounts payable from the fund to a member or used to
redeem a debt are also included. These provisions also apply to State or Local Authority provident
funds with effect from 1 March 2018. This inclusion is also applicable in the case of a conversion from
a pension fund to a provident fund. It further also applies if a court granted an order during the di-
vorce proceedings of a member in terms of which any part of his or her benefits should be paid to his
or her former spouse (proviso to par (eA)(bb)).
4.8 Services: Commutation of amounts due (par (f) of the definition of ‘gross
income’)
Amounts received or accrued in commutation of amounts due under a contract of employment or
service are included in gross income (par (f)). ‘Commutation’ means ‘substitution’ and simply means
that the person substituted his right to receive a certain benefit under a contract of employment with
a right to receive another benefit. For example, an employee may substitute his right in terms of his
contract of employment to be given notice before the termination of his services for a cash payment.
Such amount will be included in his gross income in terms of par (f). Commuted amounts can also be
severance benefits if the requirements of that definition (see 4.6) are met.
In view of the wide scope of par (d), it seems that there is little need for par (f) (which was enacted
many years prior to the enactment of par (d)). Paragraph (d), however, refers to ‘any office or employ-
ment’, while par (f) refers to ‘any contract of employment or service’.
The taxability of par (f) amounts is the same as lump sum amounts received on the termination of
employment (par (d)(i)) discussed in 4.6.
4.9 Lease premiums (par (g) of the definition of ‘gross income’, s 11(f) and (h))
Amounts paid for the use of assets are normally called ‘rent’ and are included in terms of the general
definition of gross income. The words ‘premium or consideration in the nature of a premium’ are not
defined in the Act. Case law has confirmed that lease premiums are amounts paid by the lessee to
the lessor, whether in cash or otherwise, for the use (or right of use) of certain assets distinct from and
in addition to, or instead of, rent (CIR v Butcher Bros (Pty) Ltd (1945 AD)). Lease premiums must have
70
an ascertainable monetary value. Such amounts paid in respect of the wide variety of tangible and
intangible assets listed are gross income (par (g)).
A lease premium must be distinguished from a rental deposit and an upfront rental receipt by the
lessor (Interpretation Note No. 109). A lease premium is usually, but not necessarily, received as a
cash lump sum at the commencement of the lease and is not refundable. A rental deposit is generally
also received up front, but its purpose is to cover potential damages that may occur during the lease
period. It is normally refundable to the lessee at the end of the lease period if not required to cover
damages or related costs specified in the lease agreement. An upfront rental receipt, also called a
bullet rental, is for the use or right of use, and remains rent in nature. A rental deposit or upfront rental
with these features is not a lease premium or consideration in the nature of a premium. No hard and
fast rule can be formulated to determine whether the receipt of an amount constitutes a lease premi-
um, a rental deposit, or an upfront rental. All the facts and circumstances of a particular case must be
considered in making that determination.
The whole amount of the premium is included in gross income in the year in which it is received by or
accrues to the lessor. The Commissioner may make an allowance to the lessor in special circum-
stances (s 11(h) – see chapter 13). In practice, however, s 11(h) is rarely applied in respect of lease
premiums received because the lease premium is received in cash. This contrasts with leasehold
improvements received, where the lessor will only benefit from the improvements after the lease con-
tract has expired – see 4.11.
If a lessee sublets land to a sub-lessee for a lump sum payment of R120 000 plus a monthly rental of
R25 000, it is submitted that the R120 000 is a lease premium, since it is a consideration passing
from the sub-lessee to the sub-lessor (the principal lessee) in addition to the rent. Paragraph (g)
therefore applies to a premium passing from a sub-lessee to a sub-lessor.
If the lessee cedes or sells his rights under the lease to a third person for a payment of R120 000, this
amount is not a lease premium, since it is a consideration (purchase price for the right of use) pas-
sing from a new lessee to a former lessee and not from a lessee to a lessor. For an amount to qualify
as a lease premium, it must meet the requirement that it is a payment passing from a lessee to a
lessor. The R120 000 will therefore not form part of the gross income of the original lessee, being a
receipt or an accrual of a capital nature but may be subject to ‘capital gains tax’ if it meets all the
requirements.
The same amount that is deductible by the lessee paying the lease premium (in terms of s 11(f)), is
the amount that will be taxable in the hands of the lessor (in terms of par (g)). The deduction may,
however, only be claimed by the lessee if the amount is taxable in the hands of the lessor in terms of
par (g) and not, for example, if the lessor is exempt from tax as taxpayer. The deduction for the
lessee is spread over the period of the lease (s 11(f) – see chapter 13), while the amount received by
the lessor is included in one year.
Lessor: Lessee:
Gross income par (g) Section 11(f ) deduction
Include full amount in one year Spread the deduction over greater of
lease period or 25 years
4.10 Compensation for imparting knowledge and information (par (gA) of the
definition of ‘gross income’, s 9(2)(e) and (f))
Any amount received by a person for imparting (disclosing or communicating) any scientific, tech-
nical, industrial, or commercial knowledge or information is included in gross income (par (gA)).
Rendering any assistance or service in connection with the application or utilisation of such know-
ledge or information is also included in terms of par (gA).
Such an amount paid for ‘know-how’ is included in full in the year of receipt or accrual, whether paid
as a ‘premium or like consideration’ or not. Know-how payments received by non-residents are
deemed to be derived from a source within the Republic if they are paid by a resident or paid for the
use of the knowledge or information in the Republic (s 9(2)(e) and (f)).
4.11 Leasehold improvements (par (h) of the definition of ‘gross income’, s 11(h))
The lessor (owner) must include the value of the improvements effected on his land or to his buildings
by the lessee in his gross income (par (h)). The inclusion only applies if the lessor has a right to have
the improvements effected to his property. This means that the lessee has a legal and enforceable
71
obligation in terms of an agreement to effect improvements on the land or to the buildings of the
lessor.
A strict interpretation of the wording in the Act leads to an inclusion in the tax year in which the im-
provements (or the right to have them effected) accrue to the lessor. The right to have improvements
effected generally accrues when the lessor acquires the right to have the improvements effected
(Interpretation Note No. 110). The date of accrual is normally the date on which all the parties to the
lease agreement sign the lease agreement. Therefore, if the amount of the improvement is stipulated
in the lease agreement, the amount is generally included in the lessor’s gross income in the year of
assessment when all the parties sign the lease agreement. However, if the amount of the improve-
ments is not stipulated in the lease agreement, the date of completion of the improvement is general-
ly regarded as the date of accrual because the amount can only be determined then (Interpretation
Note No. 110).
The amount to be included in gross income of the lessor is
l the amount stipulated in the agreement as the value of the improvements, or
l the amount stipulated in the agreement as the amount to be expended on the improvements, or
l if no amount is stipulated, an amount representing the fair and reasonable value of the improvements.
If the lessee voluntarily pays an additional amount, such amount will not be included in the lessor’s
gross income. For example, if a lessee has agreed under a lease of land to erect buildings up to the
value of R500 000 but spends R600 000 on the improvements, only R500 000 is included in the
lessor’s gross income. If the lessee spends less than the amount stipulated in the agreement, the
stipulated amount must still be included in the lessor's gross income under paragraph (h). When the
contract does not stipulate any amount, the ‘fair and reasonable value’ of the improvements must be
objectively determined having regard to all the relevant facts and circumstances of the case. The fair
and reasonable value can correspond to the cost incurred by the lessee in certain cases.
A lease may obligate a lessee to erect certain specified buildings, such as a hotel or a parking gar-
age, or a building that must meet certain specifications with a certain stated minimum value. The
amount to be included in the lessor’s gross income in such a case is the fair and reasonable value of
the improvements and not merely the minimum amount stated. This is because the lessor does not
merely require the erection of buildings – he requires the erection of a particular building, and the
lessee must meet his requirements even if the cost is more than the stated minimum value in the
lease.
If the stipulated amount is contractually varied later, the increased sum will be included in the gross
income of the lessor provided the improvements are still in the course of construction at the date of
the variation of the lease (COT v Ridgeway Hotel Pty Ltd (1961)).
The lessor must include the full amount in the year in which the right accrued. The Commissioner
may, however, allow the deduction of a special allowance (s 11(h) – see chapter 13), having regard
to, amongst other things, the fact that the lessor will become entitled to the benefit of the improve-
ments only upon the expiry of the lease.
4.12 Taxable (fringe) benefits (paras (c) and (i) of the definition of ‘gross income’)
Benefits and advantages received by an employee from an employer, and which normally do not
consist of cash or cannot be turned into money are referred to as taxable (fringe) benefits. The ‘cash
equivalent’, as determined under the Seventh Schedule to the Act, of taxable benefits is included in
gross income (par (i)), and not the ‘amount’ as in the case of other amounts in respect of services
rendered (par (c)).
Paragraph (i) overrides par (c) and a benefit or an advantage to which par (i) applies can therefore
not be considered for par (c) (proviso (i) to par (c)). Paragraph (i), different to par (c), does not refer
to voluntary amounts.
In KBI v Kotze (1992 (T)) it was held that where a new employer releases an employee from an obli-
gation the employee had towards a previous employer, it constitutes a fringe benefit in terms of
par (i). See chapter 8.4.13 and par 13(3) of the Seventh Schedule for a no value rule in respect of
such a fringe benefit.
Gains in respect of the right to acquire marketable securities that are taxable in terms of s 8A (rights
obtained on or before 26 October 2004) are also specifically included in gross income in terms of
par (i).
For a detailed discussion on the taxability of taxable (fringe) benefits from employment, see chapter 8.
72
4.13 Proceeds from the disposal of certain assets (par (jA) of the definition of ‘gross
income’, ss 8(4)(a), 22(8) and 26A)
The proceeds from the disposal by a taxpayer of fixed capital assets are capital in nature and the
capital gain on the disposal may form part of the taxable capital gain that must be included in the
taxable income of the taxpayer in terms of s 26A.
If a company that manufactures vehicles uses certain vehicles that it manufactures as fixed capital
assets within its business operations, the proceeds from the subsequent disposal of these vehicles
are capital in nature. However, if the asset is manufactured, produced, constructed, or assembled by
the taxpayer and the asset is similar to any trading stock used for the purposes of manufacture, sale
or exchange by the taxpayer, such proceeds must be included in gross income (par (jA)). The dis-
posal of such fixed assets does not give rise to a taxable capital gain, but to a gross income inclu-
sion.
For example: A manufacturer, Alfa Ltd, uses one vehicle manufactured by it (at a cost price of
R250 000 in the 2021 year of assessment) in its business operation as a demonstration model, and
gave the right of use of another similar vehicle to an employee as a fringe benefit (in the 2021 year of
assessment). Alfa Ltd disposes of both the vehicles during the 2022 year of assessment for an
amount of R280 000 per vehicle. This will have the following consequences:
l the assets will be included in closing stock at the end of the 2021 year of assessment and in
opening stock at the beginning of the 2022 year of assessment at the cost price of R250 000 per
vehicle
l the full proceeds from the disposals (R280 000 per vehicle) are included in gross income in the
2022 year of assessment in terms of par (jA) (similar to when trading stock is sold), even though
the vehicles were used as fixed capital assets
l no wear-and-tear allowances are claimed on these vehicles in the 2021 year of assessment and
no capital gains are calculated on the disposal of the vehicles in the 2022 year of assessment
l no inclusion takes place under s 22(8) in the 2021 year of assessment, and
l no recoupment is included in terms of s 8(4)(a) in the 2022 year of assessment.
4.14 Dividends (par (k) of the definition of ‘gross income’, ss 10(1)(k) and 10B)
All dividends and foreign dividends are included in gross income (par (k)). The principles of the
residence-based system of tax for residents, and the source-based system of tax for non-residents
must be considered. Section 10(1)(k) and s 10B provide exemptions from normal tax for certain divi-
dends (see chapter 5). The withholding tax on dividends (see chapter 19) might be applicable to
such exempt dividends.
4.15 Subsidies and grants (par (l) of the definition of ‘gross income’ and
par 12(1) of the First Schedule)
Any grants, subsidies in respect of any soil erosion works and certain capital development expendi-
ture in terms of par 12(1) of the First Schedule are included in the gross income of farmers (par (l )).
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA) of the
definition of ‘gross income’)
Amounts received by or accrued to non-profit sporting bodies must be included in gross income if
another sporting body that is allowed a deduction in terms of s 11E paid the amount.
4.17 Government grants (par (lC) of the definition of ‘gross income’ and s 12P)
Any amount received by or accrued to a person by way of a government grant as contemplated in
s 12P must be included in gross income (par (lC)). The list of such government grants exempted in
terms of s 12P is contained in the Eleventh Schedule and is discussed in chapter 5.
73
4.18 Key-man insurance policy proceeds (par (m) of the definition of

‘gross income’)
Employers often hedge themselves against risks that relate to the death, disablement or illness of an
employee or director by taking out policies of insurance. Paragraph (m) includes the proceeds of
such policies of insurance paid out to the employer, including by way of a debt, in its gross income.
The final amount paid out must be reduced by the amount of any debt that is or has previously been
included in the employer’s gross income (proviso to par (m)).
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments

(par (n) of the definition of ‘gross income’, ss 7, 8C and 24I)
All amounts that are specifically included in a taxpayer’s ‘income’ through other provisions of the Act
are included in gross income in terms of par (n). Examples of such amounts are the anti-avoidance
provisions of s 7 where certain donations are made, s 8C gains on the vesting of equity instruments
and s 24I foreign exchange gains. Furthermore, it is deemed that these amounts are received by or
accrued to the taxpayer (even if no actual amounts were received, for example, since s 24I taxes an
unrealised foreign exchange profit that results in no physical receipt by the taxpayer, it is deemed
that he received that amount).
See chapter 13 for a detailed discussion of the various s 8(4) recoupments and chapter 15 for a
discussion of s 24I.
4.20 Amounts received in terms of certain short-term insurance policies

(s 23L(2))
For the purposes of s 23L a ‘policy’ means a policy of insurance or reinsurance other than a long-
term policy as defined in the Long-term Insurance Act (s 23L(1)).
No deduction is allowed in respect of premiums paid that are not taken into account as an expense
for ‘IFRS’ (s 23L(2)).
The non-deductibility of any such premiums during the current or any previous year of assessment
(see chapter 6) causes a reduced amount to be included in gross income when the policy is paid out
(s 23L(3)).
Example 4.2. Gross income
John (33 years old and unmarried) is an RSA resident. He designs websites and is in the full-time
employment of Webdezine CC, an RSA close corporation. Webdezine often sends him to pro-
vide training to its United States of America (USA) clients. John’s receipts and accruals during
the 2022 year of assessment were as follows:
Note R
Salary ....................................................................................................... 1 192 000
Lump sum from employer ........................................................................ 2 32 000
Rent received ........................................................................................... 3 91 300
Leasehold improvements......................................................................... 3 ?
Lease premium received ......................................................................... 3 ?
Interest received ...................................................................................... 4 16 600
Dividends received .................................................................................. 5 49 000
Annuity ..................................................................................................... 6 ?
Leave conditions amended ..................................................................... 7 4 000
Private work ............................................................................................. 8 28 000
Gambling ................................................................................................. 9 12 000
Royalties .................................................................................................. 10 130 000
Notes
(1) John’s salary was divided between the periods that he worked in the RSA and the USA (he
was, however, at all times an RSA resident):
South Africa R128 000 (8 months)
USA R64 000 (4 months)
Total R192 000
(2) In recognition of all his years of faithful service, Webdezine voluntarily paid an amount equal
to two months’ salary to John on 28 February 2022.
continued
74
(3) John owns a house in Stellenbosch, which he let to the Khumalo couple for the whole year.
The lease contract was concluded on 1 August 2020 and specified the following:
l The Khumalos must pay a monthly rent of R8 300 from 1 August 2020. The Khumalos
only paid the February 2022 rental on 15 March 2022.
l The Khumalos are obligated to effect improvements to the house to the value of
R40 000. Due to cash flow problems, the Khumalos only completed the improvements
during April 2021 at an amount of R35 000.
l The lease term expired on 31 July 2021. However, the Khumalos had a preference
right to lease the house again and paid a once-off amount of R6 000 as a lease premi-
um (the right to occupy the house) on 1 August 2021. The monthly rent remained un-
changed at R8 300.
(4) John has fixed deposits at various banks and received the following interest:
From South Africa R9 100
From Switzerland R7 500
Total R16 600
(5) John owns shares in both RSA and Australian companies and received the following divi-
dends:
From Australia R17 000
Total R49 000
(6) John purchased an annuity from Old Mutual Life Insurers at R420 000 on 1 December
2021. He receives a monthly annuity of R5 000 since 1 December 2021. The capital portion
that is calculated in terms of section 10A amounts to R1 100 per monthly annuity.
(7) Due to the recession, Webdezine amended the leave conditions of all its employees. From
1 June 2021 John is no longer entitled to paid study leave. To compensate him for this,
Webdezine paid a once-off amount of R4 000 to John on 1 June 2021.
(8) John updates the websites of his private clients over weekends. His total fees for the 2022
year of assessment amounted to R28 000.
(9) On his birthday (14 March 2021), John and a few of his friends gambled at the Grandwest
Casino for fun. John won R12 000 that evening.
(10) John wrote a manual on web design that was published during November 2021. The man-
ual is distributed across the world, and he received the following gross royalties:
From overseas R44 000
Total R130 000
Calculate John’s gross income for the 2022 year of assessment.
l Indicate for each item whether it complies with the general definition of gross income or a
specific inclusion of the s 1 gross income definition.
l If it is a specific inclusion, provide the paragraph number, for example par (c). You do not
have to provide a reason for your answer.
l If an item is not included in gross income, provide a short reason by identifying the element
that is not met.
l You do not have to refer to case law (court cases).
SOLUTION
NB: John must include worldwide amounts, as he is an RSA resident.
Item Amount Reason
(R)
Salary 128 000 l Par (c) services rendered
64 000
192 000
Lump sum 32 000 l Par (c) services rendered
l Not par (d) as employment conditions were not amended,
nor was the employment terminated.
continued
75
Item Amount Reason

(R)
Rental 99 600 l General definition
l Total = R8 300 × 12 = R99 600
l February’s rental has already accrued
l Practice: earlier of receipt or accrual
Leasehold 0 l Par (h) leasehold improvement included at lessor
improvement l Act: in the year contract was concluded (i.e., 2021 year of
assessment)
l The amount is specified and John was taxed on R40 000
(irrespective of amount incurred by lessee) in 2021
Lease premium 6 000 l Par (g) lease premium included at Lessor
Interest received 9 100 l General definition
7 500
16 600
Dividends 32 000 l Par (k) dividend and foreign dividends
17 000
49 000
Annuity 15 000 l Par (a) annuity
l = R5 000 × 3 = R15 000
l The capital portion (R1 100 × 3) is later exempt in terms of
s 10A
Leave conditions 4 000 l Par (d) lump sum from employer OR
l Par (f) also applies (because in terms of employment
contract). It is not a severance benefit.
Private work 28 000 l Par (c) services rendered
Gambling – l Capital of nature does not meet the general definition of
gross income
Royalties 86 000 l General definition
44 000
130 000
Gross income 572 200
76
5 Exempt income
Alta Koekemoer

l identify amounts (that were included in gross income) that are exempt from normal
tax
l apply the qualifying criteria to determine whether certain amounts are exempt from
normal tax
l explain why certain amounts are exempt from normal tax.
Contents
Page
5.1 Introduction ........................................................................................................................ 78
5.2 Exemptions incentivising investments ............................................................................... 79
5.2.1 Interest received by natural persons (s 10(1)(i)) .................................................. 79
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H) ........................ 79
5.2.3 Amounts received from tax-free investments (s 12T) ........................................... 80
5.2.4 Purchased annuities (s 10A) ................................................................................. 81
5.2.5 Exemption of non-deductible element of qualifying annuities (s 10C) ................. 83
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA) ..................................... 84
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI)) ........................... 85
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B) .................................... 87
5.3 Exemptions relating to dividends ....................................................................................... 87
5.3.1 Dividends from resident companies (s 10(1)(k)) .................................................. 88
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)(k)(i)) ................................... 88
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii), (jj)
and (kk) of the proviso to s 10(1)(k)(i)).................................................................. 88
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of
the proviso to s 10(1)(k)(i)) .................................................................................... 90
5.3.5 Dividends received by a company in consequence of the exercise of a
discretionary power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))............ 90
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the
proviso to s 10(1)(k)(i)) .......................................................................................... 90
5.3.7 Dividends applied against deductible financial payments (par (hh) of the
proviso to s 10(1)(k)(i)) .......................................................................................... 91
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)........ 91
5.4 Exemptions relating to employment................................................................................... 97
5.4.1 Foreign pensions (s 10(1)(gC)) ............................................................................ 97
5.4.2 Unemployment insurance benefits (s 10(1)(mB)) ................................................. 99
5.4.3 Uniforms and uniform allowances (s 10(1)(nA)) ................................................... 99
5.4.4 Relocation benefits (s 10(1)(nB)) .......................................................................... 99
5.4.5 Broad-based employee share plan (s 10(1)(nC))................................................. 100
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE)) .......................... 100
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD)).................. 100
5.4.8 Salaries paid to an officer or crew member of a ship (s 10(1)(o)(i) and (iA)) ....... 100
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii)) ................................................ 101
5.5 Exemptions that incentives education ............................................................................... 105
5.5.1 Bursaries and scholarships (s 10(1)(q) and (qA)) ................................................ 105
5.6 Exemptions relating to government, government officials and governmental institutions 110
5.6.1 Government and local authorities (s 10(1)(a) and 10(1)(bA)) .............................. 110
5.6.2 Foreign government officials (s 10(1)(c)) .............................................................. 110
77
Page
Non-residents employed by the South African government (s 10(1)(p)) .............
5.6.3 110
5.6.4
Pension payable to former State President or Vice President (s 10(1)(c)(ii)) ....... 110
Foreign central banks (s 10(1)(j))..........................................................................
5.6.5 110
Semi-public companies and boards, governmental and other multinational
5.6.6
institutions (s 10(1)(bB), (t) and (zE)) .................................................................... 110
5.7 Exemptions for organisations involved in non-commercial activities ................................ 111
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e)) 111
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30) .............................................. 112
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A) .......................................................... 113
5.7.4 Political parties (s 10(1)(cE)) ................................................................................. 114
5.8 Exemptions relating to economic development ................................................................ 114
5.8.1 Micro businesses (s 10(1)(zJ)).............................................................................. 114
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK), 30C and par 63B of
the Eighth Schedule) ............................................................................................. 114
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P) ......... 115
5.8.4 Film owners (s 12O) .............................................................................................. 118
5.8.5 International shipping income (s 12Q) .................................................................. 118
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG)) ....................................... 119
5.9 Exemptions incentivising environmental protection .......................................................... 119
5.9.1 Certified emission reductions (s 12K) ................................................................... 119
5.9.2 Closure rehabilitation company (s 10(1)(cP)) ....................................................... 119
5.10 Exemptions aimed at amounts that are subject to withholding tax ................................... 119
5.10.1 Royalties paid to non-residents (s 10(1)( l)) .......................................................... 119
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA)) ................... 120
5.10.3 Interest paid to non-residents (s 10(1)(h)) ............................................................ 120
5.11 Other exemptions ............................................................................................................... 120
5.11.1 Alimony and maintenance (s 10(1)(u)).................................................................. 120
5.11.2 Promotion of research (s 10(1)(cA))...................................................................... 120
5.11.3 Interest received by the holder of a debt (s 10(1)(hA)) ........................................ 121
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and
(gB)) ...................................................................................................................... 121
5.11.5 Beneficiary funds (s 10(1)(gE)) ............................................................................. 121
5.1 Introduction
The ‘income’ of a taxpayer, as defined in s 1, is the amount of his gross income remaining after the
exclusion of any amounts exempt from normal tax for any year of assessment.
Income is thus calculated as follows:
Gross income Rxxx

Less: Exempt income (s 10 and certain sections in s 12) (xxx)
Income Rxxx
Exempt income refers to amounts received or accrued that are not subject to normal tax. Govern-
ments often use tax exemptions to incentivise investments, to provide relief to the poor and under-
privileged or to ensure that the income of organisations that are not directly involved in commercial
activities, such as religious organisations, amateur sports organisations and charities are not subject
to tax. In some cases, tax exemptions are provided to ensure that the same amount of income is not
subject to double taxation. The exemptions from normal tax provided for in the Act are grouped and
discussed in this chapter based on the purpose of the exemption as mentioned earlier.
If an amount does not form part of income, no deduction in respect of expenses

relating to the amount may be claimed in terms of ss 11(a) and 23(f). For example,
Please note! dividends are included in gross income, but certain qualifying dividends are
excluded from income as they are exempt, with the result that no expenses
incurred in the production of these dividends may be claimed under s 11(a).
78
5.2 Chapter 5: Exempt income
5.2 Exemptions incentivising investments

The following types of investment income are exempt from normal tax:
5.2.1 Interest received by natural persons (s 10(1)(i))

Where a natural person receives interest from a source in South Africa, the following amounts qualify
for an exemption:
l where the person has not reached the age of 65, the first R23 800 interest that the person re-
ceived during the year, or
l where the person is 65 years or older (or would have been 65 years old on the last day of the
year of assessment had he lived), the first R34 500 interest that the person received during the
year.
This exemption does not apply to interest received in respect of a tax-free investment (as defined in
s 12T – see 5.2.3). The exemption is also not available to non-natural persons (companies and
trusts).
5.2.2 Interest received by non-residents (ss 10(1)(h) and 50A to 50H)

Only interest that is received from a South African source will be included in a non-resident’s gross
income. The source of interest is in South Africa if the interest is paid by a resident (unless the in-
terest is attributable to a permanent establishment of the non-resident situated outside South Africa),
or is received or accrued regarding any funds used or applied by any person in South Africa
(s 9(2)(b); see chapter 3).
Interest received by a non-resident is exempt from normal tax, subject to the exceptions mentioned
below (s 10(1)(h)). Interest received by a non-resident is, however, not tax-free, since it may be sub-
ject to the 15% withholding tax on interest (ss 50A–50H; see chapter 21). The rate of the withholding
tax on interest may be reduced by a double tax agreement between South Africa and the other
country (s 50E(3)).
The normal tax exemption does not apply in the case of a
l a natural person
– who was physically present in South Africa for a period exceeding 183 days in aggregate
during the twelve-month period preceding the date on which the interest is received by or ac-
crues to that person, or
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa, and
l any other person
– if the debt from which the interest arises is effectively connected to a permanent establishment
of that person in South Africa.
Where in the above cases the normal tax exemption does not apply, the foreign person will be exempt
from withholding tax on interest (s 50D(3)).
Example 5.1. Interest received by a non-resident
Oliver Capital Ltd is a company resident in Australia. It has a wholly-owned subsidiary in South
Africa, Sandile Investments (Pty Ltd, and carries on business in South Africa through a branch
that qualifies as a permanent establishment. Oliver Capital Ltd granted an interest-bearing loan to
Sandile Investments (Pty) Ltd (assume that the loan is on market-related terms) and received
R100 000 interest from Sandile Investments (Pty) Ltd on 31 December 2022. Oliver Capital Ltd
further received interest of R80 000 from a South African bank on a current account in its
branch’s name.
What effect does the above have on Oliver Capital Ltd’s South African taxable income for its year
of assessment ending on 31 December 2022?
79
SOLUTION
Interest received from a South African source (R100 000 + R80 000) ...................... R180 000
Interest exemption (s 10(1)(h)) (The loan in respect of which Oliver Capital Ltd
received the R100 000 interest is not effectively connected to Oliver Capital Ltd’s
permanent establishment in South Africa (see note) and therefore qualifies for the
exemption under s 10(1)(h). The R80 000 interest received on the branch’s cur-
rent account is effectively connected to a permanent establishment and does not
qualify for the exemption) .......................................................................................... (100 000)
Taxable income ......................................................................................................... R80 000
Note: The subsidiary in South Africa (Sandile Investments (Pty) Ltd) is a company in its own
right and is therefore not a permanent establishment of Oliver Capital Ltd.
5.2.3 Amounts received from tax-free investments (s 12T)

As an incentive to encourage household savings, all amounts received from a ‘tax-free investment’ by
a natural person (or a deceased or insolvent estate of such person) is exempt from normal tax. The
capital gain or loss from the disposal of a ‘tax-free investment’ is also disregarded for CGT purposes
(see chapter 17). A dividend paid to a natural person in respect of a ‘tax-free investment’ is also
exempt from dividends tax (s 64F) (see chapter 19).
Tax-free investment (definition of ‘tax-free investment’, s 12T(1))
A ‘tax-free investment’ is a financial instrument or a policy owned by natural person and administered
by a person designated by the Minister of Finance. A financial instrument or policy in respect of a tax-
free investment may only be issued by
l a bank (as defined in s 1 of the Banks Act, 1990)
l a long-term insurer (as defined in s 1 of the Long-term Insurance Act, 1998)
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002
l a manager as defined in s 1 of the Collective Investment Scheme Control Act, 2002 of a collective
investment scheme in participation bonds that complies with the requirements determined by the
Registrar
l the Government of the Republic of South Africa in the national sphere
l a mutual bank (as defined in s 1 of the Mutual Banks Act, 1993), or
l a co-operative bank (as defined in s 1 of the Co-Operative Banks Act, 2007).
(Regulation 172 (25 February 2015))
Investment contribution limit (s 12T(4)–(7))

An investment contribution of up to R36 000 per natural person is allowed during a year of assess-
ment and a lifetime contribution limitation of R500 000 will apply. Individuals may open multiple tax-
free savings accounts that may each invest in different ‘tax-free investments’; however, the annual
and lifetime limits apply in respect of the total of all tax-free investments held by a person. A product
provider may not accept an amount regarding a tax-free investment from an investor that exceeds
these limits (Regulation 172).
The annual or lifetime limit will not be affected by the following:
l Amounts received from a ‘tax-free investment’ and that are re-invested are not taken into account
when determining whether a person has exceeded the annual or lifetime contribution limits.
l Any transfers of amounts between tax free investments of a person shall not be taken into account
when determining whether a person has exceeded the annual or lifetime contribution limits.
Any transfer of tax free investments from one individual (or his estate) to another individual will be
deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.
Where a person’s contribution amounts are in excess of the above limitations, the person will be
penalised by having 40% of the excess contribution being deemed to be normal tax payable. There-
fore, if, during a year of assessment, contributions in excess of the R36 000 annual contribution limit
were made for the benefit of a person, an amount equal to 40% of the excess amount is deemed to
be normal tax payable by the person in respect of that year of assessment. Where the aggregate of a
person’s investment exceeds R500 000, 40% of the excess is deemed to be normal tax payable. In
both instances all proceeds received from the tax-free investment will be exempt from tax despite the
fact that the contributions are in excess of the limits.
80
Death or insolvency (definition of ‘tax free investment’, s 12T(1))

The deceased or insolvent estate of a natural person may also hold ‘tax free investments’. If a person
dies, the person’s ‘tax-free investments’ will be added to his or her estate as property for the pur-
poses of levying estate duty, but while the investments are held by the estate, the returns from these
investments will continue to be exempt from income and dividends tax.
Example 5.2. Amounts received from tax free investments

During the 2022 year of assessment, Kagiso contributed R2 500 per month to a fund that quali-
fies as a ‘tax-free investment’ as defined in s 12T(1). Kagiso also contributed R3 000 per month
to the same fund on behalf of his major son. Kagiso received R1 500 interest and R800 dividends
during this year from his own investment. He capitalised the interest and dividends that accrued
during the year to the investment.
Determine whether Kagiso exceeded the annual contribution limitation to the tax-free investment
funds and discuss the normal income tax implications for Kagiso relating to the interest and divi-
dends received.
SOLUTION
Total contribution made to the tax free investment
(R2 500 × 12 + R1 500 interest + R800 dividends) ....................................................... R32 300
Less: Amounts received from a tax free investment that is exempt from normal tax (R2 300)
under s 12T(2) (R1 500 interest + R800 dividends) .......................................................
Contribution subject to limitation of R36 000 per person ............................................... R30 000
The contribution made to the fund on behalf of his major son is not added to his con-
tributions as the contribution limit of R36 000 is calculated per person and his major
son is a different person. Since Kagiso’s total contributions made during this year of
assessment did not exceed R36 000, Kagiso did not exceed the annual contribution
limit.
The effect of the amounts received from his tax-free investment on Kagiso’ taxable
income for his 2022 year of assessment will be:
Interest received from tax-free investment..................................................................... R1 500
Dividends received from tax-free investments ............................................................... 800
Less: Amounts received from tax-free investment exemption – the exemption applies
in respect of both interest and dividends (s 12T(2)) ...................................................... (2 300)
Taxable income ............................................................................................................. Rnil
Notes
(1) The R800 dividend that Kagiso received from his tax-free investment will be exempt from
dividends tax in terms of s 64F(1)(o).
(2) The amount of dividends and interest that are exempt in terms of s 12T(2) do not affect the
dividend exemption under s 10(1)(k) (see 5.3.1) or the interest exemption under s 10(1)(i)
(see 5.1.1). Kagiso would still be entitled to the total interest exemption of R23 800 if he is not
yet 65 years old, or R34 500 if he is 65 or older (or would have been 65 years old had he
lived) in respect of other South African source interest that he receives during the year of
assessment.
5.2.4 Purchased annuities (s 10A)

The general rule is that amounts received as an annuity are included in a person’s gross income
(par (a) of the gross income definition). However, the capital portion of certain annuities are in some
cases exempt from normal tax (s 10A(2)). This exemption ensures that the capital payment made by
an investor when purchasing a life annuity product is not subject to normal tax when the amount is
paid back to the investor as part of the annuity. A company purchasing an annuity would not qualify
and the provisions are only applicable to natural persons.
The exemption applies to the capital portion of an ‘annuity amount’ payable to a ‘purchaser’, his
spouse or surviving spouse as per the definition of an ‘annuity contract’ (s 10A(2)). These terms are
defined as follows (s 10A(1)):
‘Purchaser’ is
l any natural person or his deceased or insolvent estate, or
l a curator bonis of, or a trust created solely for the benefit of, any natural person. The High Court
should have declared the person to be of unsound mind and incapable of managing his own
affairs and ordered the appointment of a curator or creation of a trust.
81
An ‘annuity amount’ is an amount payable by way of annuity under an annuity contract and any amount
payable in consequence of the commutation or termination of an annuity contract.
An ‘annuity contract’ is an agreement concluded between an insurer in the course of his insurance
business and a ‘purchaser’, which meets all the following requirements:
l The insurer agrees to pay to the purchaser or the purchaser’s spouse or surviving spouse an
annuity or annuities until the death of the annuitant or the expiry of a specified term. Payments
may be made either to one of these annuitants or to each of them.
l The purchaser agrees to pay to the insurer a lump sum cash consideration for the annuity or
annuities.
l No amounts are or will be payable by the insurer to the purchaser or any other person other than
amounts payable by way of the envisaged annuity or annuities.
An agreement for the payment by an insurer of an annuity that, under the rules of a pension fund,
pension preservation fund, a provident fund, a provident preservation fund or a retirement annuity
fund is payable to a member of the fund or to any other person is excluded from the definition of an
annuity contract.
Therefore, only annuities that are bought from an insurer for a lump sum cash consideration give rise
to an annuity amount qualifying for division into capital and non-capital elements and for the exemption
of the capital element. Annuities payable under pension, pension preservation, provident, provident
preservation or retirement annuity funds were not acquired from an insurer and therefore do not
qualify for exemption. Similarly, inherited or donated annuities, annuities for services rendered, annui-
ties granted as a consideration for the disposal of a business, asset or right would also not qualify.
Annuities: Calculation of capital element

The capital element of an annuity amount (which is the portion exempt from normal tax) is calculated
by means of the following formula:
A
Y= ×C
B
In this formula:
Y is the capital amount (i.e. the exempt amount) to be determined
A is the amount of the total cash consideration paid by the purchaser of the annuity
B represents the total ‘expected return’ of all the annuities provided for in the annuity contract
C is the annuity amount received of which the exempt capital portion must be calculated (s 10A(3)(a)).
The expected return is the sum of all the annuity amounts that are expected to become payable by
way of the annuity from the commencement of the annuity contract (s 10A(1)).
The calculation of the capital portion of all the annuity amounts to be paid under an annuity contract
must be done by the insurer before the payment of the first annuity amount (s 10A(4)). When a deter-
mination has to be made of the life expectancy of a person for the purpose of the calculation of the
expected return of an annuity or the probable number of years during which annuity amounts will be
paid under an annuity contract, the mortality tables must be used (s 10A(5)). The tables are repro-
duced in Appendix D. Furthermore, the age of the person concerned must for the purposes of the
determination be taken to be his age on his birthday immediately preceding the commencement of
the annuity contract (s 10A(5)).
Where an annuity contract is varied to the effect that it no longer qualifies as an ‘annuity contract’ as
defined, the exemption in respect of the capital element will no longer apply to amounts which become
due and payable thereafter (s 10A(6)(a)). Where the annuity amount is varied, the capital element of
the annuity must be recalculated (s 10A(6)(b)).
The insurer must give each annuitant under an annuity contract two copies of the calculation (as per
s 10A(4)) or re-calculation (as per s 10A(6)(b)) of the capital amount. This must be done within one
month after the calculation or recalculation, or further period as the Commissioner may allow
(s 10A(7)(a)). The annuitant must submit one copy to the Commissioner (s 10A(7)(b)).
The calculation done under s 10A(4) or recalculation under s 10A(6)(b) shall apply in respect of all
annuity amounts which become due and payable to any person under the annuity contract. It will also
apply to any subsequent year of assessment (s 10A(7)(c)).
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Example 5.3. Annuities: Capital element

A man (aged 38) purchases a life annuity for R50 000. The annuity is R3 600 a year. His life
expectancy is 30,41 years (based on his age on his birthday preceding the commencement of the
annuity contract). The expected return is therefore R109 476 (R3 600 × 30,41).
The capital element of the annuity that qualifies for the exemption is determined as follows:
A
Y = ×C
B
R50 000
= × R3 600
R109 476
= R1 644
or 45,67% of each annuity amount
The percentage calculated, 45,67%, will be applied to all the future annuity amounts to determine
the exempt capital element (s 10A(4) and (10)).
If the cash consideration is paid by the purchaser in a foreign currency, the capital amount must,
after being calculated in the foreign currency, be translated into rand by applying the provisions of
s 25D (natural persons can convert using either spot rate or average rate – see chapter 15) to the
annuity amount payable during that year of assessment (a 10A(11)).
Annuities: Calculation of capital element on commutation (amendment) or termination

The capital element of an annuity amount payable in consequence of the commutation or termination
of the annuity contract is calculated by means of the following formula:
X=A–D
In this formula:
X is the amount to be determined (i.e. the exempt amount)
A is the amount of the total cash consideration paid by the purchaser of the annuity contract
D is the sum of the previously exempt capital element of an annuity received prior to the commuta-
tion or termination (s 10A(3)(c)).
Example 5.4. Annuities: Payable on commutation or termination of contract
An annuitant is paid an amount of R33 120 on the commutation of an annuity contract for which
he had initially paid a cash consideration of R60 000. The capital amounts payable under the
contract from its commencement up to the date of commutation totalled R49 680.
The capital element of the annuity amount payable on the commutation of the contract is deter-
mined as follows:
X = A–D
= R60 000 – R49 680
= R10 320
Therefore, of the amount of R33 120 received on the commutation of the contract, R10 320 is the
capital element and is exempt.
5.2.5 Exemption of non-deductible element of qualifying annuities (s 10C)

The rules of a pension fund, pension preservation fund and retirement annuity fund provide that not
more than one-third of the total value of the retirement interest may be commuted for a single pay-
ment (i.e. a lump sum payment). The remainder of the retirement interest must be paid in the form of
an annuity (including a living annuity). From years of assessment commencing on or after 1 March
2021, these rules also apply in respect of a provident fund and a provident preservation fund.
To the extent that a retirement fund member elects to receive a portion of his or her retirement fund
interest in the form of a lump sum upon retirement, that lump sum is subject to tax as per the retire-
ment lump sum tax table. In calculating the tax due on the lump sum, the former member is afforded
a deduction in terms of the Second Schedule to the extent the member has previously made non-
deductible contributions to retirement funds. These non-deductible contributions constitute the total
contributions made to a pension fund, pension preservation fund, provident fund, provident preserva-
tion fund or retirement annuity fund that did not qualify for a deduction against the person’s income in
terms of s 11F (or the repealed s 11(k)) (see chapter 7). All non-deductible contributions are therefore
first deducted from the lump sum in terms of the Second Schedule.
83
The remaining balance of non-deductible contributions is then applied as an exemption against any
‘qualifying annuity’ received by the taxpayer. For purposes of s 10C, a ‘qualifying annuity’ includes
any retirement interest paid in relation to a pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund in the form of annuities. This exemption is
calculated in respect of the aggregate (i.e. total) qualifying annuities payable to a natural person. If,
after applying the s 10C exemption, a balance of non-deductible contributions remains, this balance
can be considered actual retirement fund contributions which can be claimed as a s 11F deduction.
Thereafter, any remaining balance is carried forward to the following year where the balance can be
applied in the same order (first as deduction against a lump sum, then as s 10C exemption and then
as s 11F deduction). Refer to chapter 9 for a detailed discussion in this regard.
Example 5.5. Exemption of non-deductible element of qualifying annuities (s 10C)

Sandile retires from the ABC pension fund on 1 March 2021. He received a lump sum of
R1 000 000 plus an annuity of R10 000 per month. Previous contributions of R1 100 000 he had
made to the pension fund over the years were not deductible for income tax purposes.
What will the normal tax consequences of the above be for Sandile’s 2022 year of assessment?
SOLUTION
First, the non-deductible contributions are deducted from the lump sum:
Retirement lump sum from ABC pension fund ...................................................... R1 000 000
Reduced by non-deductible contributions ............................................................ (1 000 000)
Retirement lump sum included in terms of the gross income definition par (e)..... Rnil
Next, the remaining balance of non-deductible contributions of R100 000
(R1 100 000 less R1 000 000) is used to exempt any ‘qualifying annuities’
received by the taxpayer.
Annuities in terms of par (a) of the definition of ‘gross income’ ............................. R120 000
Less: Section 10C exemption. ............................................................................... (100 000)
R20 000
The balance of non-deductible contributions is Rnil (R1 100 000 less R1 000 000 (Second
Schedule deduction) less R100 000 (s 10C exemption)). If there had been a remaining balance, it
would have been added to current contributions in the s 11F deduction.
5.2.6 Collective investment schemes (ss 10(1)(iB) and 25BA)

A collective investment scheme is a scheme in terms of which two or more investors contribute mon-
ey and hold a participatory interest in a portfolio of the scheme through shares, units or any other
form of participatory interest. The investors share the risk and the benefit of the investment in propor-
tion to their participatory interest in a portfolio of a scheme.
Any amount distributed by a portfolio of a collective investment scheme to a holder of a participatory
interest in the portfolio within 12 months of the date of receipt by the portfolio, is deemed to accrue
directly to the holder on the date of distribution. This does not apply to capital amounts distributed or
to a portfolio of a collective investment scheme in property (s 25BA(1)(a)).
If an amount is not distributed by the portfolio within 12 months after its accrual to the portfolio, the
amount is deemed to accrue to the portfolio on the last day of the 12-month period (s 25BA(1)(b)).
The effect of this rule is that since the amount is deemed to accrue to the holder, it will be subject to
normal tax in the holder’s hands. The holder will be entitled to any relevant normal tax exemption,
depending on the nature of the amount. If the amount is not distributed by the portfolio within 12
months after its accrual to the portfolio, the amount is subject to normal tax in the portfolio’s hands.
The portfolio would then be entitled to any relevant normal tax exemption, depending on the nature of
the amount. Where the amount retained by the collective investment scheme is attributable to a
dividend received by or accrued to the portfolio, the amount is deemed to be income of the portfolio.
The effect of this is that the collective investment scheme would be entitled to deduct expenses
against the dividend income, which would otherwise not be the case (a 25BA(1)(b)).
Where an amount that is deemed to have accrued to the portfolio (because it was not distributed to a
holder within 12 months after its accrual to the portfolio) is subsequently distributed to a holder, the
amount is exempt in the holder’s hands in terms of s 10(1)(iB). This exemption only applies if the
amount was subject to normal tax in the portfolio’s hands.
84
Section 25BA is not applicable to a portfolio of a collective investment scheme in property. In fact,
such portfolio is excluded from the definition of ‘person’ in s 1 and since only a ‘person’ could be
liable for normal tax in terms of s 5, a portfolio of a collective investment scheme in property is not
liable for normal tax. Section 25BB provides for the taxation of Real Estate Investment Trusts (REITs).
A portfolio of a collective investment scheme in property would typically qualify as an REIT. The tax-
ation of REITs is discussed in chapter 19.
The normal tax consequences of amounts received by a portfolio of a collective investment scheme
(other than a portfolio of a collective investment scheme in property and REITs) and distributed to the
holders of participatory interests in such portfolio are summarised in the following table:
Types of Normal tax consequences for the portfolio: Normal tax consequences for the
income received holders of participatory interests in the
by the portfolio: portfolio on amounts distributed:
Local and If distributed within 12 months from the date of If the holder is a resident, the amounts
foreign interest its accrual: Deemed to accrue directly to the are included in gross income. The
holder (s 25BA) (i.e. not included in the port- local interest may be exempt in terms
folio’s gross income). of s 10(1)(i) if the holder is a natural
person.
If the holder is a non-resident, only
local interest is included in gross in-
come (foreign interest is not from a
source in South Africa). The local
interest may be exempt in terms of
s 10(1)(h) or 10(1)(i)).
If not distributed within the 12-month period: The If these amounts are subsequently
amounts accrue to the portfolio (s 25BA) (i.e. distributed to a holder, the amount is
included in the portfolio’s gross income). exempt in the holder’s hands
(s 10(1)(iB)).
Local dividends If distributed within 12 months from the date of The amount is included in gross in-
its accrual: Deemed to accrue directly to the come and may qualify for the
holder (s 25BA) (i.e. not included in the portfo- s 10(1)(k)(i) exemption.
lio’s gross income).
included in the portfolio’s gross income). The exempt in the holder’s hands
amounts could be exempt under s 10(1)(k)(i). (s 10(1)(iB)).
Foreign If distributed within 12 months from the date of The amount is included in gross in-
dividends its accrual: Deemed to accrue directly to the come and may qualify for the s 10B
holder (s 25BA) (i.e. not included in the portfo- exemption.
lio’s gross income).
included in the portfolio’s gross income). The exempt in the holder’s hands
amounts could be exempt under s 10B. (s 10(1)(iB)).
5.2.7 Proceeds from insurance policies (s 10(1)(gG), (gH) and (gI))

The proceeds from an insurance policy that pays out in the event of the death, disablement or illness
of a person could be exempt from normal tax depending on a number of factors. A distinction is
drawn between
l policies where the proceeds are intended to solely benefit a taxpayer on the death, disablement
or illness of an employee or director of the taxpayer (so called key-person policies); and
l policies where the proceeds are intended to directly or indirectly benefit a person or the person’s
beneficiaries on the death, disablement or illness of that person (for example, life insurance pol-
icies, group life insurance policies, disability insurance policies and income protection policies).
85
Remember
Where an insurance policy is intended to solely benefit a taxpayer on the death, disablement or
illness of an employee or director, the taxpayer has to be the sole policyholder as well as the
sole beneficiary under the policy.
Where the intention is to benefit a person or the person’s beneficiaries on the death, disable-
ment or serious illness of that person, the person could be the policyholder and beneficiary of
the policy. The person’s employer could also be the policyholder and the person (or the per-
son’s beneficiaries) the beneficiary under the policy, or the person’s employer could be the
policyholder and beneficiary where there is a contractual obligation on the employer to pay the
proceeds received under the policy to the person (or the person’s beneficiaries).
The normal tax consequences of proceeds received from these policies are explained by means of
the following table:
Policies that are intended to solely benefit Policies in respect of Policies where a person
an employer (or company in the case of a which an employee (or other than an employer (or
director) (that is, the employer is both the director) or his/her company in the case of a
policyholder and the beneficiary) beneficiaries directly or director) is the
indirectly receive a benefit policyholder
The proceeds from an insurance policy Proceeds are included in The proceeds from some
relating to the death, disablement or illness the employee/director’s of these policies are of a
of an employee/director are included in the gross income (par (d)(ii) of capital nature and there-
employer’s gross income (par (m) of ‘gross ‘gross income’) (see fore not included in gross
Inclusion in gross income
income’) (see note 1). note 4). income. However, in the

case of an income protec-
tion policy and annuities
paid in terms of the policy,
the proceeds would be
included in gross income.
(The deduction of the
premiums on these income
protection policies is pro-
hibited in terms of s 23(r).)
If the premiums did not qualify for a deduc- Exempt under s 10(1)(gG). The proceeds from an
tion, the proceeds are exempt in the em- insurance policy relating
Exemption
ployer’s hands (s 10(1)(gH)) (see note 2). to the death, disablement,

If the premiums qualified for a deduction, illness or unemployment of
the proceeds are taxable in the employer’s any person who is insured
hands and are not exempt in terms of s in terms of the policy are
10(1)(gH) (see note 2). exempt (s (10(1)(gI)) (see
note 3).
Notes:
(1) Paragraph (m) of ‘gross income’ also applies where the policy relates to the death, disablement
or illness of a former employee or director. Paragraph (m) is discussed in detail in chapter 4.
(2) The deductibility of insurance premiums is discussed in chapter 12.
(3) The exemption under s 10(1)(gI) also applies in respect of a policy of insurance relating to the
death, disablement, illness or unemployment of a person who is an employee of the policy-
holder.
The exemption under s 10(1)(gI) does not apply to a policy of which the benefits are payable by
a retirement fund.
(4) Paragraph (d)(ii) of ‘gross income’ provides that an amount received or accrued by or to a
person, or dependant or nominee of the person, directly or indirectly in respect of proceeds
from a policy of insurance where the person is or was an employee or director of the policy-
holder, is included in the person’s gross income. The paragraph specifically provides that any
amount received by or accrued to a dependant or nominee of a person shall be deemed to be
received by or to accrue to that person. This paragraph therefore applies where
l an employer is the policyholder and the employee or dependant or nominee of the employee
is the beneficiary under the policy, or
86
5.2–5.3 Chapter 5: Exempt income
l a company is the policyholder and a director of the company or its dependent or nominee
is the beneficiary under the policy, or
l an employer (or company in the case of a director) is the policyholder and beneficiary
under the policy, but is contractually obliged to pay the proceeds under the policy to the
employee or director, or his or her dependents or nominees.
Since a lump sum award from any pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund is not included in the person’s gross
income in terms of par (d)(ii) of the definition of ‘gross income’ (it is included in gross income in
terms of par (e) of the definition of ‘gross income’), it does not qualify for the exemption under
s 10(1)(gG).
5.2.8 Approved funds and associations (ss 10(1)(d) and 30B)

The receipts and accruals of the following funds and associations are exempt from normal tax:
l any pension fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund (these funds are defined in s 1), or a beneficiary fund defined in s 1 of the
Pension Funds Act (s 10(1)(d)(i))
l a benefit fund, which is defined in s 1 as any friendly society registered under the Friendly
Societies Act of 1956 or any medical scheme registered under the provisions of the Medical
Schemes Act (s 10(1)(d)(ii))
l a mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or indus-
tries (or an association of such chambers) or local publicity association approved by the Com-
missioner in terms of s 30B (s 10(1)(d)(iii))
l a company, society or other association of persons established to promote the common interests
of persons (being members of such company, society or association of persons) carrying on any
particular kind of business, profession or occupation, approved by the Commissioner in terms of
s 30B (s 10(1)(d)(iv)).
5.3 Exemptions relating to dividends

Dividends received from a South African resident company are generally exempt from normal tax.
Companies are subject to 28% normal tax on their taxable income. Dividends are in essence the
distribution of a company’s after-tax income. Dividends declared by a company are subject to 20%
dividends tax in respect of dividends paid on or after 22 February 2017 (previously 15%), which is
withheld by the company from the dividend and paid to SARS (see chapter 19) on behalf of the
beneficial owner (the shareholder). Since a company’s profit distributed to a shareholder is subject to
28% normal tax paid by the company and 20% dividends tax paid by the shareholder (withheld by
the company from the dividends declared), dividends are not also subject to normal tax in the share-
holder’s hands.
Dividends are, as a general rule, exempt from normal tax. However, a number of exceptions apply,
mainly where the underlying company profit was not subject to normal tax, or to prevent tax avoid-
ance. In the following cases dividends are not exempt from normal tax:
l dividends that form part of an amount that is paid as an annuity (s 10(2)(b))
l amounts distributed by a Real Estate Investment Trust (‘REIT’) or a controlled company in respect
of an REIT (par (aa) of the proviso to s 10(1)(k)(i); see 5.3.2)
l dividends in respect of employee-based share schemes (paras (dd), (ii) and (jj) of the proviso to
s 10(1)(k)(i); see 5.3.3)
l dividends received by a company in consequence of a cession (par (ee)(A) of the proviso to
s 10(1)(k)(i); see 5.3.4)
l dividends received by a company in consequence of the exercise of a discretionary power of
trustee of a trust (par (ee)(B) of the proviso to s 10(1)(k)(i); see 5.3.5)
l dividends received by a company in respect of shares borrowed by the company (paras (ff) and
(gg) of the proviso to s 10(1)(k)(i); see 5.3.6)
l dividends applied against deductible financial payments (par (hh) of the proviso to s 10(1)(k)(i);
see 5.3.7)
l dividends received as part of a dividend-stripping transaction (s 22B; see chapter 20).
Dividends declared by headquarter companies and foreign dividends may qualify for specific exemp-
tions (s 10B; see 5.3.8).
87
5.3.1 Dividends from resident companies (s 10(1)(k))

Dividends declared by South African resident companies are exempt from normal tax (s 10(1)(k)(i)).
This exemption applies irrespective of whether the recipient is a natural person or a corporate entity
and also irrespective of whether the recipient is a resident or not.
l Note that s 10(1)(k)(i) does not state that the exemption applies only to
dividends declared by South African resident companies. The limitation
comes from the definition of ‘dividend’ in s 1 that defines a ‘dividend’ as an
amount distributed by a resident company (see chapter 19).
l Dividends declared by a resident company are regarded as being from a
Please note! source within South Africa (s 9(2)(a); see chapter 3). If a non-resident re-
ceives such dividend, it will be included in the non-resident’s gross income
and will then be exempt in terms of s 10(1)(k)(i).
l Although these dividends may be exempt from normal tax, they may be
subject to dividends tax (see chapter 19).
5.3.2 REIT distributions (par (aa) of the proviso to s 10(1)(k)(i))

Amounts distributed by a Real Estate Investment Trust (‘REIT’) are fully taxable in the recipient’s
hands. The requirements of REITs and the taxation thereof are dealt with under s 25BB and are
discussed in detail in chapter 19. Where such distribution is in the form of a dividend, the dividend is
not exempt in the recipient’s hands (s 10(1)(k)(i)(aa)). This exclusion from the dividend exemption
also applies regarding dividends distributed by a subsidiary of an REIT, a so-called ‘controlled com-
pany’ (see chapter 19).
The dividend exemption will, however, apply where the REIT or a controlled company
l distributes a dividend to a non-resident, or
l distributes an amount to a holder of a share as consideration for the acquisition of shares in
the REIT or controlled company (that is, a dividend referred to in par (b) of the definition of
‘dividend’).
5.3.3 Dividends in respect of employee-based share schemes (paras (dd), (ii) (jj) and (kk) of
the proviso to s 10(1)(k)(i))
Employee-based share schemes are schemes whereby employees of a company are allowed to
subscribe for shares in the company. As a general rule, where a person receives an amount in cash
or in kind in respect of or by virtue of services or employment, the amount will be taxed as ordinary
revenue. A number of anti-avoidance measures are put in place to ensure that amounts received that
relate to services or employment are
l not subject to capital gains tax (the normal tax consequences for an employee from acquiring
shares in a company are dealt with in s 8B and 8C (see chapter 8), and
l not exempt from normal tax and only subject to dividends tax.
Dividends in respect of services rendered (par (ii) to the proviso to s 10(1)(k)(i))
Dividends received or accrued as result of services rendered or to be rendered would not be exempt
(therefore taxable as similar to remuneration), unless
l the dividend is received in respect of a restricted equity instrument as defined in s 8C (in such a
case, the taxability of the dividend will be determined under par (dd) of the proviso to s 10(1)(k)(i))
(see below), or
l the share is held by the employee.
(Paragraph (ii) to the proviso to s 10(1)(k)(i).)
Some share schemes hold pure equity shares where the sole intent of the scheme is to generate
dividends for employees as compensation for past or future services rendered to the employer,
without the employees ever obtaining ownership of the shares. The dividend yield in these instances
effectively operates as disguised salary for employees even though these dividends arise from equity
shares. These dividends will not be exempt, unless they fall under one of the above exceptions.
88
Dividends in respect of restricted equity instruments (par (dd) of the proviso to s 10(1)(k)(i))
A restricted equity instrument is an instrument with a number of restrictions imposed on it. The reten-
tion or acquisition by a scheme beneficiary of the benefits flowing from the scheme, for example
dividends, is subject to suspensive or resolutive terms or conditions. These benefits are dependent,
in essence, on continued employment or the rendering of services for a specified period.
Section 8C provides for the normal tax consequences of the vesting of restricted equity instruments
acquired by a person by virtue of his employment or office of director of a company or from a person
by arrangement with such employer (this section is discussed in detail in chapter 8).
Dividends from restricted equity instruments forming part of employee share schemes are taxable as
ordinary revenue unless the dividend falls into one of the following three exceptions:
l the restricted equity instrument is an equity share (other than an equity share that would have
been a hybrid equity instrument as defined in s 8E but for the three-year period requirement in
s 8E (see chapter 16)), or
l the dividend is an equity instrument as defined in s 8C, or
l the restricted equity instrument is an interest in a trust. Where the trust holds shares, all those
shares must be equity shares (other than an equity share that would have been hybrid equity instru-
ments as defined in s 8E but for the three-year period requirement in s 8E (see chapter 16)).
(Paragraph (dd) of the proviso to s 10(1)(k)(i).)
In effect, the exemption from normal tax of dividends from restricted equity instruments forming part
of share incentive schemes will be respected if the underlying shares have pure equity features (for
example, stem from ordinary shares as opposed to preference shares).
Example 5.6. Dividends received in respect of a restricted equity instrument.

AMC Holdings (Pty) Ltd (‘AMC Holdings’) has given some of its employees and directors the
option to buy equity shares in the company at a value less than its market value on condition that
the shares may not be disposed of within three years of acquisition (the shares are therefore
restricted equity instruments as defined in s 8C during this three-year period).
Ajit Koosal, one of AMC Holdings’ directors, exercised this option and acquired 5 000 equity
shares in AMC Holdings on 1 March 2020. Ajit received a dividend of R100 000 on 28 February
2022 in respect of these shares.
What will the normal tax consequences of the above be for Ajit’s 2022 year of assessment?
SOLUTION
The dividend is included in Ajit’s gross income in terms of par (k) of the
definition of ‘gross income’ .................................................................................... R100 000
The dividend is exempt in terms of section 10(1)(k)(i)(dd). Although the
dividend is paid in respect of a restricted equity instrument as defined in s 8C,
the restricted equity instrument is an equity share (and not a hybrid equity
instrument as defined in s 8E). The dividend is therefore exempt. ........................ (100 000)
Rnil
Dividends liquidating the underlying value of shares (paras (jj) and (kk) of the proviso to s 10(1)(k)(i))
Dividends in respect of restricted equity instruments acquired by virtue of a person’s employment or
office of director of a company will not be exempt if the value of the underlying shares is liquidated in
full or in part by means of a distribution before the restrictions on the shares fall away. As an anti-
avoidance measure, the dividend exemption will not apply where the dividend constitutes
l an amount transferred or applied by a company as consideration for the acquisition or redemp-
tion of any share in that company
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
l an equity instrument that does not qualify as a restricted equity instrument as defined in s 8C at
the time of receipt or accrual of the dividend (s 10(1)(k)(i)(jj)).
Dividends received in respect of such restricted equity instruments will also not be exempt if the
dividend is derived directly or indirectly from
tion of any share in that company, or
89
l an amount received or accrued in anticipation of, or in the course of the winding up, liquidation,
deregistration or final termination of a company (s 10(1)(k)(i)(kk)).
Subparagraphs (jj) and (kk) override the provisions of par (dd) and (ii) of the proviso to s 10(1)(k)(i).
5.3.4 Dividends received by a company in consequence of a cession (par (ee) of the

proviso to s 10(1)( k)(i))
A person may cede his right to dividends to another person before or after the declaration of divi-
dends. In terms of such cession, the cedent transfers his right to dividends to the cessionary. The
cessionary would typically pay an amount to the cedent for this right. Where a company receives a
dividend in consequence of a cession (i.e. the company is the cessionary), the dividend is not ex-
empt. This paragraph aims to deny the dividend exemption where the recipient of the dividend is a
company but does not hold the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of a cession
where the result of the cession is that the company holds all the rights attaching to a share. The only
case where the exemption will not apply is where the company receives dividends in consequence of
a cession without acquiring the underlying share.
5.3.5 Dividends received by a company in consequence of the exercise of a discretionary

power by a trustee (par (ee) of the proviso to s 10(1)(k)(i))
Paragraph (ee) of the proviso to s 10(1)(k)(i) provides that a dividend received by a company in
consequence of the cession of a right to that dividend or in consequence of the exercise of a discre-
tionary power by a trustee of a trust, will not qualify for the dividend exemption. This paragraph aims
to deny the dividend exemption where the recipient of the dividend is a company but does not hold
the underlying share.
The dividend will, however, be exempt where the dividend is received in consequence of the exer-
cise of a discretionary power resulting in the company holding all the rights attaching to a share.
5.3.6 Dividends received in respect of borrowed shares (paras (ff) and (gg) of the proviso
to s 10(1)( k)(i))
Securities lending refers to the practice by which securities (i.e. shares) are transferred temporarily
from one party (the lender) to another (the borrower) with the borrower obliged to return them (or
equivalent securities) either on demand or at the end of any agreed term. The terms of such loan will
be governed by a securities lending agreement. As payment for the loan, the parties negotiate a fee
(a securities lending fee), generally quoted as an annualised percentage of the value of the borrowed
shares.
When a share is borrowed, the title of the share transfers to the borrower. The borrower therefore
becomes the full legal and beneficial owner of the share. An amount equal to the dividends declared
in respect of the borrowed shares is normally paid by the borrower to the lender. This amount is
referred to as a manufactured dividend and will be deductible under s 11(a) since it is an amount
incurred by the borrower in generating taxable income.
Remember
The most common reason for borrowing a security is to cover a short position. Short selling is the
practice of selling shares or other financial instruments, with the intention of subsequently repur-
chasing them at a lower price. In the event of an interim price decline, the short seller will profit,
since the cost of repurchase will be less than the proceeds received upon the initial sale. The short
seller is obliged to deliver the shares upon the initial sale and for this reason borrows the shares.
When the shares are repurchased, the borrower returns the equivalent shares to the lender.
Where a company receives a dividend in respect of a borrowed share held by the company, the
dividend does not qualify for the dividend exemption (s 10(1)(k)(i)(ff)).
Where a company receives dividends in respect of shares that are identical to the shares borrowed
by the company, an amount equal to the manufactured dividend does not qualify for the dividend
exemption (s 10(1)(k)(i)(gg)), except if a dividend in respect of a borrowed share accrued to the
company and was not exempt under s 10(1)(k)(i)(ff). An identical share is a share of the same class
in the same company as the share, or a share that is substituted for a listed share in terms of an
arrangement that is announced and released as a corporate action, as contemplated in the JSE
90
Limited Listings Requirements in the SENS (Stock Exchange News Service). Included is any cor-
porate action as contemplated in the listings requirements of any other exchange, licenced under the
Financial Markets Act, that are substantially the same as the requirements prescribed by the JSE
Limited Listings Requirements, where that corporate action complies with the applicable require-
ments of that exchange. (Definition of ‘identical share’ in s 1).
Where the company loaned any other share that is identical to the borrowed shares, the aggregate
amount incurred as compensation for any distributions in respect of the borrowed shares must be
reduced by the aggregate amount accrued to the company as compensation for any distributions in
respect of the loaned shares (s 10(1)(k)(i)(gg)).
5.3.7 Dividends applied against deductible payments (par (hh) of the proviso to s 10(1)(k)(i))
Where a company incurs an obligation to pay deductible expenditure that is determined directly or
indirectly with reference to dividends in respect of an identical share to the share from which the
company received or accrued a dividend, the amount of the dividend will be taxable to the extent of
the deductible expenditure. This means that dividends received will not be exempt if used as an
offset against a deductible expense. For example, financial intermediary companies sometimes
receive dividends that are applied to offset deductible payments in respect of share derivatives (such
as stock futures, contracts-for-difference and total return swaps). In these cases, a mismatch arises if
the dividend received is exempt and the payment made in respect of the derivative or identical share
is deductible. The proviso to this subparagraph ensures that the subparagraph only denies an exemp-
tion to the extent of the expenditure. This anti-avoidance provision is similar to s 10B(6A) that applies
in respect of foreign dividends – see 5.3.8. The definition of an identical share is discussed in 5.3.6.
5.3.8 Foreign dividends and dividends paid by headquarter companies (s 10B)

Foreign dividends and dividends declared by headquarter companies are exempt from normal tax
under certain circumstances.
Foreign dividend
A foreign dividend is an amount paid by a foreign company in respect of a share in that foreign
company. A foreign company is any company that is not a resident. In order for the amount to qualify
as a foreign dividend, the amount must be treated as a dividend or similar payment for purposes of
the laws relating to tax on income on companies of the country in which the foreign company has its
place of effective management (if that country does not have any applicable laws relating to tax on
income, the amount must be treated as a dividend for purposes of the laws relating to companies in
that country). An amount does not qualify as a foreign dividend if it constitutes a redemption of a
participatory interest in a foreign collective investment scheme, or if it constitutes a share in the
foreign company (definition of ‘foreign dividend’ in s 1).
*
Remember
l As foreign dividends are not received from sources in South Africa, they are not included in
a non-resident’s gross income. Foreign dividends are therefore only included in a resident’s
gross income.
l It is important to note that it is the gross amount of a foreign dividend, before any withholding
taxes are deducted, that is included in a person’s gross income. Withholding taxes paid by a
South African resident on foreign dividends that are included in the resident’s gross income
may be allowed as a rebate against the resident’s South African normal tax payable. The
rebate is limited to the resident’s South African normal tax payable on the foreign dividend
included in gross income (s 6quat; see chapter 21).
l If a foreign dividend is exempt from normal tax, the taxpayer is not entitled to deduct the
foreign withholding taxes paid in respect of the foreign dividend from its South African nor-
mal tax payable (s 6quat(1B); see chapter 21).
l Foreign dividends should be converted into rand by applying the spot rate on the date on
which the dividend is received or accrued. Individuals and non-trading trusts are allowed to
elect to convert the amount into rand by applying the average rate of exchange for the year
of assessment (s 25D; see chapter 15).
91
Dividend declared by headquarter company

A headquarter company is a resident company that complies with the following requirements:
l each of the shareholders of the company must hold at least 10% of the equity shares of the
company
l more than 80% of the company’s assets must be attributable to an interest in the equity shares of
a foreign company (or debt owed to, or intellectual property licensed to a foreign company
l the company must hold at least 10% of the equity shares of such foreign companies, and
l where the gross income of the company exceeds R5 million, more than 50% of its gross income
must consist of rental, dividend, interest, royalties or service fees paid by such foreign company
(or from the proceeds of the disposal of equity shares in a foreign company, or intellectual prop-
erty licensed to a foreign company).
A headquarter company is in actual fact a local company, however, its dividends are treated as
dividends from a non-resident company in the recipient’s hands.
*
Remember
Although a dividend declared by a headquarter company is effectively a dividend from a local
company, it is excluded from the exemption under s 10(1)(k)(i), but may be exempt
under s 10B.
Complete and partial exemption in respect of foreign dividends

In some cases, foreign dividends and dividends declared by headquarter companies may qualify for
a complete exemption, whereas in other cases the dividends are only partially exempt, as set out in
the following diagram:
Foreign dividend
Complete exemption Partial exemption
Dividend Dividend from

Country-to- Ratio
Participation declared on a controlled
country exemption
exemption JSE listed foreign
exemption
shares company
1 Participation exemption (s 10B(2)(a))

Foreign country
If the person receiving the foreign dividend holds at least 10% of Foreign
the total equity shares and voting rights in the company declaring Company
the foreign dividend, the total foreign dividend will be exempt. If the
recipient of the foreign dividend is a company, the interest that any
=/>10% equity
share interest
Dividend
other company forming part of the same group of companies as the

recipient has in the company declaring the dividend is added to
the recipient’s interest when determining whether the 10% thresh-
South Africa
old is exceeded.
The participation exemption will not apply
Shareholder
l if the amount of the foreign dividend arises from an amount
paid by one person to another, which is deductible from the
income of the person paying the amount, but not subject to normal tax in the hands of the
person receiving the amount (or net income as contemplated in s 9D(2A) in the case of a
controlled foreign company). The same applies if the amount of the dividend is determined
directly or indirectly with reference to such amount paid. This exclusion does not apply if
the amount is paid as consideration for the purchase of trading stock by the person paying
the amount (s 10B(4)(a))
92
l if the amount is paid by a foreign collective investment scheme (s 10B(4)(b))

l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income of companies of the country in which the foreign company has its place
of effective management (proviso to s 10B(2))
l if the foreign dividend is received in respect of a share other than an equity share, for
example, preference shares (second proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend received by or accrued to
any person (s 10B(5)).
Example 5.7. Participation exemption (s 10B(2)(a))
Multo Ltd, a South African resident, holds 15% of the equity shares and voting interest in BTX
Plc, a foreign company (not a controlled foreign company under s 9D). On 10 June 2022 Multo
Ltd received a foreign dividend of R3 million (converted to rand) from BTX Plc.
Calculate Multo Ltd’s taxable income for its year of assessment ending on 31 December 2022.
SOLUTION
Gross income – foreign dividend received (par (k) of the gross income definition) R3 000 000
Less: s 10B(2)(a) exemption (> 10% holding) ....................................................... (R3 000 000)
Taxable income ..................................................................................................... Rnil
Notes
l If the foreign dividend payable to Multo Ltd arose from or was determined with reference to
an amount of interest that BTX Plc received from another South African company. The foreign
dividend will as a result not be exempt in Multo Ltd’s hands. This will be the case if the inter-
est was deductible in the hands of the company paying the interest to BTX Plc and not sub-
ject to normal tax in BTX Plc’s hands.
l If the foreign dividend was received in respect of a non-equity share (i.e. a preference
shares), the participation exemption under s 10B(2)(a) will not apply.
l If the foreign dividend does not qualify for the participation exemption under s 10B(2)(a), it
may still qualify for the ratio exemption under s 10B(3) (see below).
1 Country-to-country exemption (s 10B(2)(b))

If the foreign dividend is received by a foreign company,
which is a resident in the same country as the person paying
Residents in same
Foreign
foreign country
the dividend, the dividend is exempt. This exemption applies Company A

irrespective of the interest that the recipient company has in
the equity shares and voting interest in the company declaring Dividend
the foreign dividend. Since foreign dividends received by for-
eign companies are normally not included in such a foreign
company’s gross income for South African normal tax pur- Foreign
poses (since such dividend will not be from a South African Company B
source), the country-to-country exemption will only have prac-
tical application where the recipient foreign entity is a con-
trolled foreign company. The foreign dividend received by a controlled foreign company will, if
it is not exempt in terms of s 10B(2)(b), be included in the controlled foreign company’s net
income in terms of s 9D(2A) and consequently in the resident shareholder’s income in terms of
s 9D(2).
This exemption will, however, not apply
l if the amount of the foreign dividend arises from an amount paid by one person to another,
which is deductible from the income of the person paying the amount, but not subject to
normal tax in the hands of the person receiving the amount (or net income as contemplated
in s 9D(2A) in the case of a controlled foreign company). The same applies if the amount of
the dividend is determined directly or indirectly with reference to such amount paid. This
exclusion does not apply if the amount is paid as consideration for the purchase of trading
stock by the person paying the amount (s 10B(4)(a));
l where the amount is paid by a foreign collective investment scheme (s 10B(4)(b))
93
l to the extent that the foreign dividend is deductible by the foreign company in determining
any tax on income on companies of the country in which the foreign company has it place
of effective management (proviso to s 10B(2)), or
l to any portion of an annuity or payment out of a foreign dividend (s 10B(5)).
1 Controlled foreign company exemption (s 10B(2)(c))

If a resident receives a foreign dividend, it will be exempt to the
extent that the income of the foreign company declaring the divi-
CFC
Foreign
dend was included in the resident’s income in terms of s 9D. Sec- Company
Dividend
tion 9D(2) includes a proportionate amount of a controlled foreign
company’s (CFC’s) net income in the income of a resident share-
holder. The exemption of this foreign dividend prevents the dou-
ble taxation of the same profits, both in terms of s 9D and again
when the profits are distributed as a dividend (section 9D is dis- Resident
cussed in detail in chapter 21).
The controlled foreign company exemption is limited to the following calculation:
The aggregate of the net income of the CFC that is included in the resident’s income in
terms of s 9D (without having regard to the ratio exemption under s 10B(3)) .................... Rx
Add: The aggregate of the net income of any other company which has been
included in the resident’s income in terms of s 9D by virtue of the resident’s
participation rights in the other company held indirectly through the com-
pany declaring the dividend (without having regard to the ratio exemption
under s 10B(3)) .................................................................................................. Rx
Less: The aggregate amount of foreign tax paid in respect of amounts so included
in the resident’s income ..................................................................................... (Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were exempt in terms of s 10B(2)(a),
10B(2)(d) or (2)(e) .............................................................................................. (Rx)
Less: The aggregate amount of foreign dividends that the resident received from
the above two companies that were not included in the resident’s income
because of a prior inclusion in terms of s 9D (in other words, a dividend that
previously qualified for a s 10(1)(k)(ii)(cc) or a s 10B(2)(c) exemption)............ (Rx)
Dividend exemption in terms of s 10B(2)(c).................................................................. Rx
This exemption will not apply to any portion of an annuity or payment out of a foreign dividend
(s 10B(5)).
Example 5.8. Controlled foreign company exemption (s 10B(2)(c))
Thebogo Baroka (a resident) holds 8% of the equity shares of French Cuisine Ltd (‘French Cui-
sine’) (a controlled foreign company).
During French Cuisine’s year of assessment ending on 28 February 2022, its net income (as
contemplated in s 9D) was R10 million; it paid foreign tax of R2,5 million; and distributed divi-
dends of R2 million to its shareholders.
During French Cuisine’s year of assessment ending on 28 February 2023, its net income (as
contemplated in s 9D) was R2 million; it paid foreign tax of R500 000; and distributed dividends
of R5 million to its shareholders.
What is the effect of the above on Thebogo Baroka’s taxable income for his 2022 and 2023 years
of assessment?
94
SOLUTION
Thebogo Baroka’s 2022 year of assessment:
Net income imputed in terms of s 9D(2) (R10 000 000 × 8%) .................................. R800 000
Foreign dividend (R2 000 000 × 8%) ........................................................................ 160 000
Less: s 10B(2)(c) exemption: R160 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2) ............... R800 000
Less: Aggregate foreign tax paid (R2 500 000 × 8%) ............ (200 000)
R600 000
The s 10B(2)(c) exemption is limited to R600 000. Since the foreign divi-
dend was only R160 000, the entire amount is exempt ................................... (160 000)
Taxable income ........................................................................................................ R800 000
Thebogo Baroka’s 2023 year of assessment:

Net income imputed in terms of s 9D(2) (R2 000 000 × 8%) .................................... R160 000
Foreign dividend (R5 000 000 × 8%) ........................................................................ 400 000
Less: s 10B(2)(c) exemption: R400 000 foreign dividend limited to:
Aggregate net income imputed in terms of s 9D(2)
(R800 000 in respect of 2022 + R160 000 in respect of 2023) R960 000
Less: Aggregate foreign tax paid (R200 000 in respect of
2022 + R40 000 (R500 000 × 8%) in respect of 2023)........... (240 000)
Less: Aggregate amount of foreign dividends previously not
included in income by reason of a prior inclusion under s 9D (160 000)
R560 000
The s 10B(2)(c) exemption is limited to R560 000. Since the foreign divi-
dend was only R400 000, the entire amount is exempt. .............................. (400 000)
Taxable income ........................................................................................................ R160 000
1 Dividends declared in respect of JSE-listed shares (ss 10B(2)(d) and 10B(2)(e))

If the company declaring the foreign dividend is listed on the JSE, the dividend will be exempt
from normal tax. The exemption applies only if the dividend does not consist of a distribution of
an asset in specie. However, if a foreign dividend in the form of an in specie distribution is received
in respect of a JSE listed share by a resident company, the foreign dividend will be exempt
(s 10B(2)(e)).
This exemption will not apply to any payment out of a foreign dividend received by or accrued
to any person (s 10B(5)).
Remember
Because dividends declared in respect of listed shares are subject to dividends tax, they are
exempt from normal tax.
1 Ratio exemption (s 10B(3))

A foreign dividend may qualify for the ratio exemption to the extent that it does not qualify for
the above exemptions (meaning the participation exemption, country-to-country exemption,
controlled foreign company exemption or JSE-listed share exemption). This exemption is calcu-
lated in terms of the formula
A=B×C
‘A’ represents the amount to be exempted for a specific year of assessment.
‘B’ represents
l the ratio of 25/45 if the person receiving the dividend is a natural person, deceased or
insolvent estate or a trust
l the ratio of 8/28 where the person receiving the dividend is a person other than a natural
person, deceased or insolvent estate or a trust (thus also companies), or is an insurer in
respect of its company policyholder fund, corporate fund or risk policy fund, or
l the ratio of 10/30 where the person receiving the dividend is an insurer in respect of its
individual policyholder fund.
‘C’ represents the aggregate of all foreign dividends that the person received during the year of
assessment that did not qualify for the above exemptions.
95
This exemption will not apply to any portion of an annuity or any payment out of a foreign divi-
dend (s 10B(5)).
Example 5.9. Ratio exemption (s 10B(3))
FinCon Holdings (Pty) Ltd (‘FinCon’), a South African resident, received the following dividends
paid by non-resident companies during its 2022 year of assessment ending on 31 December
2022:
l A dividend of R200 000 from XLN Plc, a company resident in the UK. FinCon holds 5% of
XLN’s total equity shares and voting interest. XLN Plc is not a controlled foreign company.
l A dividend of R280 000 from ABL Ltd, a company resident in Ireland. FinCon holds 6% of
ABL Ltd’s total equity shares and voting interest. ABProp (Pty) Ltd, a company forming part of
the same group of companies as FinCon holds 5% of ABL’s total equity shares and voting in-
terest. ABL Ltd is not a controlled foreign company.
l A dividend of R650 000 from DMA Ltd, a company resident in the Netherlands. FinCon holds
15% of DMA Ltd’s total equity shares and voting interest. The dividend declared by DMA Ltd
was allowed as a deduction when calculating DMA Ltd’s income tax liability in the Nether-
lands. DMA Ltd is not a controlled foreign company.
l A dividend of R800 000 from BDS Ltd, a company resident in China. FinCon holds 5% of BDS
Ltd’s total equity shares and voting interest. BDS Ltd is a controlled foreign company and
R300 000 of the dividend qualifies for an exemption under s 10B(2)(c).
Calculate FinCon’s taxable income for its 2022 year of assessment.
SOLUTION
Gross income
The dividends received qualify as foreign dividends since they are paid by non-resident com-
panies; the foreign dividends are included in gross income in terms of par (k) of the definition of
‘gross income’:
l Foreign dividend received from XLN Plc.............................................................. R200 000
l Foreign dividend received from ABL Ltd ............................................................. 280 000
l Foreign dividend received from DMA Ltd ............................................................ 650 000
l Foreign dividend received from BDS Ltd ............................................................. 800 000
Exemptions
l Foreign dividend received from XLN Plc – the foreign dividend is not exempt
under s 10B(2) since FinCon holds less than 10% of XLN Plc total equity
shares and voting interest. ................................................................................... nil
l Foreign dividend received from ABL Ltd – the foreign dividend is exempt under
s 10B(2)(a), since FinCon together with a company forming part of the same
group of companies holds more than 10% of ABL Ltd’s total equity shares and
voting interest. ...................................................................................................... (280 000)
l A foreign dividend received from DMA Ltd – since a deduction was allowed
when calculating DMA Ltd’s income tax liability in the Netherlands, it does not
qualify for a participation exemption (s 10B(2)(a)). .............................................. nil
l Foreign dividend received from BDS Ltd – an amount of R300 000 qualifies for
an exemption under s 10B(2)(c) .......................................................................... (300 000)
Ratio exemption:
Foreign dividends not exempt:
Foreign dividend from XLN Plc ................................................................ R200 000
Amount received from DMA Ltd .............................................................. 650 000
Foreign dividend received from BDS Ltd (R800 000 – R300 000) ........... 500 000
R1 350 000
Ratio exemption (8/28 × R1 350 000) ....................................................................... (385 714)
Taxable income ........................................................................................................... R964 286
Anti-avoidance provisions relating to share schemes (s 10B(6))

Certain measures are put in place to prevent taxpayers from converting a taxable salary into exempt
(or low taxed) dividends. Many share schemes hold pure equity shares where the sole intent of the
scheme is to generate dividends for employees as compensation for past or future services rendered
to the employer, without the employees ever obtaining ownership of the shares. The dividend yield in
these instances effectively operates as disguised salary for employees even though these dividends
arise from equity shares.
96
Where a foreign dividend is received or accrued in respect of services rendered or to be rendered or

in respect of or by virtue of employment or the holding of any office, the above exemptions under
s 10B(2) and 10B(3) will not apply, unless
l the share is held by the employee, or
l the foreign dividend is received in respect of a restricted equity instrument as defined in s 8C
held by the employee. A foreign dividend received in respect of a restricted equity instrument will
not be exempt if the shares were acquired in the circumstances contemplated in s 8C and the
dividend is derived directly or indirectly from, or constitutes:
– an amount transferred or applied by a company as consideration for the acquisition or redemp-
– an amount received or accrued in anticipation or in the course of the winding up, liquidation,
deregistration or final termination of a company, or
– an equity instrument that does not qualify, at the time of receipt or accrual of the foreign divi-
dend, as a restricted equity instrument as defined in s 8C.
Dividends applied against deductible payments (s 10B(6A))

Where a company incurs an obligation to pay deductible expenditure that is determined directly or
indirectly with reference to foreign dividends in respect of an identical foreign share from which the
company received or accrued a dividend, the amount of the foreign dividend will be taxable to the
extent of the deductible expenditure. This means that foreign dividends received will not be exempt
in terms of s 10B(2) or (3) if used as an offset against a deductible expense. For example, financial
intermediary companies sometimes receive foreign dividends that are applied to offset deductible
payments. In these cases, a mismatch arises if the foreign dividend received is exempt in terms of
s 10B(2) or (3) and the payment made is deductible. The proviso to this subparagraph ensures that
the subparagraph only denies an exemption in terms of s 10B(2) or (3) to the extent of the expendi-
ture. Section 10B(6A) comes into operation on 1 January 2021 and applies in respect of foreign
dividends received or accrued on or after that date. This anti-avoidance provision is similar to
par (hh) of the proviso to s 10(1)(k)(i) that applies in respect of local dividends – see 5.3.7. The defini-
tion of an identical share is discussed in 5.3.6.
5.4 Exemptions relating to employment

Employers often grant benefits or allowances to their employees to enable them to perform their
duties as employees. Where a non-cash benefit is granted to an employee, the taxable benefit should
be determined in terms of the Seventh Schedule and included in the employee’s gross income in
terms of par (i). However, it appears that par 1 of the Seventh Schedule (definition of ‘taxable benefit’)
excludes all exempt amounts. This creates an anomaly as it is normally only if an amount is included
in gross income that can be exempt in terms of s 10. In this regard, consider uniform benefits
(s 10(1)(nA)), relocation benefits s 10(1)(nB) and scholarships and bursaries (s 10(1)(q)/(qA)). It is
submitted that the exemption can still apply in these situations because the benefits can still be
included in gross income in terms of par (c) of the gross income definition and not in terms of par (i)
thereof.
The same applies where employers pay allowances or advances to employees. All cash allowances
and advances are included in the taxable income (and not in the gross income) of the recipient in
terms of s 8(1). Any portion of an allowance, to the extent that it is exempt from normal tax in terms of
s 10, must be excluded from the amount to be included in taxable income (s 8(1)). An example of an
allowance that is exempt in terms of s 10 is a uniform allowance meeting all the requirements of
s 10(1)(nA). Such an exempt uniform allowance remains an amount received in respect of services
rendered and, even though such an amount is specifically excluded from the s 8(1) amount, it can
still be included in gross income in terms of par (c) of the gross income definition. The amount can
therefore be exempt in terms of s 10(1)(nA).
5.4.1 Foreign pensions (s 10(1)(gC))

Any foreign pension, annuity or lump sum will be included in the gross income of a resident. These
foreign pensions, annuities and lump sums are, however, exempt from normal tax in the hands of the
resident, if received or accrued
l from the social security system of any foreign country (s 10(1)(gC)(i)), or
l from a source outside South Africa as compensation for past employment outside South Africa
from a pension fund, pension preservation fund, provident fund, provident preservation fund or
97
retirement annuity fund as defined in s 1 of the Act (s 10(1)(gC)(ii)). These definitions of retire-
ment funds refer to South African funds approved by SARS. This implies that the exemption from
normal tax only applies to amounts received from foreign retirement funds. Amounts received
from any South African pension fund, pension preservation fund, provident fund, provident
preservation fund or retirement annuity fund do not qualify for the exemption. Amounts received
from a South African long-term insurer will also not qualify for this exemption. Amounts transferred
to a South African fund or long-term insurer from a source outside South Africa in respect of a
specific member, will, however, qualify for the exemption.
It is clear that it is lump sum payments, pensions or annuities from a source outside South Africa
received or accrued by a resident that may be exempt. Any pension, annuity, or lump sum is deemed
to be received from a source within South Africa if the services in respect of which the amount relates
were rendered within South Africa (s 9(2)(i); see chapter 3). Where such amount relates to services
that were rendered partly in South Africa and partly outside South Africa, the full amount is included
in gross income and the portion of the amount that is exempt, is calculated in terms of the following
formula:
The period during which the services
Total amount were rendered outside South Africa
Amount exempt = ×
received / accrued The total period during which
the services were rendered
Example 5.10. Foreign pensions
Lerato is a South African resident. From 1 March 2021, she received R7 000 per month from a
foreign pension fund with regard to services rendered to a foreign company from 1 March 1983
until her retirement in February 2021.
She rendered services at the following times in the following places:
1 March 1983–28 February 1991 in Amsterdam (8 years)
1 March 1991–28 February 1994 in Bloemfontein (3 years)
Explain the South African normal tax implications of Lerato’s pension in respect of her 2022 year
of assessment.
SOLUTION
Gross income
Pension received (R7 000 × 12) (since Lerato is a resident, her worldwide income is
included in her gross income ....................................................................................... 84 000
Less: Pension exempt in terms of s 10(1)(gC) (R4 236,85 × 12) (note 1)..................... (50 842)
Income .......................................................................................................................... 33 158
Note 1
The portion of Lerato’s pension that is received from a source outside South Africa, is exempt in
terms of s 10(1)(gC). Since the services to which the pension relates were rendered partly in
South Africa and partly outside South Africa, a portion of Lerato’s pension will be regarded as
being from a source outside South Africa and exempt in terms of s 10(1)(gC). This portion is
calculated as follows:
The total period during which the services were rendered........................................... 38 years
The period during which the services were rendered in South Africa .......................... 15 years
Portion of monthly pension regarded from a source within South Africa
(R7 000 × 15/38) ........................................................................................................... R2 763,15
Portion of monthly pension exempt in terms of s 10(1)(gC) (R7 000 × 23/38) R4 236,85
Note 2
If, instead of receiving a pension from a foreign pension fund, Lerato received a purchased
annuity from a South African resident life insurance company (that is a long-term insurer) to
which she contributed a lump sum amount herself (no amount transferred from funds), the capital
portion of the annuity that she received during the months of March 2021 to February 2022 would
be exempt under s 10A (see 5.2.4). The non-capital portion that is attributable to a foreign source
will not be exempt under s 10(1)(gC)(ii) since the long-term insurer is a South African resident life
insurance company.
98
5.4.2 Unemployment insurance benefits (s 10(1)(mB))

Any benefit or allowance payable in terms of the Unemployment Insurance Act 63 of 2001 is exempt
from normal tax.
5.4.3 Uniforms and uniform allowances (s 10(1)(nA))

Benefits granted and allowances paid by an employer to an employee in respect of a uniform are
both taxable in the employee’s hands. The cash equivalent of a uniform benefit, as well as the
amount of a uniform allowance paid by the employer can be included in the employee’s gross
income in terms of par (c) of the definition of gross income (refer to discussion in par 5.4). Certain
uniforms are, however, exempt from normal tax (s 10(1)(nA)). For the exemption to apply, the uniform
should be clearly distinguishable from ordinary clothing, and the employee should be required to
wear the uniform while on duty.
5.4.4 Relocation benefits (s 10(1)(nB))

Where an employer pays the relocation cost of an employee who is either transferred from one place
of employment to another place of employment or appointed/terminated as an employee, the benefit
of the relocation cost can be included in the employee’s gross income in terms of par (c) of the gross
income definition (refer to discussion in par 5.4). An exemption from normal tax in terms of
s 10(1)(nB) applies to the following expenses borne by the employer:
l the expense of transporting the employee, members of his household and their personal goods
and possessions from his previous place of residence to his new place of residence
l those costs that have been incurred by the employee in respect of the sale of his previous resi-
dence and in settling-in at his new permanent place of residence
l the expense of hiring residential accommodation in a hotel or elsewhere for the employee or
members of his household for a maximum period of 183 days after his transfer took effect or after
he took up his appointment. The rented accommodation must be temporary while the employee
is in search of permanent residential accommodation.
The employer must have borne these expenses, that is, he must either have incurred them himself or
have reimbursed his employee.
In practice, SARS allows the exemption for the reimbursement of the expenditure incurred by the
employee on the following:
l new school uniforms
l the replacement of curtains
l the registration of a mortgage bond and legal fees
l transfer duty
l motor-vehicle registration fees
l telephone, water and electricity connection
l the cancellation of a mortgage bond, and
l an agent’s fee on the sale of the employee’s previous residence.
It will not accept a loss incurred by the employee on the sale of his previous residence or an architect’s
fees for the design or alteration of a residence.
l Only actual expenses incurred by the employer, or reimbursed by the employer,

qualify for the exemption. Where an employer pays an allowance to an
employee, such as a relocation allowance equal to a number of months’ salary,
the allowance will be fully taxable in the employee’s hands if the purpose is not
to reimburse the employee for actual relocation expenses incurred.
l The exemption is not subject to a monetary limitation. As long as the expense
Please note! is actually incurred (either by the employer, or the employee who is then reim-
bursed by the employer for the expense), the benefit that accrues to the
employee is exempt from normal tax.
l The 183 days limit is only applied in respect of the cost of temporary accom-
modation. If the cost relating to temporary accommodation exceeds 183 days,
the portion of the cost relating to accommodation in excess of 183 days will not
be exempt.
99
5.4.5 Broad-based employee share plan (s 10(1)(nC))

Employee share incentive schemes are ordinarily implemented by employer companies in order to incen-
tivise and retain employees, and for such employees to receive indirect benefits from the apprecia-
tion in the growth of such company. Where an employer company gives an employee shares in the
company, a tax implication will generally arise for the employee. However, shares received in terms
of a broad-based employee share plan are exempt from normal tax until the employee disposes of
such shares (s 10(1)(nC)). The exemption is effectively limited to shares received with a market value
of R50 000 over a five-year period. The normal tax consequences for employees receiving shares in
terms of a broad-based employee share plan are provided for in s 8B (see chapter 7).
See also Interpretation Note No. 62 (30 March 2011) that deals with the taxation of broad-based
employee share plans.
5.4.6 ‘Stop-loss’ provision for share-incentive schemes (s 10(1)(nE))

As mentioned above, employee share-incentive schemes are designed to incentivise and retain
employees. It may, however, happen that the value of the employer company shares decline, which
could result in a loss for the employee. Amounts received by a person under these circumstances
may be exempt from normal tax (s 10(1)(nE)). This exemption is referred to as a stop-loss provision,
and applies in the following circumstances:
l where a person receives an amount when the transaction in terms of which the person acquired
the shares is cancelled, or
l where the shares are repurchased from the employee at a price not exceeding the original pur-
chase price.
The above exemption only applies if the taxpayer has not received or become entitled to any consid-
eration or compensation other than the repayment of the original purchase price.
The exemption does not apply in respect of equity instruments in respect of which s 8C applies (see
chapter 7).
5.4.7 Equity instruments awarded to employees or directors (s 10(1)(nD))

An employer could also issue equity instruments, which are not in terms of a broad-based employee
share plan, to employees (see 5.4.5), for example when shares are only awarded to certain employ-
ees and not to at least 80% of permanent employees. An employer could award shares to an employee
subject to a condition that the share only vests in the employee after a period of time, or after certain
conditions are met. An employer would normally do this to incentivise retention of key employees, or
to award employees for specific performance. Where an employer gives shares to an employee,
which do not vest in the employee at the time of acquisition, the amount accruing to the employee will
be exempt from normal tax in the employee’s hands (s 10(1)(nD)(i)).
This exemption will apply regarding equity shares that the person receives by virtue of his employ-
ment, or because the person is a director of the company, or in respect of equity shares received
from any other person by arrangement with the person's employer.
Where the person disposes of such shares before they vest in his or her hands, the amount received
will similarly be exempt from normal tax (s 10(1)(nD)(ii)).
Although the benefit that accrues to a person when he or she receives the above shares is exempt
from normal tax, the shares may have tax implications for the person at the time when the shares vest
in the person (that is when the restrictions imposed on the share are lifted). Section 8C determines
the amount that should be included in or deducted from the person’s income at the time when the
shares vest in the person’s hands (see chapter 7).
Also see Interpretation Note No. 55 (30 March 2011) that deals with the taxation of directors and
employees on the vesting of equity instruments.
5.4.8 Salaries paid to an officer or crew member of a ship (ss 10(1)(o)(i) and (iA))
The remuneration of a person earned as an officer or crew member of a ship is exempt from normal
tax if the person was outside South Africa for a period or periods exceeding 183 full days in aggre-
gate during the year of assessment. The remuneration referred to here is remuneration as defined in
par 1 of the Fourth Schedule. This exemption only applies if
l the ship is engaged in the international transport of passengers or goods, or
l the ship is engaged in prospecting, exploration or mining for, or production of, any minerals
(including natural oils) from the seabed outside South Africa, or
100
l the ship is a South African ship engaged in international shipping (as defined in s 12Q), or in
fishing outside South Africa.
In the case of a South African ship engaged in international shipping or in fishing outside South
Africa, the requirement that the person should be outside South Africa for a period or periods
exceeding 183 days in aggregate, does not apply. The remuneration received by an officer or crew
member on such ship is exempt from normal tax regardless of the period that the person was outside
South Africa.
5.4.9 Employment: Outside South Africa (s 10(1)(o)(ii))

An exemption in terms of s 10(1)(o)(ii) applies
(a) in respect of employees who are South African residents
(b) earning remuneration (see list under (b) below) in respect of services rendered
(c) by way of employment outside South Africa
(d) for or on behalf of an employer, who can be situated in or outside South Africa,
(e) during a qualifying period of employment outside South Africa (183-days requirement* and 60-
continuous-days requirement must both be met)
(f) provided that the remuneration is not specifically excluded from the exemption.
*As a COVID-19 relief measure, the 183-day requirement will be met where the period of employment
outside South Africa exceeds more than 117 full days during any period of 12 months ending
between 29 February 2020 and 28 February 2021. The reason for reducing the required 183 days in
a 12-month period to 117 days, is to provide relief in respect of the lockdown period when residents
were not allowed to travel outside South Africa.
With effect from 1 March 2020 and in respect of years of assessment commencing after 1 March
2020, the s 10(1)(o)(ii) exemption will only apply to the first R1,25 million of a person’s qualifying
foreign remuneration.
Interpretation Note No. 16, issue 3 (31 January 2020) provides more clarity regarding the require-
ments of s 10(1)(o)(ii):
(a) Employees must be South African residents

A person is a resident of South Africa if he or she is ordinarily resident or becomes a resident by way
of physical presence. Citizenship or financial emigration are merely factors to consider and do not
determine residency. Refer to chapter 3 for the different tests to determine if a person is a resident of
South Africa.
If a person ceases to be a resident of South Africa for tax purposes, a deemed

disposal of his or her worldwide assets, excluding immovable property situated in
Please note!
South Africa and assets attributable to a permanent establishment in South
Africa, is triggered. See chapter 3 for a detailed discussion of s 9H.
(b) Remuneration in respect of services rendered

The exemption applies to any salary, taxable benefits (as determined in terms of the Seventh Sched-
ule), leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, allowance and
amounts vested in terms of share schemes (ss 8B (broad-based employee share plans) and 8C
(restricted equity shares)). The exemption does not apply to payments for the termination, loss,
cancellation or variation of any office or employment as these payments are not in respect of services
rendered.
(c) Employment outside the Republic of South Africa

The services must be rendered outside the Republic of South Africa. The ‘Republic’ is defined in
s 1(1) and includes the landmass of South Africa as well as its territorial waters, which is a belt of sea
adjacent to the landmass not exceeding 12 nautical miles (approximately 22,2 km). The definition
also specifically includes exclusive areas beyond the territorial waters where South Africa has sover-
eign rights in respect of the exploration of natural resources which extends to the outer edge of the
continental margin, or 200 nautical miles (approximately 370,6 km), whichever is the greater. This
means that any remuneration for exploration services rendered beyond South Africa’s territorial seas
but within the exclusive economic zone will not qualify for exemption under this section.
101
(d) Services for or on behalf of an employer situated in or outside South Africa

The services that are rendered for or on behalf of the employer must be rendered in terms of an
employment contract. The term ‘any employer’ means that services rendered to resident or non-
resident employers could qualify for exemption. The term ‘employee’ excludes an independent con-
tractor or self-employed person (sole proprietors or partners in a partnership) because they are not
considered to be employees. Directors in their capacity as directors are holders of an office, not
employees, and to the extent that they earn director’s fees, such fees do not qualify for the exemption.
(e) Outside South Africa for a qualifying period

The period of employment outside South Africa must be for more than 183 full days during any
12-month period (or, in terms of the transitional measure, for more than 117 full days during any
12-month period ending between 29 February 2020 and 28 February 2021). This period of 183 days
(or 117 days) must include a continuous period of absence of more than 60 full days during that
period of 12 months. Full days are required for purposes of both the 183-day (or 117-day) and 60-
continuous-day requirements. A ‘full day’ means 24 hours, i.e. from 0:00 to 24:00. In calculating the
number of days during which a person is outside South Africa, weekends, public holidays, vacation
leave and sick leave spent outside South Africa are considered to be days during which services are
rendered. These should therefore be included in the calculation of the 183-day (or 117-day) and
60-day periods of absence. Where a person is in transit through South Africa between two places
outside South Africa and does not formally enter South Africa through a designated port of entry, the
person is deemed to be outside of South Africa for purposes of this exemption (proviso (A) to
s 10(1)(o)(ii)).
The rules, to calculate whether the 183-day (or 117-day) or 60-continous day
tests have been met, are different from the rules to determine the qualifying days
Please note! for the apportionment of income (see the discussion of apportionment under (g)
below).
The 12-month period need not correspond with a financial or tax year – in other words, any 12-month
period may be used to establish whether the person was outside South Africa for more than 183 days
(117 days during any 12-month period ending between 29 February 2020 and 28 February 2021).
The services that generated the exempt income should, however, have been rendered during that
period. In identifying a period of 12 months that may be used, the period during which the services
were rendered to the employer should first be identified. It is suggested that one should start by
looking from the first day of the month in which remuneration from foreign services was received or
accrued, and then work forward 12 months to determine whether the 183-day (or 117-day) and 60-
continuous-day tests were met. Alternatively, if the days tests are not met using this first test, one can
look backwards 12 months from the last day of the month in which foreign remuneration was earned
to determine whether the 183-day (or 117-day) and 60-continuous-day tests were met. Please note
that a person is entitled to look both forwards and backwards over any period of 12 months. The use
of any specified period in more than one tax year is therefore permitted due to the wording of the
section that permits the test to be conducted over ‘any’ period of 12 months.
The onus is on the employee to prove his or her periods of absences from South African and that the
absences were in terms of an employment contract. Examples of proof include letters of secondment,
employment contracts for foreign services, travel schedules and copies of passports.
(f) Exclusions from s 10(1)(o)(ii) exemption

This exemption is also not applicable to the following types of remuneration:
l remuneration derived from the holding of any public office to which the person was appointed in
terms of an Act of Parliament (refer to s 9(2)(g)), or
l remuneration received in respect of services rendered or work or labour performed of an employer
– in the national, provincial or local sphere of government of South Africa
– that is a constitutional institution listed in Schedule 1 of the Public Finance Management Act,
1 of 1999
– that is a public entity listed in Schedule 2 of the Public Finance Management Act, 1 of 1999,
or
– that is a municipal entity as defined in s 1 of the Local Government: Municipal Systems Act,
32 of 2000 (refer to s 9(2)(h)).
(Proviso (B) to s 10(1)(o)(ii))
102
Example 5.11. Foreign employment income

Karabo is a resident who conducts a business as a sole proprietor.
l During the 2022 year of assessment, he was awarded a contract to construct a building in
Nigeria. The construction of the building will take nine months to complete. Karabo will not be
returning to South Africa any time during these nine months (not even over weekends).
l Fifteen (15) of his employees are going to render services on the site in Nigeria. These employ-
ees are all South African residents.
– Eight (8) have agreed not to return to South Africa during the nine-month period.
– Seven (7) have agreed only to work on the contract if they can return to South Africa
during the last weekend of every month in order to visit their families.
Explain the tax implications for the 2022 year of assessment for:
(a) Karabo
(b) The eight employees that do not return to South Africa
(c) The seven employees that return to South Africa once a month.
Assume for purpose of this example that there is no double tax agreement between South Afri-
ca and Nigeria.
SOLUTION
(a) Because Karabo is a resident, he will be taxed on his worldwide receipts and accruals. As
he is not an employee, he will be taxed on the profit of the contract. The s 10(1)(o)(ii)
exemption is not available to him.
(b) Because the eight employees comply with the requirements of s 10(1)(o)(ii), they qualify for
the exemption. The first R1,25 million of each employee’s remuneration that relates to the
period worked in Nigeria will not be taxed in South Africa due to the fact that it will be
exempt.
(c) The seven employees who return to South Africa once a month do not qualify for the
s 10(1)(o)(ii) exemption. They do not comply with the requirement to be outside of South
Africa for more than 60 continuous days during the 183-day period in 12 months. They will
be taxed in South Africa on the salary that they earn while working in Nigeria.
(g) Apportionment of remuneration

It is clear that the exemption applies to remuneration received or accrued for services rendered out-
side South Africa during a qualifying period. There should be a link between the remuneration and
the foreign services rendered. Where remuneration is received or accrued during a qualifying period
but it relates to services rendered within South Africa, it cannot qualify for the exemption. However,
any remuneration earned during a qualifying period in respect of services that were rendered both
inside and outside South Africa must be apportioned so that only the income relating to foreign
services rendered during that specific tax year is exempt (proviso (C) to s 10(1)(o)(ii)). This is rele-
vant, for example, where an employee becomes entitled to benefits under share incentive schemes.
The inclusion of the gain in terms of s 8C takes place when the vesting of the equity instrument
occurs. The vesting of the equity instrument is, however, not the originating source of the gain. The
originating source is the service period that the equity benefit relates to (also referred to as the
source period).
SARS accepts the following as the correct method to apportion the remuneration:
Work days outside the Republic during qualifying period (relating to source period)
× Remuneration
Total work days in respect of the source period
= Exempt portion of remuneration limited to R1,25 million
For purposes of the apportionment, ‘work days’ means days of actual services rendered and not
weekends, public holidays or leave days.
103
Example 5.12. Foreign employment income

Martin is a resident who works for a South African company. On 1 March 2016, Martin acquired
shares in the company by virtue of his employment. Under the agreement, Martin was not permit-
ted to dispose of the shares until 1 March 2021. The shares were granted solely to retain Martin’s
services during the period from 1 March 2016 to 1 March 2021, i.e. for 1 826 calendar days and
1 152 actual working days (excluding leave days) and it was not awarded to any other employ-
ees.
The shares vested on 1 March 2021 and the s 8C gain to be included in his gross income on this
date was correctly calculated as R320 000. Martin is currently 28 years old. All of Martin’s ser-
vices to his employer were physically rendered in South Africa, except for the following:
l From 1 March 2017 until 31 July 2019, Martin was seconded by his employer to render his
services physically in Mauritius. During this 17-month period (517 calendar days) in Mauritius,
Martin’s actual working days were 342 days (excluding leave days) and he only returned to
South Africa once during this period, for a holiday of two weeks.
Explain the tax implications of the above for Martin’s 2022 year of assessment.
For purpose of this example, you can ignore the double tax agreement between South Africa and
Mauritius.
SOLUTION
l The period from 1 March 2017 to 31 July 2019 is a qualifying period because Martin met the
183-day requirement (517 days in Mauritius) and the 60-continuous-day requirement (only
returned for 14 days in 517 days). The remuneration earned for services rendered outside
the Republic during this 17-month period in Mauritius, therefore, qualified for exemption
under s 10(1)(o)(ii). (The R1,25 million limit was not applicable to that period).
l According to proviso C of s 10(1)(o)(ii), Martin’s s 8C gain is deemed to be spread evenly
over the period relating to the s 8C remuneration. The shares were granted solely to retain
Martin's services for the period from 1 March 2016 to 1 March 2021. Thus, the total 1 152
actual work days relate to the s 8C remuneration. Of these 1 152 days, 342 working days
fall in a qualifying period in respect of services rendered outside South Africa.
l The s 8C gain of R320 000 can thus be apportioned to determine the exempt portion by
multiplying the amount with 342 days / 1 152 days. The exemption equals R95 000, limited
to R1,25 million. The balance of the s 8C gain of R225 000 (R320 000 less the R95 000
exemption) remains taxable in South Africa, i.e. must be included in Martin’s taxable
income and taxed per normal tax tables.
Limitation of R1,25 million

With effect from 1 March 2020 and in respect of years of assessment commencing after 1 March
2020, the s 10(1)(o)(ii) exemption will only apply to the first R1,25 million of a person’s qualifying
foreign remuneration. Any excess above R1,25 million will be included in the person’s taxable income
and will be subject to normal tax in South Africa. The R1,25 million exemption is available in respect
of each year of assessment and will apply even if the person rendered services outside South Africa
for only a part of the year of assessment, provided that the ‘days’ requirements are met in respect of
the foreign salary income. Taxable benefits received while rendering services outside South Africa
are valued using the provisions of the Seventh Schedule and these benefits should be included in
calculating the person’s remuneration amount (see chapter 8) (SARS Guide – FAQs: Foreign Employ-
ment Income Exemption).
The provisions of a double tax agreement should be considered in respect of

remuneration that exceeds R1,25 million. In general, double tax agreements
provide that both countries enjoy taxing rights where an employee renders
Please note! services in a foreign country for a period or periods exceeding 183 full days.
Double tax relief in the form of a foreign tax credit is available in South Africa
where tax was paid in both countries on the same remuneration. Refer to chap-
ter 21 for a detailed discussion of double tax agreements and foreign tax credits.
104
5.5 Exemptions that incentives education
5.5.1 Bursaries and scholarships (s 10(1)(q) and (qA))

Any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised
educational or research institution is exempt from normal tax (s 10(1)(q)). The following requirements
must be met for a bursary or scholarship to qualify for this exemption:
l The scholarship or bursary must be a bona fide scholarship or bursary.
l It must be granted to enable or assist a person to study.
l The person must study at a recognised educational or research institution.
l Where a bursary is awarded to an employee or a relative of an employee, further requirements
apply, which are discussed below.
Section 10(1)(qA) exempts bona fide scholarships or bursaries granted to enable or assist any per-
son who is a person with a disability to study at a recognised educational or research institution. The
requirements for this exemption are the same as under s 10(1)(q) discussed above. ‘Disability’ is
defined in s 6B and is discussed in chapter 7. The only difference brought about by s 10(1)(qA) is
that bursaries granted to a relative who is a person with a disability are subject to a higher threshold
(see below).
Scholarships or bursaries to non-employees

These scholarships or bursaries are exempt from normal tax. They refer to scholarships or bursaries
that are competed for by, or are awarded on merit (academic or otherwise) to, anyone applying for
them and are not, to any extent, confined to the employees or relatives of employees of a particular
employer, organisation or other institution.
Scholarships or bursaries granted by an employer to an employee

A bursary or scholarship granted by an employer to an employee is exempt from normal tax as long
as the employee agrees to reimburse the employer if he or she fails to complete his or her studies
(except if failure to complete occurs as a result of death, ill-health or injury) (s 10(1)(q) and in respect
of an employee who is a person with a disability, s 10(1)(qA)).
Scholarships or bursaries granted by an employer to relatives of an employee
Where a scholarship or bursary is granted by an employer to enable a relative of an employee to
study at a recognised educational or research institution, the amount can be included in gross
income (see discussion in par 5.4) and it will be exempt from normal tax if the following conditions
are met:
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l The remuneration proxy must not be subject to an element of salary sacrifice. A salary sacrifice
normally occurs where an employee agrees to a reduction in his or her cash salary, usually in
return for a non-cash benefit. If the remuneration (or future remuneration) of the employee is
reduced or forfeited because of the granting of a scholarship or bursary, then the exemption will
not be allowed. This requirement applies in respect of years of assessment commencing after
1 March 2021, i.e. for the 2022 year of assessment.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R20 000 in respect of grades R to 12,
– R20 000 in respect of a qualification to which an NQF level from 1 up to and including 4 has
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
been allocated in accordance with Chapter 2 of the above Act.
The amounts mentioned above apply in respect of the 2018 and later years of
Please note! assessment for a natural person.
105
Where an employer grants a bursary to a person with a disability who is a member of the family of an
employee in respect of whom the employee is liable for family care and support, the amount will be
exempt from normal tax if the following conditions are met:
l The remuneration proxy (see below) of the employee in relation to a year of assessment may not
exceed R600 000.
l Again, the remuneration proxy must not be subject to an element of salary sacrifice. If the remu-
neration (or future remuneration) of the employee is reduced or forfeited because of the granting
of a scholarship or bursary, then the exemption will not be allowed. This requirement applies in
respect of years of assessment commencing after 1 March 2021, i.e. for the 2022 year of assess-
ment.
l The amount of any scholarship or bursary awarded to a relative during the year of assessment
that is exempt, is limited to the following:
– R30 000 in respect of grades R to 12
been allocated in accordance with Chapter 2 of the National Qualifications Framework Act,
2008, and
been allocated in accordance with Chapter 2 of the above Act.
‘Remuneration proxy’ is the remuneration that the employee received from the employer during the
immediately preceding year of assessment (definition of remuneration proxy in s 1). If the employee
was only employed by a specific employer (or associated institution to the employer) for a portion of
the preceding year, the remuneration proxy must be determined with reference to the number of days
in that year that the employee was employed. If the employee was not employed by the employer
during the immediately preceding year, the employee’s remuneration proxy is determined with refer-
ence to the number of days in the first month of the employee’s employment.
An employee’s remuneration excludes the cash value of employer-provided

Please note! accommodation (as contemplated in par 9(3) of the Seventh Schedule) when
determining the employee’s remuneration proxy.
106
The requirements that must be complied with in order for a bursary or scholarship to be exempt from
normal tax are summarised in the following diagram:
Is the bursary or NO
scholarship a bona fide The bursary or
bursary or scholarship? scholarship is not exempt
YES
NO
Was the bursary granted
to enable a person to NO Did the employee agree to
study at a recognised Bursary or reimburse the employer if he
educational or research scholarship granted to failed to complete his studies for
institution? an employee reasons other than death, ill health
or injury?
YES
The bursary or
scholarship is exempt in
terms of s 10(1)(q)
Bursary or Did the employee’s remuneration

YES
scholarship granted to proxy for the year of assessment
a relative of an exceed R600 000 or was remu-
Was the bursary granted by neration sacrificed to obtain the
an employer (or associated YES employee
scholarship/bursary?
institution) to an employee
or relative of an employee?
YES NO NO NO
NO
The bursary or If the bursary If the bursary is If the bursary is

The bursary or
scholarship is is awarded awarded in awarded in
scholarship is exempt in
not exempt in respect respect of an respect of an
terms of s 10(1)(q)
of grades R NQF 1 to 4 NQF 5 to 10
to 12 qualification, qualification,
then then
the first R20 000 the first R20 000 the first R60 000
(R30 000 if (R30 000 if (R90 000 if
disabled) disabled) disabled)
of the bursary of the bursary of the bursary
awarded to awarded to awarded to
such relative is such relative is such relative is
exempt exempt exempt
107
Example 5.13. Bursaries and scholarships
Pretend (Pty) Ltd awarded various bursaries during the 2022 year of assessment ending on
28 February 2022. The following employees were involved:
l Nomatema: An employee who was awarded a bursary of R20 000 to study at a prestige uni-
versity for an NQF level 5 qualification. The bursary was granted on condition that she would
reimburse Pretend if she fails to complete her studies for reasons other than death, ill-health
or injury. On her way to the exam venue she was in a fatal accident and was pronounced
deceased at the scene.
l Sibiwe: An employee who successfully completed a qualification at a university of technology
for an NQF level 4 qualification was reimbursed for his study expenses of R15 000. Pretend
was unaware that Sibiwe was studying, until he brought his new qualification to the Human
Resources Department of Pretend to record in his personnel file.
l Joe: Joe is an employee whose child, Nelson, was awarded a bursary of R70 000 to study an
NQF level 6 qualification at a university. Joe has been in Pretend (Pty) Ltd’s employment
since 1 September 2020. During the period from 1 September 2020 to 28 February 2021,
Joe’s remuneration was R90 000. During the period 1 March 2021 to 28 February 2022, Joe’s
remuneration was R216 000. Joe’s remuneration was not sacrificed to obtain the bursary.
l Julia: Julia is an employee. Her daughter, Kate, received a scholarship of R18 000 for her
primary school fees. Kate is in grade 5. Julia has been employed at Pretend (Pty) Ltd since
1 June 2021. Her remuneration was R50 000 per month during the period 1 June 2021 to
28 February 2022. Julia’s remuneration was not sacrificed to obtain the bursary.
l Simon: Simon is an employee. Simon’s remuneration proxy is R580 000 for a full year. His
disabled daughter, Amy, was awarded a bursary of R90 000 to study an NQF level 8 qualifi-
cation at a university. Simon has been employed at Pretend (Pty) Ltd since 2001. He had to
forfeit remuneration of R90 000 during the period 1 March 2021 to 31 December 2021 to
obtain the bursary.
Calculate all the tax implications for the employees (and their dependents where applicable) in
respect of the bursaries granted.
SOLUTION
Nomatema: Exempt from normal tax under s 10(1)(q). Failure to complete her studies
due to death does not disqualify her from the exemption. ................................................ Rnil
Sibiwe: Reimbursement of expenses after completion of studies is not exempt, but a
taxable benefit under par 2(h) of the Seventh Schedule in Sibiwe’s hands ...................... R15 000
Joe: Joe’s remuneration proxy is R181 492 (R90 000/181 days × 365 days). Since
this is less than R600 000 and since the NQF level of the qualification that his child
will study towards is higher than level 4, R60 000 of the bursary awarded to his child
will be exempt in his hands and he will only be taxed on R10 000 (R70 000 –
R60 000)) .......................................................................................................................... R10 000
The bursary awarded to Nelson is taxed in the hands of Joe (par 16 of the Seventh
Schedule) and will not be taxable in Nelson’s hands.
Julia: Julia’s remuneration proxy is R608 333 (R50 000/30 days × 365 days). Since
this is more than R600 000, the scholarship is not exempt in Julia’s hands ..................... R18 000
The bursary awarded to Kate is taxed in the hands of Julia (par 16 of the Seventh
Schedule) and will not be taxable in Kate’s hands.
Simon: For years of assessment commencing after 1 March 2021, the bursary will no
longer be exempt in Simon’s hands because he sacrificed cash remuneration in
order to obtain Amy’s bursary. The bursary awarded to Amy will be taxed in the
hands of Simon (par 16 of the Seventh Schedule) and will not be taxable in Amy’s
hands (R90 000 – R0) ....................................................................................................... R90 000
Interpretation Note No. 66 (1 March 2012)

Interpretation Note No. 66, which deals with the taxation of scholarships and bursaries provides the
following guidelines:
l The phrase ‘bona fide scholarship or bursary granted’ refers to financial or similar assistance
granted to enable a person to study at a recognised educational or research institution. A bona
fide scholarship or bursary could include the cost of the following:
– tuition fees
– registration fees
– examination fees
– books
108
– equipment (required in that particular field of study, for example, financial or scientific calcu-
lators)
– accommodation (other than the person’s home)
– meals or meal voucher/card
– transport (from residence to campus and vice versa).
l A direct payment of fees, for example, to a university for the purpose of an employee’s studies, is
regarded as falling within the ambit of a bona fide scholarship or bursary.
l A recognised educational or research institution is a ‘college’ or ‘university’ as defined in s 18A of
the Act, or a school or any other educational or research institution, wherever situated, which is of
a permanent nature, open to the public generally and offering a range of practical and academic
courses.
l The payment received by a person who undertakes research for the benefit of another person will
be subject to normal tax in his or her hands and he or she will not qualify for the exemption in
terms of s 10(1)(q).
l A loan does not constitute income for tax purposes and is therefore not taxable. Personal study
loans obtained from a financial institution or from any other source unrelated to employment are
not taken into consideration for purposes of s 10(1)(q), nor are study expenses (including the
interest payable) incurred by the holder of the loan deductible from the income of the borrower.
Such privately funded loans are therefore neither taxable nor tax deductible. In terms of
par 11(4)(b) of the Seventh Schedule to the Act, no value is placed on a taxable benefit derived
by an employee in consequence of the grant of a loan by any employer for the purpose of
enabling that employee to further his own studies.
l Any scholarship or bursary which is granted subject to repayment due to non-fulfilment of con-
ditions stipulated in a written agreement will be treated as a bona fide scholarship or bursary until
such time as the non-compliance provisions of the agreement are invoked. In the year of assess-
ment in which these provisions are invoked, the amount or amounts of the scholarship or bursary
will be regarded as a loan and, if relevant, any benefit which an employee may have received by
way of an interest-free or low-interest loan will constitute a taxable benefit in terms of par 2(f ) of
the Seventh Schedule and will not qualify for the exemption contained in par 11(4)(b) of the Sev-
enth Schedule, as such loan was not granted to enable the employee to study.
l Where an employee who had obtained a loan from his employer to enable him to study is absolved
from repaying the loan, he will have received a taxable benefit in terms of par 2(h) of the Seventh
Schedule.
l A reward, or reimbursement of study expenses borne by a person, after completion of his studies
does not constitute a scholarship or bursary, as the grant must have been made to enable or
assist the person to study. Where an employer rewards an employee for a qualification or for
having successfully completed a course of studies or reimburses him for study expenses borne
by him, the reward or reimbursement of study expenses will represent, in the case of the reward,
taxable remuneration, and in the case of the reimbursement of expenses, a taxable benefit in
terms of par 2(h) of the Seventh Schedule to the Act.
l A scholarship or bursary granted to a visiting academic for the purpose of lecturing students
does not satisfy the study requirement as the object of the grant will be to impart knowledge, not
to gain it.
l Expenditure in connection with in-house or on-the-job training or courses presented by other under-
takings for or on behalf of employers does not represent a taxable benefit in the hands of the
employees of the employer if the training is job-related and ultimately for the employer’s benefit.
l It is common practice for certain educational institutions, notably universities, to allow their
employees and such employees’ close relatives to study free of charge or at greatly reduced fees
at these institutions. While the marginal cost of the education of such employees and their rela-
tives represents a taxable benefit under the Seventh Schedule, the exemption under s 10(1)(q)
will apply, subject to the limitations provided for.
109
5.6 Exemptions relating to government, government officials and governmental

institutions
5.6.1 Government and local authorities (s 10(1)(a) and 10(1)(bA))

The receipts and accruals of the Government of the Republic is exempt from normal tax (s 10(1)(a)).
This exemption applies to the national, provincial and local governments. The receipts and accruals
of any sphere of government of any country other than South Africa are also exempt from tax
(s 10(1)(bA)(i)).
5.6.2 Foreign government officials (s 10(1)(c))

The salaries (and amounts for services rendered, referred to as emoluments) payable to certain
foreign government officials are exempt from normal tax in the following cases:
l If the person holds office in South Africa as an official of a foreign government. The person must
be stationed in South Africa and may not be ordinarily resident in South Africa (s 10(1)(c)(iii)).
Diplomats, consuls and ambassadors representing foreign countries in South Africa qualify for
this exemption.
l The person is a domestic or personal servant of the above foreign government official. The per-
son may not be a South African citizen or ordinarily resident in South Africa (s 10(1)(c)(iv)).
l The person is a subject of a foreign state and is temporarily employed in South Africa. The ex-
emption must be authorised by an agreement entered into by the governments of the foreign
state and South Africa (s 10(1)(c)(v)).
l The person is a subject of a foreign state and not a resident in South Africa, and the salary is
paid by a government agency or multinational organisation providing foreign donor funding
(s 10(1)(c)(vi)).
5.6.3 Non-residents employed by the South African government (s 10(1)(p))

Any amount that a non-resident receives for services rendered or work done outside South Africa will
be exempt from normal tax if the services are rendered or work is done for or on behalf of any em-
ployer in the national or provincial sphere of Government (s 10(1)(p)). The exemption will also apply if
the work is done for or on behalf of any South African municipality or any national or provincial public
entity if at least 80% of the expenditure of such entity is defrayed directly or indirectly from funds
voted by Parliament.
This exemption will only apply if the amount received or accrued is subject to normal tax in the coun-
try in which the person is ordinarily resident. The normal tax must also be borne by the person himself
and not paid on his behalf by the government, municipality or public entity.
5.6.4 Pension payable to former State President or Vice President (s 10(1)(c)(ii))

A pension that is payable to any former State President or Vice State President or his or her surviving
spouse is exempt from normal tax (s 10(1)(c)(ii)).
5.6.5 Foreign central banks (s 10(1)(j))

The receipts and accruals of any bank are exempt from tax if all the following requirements are ful-
filled:
l the bank is not resident in South Africa, and
l the bank is the central bank of another country (that is, the bank is entrusted by the government
of a territory outside South Africa with the custody of the principal foreign-exchange reserves of
that territory).
5.6.6 Semi-public companies and boards, governmental and other multinational institutions
(s 10(1)(bB), (t) and (zE))
The receipts and accruals of the following semi-public companies and boards are exempt from
normal tax:
l the Council for Scientific and Industrial Research (s 10(1)(t)(i))
l the South African Inventions Development Agency (s 10(1)(t)(ii))
l the South African National Roads Agency (s 10(1)(t)(iii))
110
l any traditional council or traditional community (established or recognised in terms of the Tradi-
tional Leadership and Governance Framework Act 41 of 2003) or any tribe as defined in s 1 of
that Act (s 10(1)(t)(vii))
l the Armaments Corporation of South Africa Limited contemplated in s 2(1) of the Armaments
Corporation of South Africa, Limited Act, 2003 (s 10(1)(t)(v))
l the compensation fund or reserve fund established in terms of s 15 of the Compensation for
Occupational Injuries and Diseases Act 130 of 1993 (COIDA). This Act regulates the compensa-
tion relating to the death or personal injury suffered by an employee in the course of employment.
A mutual association licensed in terms of COIDA may also be exempt from normal tax. Such
mutual association should be licensed in terms of COIDA to carry on the business of insurance of
employers against their liabilities to employees. The mutual association will only qualify for the
exemption to the extent that the compensation paid by the mutual association is identical to com-
pensation that would have been payable in circumstances in terms of COIDA (s 10(1)(t)(xvi))
l any water service provider (s 10(1)(t)(ix))
l the Development Bank of Southern Africa (s 10(1)(t)(x))
l the National Housing Finance Corporation established in 1996 by the National Department of
Human Settlements (s 10(1)(t)(xvii)) (this exemption applies regarding amounts received or accrued
on or after 1 April 2016)
l amounts received by or accrued to the Small Business Development Corporation Limited by way
of any subsidy or assistance payable by the state (s 10(1)(zE))
l institutions established by a foreign government that perform their functions in terms of an official
development assistance agreement which provides that the receipts and accruals of such organ-
isation is exempt. The agreement must be binding in terms of s 231(3) of the Constitution of the
Republic of South Africa (1996) (s 10(1)(bA)(ii))
l multinational organisations providing foreign donor funding in terms of an official development
assistance agreement that is binding in terms of s 231(3) of the Constitution of the Republic of
South Africa (1996) (s 10(1)(bA)(iii))
l the following multilateral development financial institutions (s 10(1)(bB)):
– African Development Bank, established on 10 September 1964
– World Bank, established on 27 December 1945 including the International Bank for Recon-
struction and Development and International Development Association
– International Monetary Fund, established on 27 December 1945
– African Import and Export Bank, established on 8 May 1993
– European Investment Bank, established on 1 January 1958 under the Treaty of Rome, and
– New Development Bank, established on 15 July 2014.
5.7 Exemptions for organisations involved in non-commercial activities
5.7.1 Bodies corporate, share block companies and other associations (s 10(1)(e))
Certain amounts received by body corporates, share block companies and other associations are
exempt from normal tax (s 10(1)(e)). The amounts that qualify for the exemption are
l levies received by these entities from its members (or from holders of shares in the case of a
share block company), and
l any amount received other than levies to the extent that it does not exceed R50 000.
The exemption applies only to
l bodies corporate established in terms of the Sectional Titles Act 95 of 1986
l share block companies as defined in the Share Blocks Control Act 59 of 1980
l any other association of persons that was formed solely for purposes of managing the common
collective interest of its members. To qualify, the association may not be permitted to distribute
any of its funds to any person other than a similar association of persons. Such association of per-
sons may not be a company as defined in the Companies Act, any co-operative, close corpor-
ation or trust. The association may, however, be a non-profit company as defined in s 1 of the
Companies Act.
This exemption is nullified if the body, share block company or association knowingly becomes a
party to any tax avoidance scheme.
(Refer to 5.7.3 with regard to the exemption available to recreational clubs.)
111
Example 5.14. Bodies corporate, share block companies and other associations
The statement of comprehensive income of the ABC Association for the 2022 year of assessment
is as follows. The association qualifies for exemption in terms of s 10(1)(e).
Statement of profit or loss
Administrative expenses –
member transactions ....................... R8 000 Income from members:
Net surplus ....................................... 60 000 Levies ............................................. 10 000
Interest on investments ................... 58 000
R68 000 R68 000
SOLUTION
Levies from members – exempt (s 10(1)(e)) .................................................................. –
Interest on investment (R58 000 – R50 000 (s 10(1)(e) exemption)) ............................. R8 000
Less: Administrative expenses (not allowed as it relates to exempt income received
(s 23(f)) .......................................................................................................................... –
Taxable income ............................................................................................................. R8 000
5.7.2 Public benefit organisations (ss 10(1)(cN) and 30)

The receipts and accruals resulting from any ‘public benefit activity’ (non-trading activities) of any
approved ‘public benefit organisation’, as defined in s 30(1) are exempt from normal tax
(s 10(1)(cN)). Public benefit activities are listed in Part I of the Ninth Schedule to the Act or are deter-
mined by the Minister of Finance and published in the Gazette. Examples of public benefit activities
according to the different categories are (subject to certain criteria) the following:
l Welfare and Humanitarian. The provision of services to homeless children, elderly people,
abused persons or people in distress, and the development of poor and needy communities.
l Health care. The provision of health care services to poor and needy persons, education on
family planning and services in connection with HIV/Aids.
l Land and Housing. The development of stands and housing units for low income groups, residen-
tial care for certain elderly people and the building of certain buildings used by the community.
l Education and Development. The provision of education on all levels and training to the unem-
ployed, disabled persons or government officials.
l Religion, belief or philosophy. The promotion or practice of a belief or philosophical activities or
any religion that involves acts of worship, witness, teaching and community service.
l Cultural. The promotion and protection of the arts, cultures, customs, libraries and buildings of
historical and cultural interest. The development of youth leadership is included under this cat-
egory.
l Conservation, environment and animal welfare. The protection of the environment and the
care and rehabilitation of animals, as well as environmental awareness programmes and clean-
up projects.
l Research and consumer rights. Research in certain fields and the protection of consumer rights
and improvement of products or services.
l Sport. The managing of amateur sport or recreation.
l Providing of funds, assets or other resources. If assets, resources or money are donated or sold
at cost to a public benefit organisation, government department or person conducting one or
more public benefit activities.
l General. Supporting or promoting public benefit organisations, as well as the bid to host or the host-
ing of any international event where foreign countries will participate and that will have an eco-
nomic impact on the country.
The provision of funds to foreign public benefit organisations, which are exempt from tax in the for-
eign country, with the sole or principal object of the carrying on of one or more PBO activity listed in
Part 1 of the Ninth Schedule to the Income Tax Act has also been classified as a public benefit activity.
112
What is a public benefit organisation?

A public benefit organisation is defined in s 30(1) as any organisation
l that is a non-profit company as defined in s 1 of the Companies Act, or a trust or association of
persons that has been incorporated, formed or established in South Africa, or
l a South African agency or branch of a non-resident company, association or a trust, that is exempt
from tax in its country of residence.
The sole or principle objective of the organisation must be the carrying on of one or more public
benefit activities. These activities must be carried on in a non-profit manner and with an altruistic or
philanthropic intent. The activities may not be intended to directly or indirectly promote the self-
interest of any fiduciary or employee of the organisation other than by way of reasonable remuner-
ation. The activities of the organisation must be carried on for the benefit of, or must be widely acces-
sible to, the general public at large, including any sector thereof.
All of the above requirements must be met. In addition, the Minister must approve the public benefit
organisation before the exemption will apply.
Exempt from normal tax

The following receipts and accruals of a public benefit organisation are exempt from normal tax
(s 10(1)(cN)):
l the receipts and accruals derived otherwise than from any business undertaking or trading activ-
ity, or
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assist-
ance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of 5% of the total receipts and accruals of the organisation during
the relevant year of assessment and R200 000.
See Interpretation Note No. 24 (Issue 4) (12 February 2018) for the practical application and provi-
sions of s 10(1)(cN) regarding the trading rules of Public Benefit Organisations. Also refer to Interpre-
tation Note No. 98 (7 February 2018) that provides guidance on a conduit public benefit organisation
carrying on public benefit activities contemplated in par 10(iii) of Part I of the Ninth Schedule and the
meaning of “association of persons”.
A COVID-19 disaster relief organisation that is approved by the Commissioner as a

COVID-19 note PBO under s 30(3) of the Act qualifies for various tax concessions. Refer to chap-
ter 34 for a discussion of these relief measures.
5.7.3 Recreational clubs (ss 10(1)(cO) and 30A)

Certain receipts and accruals of a recreational club approved by the Commissioner will be exempt from
normal tax. (The club exemption is not automatic. Clubs have to apply for the exemption.) A recreation-
al club is defined in s 30A as any non-profit company as defined in s 1 of the Companies Act, society
or other association of which the sole or principal object is to provide social and recreational ameni-
ties or facilities for the members of that company, society or other association.
These receipts and accruals must be derived in the form of
l membership fees or subscriptions paid by members
l from any business undertaking or trading activity that
– is integral and directly related to the provision of social and recreational amenities (or facilities)
to its members
– substantially carried out only to recover cost, and
– does not create unfair competition for taxable entities
l occasional fundraising undertaken substantially with voluntary assistance without compensation,
and
113
l 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 and subscriptions due and payable by its members during
the relevant year of assessment, or
– R120 000.
Section 30A provides the conditions to which a club must adhere to qualify for the exemption:
l The club will have at least three unconnected persons who accept fiduciary responsibility for the
club. One person may never directly or indirectly control the decision-making of the club.
l The club will carry on its activities solely in a non-profit manner.
l The club will not distribute any surplus funds.
l All assets and funds will be transferred to another club that qualifies for the exemption on club
dissolution or a public benefit organisation approved under s 30(3). The funds may also be trans-
ferred to an institution that is exempt from tax under s 10(1)(cA)(i) (an institution, board or body
which has as its sole or principle object the carrying on of any public benefit activity) or the gov-
ernment of South Africa in the national, provincial or local sphere.
l The club will not pay excessive remuneration.
l All members must be entitled to annual or seasonal membership.
l Members cannot sell their membership rights.
l A copy of any amendment to the constitution must be submitted to the Commissioner.
l The club may not be part of a tax avoidance scheme (s 30A(2)).
5.7.4 Political parties (s 10(1)(cE))

The receipts and accruals of any political party registered in terms of the Electoral Commission Act
51 of 1996 are exempt from normal tax.
5.8 Exemptions relating to economic development
5.8.1 Micro businesses (s 10(1)(zJ))

Any amount received by or accrued to or in favour of a registered micro business (as defined in the
Sixth Schedule; see chapter 23) from a business carried on in South Africa, will be exempt from
normal tax. The exemption does not include any amount received by or accrued to a natural person if
it constitutes
l investment income as defined in par 1 of the Sixth Schedule (see chapter 23), or
l remuneration as defined in the Fourth Schedule.
Although the receipts and accruals of micro businesses are exempt from normal tax, these busi-
nesses are not completely exempt from tax since they will be subject to turnover tax (see chapter 23).
5.8.2 Small business funding entity (ss 10(1)(cQ), 10(1)(zK), 30C and par 63B of the Eighth
Schedule)
The receipts and accruals of any small business funding entity are exempt from normal tax under
certain circumstances (s 10(1)(cQ)). A small business funding entity is an entity approved by the
Commissioner under s 30C. An entity will qualify as a small business funding entity if it complies with
the following requirements (s 30C(1)):
l It must either be a trust, an association of persons or a non-profit company as defined in s 1 of
the Companies Act incorporated, formed or established in the South Africa.
l The sole or principal object of the entity must be to provide funding for small, medium and micro-
sized enterprises. A small, medium and micro-sized enterprise is a person that qualifies either as
a micro business as defined in par 1 of the Sixth Schedule (see chapter 23) or as a small busi-
ness corporation as defined in s 12E(4) (see chapter 19) (definition of small, medium and micro-
sized enterprises in s 1).
l The entity must provide funding for the benefit of, or must be widely accessible to small, medium
and micro-sized enterprises.
l The funding must be provided on a non-profit basis and with an altruistic or philanthropic intent.
l The funding should not be intended to directly or indirectly promote the self-interest of any fiduci-
ary or employee of the entity, other than reasonable remuneration.
114
l The entity’s constitution or written instrument under which it was established must be submitted to
the Commissioner and must comply with specific requirements set out in s 30C(1)(d).
Exempt from normal tax

Section 10(1)(cQ) exempts the following receipts and accruals of a small business funding entity
from normal tax:
l the receipts and accruals derived otherwise than from any business undertaking or trading activ-
ity, or
l the receipts and accruals derived from any business undertaking or trading activity, if
– the undertaking or activity is integral and directly related to the sole or principle object of the
organisation (the basis on which the activity is carried out must substantially be directed at
the recovery of costs and may not result in unfair competition in relation to taxable entities),
– the undertaking or activity is of an occasional nature and undertaken substantially with assist-
ance on a voluntary basis without compensation, or
– the undertaking or activity is approved by the Minister by notice in the Gazette, or
l where the receipts and accruals are derived from any business undertaking or trading activity
other than the above, the receipts and accruals will be exempt from normal tax to the extent that it
does not exceed the greater of
– 5% of the total receipts and accruals of the organisation during the relevant year of assess-
ment, or
– R200 000.
Amounts received from a small business funding entity

Any amount received by or accrued to a small, medium or micro-sized enterprise from a small busi-
ness funding entity is exempt from normal tax (s 10(1)(zK)).
CGT exemption
A small business funding entity must disregard any capital gain or loss determined in respect of the
disposal of
l an asset that the small business funding entity did not use in carrying on any business undertak-
ing or trading activity, or
l an asset where substantially the whole of the use of the asset was directed at a purpose other
than carrying on any business undertaking or trading activity or a business undertaking or trading
activity in respect of which the receipts and accruals qualified for an normal tax exemption under
s 10(1)(cQ).
What are the consequences if an approved small business funding entity fails to comply with the
s 30C requirements?
The Commissioner may withdraw its approval of a small business funding entity if it fails to comply
with the s 30C requirements (s 30C(3)). Such entity must within six months after the withdrawal trans-
fer the remainder of its assets to another small business funding entity, a public benefit organisation,
an institution, body or board exempt from tax under s 10(1)(cA)(i) or the government of South Africa
(s 30C(4)). This also applies in the case where a small business funding entity is wound up or liqui-
dated (s 30C(5)). If it fails to transfer its assets as required, an amount equal to
l the market value of its remaining assets
l less an amount equal to the bona fide liabilities of the entity
is deemed to be an amount of taxable income that accrued to the entity in the year of assessment in
which the approval is withdrawn or the winding up or liquidation took place (s 30C(6)).
Any person who is in a fiduciary capacity responsible for the management of a small business fund-
ing entity and who intentionally fails to comply with the above requirements or with the provisions of
the small business funding entity’s constitution, is guilty of an offence and liable on conviction to a
fine or imprisonment for a period not exceeding 24 months (s 30C(7)).
5.8.3 Amounts received in respect of government grants (ss 10(1)(y) and 12P)
In terms of paragraph (lC) of the gross income definition, any amount received or accrued by way of
a government grant (as contemplated in s 12P) must be included in gross income, whether the grant
is capital or revenue of nature. The government grant may then be exempt for income tax in terms of
s 12P. The following government grants are exempt from normal tax (s 12P):
115
l a grant in aid, subsidy or contribution by the Government in the national, provincial or local
sphere that
– is listed in the Eleventh Schedule, or
– is identified by the Minister of Finance in the Gazette (s 12P(2)), and
l an amount received from the Government in the national, provincial or local sphere for the per-
formance of that person’s obligations pursuant to a Public Private Partnership. This amount is
exempt if the person is required to spend at least an equal amount on improvements on land or to
buildings owned by any sphere of the Government, or over which any sphere of the Government
holds a servitude (s 12P(2A)).
A person can receive the government grant funding or a government grant in kind. Where the person
receives a government grant in kind, which is exempt from normal tax in terms of s 12P(2), the base
cost of the asset received will be zero. Other than this, the grant in kind will have no further normal tax
consequences.
Special rules apply where a person receives government grant funding that is exempt in terms of
s 12P(2) or s 12P(2A). The purpose of these rules is to avoid a further tax benefits from applying.
Where a government grant (other than a grant in kind) is received for the purpose of acquisition,
creation or improvement or as a reimbursement for expenditure incurred in respect of the acquisition,
creation or improvement of
l trading stock – any expenditure allowed as a deduction in terms of s 11(a) (or the amount taken
into account for purpose of opening stock in terms of s 22(1) or (2)) must be reduced to the ex-
tent that the government grant is so applied (s 12P(3)(a)).
l an allowance asset – the base cost of the allowance asset must be reduced to the extent that the
government grant is so applied (s 12P(3)(b)). Furthermore, the aggregate of any deductions or
allowances allowable in respect of the allowance asset may not exceed an amount equal to
(s 12P(4)):
The aggregate The aggregate amount

The amount of
amount incurred in of all deductions and
LESS the government PLUS
respect of the allowances previously allowed in
grant
allowance asset respect of that allowance asset
l any other asset (i.e. other than trading stock or an allowance asset) – the base cost of the asset
must be reduced to the extent that the government grant is so applied (s 12P(5)).
Where a person received a government grant (other than a grant in kind) during the year of assess-
ment otherwise that for the purpose of acquiring, creating or improving any of the assets above (or as
a reimbursement for such acquisition, creation or improvement) any allowable deductions in terms of
s 11 for that year of assessment must be reduced by the amount of the government grant. Where the
government grant exceeds the allowable deductions in terms of s 11 for that year of assessment, the
excess must be carried forward to the following year of assessment and deemed to be a government
grant received during that year (s 12P(6)).
Grants or scrapping allowances received in terms of approved programs

Any government grant or government scrapping payment received or accrued in terms of any pro-
gramme or scheme which has been approved in terms of the national annual budget process and
has been identified by the Minister by notice in the Gazette (after taking prescribed factors into
account) qualifies for an exemption under s 10(1)(y). Grants and scrapping allowances that qualify
for an exemption under s 10(1)(y) are not subject to the anti-double-dipping-rules of s 12P.
116
Example 5.15. Government grants

On 1 August 2020, Pumbela Enterprises received a R4 million government grant from the
Department of Trade and Industry as part of the Small, Medium Enterprise Development Pro-
gramme. The grant was paid in order to reimburse Pumbela Enterprises for capital equipment
that it acquired during December 2020 for R5 million. During its 2022 year of assessment that
ended on 28 February 2022, Pumbela Enterprises claimed a capital allowance of R2 million for
the assets acquired.
On 1 October 2022, JayJay Clothing (Pty) Ltd (‘JayJay Clothing’) received a R500 000 govern-
ment grant from the Department of Trade and Industry as part of the Clothing and Textiles Com-
petitiveness Programme. JayJay Clothing had to use the government grant to purchase clothing
material from South African suppliers. During its 2022 year of assessment that ended on
31 December 2022, JayJay Clothing expended R450 000 of the government grant on purchasing
clothing material.
On 1 November 2020, Food4Africa (Pty) Ltd (‘Food4Africa’) received a R1 million Food Fortifica-
tion Grant from the Department of Health. Food4Africa was not required to purchase any specific
assets with the grant. During its 2022 year of assessment that ended on 30 June 2022, Food4Africa
incurred expenses of R5 million that qualify for a deduction in terms of s 11 of the Act.
What effect does the above have on the respective taxpayers’ taxable income for the relevant
years of assessment? Assume that the grants were not approved for purpose of s 10(1)(y).
SOLUTION
Pumbela Enterprises
Government grant. .................................................................................................... R4 000 000
Government grant exempt from normal tax in terms of s 12P(2), since the Small,
Medium Enterprise Development Programme is listed in the Eleventh Schedule .... (4 000 000)
Capital allowance in respect of the capital asset (see note 1).................................. (nil)
Effect on Pumbela Enterprises’ taxable income in respect of its 2022 year of
assessment. .............................................................................................................. Rnil
JayJay Clothing
Government grant ..................................................................................................... R500 000
Government grant exempt from normal tax in terms of s 12P(2), since the Cloth-
ing and Textiles Competitiveness Programme is listed in the Eleventh Schedule .... (500 000)
Trading stock acquired (s 11(a)) (R450 000 less R500 000) .................................... Rnil
Closing stock (s 22) (R450 000 less R500 000) ........................................................ Rnil
Effect on JayJay Clothing taxable income in respect of its 2022 year of
assessment ............................................................................................................... Rnil
Food4Africa
Government grant ..................................................................................................... R1 000 000
Government grant exempt from normal tax in terms of s 12P(2), since a Food
Fortification Grant is listed in the Eleventh Schedule ................................................ (1 000 000)
Section 11 deductions (R5 000 000 less R1 000 000) (see note 3) .......................... (4 000 000)
Effect on Food4Africa’s taxable income in respect of its 2022 year of
assessment ............................................................................................................... (R4 000 000)
Notes
(1) The aggregate of any allowance or deduction in respect of an allowance
asset may not exceed:
The aggregate amount incurred in respect of the allowance asset .................. R5 000 000
Less: The amount of the government grant (R4 000 000) plus the aggregate
amount of all deductions and allowances previously allowed in respect of
that allowance asset (R2 000 000). ................................................................... (6 000 000)
Since this amount is less than Rnil, Pumbela Enterprises may not claim any
further capital allowances in respect of the asset. ............................................ (R1 000 000)
The base cost of this asset is reduced by R4 000 000. Since the base cost
was R3 000 000 (R5 000 000 cost price less R2 000 000 capital allowance in
respect of the 2020 year of assessment) at the time of receiving the grant,
the base cost is reduced to Rnil.
continued
117
(2) Since the government grant exceeds the expenditure incurred in respect of acquiring the
trading stock, the cost of the trading stock is Rnil. The excess of R50 000 must be carried
forward to the following year of assessment and deemed to be a government grant received
during that year (s 12P(6)). The expenditure in respect of trading stock acquired in that fol-
lowing year will thus be reduced by R50 000.
(3) Since Food4Africa received a government grant during its 2022 year of assessment for the
purpose of acquiring, creating or improving any of the assets above (or as a reimbursement
for such acquisition, creation or improvement), any allowable deductions in terms of s 11 for
that year of assessment must be reduced by the amount of the government grant.
5.8.4 Film owners (s 12O)

Section 12O(2) provides for the exemption of all income derived from the exploitation rights of a film.
Exploitation rights are defined in s 12O(1) as the right to any receipts or accruals in respect of the
use of, right of use of, or the grant of permission to use any film to the extent that those receipts and
accruals are wholly dependent on profits and losses in respect of the film. Film is defined for purpose
of s 12O as a feature film, a documentary or documentary series, or an animation, conforming to the
requirements stipulated by the Department of Trade and Industry in the Programme Guidelines for
the South African Film and Television Production and Co-production Incentive.
The following requirements have to be complied with in order to qualify for the exemption:
l The National Film and Video Foundation must approve the film as a local production or co-pro-
duction whereby the film is produced in terms of an international co-production agreement be-
tween the Government of South Africa and the government of another country.
l If income is derived from the exploitation rights of the film by a person who acquired the exploita-
tion rights in respect of that film:
– prior to the date that the principal photography of the film commenced, or
– after the principal photography of the film commenced, but before the completion date of the
film if no consideration was directly or indirectly paid to the person who acquired the exploita-
tion rights of the film prior to the date that the principal photography of the film commenced).
l The income must be received by or must have accrued to the person within 10 years of the
completion date.
Completion date is defined for purpose of s 12O as the date on which the film is in a form for the first
time in which it can be regarded as ready for copies of it to be made and distributed for presentation
to the general public.
The exemption in terms of s 12O is not allowed to a person who is a broadcaster as defined in s 1 of
the Broadcasting Act 4 of 1999.
Section 12O(5) provides that a taxpayer may claim a deduction in respect of any expenditure incur-
red to acquire exploitation rights in respect of a film. This deduction is allowed despite the provisions
of s 23(f), which provides that expenses incurred in respect of exempt income are not deductible.
Such deduction is equal to the amount of any expenditure incurred to acquire exploitation rights in
respect of a film less any amount received or accrued during any year of assessment in respect of
the film. The deduction may not be made to the extent that the expenditure was funded from a loan,
credit or similar funding. Furthermore, the deduction may only be made in any year of assessment
commencing at least two years after the completion date of the film to the extent that the expenditure
incurred exceeds the total amount received or accrued in respect of the exploitation rights. The
exemption under s 12O(2) ceases to apply to any income derived from a film in any year of assess-
ment subsequent to the date that a deduction is made in terms of s 12O(5).
5.8.5 International shipping income (s 12Q)

International shipping income received by an international shipping company is exempt from normal
tax. The purpose of this exemption is for the industry to remain competitive internationally. The inter-
national trend has been to reduce the taxation of international shipping transport due to the highly
mobile nature of this activity.
In order to qualify for this exemption, the international shipping company must be a South African
resident that operates one or more South African ships that are used in international shipping. Inter-
national shipping (defined in s 12Q(1)) is the conveyance for compensation of passengers or goods
by means of the operation of a South African ship mainly engaged in international traffic. A South
African ship is a ship which is registered in South Africa in accordance with Part 1 of Chapter 4 of the
118
Ship Registration Act, 1998. If a non-South African ship is temporarily used to replace a qualifying
South African ship whilst the South African ship is undergoing repairs or maintenance, the replace-
ment ship will also qualify as a South African ship for purposes of s 12Q and the exemption in terms
of this regime for gross income from that ship will still apply.
Tax regime for qualifying international shipping companies includes exemptions from normal tax,
capital gains tax (see chapter 17), dividends tax (see chapter 19) as well as cross-border withholding
tax on interest (see chapter 21).
5.8.6 Owners or charterers of a ship or aircraft (s 10(1)(cG))

The receipts and accruals of a non-resident that carries on business as the owner or charterer of a
ship or aircraft are exempt from normal tax. The exemption, however, only applies if a similar or
equivalent exemption is granted for South African residents carrying on the same type of business in
the country where the non-resident resides.
5.9 Exemptions incentivising environmental protection
5.9.1 Certified emission reductions (s 12K)

Section 12K was repealed with effect from 1 June 2019, the date on which carbon tax was imple-
mented. The Carbon Tax Act 15 of 2019 deals with several relief measures that make this income tax
exemption redundant.
5.9.2 Closure rehabilitation company (s 10(1)(cP))

The receipts and accruals of a closure rehabilitation company or trust (as contemplated in s 37A) are
exempt from normal tax. The sole object of such company or trust must be the rehabilitation of land
following the closure and decommissioning of a mine. The constitution of the company or the instru-
ment that established the trust must incorporate the provisions of s 37A.
5.10 Exemptions aimed at amounts that are subject to withholding tax

Certain amounts paid to non-residents are subject to withholding tax. Withholding tax is imposed on
the recipient of an amount, but the payer of the amount is required to deduct the tax from the pay-
ment and pay the tax to the government. The amount subject to withholding tax should not be subject
to normal tax as well. For this reason, exemption from normal tax is provided for.
5.10.1 Royalties paid to non-residents (s 10(1)(l))

A royalty paid to a foreign person is subject to 15% withholding tax on royalties to the extent that the
royalty is regarded as being from a South African source (s 49B; see chapter 21). If a double taxation
agreement applies in the specific circumstances, the withholding tax rate might be reduced by the
double tax agreement.
The source of royalty income is in South Africa if the royalty is paid by a resident (unless the royalty is
attributable to a permanent establishment situated outside South Africa), or is received in respect of
the use of any intellectual property in South Africa (s 9(1)(d) and (c); see chapter 3).
A royalty paid to a non-resident is exempt from normal tax, unless
l the person is a natural person who was physically present in South Africa for longer than 183 days
in aggregate during the 12-month period before the royalty is received or accrued, or
l the intellectual property or the knowledge or information in respect of which it is paid is effectively
connected with the permanent establishment of the person in South Africa (s 10(1)(l)).
For purpose of this exemption, royalty means any amount that is received for the use or right of use of
or permission to use any intellectual property, or the imparting of or the undertaking to impart any
scientific, technical, industrial or commercial knowledge or information, or the rendering of or the
undertaking to render any assistance or service in connection with the application or use of such
knowledge or information (definition of royalty in s 49A).
119
Example 5.16. Royalty or similar payments to non-residents (s 10(1)(l))

Mr Collins, who is not a resident of South Africa, received a gross royalty payment of R300 000
for the use of a trademark in South Africa by ABC Limited on 10 May 2021.
What is the effect of this on Mr Collins’ taxable income in respect of his 2022 year of assessment?
SOLUTION
The ‘income’, as defined, of Mr Collins will be calculated as follows:
Gross Income:
Royalty ............................................................................................................................ 300 000
Less: Exempt income:
Royalty – exempt in terms of s 10(1)(l)............................................................................ (300 000)
Income ............................................................................................................................ –
Note
Unless the relevant double tax agreement prescribes a reduced rate, ABC Limited must withhold
15% of the gross royalty (R45 000) as a withholding tax (s 49B) and pay it over to SARS. ABC
Limited will pay the net amount of R255 000 to Mr Collins. However, the gross amount of
R300 000 is included in Mr Collins’ gross income.
5.10.2 Amounts paid to a foreign entertainer or sportsperson (s 10(1)( lA))

Amounts paid to foreign entertainers and sport persons in respect of specified activities are subject
to 15% tax on foreign entertainers and sport persons (ss 47A to 47K; see chapter 21). To the extent
that such amount is subject to tax on foreign entertainers and sport persons, the amount is exempt
from normal tax (s 10(1)(lA)).
5.10.3 Interest paid to non-residents (ss 10(1)(h))

Interest paid to a foreign person is subject to 15% withholding tax on interest to the extent that the
interest is regarded as being from a South African source (s 50B – see chapter 21). If a double tax-
ation agreement applies in the specific circumstances, the withholding tax rate might be reduced by
the double tax agreement. The source of interest is in South Africa if the interest is paid by a resident
(unless the interest is attributable to a permanent establishment situated outside South Africa), or is
received or accrued in respect of any funds used or applied by any person in South Africa (s 9(2)(b)
– see chapter 3). Interest received by a non-resident is exempt from normal tax, subject to certain
exceptions (s 10(1)(h) – see 5.2.2).
5.11 Other exemptions
5.11.1 Alimony and maintenance (s 10(1)(u))

An amount received by or accrued to a person from or on behalf of his or her spouse or former
spouse by way of an alimony or allowance granted in consequence of proceedings instituted after
21 March 1962, or under an agreement of separation entered into after that date, is exempt from
normal tax. This exemption is not applicable when s 7(11) deems the reduction of a person’s mini-
mum individual reserve in terms of a maintenance order in favour of another person (the person’s
former spouse) to be income received by the person. The s 10(1)(u) exemption, in effect, can only be
claimed by a person if his or her former spouse paid the alimony or maintenance from after-taxed
income.
5.11.2 Promotion of research (s 10(1)(cA))
The receipts and accruals of any institution, board or body established under any law will be exempt
from normal tax if its sole or principal object is to
l conduct scientific, technical or industrial research, or
l provide necessary or useful commodities, resources or services to the State or members of the
general public, or
l carry on activities (including the rendering of financial assistance by way of loans or otherwise)
designed to promote commerce, industry or agriculture.
120
Companies (as defined in the Companies Act), co-operatives, close corporations, trusts and water
service providers are specifically excluded from this exemption. The receipts and accruals of any
association, corporation or company will qualify for the exemption if all its shares are held by an
institution, board or body mentioned above and only if the operations of such association, corporation
or company are ancillary or complimentary to the object of the institution, board or body.
The institution, board or body has to be approved by the Commissioner. Also, by law or under its
constitution, it may not be permitted to distribute any amount to any person other than, in the case of
a company, to the holders of shares in the company. It is also required to use its funds solely for
investment or the objects for which it has been established.
5.11.3 Interest received by the holder of a debt (s 10(1)(hA))

This exemption is aimed at avoiding double taxation. Where a company acquires an asset in terms of
a reorganisation transaction and funds the acquisition with debt, the amount of interest that the com-
pany may claim as a deduction is limited under certain circumstances (s 23K; see chapter 20). A
reorganisation transaction for this purpose refers to an intragroup transaction, or a liquidation distri-
bution (as defined in ss 45(1) and 47(1) respectively; see chapter 20).
Interest will be exempt from normal tax in the recipient’s hands if the person receiving the interest
and the person paying the interest forms part of the same group of companies and the interest
deduction was limited in terms of s 23K (s 10(1)(hA)).
5.11.4 War pensions and awards for diseases and injuries (s 10(1)(g), (gA) and (gB))
The following are exempt from normal tax:
l 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 (s 10(1)(g))
l disability pensions paid under s 2 of the Social Assistance Act 59 of 1992 (s 10(1)(gA))
l compensation paid in terms of the Workmen’s Compensation Act 30 of 1941 or the Compensation
for Occupational Injuries and Diseases Act 130 of 1993 (s 10(1)(gB)(i))
l pensions paid in respect of occupational injuries or disease sustained by an employee before
1 March 1994 if the employee would have qualified for compensation under the Compensation for
Occupational Injuries and Diseases Act, 1993, had the injury or disease been sustained or con-
tracted on or after 1 March 1994 (s 10(1)(gB)(ii))
l any compensation paid by an employer in respect of the death of an employee. The employee’s
death must arise out of and in the course of his or her employment. The compensation must be
paid in addition to the compensation that is paid in terms of the Workmen’s Compensation Act
30 of 1941 or the Compensation for Occupational Injuries and Diseases Act 130 of 1993. This
exemption only applies to the extent that the compensation paid does not exceed R300 000
(s 10(1)(gB)(iii))
l any compensation paid in terms of s 17 of the Road Accident Fund Act 56 of 1996 (s 10(1)(gB)(iv)).
Section 17 of the Road Accident Fund Act 56 of 1996 provides that the Road Accident Fund
(RAF) has to compensate any person for any loss or damage which the person has suffered as a
result of any bodily injury to himself or the death of or any bodily injury to any other person, caused
by or arising from the driving of a motor vehicle by any person at any place within South Africa.
5.11.5 Beneficiary funds (s 10(1)(gE))

Any amount awarded to a person by a beneficiary fund is exempt from normal tax. A beneficiary fund
is defined in the Pension Funds Act as a fund established with the object of receiving, administering
and investing death benefits on behalf of beneficiaries. These funds are set up as a last resort to
safeguard benefits that were paid from employer funds for the benefit of a minor on the death of an
employer-fund member, where no other suitable guardian, trust or other mechanism exists. All
remaining funds will be paid to the minor when he or she reaches majority.
121
6 General deductions
Linda van Heerden

l demonstrate an in-depth knowledge of the general deduction formula in practical
case studies and theoretical advice questions (supporting your opinion by relevant
authority)
l apply the criteria that disallow an item to qualify for a tax deduction to both practical
case studies and theoretical advice questions.
Contents
Page
6.1 Overview ........................................................................................................................... 124
6.2 The meaning of ‘carrying on a trade’ (ss 1(1), 11A and 20A) .......................................... 125
6.2.1 Pre-trade expenditure and losses (ss 11A, 11(a) to (x), 11D and 24J) .............. 126
6.3 General deduction formula (ss 11(a) and 23(g)) .............................................................. 127
6.3.1 ‘Expenditure and losses’ ..................................................................................... 127
6.3.2 ‘Actually incurred’ (ss 11(a), 22(2)(b), 22(3)(a)(ii), 23(e), 23H and
par 12(2)(c) of the Eighth Schedule)................................................................... 127
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M) ......................... 129
6.3.2.2 Disposal or acquisition of equity shares (s 24N)................................. 129
6.3.3 ‘During the year of assessment’ (ss 23H and 24M(2)(b)) ................................... 129
6.3.4 ‘In the production of the income’ (ss 1(1) and 23(f)) .......................................... 130
6.3.5 ‘Not of a capital nature’ ....................................................................................... 131
6.4 Prepaid expenditure (s 23H)............................................................................................. 133
6.5 Section 23 prohibited deductions ..................................................................................... 135
6.5.1 Private maintenance expenditure (s 23(a)) ......................................................... 135
6.5.2 Domestic or private expenditure (s 23(b) and (m)) ............................................ 136
6.5.3 Recoverable expenditure (s 23(c)) ..................................................................... 136
6.5.4 Interest, penalties and taxes (ss 23(d), 7E and 7F) ............................................ 136
6.5.5 Provisions and reserves (ss 23(e) and 11(j)) ...................................................... 137
6.5.6 Expenditure incurred to produce exempt income (s 23(f)) ................................ 137
6.5.7 Non-trade expenditure (s 23(g)) ......................................................................... 137
6.5.8 Notional interest (s 23(h)) .................................................................................... 138
6.5.9 Deductions claimed against any retirement fund lump sum benefits and
retirement fund lump sum withdrawal benefits (s 23(i) and paras 5 and 6
of the Second Schedule)..................................................................................... 138
6.5.10 Expenditure incurred by labour brokers and personal service providers
(s 23(k)) ..................................................................................................................... 138
6.5.11 Restraint of trade (ss 23(l ) and 11(cA)) .............................................................. 139
6.5.12 Expenditure relating to employment or an office held (ss 23(m) and 23(b))...... 139
6.5.13 Government grants (s 23(n)) ............................................................................... 141
6.5.14 Unlawful activities (s 23(o)) ................................................................................. 141
6.5.15 The cession of policies by an employer (s 23(p) and par 4(2)bis of the
Second Schedule) ............................................................................................... 141
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))............... 141
6.5.17 Premiums in respect of insurance policies against illness, injury, disability,
unemployment or death of that person (ss 23(r) and 10(1)(gl)) ......................... 142
6.6 Prohibition against double deductions (s 23B) ................................................................ 142
6.7 Limitation of deductions in respect of certain short-term insurance policies (s 23L) ...... 142
6.8 Excessive expenditure (s 23(g)) ....................................................................................... 142
6.9 Cost of assets and VAT (s 23C) ........................................................................................ 143
123
Page
6.10 Specific transactions ......................................................................................................... 144
6.10.1 Advertising ......................................................................................................... 144
6.10.2 Copyrights, inventions, patents, trademarks and know-how ............................ 144
6.10.3 Damages and compensation ............................................................................ 144
6.10.4 Education and continuing education ................................................................ 145
6.10.5 Employment and services rendered ................................................................. 145
6.10.6 Goodwill ............................................................................................................. 146
6.10.7 Legal expenditure (s 11(a) and (c)) .................................................................. 146
6.10.8 Legal expenditure: Of a capital nature (s 11(a) and (c)) .................................. 146
6.10.9 Losses: Fire, theft and embezzlement (s 23(c)) ................................................ 147
6.10.10 Losses: Loans, advances and guarantees ....................................................... 147
6.10.11 Losses: Sale of debts ........................................................................................ 148
6.10.12 Provisions for anticipated losses or expenditure .............................................. 148
6.1 Overview
‘Taxable income’ is the amount remaining after deducting all allowable deductions and allowances
from the ‘income’ as determined. The main sections of the Act dealing with deductions are ss 11 to
18A and 22 to 24.
Most deductions are allowed by virtue of the so-called general deduction formula in s 11(a) read with
s 23(g). Unless specifically provided for elsewhere in the Act, expenditure and losses incurred in the
carrying on of a trade may only be deductible if the requirements (positive terms) laid down in s 11(a)
are complied with. Compliance with the positive terms in s 11(a) to determine whether an amount is
deductible is, however, not sufficient. The provisions of s 23 must also be complied with. Section 23
contains the so-called prohibited deductions (negative terms) stating what is not deductible (CIR v
Nemojim (Pty) Ltd (45 SATC 241). Due to the opening words of s 11, the first step in the enquiry as to
whether an expenditure or loss is deductible in terms of s 11(a), is to establish whether the taxpayer
was carrying on a trade. No deductions may be claimed in terms of the general deduction formula
(and s 11 as a whole) if the taxpayer is not carrying on a trade. The trading requirement also
manifests in s 23(a) and (b) (being domestic or private expenditure not incurred for the purposes of
trade) and s 23(g) prohibiting the deduction of amounts not expended for the purposes of trade.
Prerequisite: Trade
l Definition
l Pre-trade expenditure
General deduction
formula
Positive terms Negative terms

Section 11(a) Section 23(b) and (g)
Always consider
l section 23(a)–(r)
l section 23B
Five requirements l section 23C
l section 23H
124
6.2 Chapter 6: General deductions
6.2 The meaning of ‘carrying on a trade’ (ss 1(1), 11A and 20A)
The opening words of s 11 permit deductions from the income of a person only if the person is
carrying on a trade. The implications are that
l expenditure incurred prior to the commencement of that trade is not deductible in terms of s 11
(certain pre-trade expenditure is allowed as deductions (s 11A – see 6.2.1)), and
l expenditure not incurred in carrying on a trade is not deductible in terms of s 11, and
l expenditure can only be deducted from the income derived from the carrying on of a trade. This
is strengthened by s 23(g). However, if a section specifies that a deduction can be claimed
despite s 23(g), for example s 11F, a deduction can be claimed against non-trade income.
The term ‘trade’ is given a very wide meaning in s 1(1) and includes
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, or any
design as defined in the Designs Act, or any trademark as defined in the Trade Marks Act, or any copyright
as defined in the Copyright Act, or any other property which is of a similar nature.
In Burgess v CIR (1993 A) the principle that this definition should be given a wide interpretation was
described as being well established. It was further held that the taxpayer, who laid out money to
obtain a bank guarantee, which he risked in the hope of making a profit, was engaged in a ‘venture’,
‘a speculative enterprise par excellence’. Grosskopf JA said that a taxpayer carrying on what,
standing on its own, amounts to the carrying on of a trade does not cease to carry on a trade simply
because one of his purposes or even his main purpose is to enjoy a tax advantage. He stated:
‘If he carries on a trade, his motive for doing so is irrelevant.’
It was also pointed out that the definition is not necessarily exhaustive and that the term ‘trade’ was
intended to embrace every profitable activity.
It is very important to note that, although the term ‘trade’ is defined, the Act requires the carrying on of
a trade before a s 11 deduction can be claimed. While the views of SARS contained in Interpretation
Note No 33 (Issue 5) provide direction in interpreting this requirement, it states that SARS will
consider each case on its own and that much will depend upon the nature and extent of the
taxpayer’s activities. The ‘carrying on of a trade’ might imply that there must be a continuity of
activities, but in the case of Stephan v CIR (32 SATC 54) a single venture was held to be the ‘carrying
on of a business’ (which term is included in the definition of ‘trade’).
Depending on the circumstances of the case, the principle of continuity may result in the denial of
deductions against rental income earned from a single residential property. Although the letting of
property is included in the definition of ‘trade’, it does not necessarily constitute the carrying on of a
trade. In practice, the Commissioner may allow deductions, but limit them to the income, so that it
does not result in an assessed loss. If a natural person has an assessed loss from rental activities, it
may be ring-fenced if s 20A is applicable – in other words, such assessed loss may not be offset
against taxable income derived from another trade (see chapter 7).
Continuity and the profit motive are not prerequisites, however, for the carrying on of a trade. The
activities concerned should be examined as a whole to establish whether the taxpayer is in fact
carrying on a trade (Estate G v COT (1964 SR)). It is submitted that in appropriate circumstances a
taxpayer will be carrying on a trade even if he has no objective to make a profit, or even if he delibe-
rately sets out to make a loss. In De Beers Holdings (Pty) Ltd v CIR (1985 AD) it was stated that a
taxpayer may elect to trade for some other commercial advantage for his business or that he may be
compelled to sell at a loss. This principle was established in the earlier case of Modderfontein Deep
Levels Ltd v Feinstein (1920 TPD).
Despite its wide meaning, the term ‘trade’ does not include all activities that might produce income,
for example income in the form of interest, dividends, annuities or pensions (the so-called ‘passive’
earning of income). Interpretation Note No. 33 (Issue 5), in par 4.1.6, explains this as the ‘active step’
requirement and states that it means something more than watching over existing investments that
are not income producing and are not intended or expected to be so.
A person who accumulates his savings and invests them in interest-bearing securities or shares held
as assets of a capital nature does not derive the income from carrying on any trade (ITC 1275
(1978)). In practice, SARS accepts that if capital is borrowed specifically to reinvest, such a trans-
action results in trade income and the expenditure is, therefore, allowable. On this basis, it will allow
interest incurred to earn interest income as a deduction. The Commissioner’s practice is set out in
Practice Note No 31, the relevant portion of which reads:
While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds
invested does not carry on a trade and that any expenditure incurred in the production of such interest
cannot be allowed as a deduction, it is nevertheless the practice of Inland Revenue to allow expenditure in-
curred in the production of interest to the extent that it does not exceed such income. This practice will also
125
be applied in cases where funds are borrowed at a certain rate of interest and invested at a lower rate.
Although, strictly in terms of the law, there is no justification for the deduction, this practice has developed
over the years and will be followed by Inland Revenue.
In Robin Consolidated Industries Ltd v CIR (1997 A, 59 SATC 199) one of the issues that had to be
considered by the court was whether the taxpayer had ‘carried on a trade’ during a particular year of
assessment.
The taxpayer was a manufacturer, wholesaler and retailer of stationery and associated products,
operating throughout the country via subsidiary companies. The taxpayer became insolvent and was
placed in provisional liquidation. The liquidators sold the taxpayer’s business ‘lock, stock and barrel’,
with the exclusion of goods and stock in bond. Whilst in liquidation, two sale transactions, i.e., the
sale of goods in bond and stock in bond respectively, were undertaken by the liquidators. The court
held that transactions concluded by the liquidators involving the realisation of the taxpayer’s stock
during liquidation do not constitute the carrying on of a trade by the taxpayer himself.
6.2.1 Pre-trade expenditure and losses (ss 11A, 11(a) to (x), 11D and 24J)
Expenditure and losses are generally only deductible if incurred after the commencement of a trade.
In the process of commencing a trade and setting up an income-producing structure, a taxpayer
incurs various expenditure in preparation for the carrying on of that trade before trading starts. Such
pre-trade expenditure normally includes assets bought and salaries or rent paid and is regarded as
capital expenditure because they relate to the setting up of an income-producing structure (the
business or trade). Section 11A allows certain qualifying expenditure and losses, incurred before the
commencement of that trade, and not previously claimed or allowed as a deduction, as a deduction
once that specific trade is carried on (but subject to the limitation provisions of s 23H – see 6.4). Only
expenditure qualifying for a specific deduction in terms of s 11 (other than s 11(x), which means that
this refers to s 11(a) to (w)), s 11D (research and development expenditure) or s 24J (interest incurred)
can be deducted as pre-trade expenditure.
Section 11(x) brings within the scope of s 11 all amounts allowed to be deducted in terms of other
provisions of Part I of the Act, which deal with normal tax. If such amounts (amounts in ss 11D and
24J excluded), however, were incurred before the commencement of the carrying on of the tax-
payer’s trade, it will not qualify for deduction in terms of s 11A being specifically excluded.
If the pre-trade expenditure and losses qualifying for this deduction exceed the taxable income from
that trade, such excess may not be set off against income from another trade, notwithstanding
s 20(1)(b) (s 11A(2)). This implies that the pre-trade expenditure in respect of a specific trade is ring-
fenced. Such excess may be carried forward to the following year of assessment and may then be
set off against taxable income from that same trade (s 11A(1)(c)).
Interpretation Note No. 51 (Issue 5) describes SARS’s interpretation of s 11A in more detail.
Example 6.1. Pre-trade expenditure
Assume that the following events took place within the year of assessment ending on 31 December
2022.
A vacant administration building was purchased on 25 January 2022. Transfer costs amounted
to R30 000. The building was renovated at a cost of R250 000. The renovations were completed
on 1 July 2022, the same date on which the occupants moved in and became liable for rent to
the property owner. The property owner therefore commenced with the carrying on of this rental
trade on 1 July 2022. Rental income of R50 000 and royalty income (not related to the rental
trade) of R10 000 accrued to the property owner during the year of assessment.
Rates and taxes in respect of the building amounted to the following:
l for the period 25 January 2022 to 30 June 2022 – R60 000
l in respect of the remainder of the year of assessment – R33 000.
What amounts will qualify for a deduction in terms of s 11A?
SOLUTION
Transfer costs as well as renovation expenditure are not deductible, because these are expen-
ditures of a capital nature. Both ss 11(a) and 11A do not allow for a deduction of expenditure of a
capital nature.
The expenditure of R60 000 in respect of rates and taxes was incurred before the rental trade
was carried on. It is for this reason that this expenditure will not qualify as a deduction in terms of
any provision other than s 11A.
continued
126
6.2–6.3 Chapter 6: General deductions
The calculation of taxable income is as follows:

Taxable income from the rental trade:
Gross income – rental received ...................................................................................... R50 000
Less: Deductions
Expenditure incurred whilst carrying on the trade (s 11(a)) ........................................... (33 000)
Pre-trade expenditure (s 11A) (R60 000 limited to R17 000 (R50 000 – R33 000)) ........ (17 000)
Taxable income .............................................................................................................. Rnil
The R43 000 (R60 000 – R17 000) excess of pre-trade expenditure may be carried forward to the
next year, when it will qualify for a deduction against his rental trade taxable income
(s 11A(1)(c)).
Taxable income from non-rental trade:
Gross income – royalty income ...................................................................................... R10 000
The property owner will be subject to tax on the royalty income. He may not set off the excess
pre-trade expenditure of R43 000 against this income in terms of s 11A(2).
6.3 General deduction formula (ss 11(a) and 23(g))

The courts have laid down a general deduction formula by holding that ss 11(a) and 23(g) must be
read together when one considers whether an amount may be deducted (Port Elizabeth Electric
Tramway Co Ltd v CIR (1936 CPD)).
The general deduction formula can be broken down into the following elements:
l expenditure and losses
l actually incurred
l during the year of assessment (from case law – see 6.3.3)
l in the production of the income
l not of a capital nature
l to the extent that it is laid out or expended for the purposes of trade (s 23(g)).
The above elements, all of which must be satisfied before an amount can be deducted in terms of the
general deduction formula, are discussed in the following paragraphs.
6.3.1 ‘Expenditure and losses’

In CSARS v Labat (2011 SCA) the Supreme Court of Appeal held that the terms ‘obligation’ or
‘liability’ and ‘expenditure’ are not synonyms. The ordinary meaning of ‘expenditure’ refers to the
action of spending funds; disbursement or consumption; and hence the amount of money spent. In
the context of the Act, it would also include the disbursement of other assets with a monetary value.
Expenditure, accordingly, requires a diminution (even if only temporary) or, at the very least, move-
ment of assets of the person who expends.
The courts have not defined the word ‘losses’. In Joffe & Co (Pty) Ltd v CIR (1946 AD) the court
considered that the word had several meanings; that, in the context of a provision almost identical to
s 11(a), its meaning was ‘somewhat obscure’; and that it was not clear whether it meant anything
different from ‘expenditure’. Watermeyer CJ, who delivered the judgment of the Appellate Division of
the Supreme Court, said (at 360) that:
in relation to trading operations the word is sometimes used to signify a deprivation suffered by the loser,
usually an involuntary deprivation, whereas expenditure usually means a voluntary payment of money.
In Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) the court considered that, in the context,
the word appeared ‘to mean losses of floating capital employed in the trade which produces the
income’.
6.3.2 ‘Actually incurred’ (ss 11(a), 22(2)(b), 22(3)(a)(ii), 23(e), 23H and par 12(2)(c) of the
Eighth Schedule)
The use of the words ‘actually incurred’ rather than the words ‘necessarily incurred’ widens the field of
deductible expenditure. For instance, one man may conduct his business inefficiently or extrava-
gantly, incurring expenditure that another man does not incur; such expenditure is therefore not
‘necessary’, but it is actually incurred and is therefore deductible (Port Elizabeth Electric Tramway Co
Ltd v CIR (1936 CPD)). Excessive expenditure may be disqualified from deduction for other reasons –
see 6.8.
127
In Caltex Oil (SA) Ltd v SIR (1975 A) it was held that ‘expenditure actually incurred’ does not mean
expenditure actually paid during the year of assessment. It was said to mean ‘all expenditure for
which a liability has been incurred during the year, whether the liability has been discharged during
that year or not’. Actual payment is therefore not essential for the deduction of expenditure.
The meaning of ‘incurred’ was addressed by Corbett JA, in delivering the judgment of the majority of
the Appellate Division in Edgars Stores Ltd v CIR (1988 A), it was stated (at 90):
[I]t is clear that only expenditure (otherwise qualifying for deduction) in respect of which the taxpayer has
incurred an unconditional legal obligation during the year of assessment in question may be deducted in
terms of s 11(a) from income returned for that year . . . if the obligation is initially incurred as a conditional
one during a particular year of assessment and the condition is fulfilled only in the following year of assess-
ment, it is deductible only in the latter year of assessment (the other requirements of deductibility being
satisfied). (Own emphasis.)
There must therefore be an unconditional legal liability to pay an amount before an amount is ‘actually
incurred’. If there is no definite and absolute liability during the year of assessment to pay an amount,
expenditure has not been ‘actually incurred’ (Nasionale Pers Bpk v KBI (1986 A)). A limitation is
placed on the amount of certain prepaid expenditure that may be claimed as deductions for tax
purposes even though the expenditure was ‘actually incurred’ in the year of assessment (s 23H –
see 6.4)).
The words ‘actually incurred’ rule out the deduction of
l provisions for expenditure or losses that are uncertain, or
l expenditure or losses that may arise in the future, or
l expenditure or losses that are no more than impending or expected.
Therefore, estimates of contingent (uncertain) liabilities are not expenditure actually incurred. If an
expenditure was incurred (an unconditional legal liability exists) but cannot be quantified, the amount
must be estimated based on available information and claimed in that tax year (CIR v Edgars Stores
Ltd (1986 TPD)). The tax implications of the incurral and accrual of amounts in respect of assets
acquired or disposed of for unquantified amounts are determined by s 24M since 2004 (see 6.3.2.1
below). Moreover, a deduction of income carried to any reserve fund or capitalised in any way is
prohibited (s 23(e)).
Example 6.2. Actually incurred

ABC Ltd has a June financial year end. Due to an expected price increase, trading stock
amounting to R500 000 was bought on 25 June 2021. The invoice was issued on 26 June 2021
but delivery of the trading stock only occurred on 3 July 2021 and payment on 31 July 2021.
Discuss in which year of assessment the amount is actually incurred and deductible.
SOLUTION
ABC Ltd did not actually incur the R500 000 in terms of s 11(a) in the 2021 year of assessment
since an unconditional legal obligation to pay was not incurred. The expenditure is only actually
incurred when the trading stock is delivered in the 2022 year of assessment and will only be
deductible in that year of assessment.
When a taxpayer has originally acquired any asset with the purpose of holding it as an asset of a
capital nature, such expenditure will not be deductible in terms of s 11(a). If the taxpayer subse-
quently changes his intention and starts using the asset as trading stock, the expenditure may qualify
for the s 11(a) deduction. No expenditure is incurred at the time that the taxpayer’s intention changes,
and accordingly no deduction is available at this time. The original cost of the trading stock is normally
brought into account, and effectively deducted as opening stock, in terms of s 22(2)(b). If, however, a
capital asset becomes trading stock due to a taxpayer changing its intention, the cost price of the
trading stock is deemed to be the market value of the capital asset on the conversion date (in terms
of par 12(2)(c) of the Eighth Schedule) (s 22(3)(a)(ii)).
If a taxpayer disputes the validity of a claim against him, the disputed expenditure is not actually
incurred since no unconditional legal obligation has been incurred. To permit the deduction of dis-
puted expenditure would encourage abuse. This situation went on appeal in CIR v Golden Dumps
(Pty) Ltd (1993 A), where Nicholas AJA, who delivered the judgment of the Appellate Division, dealt
with the issue (at 206) in the following manner:
Where at the end of the tax year in which a deduction is claimed, the outcome of the dispute is undeter-
mined, it cannot be said that a liability has been actually incurred. The taxpayer could not properly claim
the deduction in that tax year, and the Receiver of Revenue could not, in the light of the onus provision of
s 82 of the Act, properly allow it. (Section 82 has since been repealed and replaced by s 102 of the Tax
Administration Act, 2011.)
128
The following cases have debated the issue of shares in exchange for something:
l It has been held that the issue of shares by a company does not mean that the company incurred
an expenditure (ITC 1783 (66 SATC 373)). The implication is that if, for example, a company issues
a share in exchange for a service, no cost was incurred in respect of the service and no
deduction may be claimed.
l A later judgment in ITC 1801 stated that ‘. . . the decision in ITC 1783 was clearly wrong and not a
reflection of the law . . .’. It was held that expenditure is actually incurred if a company issued
shares to discharge a liability that arose when it was obtained. An example of this is where an asset
is given in exchange for those shares (ITC 1801 (68 SATC 57)).
l This viewpoint was confirmed by the High Court in CSARS v Labat Africa Ltd (72 SATC 75) when
shares were issued for the acquisition of a trademark.
l The SCA, however, disagreed with the High Court in CSARS v Labat (2011 SCA) and held that an
allotment or issuing of shares does not involve a shift of assets of the company even though it
might, but not necessarily, dilute or reduce the value of the shares in the hands of the existing
shareholders. The allotment or issuing of shares in exchange for the acquisition of an asset was
therefore not allowed as an expenditure.
Currently, the tax implications of transactions where assets are acquired in exchange for shares
issued, are contained in ss 24BA and 40CA of the Act (see chapter 20).
6.3.2.1 Unquantified amounts: Acquisition of assets (s 24M)

If a person acquires an asset for a consideration that cannot be quantified in that year of assessment,
the part of the consideration that cannot be quantified is deemed not to be incurred by that person in
that year of assessment. The unquantified portion is deemed to be incurred only in the year of assess-
ment in which it can be quantified (s 24M(2)(b)).
6.3.2.2 Disposal or acquisition of equity shares (s 24N)

Section 24N applies when a person sells equity shares to another person during the year of
assessment at a quantified or quantifiable amount, but the amount is not yet payable by the pur-
chaser to the seller. The amount is deemed to accrue and to be incurred to the extent to which it
becomes due and payable (s 24N(1)) if all of the following requirements are met:
l More than 25% of the amount payable for the shares becomes due and payable after the end of
the seller’s year of assessment and is based on the future profits of that company. It is important
to note that, even though the future profits must be determined before the amount payable can
be quantified, the date on which such amount becomes due and payable triggers taxability and
deductibility.
l The value of all the equity shares sold during the year to which s 24N applies, exceeds 25% of
the total value of equity shares in the company.
l The purchaser and seller are not connected persons after the disposal.
l The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
l The amount is not payable by the purchaser to the seller in terms of a financial instrument that is
payable on demand and is readily tradeable in the open market (s 24N(2)).
6.3.3 ‘During the year of assessment’ (ss 23H and 24M(2)(b))

Although s 11(a) does not specifically require it, the courts have held that expenditure is only deduct-
ible in the year of assessment in which it is incurred (Concentra (Pty) Ltd v CIR (1942 CPD)). Cent-
livres CJ explained that the whole scheme of the Act shows that, as the taxpayer is assessed for a
period of one year, no expenditure incurred in a year before that particular tax year can be deducted
(Sub-Nigel Ltd v CIR (1948 A)). Expenditure cannot be carried forward to a subsequent year of
assessment or carried back to a previous year of assessment. This is so even though it may properly
relate to the income of those particular years. However, this rule is subject to exceptions. One
example is the provisions of s 23H (see 6.4), which may in certain instances allow a deduction of
expenditure which was actually incurred in a previous year of assessment but could not be claimed
due to the restrictions placed on the amounts deductible in that year during which the expenditure
was actually incurred.
Remember
If an amount is not claimed as a deduction in the correct year of assessment, the deduction may
not be claimed in a later year.
129
Example 6.3. Incurred during the year of assessment

The payment of directors’ fees was authorised but not paid during a specific year of assessment
(Year 1). The company only claimed a s 11(a) deduction in respect of this expenditure in the
following year of assessment, during which the directors’ fees were paid (Year 2).
Discuss whether the deduction will be allowed in Year 2.
SOLUTION
As the expenditure was actually incurred in Year 1 after being authorised, the s 11(a) deduction
should have been claimed in Year 1. The deduction will not be allowed in Year 2.
Expenditure incurred during the year of assessment must be quantified and brought into account at
the end of that year. If an asset is acquired for an unquantifiable amount, such expenditure is deem-
ed to be incurred only in the year of assessment that the amount can be quantified (s 24M(2)(b)).
6.3.4 ‘In the production of the income’ (ss 1(1) and 23(f))
The ‘income’ referred to in the phrase ‘in the production of the income’ is income as defined in s 1(1),
namely the gross income less the exempt income. This was confirmed in CIR v Nemojim Pty Ltd (45
SATC 241). Section 23(f), which prohibits a deduction of expenditure incurred in respect of any
amounts received or accrued that are not included in the term ‘income’ as defined in s 1(1), strength-
ens this viewpoint.
Remember
No deduction can be claimed if it does not relate to the production of income as defined.
Example 6.4. In the production of the income
ABC Ltd incurred R3 000 of expenditure to receive local dividends of R5 000.

Discuss the deductibility of the R3 000.
SOLUTION
Since dividends are exempt income in terms of s 10(1)(k)(i), it does not form part of ‘income’ as
defined. The expenditure of R3 000 cannot be claimed as a deduction in terms of s 11(a).
The meaning of the expression ‘in the production of the income’ was considered in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD). The taxpayer concerned was a transport company. The
driver of one of its vehicles was involved in an accident and, as a result, the driver suffered injuries
and eventually died. The company was compelled to pay compensation to the deceased’s depend-
ants.
To determine whether the expenditure was in the production of income, the court asked two ques-
tions:
(1) What action gave rise to the expenditure and what is the purpose of the action?
In this case, the action of the employment of an employee as a driver gave rise to the expend-
iture. This action is performed for the purpose of earning income by transporting passengers.
(2) Is this action so closely connected with (or a necessary concomitant of) the income-earning
business activities from which the expenditure arose as to form part of the cost of performing it?
The income-earning business activity of the taxpayer is the transporting of passengers. The
action that gave rise to the expenditure is the employment of drivers. There is an inherent
potential risk of an accident and a consequential potential liability to pay compensation when
driving any vehicle. The two elements (the action and the income-earning business activities)
are closely connected with each other.
The court considered the expenditure to be closely connected with and a necessary concomitant of
the income-earning business activities and was therefore allowed as a deduction.
130
Example 6.5. Incurred in the production of income

XYZ (Pty) Ltd (XYZ) is a construction company carrying on business as engineers in reinforced
concrete. XYZ had to pay damages to the dependants of deceased employees who were killed
when the roof of a building under construction collapsed. The accident was caused by the
negligence of the company in carrying out one of its contracts. Discuss whether the damages
will be allowed as a s 11(a) deduction.
SOLUTION
l Question 1: What action gave rise to the expenditure and what is the purpose of the action?
The action is the erection of a roof by employees who are employed as builders by a con-
struction company. This action is performed for the purpose of earning income by completing
contracts.
l Question 2: Is this action closely connected with the income-earning business activities?
Even though erecting roofs are part of the business activities of a construction company,
erecting defective roofs due to negligence is not a necessary concomitant of the trading
operations of a reinforced concrete engineer but rather an avoidable expenditure. The
actions are therefore not closely connected to the income-earning business activities of any
construction business. (See Joffe & Co (Pty) Ltd v CIR (1946 AD) (6.10.3) for a similar
finding.) The damages will therefore not be deductible in terms of s 11(a).
It is not necessary that expenditure produces income in the year that it was incurred before it is
deductible (Sub-Nigel Ltd v CIR (1948 A)). The income may be earned only in a future year, but if the
expenditure was incurred for the purpose of earning the income, it is deductible. Considering this
principle, the Court held that premiums paid on insurance policies against loss of income and losses
due to fire are incurred in the production of income.
Amounts paid to former employees on retirement, in recognition of prior services rendered, will not
qualify as a deduction. This expenditure is not in the production of any current or future income
(Johnstone & Co Ltd v CIR (1951 A)). If, however, as in the case of Provider v COT (1950 SR), the
expenditure is incurred to induce current and future employees to enter and remain in the service of
the taxpayer, the expenditure may qualify as a deduction since the purpose is to produce current or
future income. Amounts paid in terms of a service agreement will be deductible (see 6.10.5).
In CSARS v Mobile Telephone Networks Holdings (Pty) Ltd (2014 SCA) the Commissioner only allow-
ed a portion of the audit fees as a deduction. Mobile Telephone Networks Holdings lent money to its
subsidiaries and earned dividends from investments made. The full bench of the South Gauteng High
Court referred to ITC 1589 57 SATC 153 (Z) where it was held that expenses relating to the portion of
the accountancy work relating to dividend income should be disallowed (being exempt income) and
the remainder of the accountancy work relating to income producing activities should be allowed.
The Supreme Court of Appeal (SCA) held that the apportionment must be fair and reasonable. The
SCA held that the value of the taxpayer’s equity and dividend activities were much bigger than the
more limited income-generating activities, and, with this as yardstick, only 10% of the audit fees was
allowed as a deduction in terms of s 11(a). (This is in contrast with the decision of the High Court to
use the amount of work done during the audit as the yardstick and in terms thereof allowing 94% of
the audit fees as a deduction. This was held based on the basis that only 6% of the time was spent
on the audit of the dividend section.)
The apportionment of expenditure incurred with a dual purpose, namely, to produce moneys on resale
(income) and dividends (exempt income), was considered in CIR v Nemojim Pty (Ltd) (45 SATC 241).
The court held that the expenditure had to be apportioned since the purpose could not accurately be
appropriated either to income or to exempt income.
6.3.5 ‘Not of a capital nature’

It is often difficult to distinguish whether expenditure is of a capital or non-capital (or ‘revenue’)
nature. Although there is a mass of judicial decisions on the topic, it is impossible to extract a
universal test that can be applied in all situations. One must look at the facts of each case and the
purpose of the expenditure concerned to ascertain whether the expenditure is of a capital or revenue
nature. Despite the principle that there is no half-way house between capital and revenue,
apportionment between expenditure incurred with a dual purpose has been allowed by the courts in,
for example, SIR v Guardian Assurance Holdings (SA) Ltd (38 SATC 111).
The courts have nevertheless laid down the following very useful tests for distinguishing between cap-
ital and revenue expenditure:
131
New State Areas Ltd v CIR (1946 AD) (at 163):

The fixed v floating capital test laid down in an earlier case was used for assistance, but the main test
used in this decision was, the ‘operations v structure’ test.
Fixed v floating capital test
l Floating capital (being capital that frequently changes its form from money to goods and vice
versa, for example the purchase cost of stock) is income in nature.
l Fixed capital (being capital employed to acquire or improve property, plant, tools, etc., which
may qualify for capital allowances) is capital in nature.
Operations v structure test
l Expenditure incurred to perform the income-earning operations is income in nature.
l Expenditure incurred to establish, improve or add to the income-earning structure is capital in
nature.
SIR v Cadac Engineering Works (Pty) Ltd (1965 A):
This case also applied the ‘operations v structure’ test. It was held that there must be a sufficiently
close link between the expenditure and the taxpayer’s income-earning operations to warrant the
conclusion that it formed part of the cost of performing the taxpayer’s income-earning operations,
rather than the cost of expanding his income-producing structure. If the expenditure is more closely
related to the taxpayer’s income-earning structure than to his income-earning operations, it is capital
expenditure.
Rand Mines (Mining & Services) Ltd v CIR (1997 A):
The facts of this case revealed that millions of rands were spent in acquiring a contract to manage a
mine. This expenditure was held to be capital in nature because it was a cost expended to acquire
that income-earning right or structure. The acquisition was intended to provide an enduring benefit.
BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79):
It was held that where no new capital asset for the enduring benefit of the taxpayer has been created
(enduring in the way that fixed capital endures), the expenditure naturally tends to assume more of a
revenue character.
The question arises: how long must the asset or advantage endure to constitute a capital asset? The
fact that an asset will endure for a very short period will support a view that a payment for that asset
or right is of a revenue nature and may therefore qualify for a deduction in terms of the general
deduction formula. On the other hand, when a right is acquired for a substantial period, it constitutes
an enduring benefit. This was the position in ITC 1036 (1964), in which a right was granted for three
years, with a right of renewal for a further two years. This type of expenditure will therefore not qualify
for deduction in terms of the general deduction formula. The degree of longevity of the right or asset
is a question of fact, and each case must be considered on its own merits.
Based on the facts of previous cases, the following expenditure has been found to be of a capital
nature and is thus not deductible:
l Money spent in the acquisition of fixed capital assets for use in a business (for example factory
premises and plant and machinery). Included here would be all expenditure connected with or
attached to the acquisition of capital assets (for example transfer duty on factory premises
acquired, rail age paid on plant acquired for use in a business, and installation costs).
l Money spent to create a source of income, for example, the purchase price of the goodwill of a
business.
l Expenditure incurred by a company in obtaining share capital (for example by way of underwriting
commissions, advertising, and legal costs in connection with an offer of shares to the public).
l Transfer fees paid on the transfer of a liquor licence from one set of premises to another.
l The cost of erecting a model house on a hired site for the exhibition of the goods of a furniture
dealer. Although the purpose of the erection is to advertise the dealer’s products, the advertising
is of a permanent nature and results in the creation of a capital asset.
l Amounts paid to extinguish competition to expand the goodwill of a business.
l Expenses incurred by a freelance journalist in building up a part-time business in journalism.
Losses of a capital nature are also prohibited as a deduction in terms of the general deduction formula.
The following are examples of losses of a capital nature that are not deductible under the general
deduction formula:
l the loss of money lent, except where the money is lost by moneylenders, financiers or others
whose business it is to make loans
132
l losses on fixed capital assets (for example because of the destruction of plant or premises by fire
or the theft of machinery, furniture or other capital assets)
l the loss incurred by a tenant on the termination of his lease in connection with improvements
effected by him to the hired premises
l losses on the realisation of shares, except when it is the business of the taxpayer to deal in shares.
Although expenditure may be deductible in terms of the positive test of the general deduction
formula, the expenditure must still pass the negative test contained therein. Section 23 contains a list
of items that may not be claimed as a deduction (see 6.5).
6.4 Prepaid expenditure (s 23H)

Section 23H provides exceptions to the normal rule that expenditure is only deductible in the year of
assessment in which it is actually incurred (see 6.3.3). It limits the allowable deductions for certain
prepaid expenditure (other than expenditure incurred in respect of the acquisition of trading stock) to
the extent that only the expenditure relating to the goods supplied, the services rendered or the
benefits enjoyed during the specific year of assessment will be deductible in that year of assessment.
Section 23H(1) can only apply if the two conditions in s 23H(a) and (b) are met, and none of the four
exceptions listed in the provisos is applicable. The two conditions that must be met are
l the expenditure must be allowable as a deduction in terms of the provisions of s 11(a) (general
deduction formula), s 11(c) (legal expenditure), s 11(d) (repairs), s 11(w) (premiums in respect of
key-man policies) or s 11A (qualifying pre-trade expenditure and losses), and
l the expenditure must be in respect of
– goods or services, but all the goods or services will not be supplied or rendered during the
year of assessment, or
– any other benefits, but the period to which the expenditure relates extends beyond the year of
assessment.
Unless any of the exceptions in the four provisos below are applicable, the allowable deduction in the
year in which the expenditure is incurred and subsequent years of assessment will be limited as
follows:
l Expenditure incurred in respect of goods to be supplied: only expenditure in respect of goods
actually supplied in a particular year will be deductible in that specific year of assessment.
l Expenditure incurred in respect of services to be rendered: the amount to be deducted in any
year will be determined as follows:
Months in the year during which the services are rendered
× Total expenditure on the service
Total number of months during which services are to be rendered
l Expenditure incurred in respect of any other benefit that the person will enjoy: the amount to be
deducted in any year will be determined as follows:
Months in the year during which the person will enjoy the relevant benefit
Total number of months during which he will enjoy the benefit × Total expenditure on the benefit
The deductibility of the prepaid portion in respect of which the benefits will only be received or enjoy-
ed in a future year is postponed to that future year (s 23H(1)). If the above-mentioned apportionment
does not reasonably represent a fair apportionment in respect of the goods, services or benefits to
which it relates, the apportionment must be made in such manner as is fair and reasonable
(s 23H(2)).
In the recent Supreme Court of Appeal (SCA) judgment, Telkom SA SOC Limited v The
Commissioner for the South African Revenue Service [2020] ZASCA 19 (25 March 2020), the SCA
dealt with two separate legal issues stemming from an appeal (about s 24I) and a cross-appeal
(about s 23H) brought by the respective parties to the case. The Tax Court decided in favour of
Telkom regarding the s 23H dispute and SARS brought a cross-appeal against the findings. In the
2012 year of assessment, Telkom made a cash incentive bonus payment to Velociti (Pty) Ltd
(Velociti) in the amount of R178 788 421 in respect of the connection of initial subscriber contracts
relating to special tariff plans. These connections were made by Velociti on behalf of Telkom and the
total amount paid by Telkom as the cash incentive bonus was claimed as a deduction. However,
SARS only allowed a portion thereof as a deduction and added back the remainder in terms of
s 23H(1)(b)(ii) of the Income Tax Act. The SCA embarked on an inquiry into the benefits derived by
Telkom from the expenditure incurred, specifically how and when the benefit was enjoyed by Telkom.
SARS argued that Telkom only derived a benefit from the expenditure incurred when the connection
133
turns to fee income, and this only happens over the period of the contract when subscription fees are
paid. Telkom contended that the cash incentive bonus had to have been made prior to 30 September
2011 and that the benefit therefore did not extend beyond the 2012 year of assessment resulting in
s 23H not being applicable. The SCA concurred with SARS that the true benefit derived by Telkom
was the monthly subscription fees paid by the customers over the 24-month period of the contract. It
was held that although the conclusion of the contract benefitted Telkom, the enjoyment of that benefit
was spread out over the period of the contract. The SCA stated that the pertinent question was
whether Telkom derived a benefit from the connections over the contract period. The SCA answered
this question in the affirmative, and the term of the contracts therefore represents the periods in
respect of which the benefit was derived by Telkom. It was held that s 23H was to be applied to the
cash incentive bonus paid by Telkom.
Section 23H does not apply in the following situations (meaning that the deduction of the amount
actually incurred will therefore not be limited and the full amount will be deductible in the year that it
was actually incurred):
l If all the goods or services are to be supplied or rendered or enjoyed within six months after the
end of the year of assessment during which the expenditure was incurred, unless the expenditure
is allowable under s 11D(2)) (research and development expenditure) (proviso (aa)). The Act is
unclear about whether the six-month rule must be applied to each individual prepaid expenditure,
or to all prepaid expenditure in total. The contra fiscum rule should be followed and therefore
every prepaid expenditure should be measured separately.
l If the aggregate of all the amounts of expenditure incurred by the person, which may otherwise
have been limited by s 23H, does not exceed R100 000 (proviso (bb)). The total of all the prepaid
portions of all the expenditure to which s 23H could have been applied (meaning amounts which
are not subject to another exception in proviso (aa), (cc) or (dd)) must be measured against the
R100 000.
l Any expenditure to which the provisions of s 24K (interest-rate agreements) or 24L (option con-
tracts) apply (proviso (cc)).
l Any expenditure actually paid in respect of any unconditional liability to pay an amount imposed
by legislation. For example, if municipal law requires a person to pay property tax upfront, this
expenditure will not be subject to the limitations of s 23H (proviso (dd)).
Remember
The exceptions in provisos (aa), (cc) or (dd) must first be considered since it is measured sep-
arately. Only amounts not subject to any of these three exceptions will then be considered (in
aggregate) for the purposes of the R100 000 exception in proviso (bb).
If a person can show during any year of assessment that the goods or services will never be received
by or rendered to him or her, or that he or she will never enjoy the benefit, the expenditure can be
claimed as a deduction during that year to the extent that it has actually been paid by him or her
(s 23H(3)).
Example 6.6. Prepaid expenditure

An individual signed a contract on 1 January of the current year of assessment ending on
28 February 2022. The contract entitles him to the use of a machine for a period of five years. The
lease expenditure qualifies for a deduction in terms of s 11(a). The contract provides for a once-off
lease payment of R600 000, which becomes due and payable on the date of signature of the
contract.
Section 23H could apply because the two conditions are met. Since none of the exceptions are
applicable, s 23H will limit the amount that may be deducted in terms of s 11(a) in each of the
years of assessment as follows:
2022 year of assessment:
1 January to 28 February 2 600 000

u ........................................ R20 000
12 5
12 600 000
2023–2026 years of assessment: u ........................................ R120 000
12 5
10 600 000
2027 year of assessment: u ........................................ R100 000
12 5
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Example 6.7. Prepaid expenditure

X Ltd paid the following expenditure during the year of assessment ending on 30 June 2022:
On 1 February 2022 Annual rent of the office premises .......................................... R90 000
On 1 March 2022 Annual fee for security services .............................................. 120 000
On 1 May 2022 Stationery (3 months’ supply – R8 000 worth of stationery will
be received on each of 31 May 2022, 30 June 2022 and
31 July 2022) .......................................................................... 24 000
TOTAL ......................................................................................................................... R234 000
What amount will be deductible during the 2022 year of assessment?
SOLUTION
All the expenditures are deductible in terms of s 11(a). Not all the goods will be supplied
during the year and the period to which benefits (from renting the office and the rendering of
security services) relate extends beyond the year of assessment. Section 23H therefore applies.
The current year portion and prepaid portion of the expenditures are calculated as follows:
Current
Prepaid
year
Rent R90 000 × 5/12 ........................................................... R37 500
Rent R90 000 × 7/12 ........................................................... R52 500
Security services R120 000 × 4/12 ......................................................... 40 000
Security services R120 000 × 8/12 ......................................................... 80 000
Stationery R24 000 × 2/3 ............................................................. 16 000
Stationery R24 000 × 1/3 ............................................................. 8 000
Total ............................................................................................................ R93 500 R140 500
Test whether one of the provisos would render s 23H inapplicable.
Proviso (aa) (test each expenditure separately)
All the stationery will be supplied within six months after year end and proviso (aa) will therefore
be applicable to that expenditure and the total amount of R24 000 can be deducted.
All the benefits from the rent of the office and the security services will not be enjoyed within six
months after year end. Proviso (aa) will therefore not apply to those expenditures and the s 23H
limitation might be applicable. Test for proviso (bb) in respect of the rent expenditure and the
security services.
Proviso (bb) (test prepaid portions together)
The total expenditure actually incurred that may otherwise have been limited by s 23H (meaning
amounts not subject to another exception) relates to the prepaid portion and amounts to R132 500
(R80 000 + R52 500). Since this amount does exceed the R100 000 threshold, s 23H will apply and
only the current year portions of the rent expenditure (R37 500) and the security services (R40 000)
will be deductible.
6.5 Section 23 prohibited deductions

Section 23 provides that no deduction may be made in respect of the following expenditure, therefore
irrespective of the fact that s 11(a) might allow for a deduction:
6.5.1 Private maintenance expenditure (s 23(a))

The costs incurred in the maintenance of any taxpayer, his family or establishment (his private home)
are not allowed as a deduction.
The core word in this section is ‘maintenance’ and the meaning of the words of s 23(a) was
discussed in CIR v Hickson (1960 A) and Beyers JA, who delivered the judgment of the Appellate
Division of the Supreme Court, said (at 249):
I take ‘maintenance of the taxpayer, his family or establishment’ to mean feeding and clothing himself and
his family, providing them with the necessities of life, and comforts, and, as it were, maintaining a certain
standard of living, and keeping up his establishment.
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6.5.2 Domestic or private expenditure (s 23(b) and (m))

Domestic or private expenditure, including the rent of, cost of repairs, or expenditure in connection
with any premises not occupied for the purposes of trade, any dwelling house, or domestic premises
(private home), is not allowed as a deduction except for any part (usually based on floor area)
occupied for the purposes of trade. Read together with the trade requirement in s 11(a), expenditure
linked to the part of a private home occupied for trade purposes should consequently be deductible.
In CIR v Hickson (1960 A) Beyers JA said (at 249):
‘Domestic and private expenditure’ are, I should say, without attempting an exhaustive definition, expend-
iture pertaining to the household, and to the taxpayer’s private life as opposed to his life as a trader.
The cost of employment of a household servant to enable a taxpayer’s spouse to take up a job, a
taxpayer’s expenditure incurred in travelling from his residence to his place of business and medical
expenditure incurred are all examples of domestic or private expenditure prohibited by s 23(b).
A part of any private home only qualifies as being occupied for the purposes of trade if it is
l specifically equipped for the purposes of the taxpayer’s trade, and
l regularly and exclusively used for trade purposes
(proviso (a)).
If the trade for which such part of a private home is occupied does not constitute any employment or
office, the taxpayer must only meet the two requirements of proviso (a) to claim a deduction of the
allowable expenditure relevant to such part occupied for the purposes of trade.
In addition to the two requirements, if the trade does constitute any employment or office, the
taxpayer must also comply with one of the following two conditions before a deduction in respect of
the allowable expenditure is allowed:
l in the case where the income from that employment or office is derived mainly (‘mainly’ means
more than 50%) from commission or other variable payments based on his work performance: the
taxpayer’s duties must be mainly performed otherwise than in an office provided to him by his or
her employer, or
l in the case where the income from employment or office is not derived mainly from commission:
the taxpayer’s duties must be performed mainly in the qualifying part of the private home
(proviso (b)).
The effect of the two provisos is that a portion of the taxpayer’s relevant domestic or private expen-
diture, which would normally be prohibited deductions, but which was incurred in connection with
that part of his or her private home used for the purpose of trade as explained, will be allowed as a
deduction if all three the requirements are met. Section 23(b) must be read together with s 23(m),
which lists the specific limited deductions allowable in respect of expenditure which relates to any
employment or office held (see 6.5.12).
6.5.3 Recoverable expenditure (s 23(c))
Any loss or expenditure that is recoverable under any contract of insurance, guarantee, security or
indemnity is not allowed as a deduction. The meaning of the word ‘recoverable’ is unsure. The
opinion (without giving a definite decision) that the word means ‘capable of being sued for’ was given
in Oosthuizen v Standard Credit Corporation (1993 A) (on 350).
Since the general recoupment provision (s 8(4)(a)) will in any event bring any recovery or
recoupment of a previously deducted amount back into income, this prohibition seems to be
superfluous.
Section 23(c) was amended, with effect from 1 January 2021, to clarify the interaction between
s 23(c) and s 23L – see 6.7 below.
6.5.4 Interest, penalties and taxes (ss 23(d), 7E and 7F)
The deduction of any tax imposed under the Act, or any interest or penalty imposed under any other
Act administered by the Commissioner (for example the VAT Act) is disallowed.
Please note that interest paid by SARS to a person under a tax Act is deemed to accrue to that
person in terms of s 7E on the date of payment. If such interest must be repaid by that person to
SARS, it must be deducted in the year of assessment that the interest is repaid to SARS (s 7F). This
deduction is only available to the extent that the interest is or was included in the person’s taxable
income.
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6.5.5 Provisions and reserves (ss 23(e) and 11(j))

Income carried to any reserve fund or capitalised in any way (for example a provision made from
income to provide for a contingent liability) is denied as a deduction.
This provision underlines the ‘actually incurred’ requirement in terms of the general deduction for-
mula. The creation of a provision does not represent the ‘incurrence’ of expenditure. Section 23(e) will
not apply where the Act specifically allows for the creation of a reserve-type of allowance, for
example the provision for doubtful debt (in s 11(j)). Section 11(j) makes provision for a doubtful debt
allowance to be claimed in one year of assessment and added back to income in the next year of
assessment.
6.5.6 Expenditure incurred to produce exempt income (s 23(f ))

Expenditure incurred in respect of any amounts that are not included in the term ‘income’ as defined
in s 1(1) will not qualify as a deduction. ‘Income’ is defined as gross income less exempt income.
The purpose of this prohibition is to prevent the deduction of expenditure incurred in the production
of gross income that is exempt in terms of s 10 or amounts excluded from the definition of ‘gross
income’, because such amounts are consequently excluded from the definition of ‘income’.
A typical example is expenditure incurred to produce dividends that are exempt from tax (see 6.3.4).
It is submitted that expenditure of a general character that cannot accurately be appropriated either
to income or to non-taxable amounts should be apportioned.
Corbett JA suggested a method for the application of this prohibition in delivering the judgment of the
Appellate Division in CIR v Nemojim (Pty) Ltd (1983 A) (at 256):
It seems to me . . . that when considering whether moneys outlaid by the taxpayer constitute expenditure
incurred in respect of amounts received or accrued which do not constitute ‘income’ as defined (for the
sake of brevity I shall call this ’exempt income‘), the court must assess the closeness of the connection
between the expenditure incurred and the exempt income received or accrued, having regard to the pur-
pose of the expenditure and what the expending thereof actually effects. (Own emphasis.)
In CIR v Standard Bank of SA Ltd (1985 A) it was stated that the same general test applies to this
prohibition as to the general deduction formula. This general test entails that the purpose of
expenditure and the closeness of the connection between the expenditure and the income-earning
operations must be established.
6.5.7 Non-trade expenditure (s 23(g))

Expenditure can be incurred with mixed motives. Expenditure may be incurred partly for the purpose
of trade and partly for private purposes. Section 23(g) prohibits the deduction of any moneys claimed
as a deduction from income derived from trade ‘to the extent to which such moneys were not laid out
or expended for the purposes of trade’. The words ‘to the extent’ indicate that it is possible to
apportion any expenditure and claim the trade portion of the expenditure as a deduction.
Section 23(g) must always be read together with the trade and other requirements of s 11(a) when
the deductibility of an amount is being ascertained in terms of the general deduction formula.
In Warner Lambert SA (Pty) Ltd v C: SARS (2003 SCA) the taxpayer, a South African subsidiary of an
American company and a signatory to the Sullivan Code, involved its senior management in ‘social
responsibility projects’. When the principles of this Code became enshrined in legislation, the
Comprehensive Anti-Apartheid Act, it compelled the parent company to ensure that its South African
subsidiary complied with the principles, or fines or imprisonment for the directors could be imposed.
These costs fell into two broad categories: wage improvements and similar expenses, which were
clearly incurred in the production of income; and social responsibility expenditure incurred outside
the workplace.
The taxpayer argued that the reason for incurring the social responsibility expenditure was to prevent
the loss of its status as a subsidiary of the US parent, with all the concomitant privileges, which was
crucial to its trading success. The court held that it was unthinkable that the taxpayer should not
comply with the Sullivan Code and concluded that the expenses were incurred for the performance
of the taxpayer’s income-producing operations and formed part of the cost of performing it. This
meant that the expenditure had been ‘incurred for the purposes of trade and for no other’ and was
therefore incurred in the production of income.
In C: SARS v Scribante Construction (62 SATC 443) the taxpayer company had sufficient funds
available to pay the dividend without borrowing, but for good business reasons elected to pay only a
portion as dividend and to credit a portion of the dividend to interest-bearing loan accounts of the
shareholders. The Supreme Court of Appeal found that the ‘borrowing’ was to enable the company to
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earn income and that the loans of the shareholders were used for the purposes of trade and in fact
produced income directly and indirectly. The distinguishing feature in this case was that the funds,
which were available to pay the dividend, were surplus to the taxpayer’s business requirements and
hence the only reason for their retention was to enable the company to earn interest. The interest
paid on the loans was therefore deductible.
6.5.8 Notional interest (s 23(h))

A taxpayer cannot claim a deduction for interest which might have been made but is forfeited due to
the taxpayer employing his capital in his trade rather than investing it in a bank.
6.5.9 Deductions claimed against any retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits (s 23(i) and paras 5 and 6 of the Second Schedule)
Paragraphs 5 and 6 of the Second Schedule allow certain unclaimed contributions made by the tax-
payer to a retirement fund as deductions in the calculation of the taxable amounts of lump sum
benefits. Section 23(i) prohibits a deduction (submittedly in terms of s 11F) of the same unclaimed
contributions allowed in terms of the aforementioned paragraphs. This merely confirms that the
balance of unclaimed contributions can only be allowed once, as will be explained in detail in
chapters 7 and 9.
6.5.10 Expenditure incurred by labour brokers and personal service providers (s 23(k))
In the past, a popular tax-saving method for employees was to offer their services to their employers
through the medium of private companies or close corporations. This effectively enabled them
l to avoid the monthly payment of employees’ tax
l to be taxed at the company rate of taxation as opposed to the higher marginal tax rates applic-
able to individuals, and
l to avoid the limitations placed on the deduction of expenditure incurred by employees.
Section 23(k) places a limitation on allowable deductions to discourage the use of a corporate entity
to avoid being classified as an employee. It limits the deductions allowable for expenditure incurred
by
l labour brokers (as defined in the Fourth Schedule) who do not possess an employees’ tax
exemption certificate, and
l personal service providers (as defined in the Fourth Schedule).
Labour brokers are natural persons, and personal service providers can be either companies or
trusts. In the case of labour brokers, the remuneration paid or payable to an employee for services
rendered is the only expenditure that can be deducted. In the case of a personal service provider,
such remuneration paid and the following expenditure incurred is not prohibited as deductions:
l legal expenditure (s 11(c)), bad debt (s 11(i)), qualifying pension, provident or retirement annuity
fund contributions (s 11(l)), the refund of amounts received in respect of services or any employ-
ment or the holding of any office (s 11(nA)) and the refund of any restraint of trade payment
(s 11(nB))
l expenditure in respect of premises, finance charges, insurance, repairs, fuel and maintenance in
respect of assets if such premises or assets are wholly and exclusively used for trade purposes.
Example 6.8. Expenditure incurred by personal service providers
John rendered services to his employer, Delta Ltd, for 15 years. He resigned during the 2022
year of assessment and established a company. The company now renders the service that
John used to render. John is the only holder of shares and employee of the company. The
company incurred the following expenditure:
l rental of office space (used wholly and exclusively for trade purposes)
l lease expenditure in respect of motor vehicle used by John. The vehicle is used for trade
and private purposes
l salary paid to John (the only employee and holder of shares of the company).
Which deductions can the company claim in respect of the expenditure incurred?
138
SOLUTION
The company is a personal service provider (see chapter 10) and may claim deductions in
respect of the office rental expenditure as well as the salary paid to John (not prohibited in terms
of s 23(k)).
Since the asset is not used wholly and exclusively for trade purposes as required by s 23(k), the
motor vehicle lease expenditure may not be claimed. John cannot claim any of the expenditure
because he did not incur it.
Note that Delta Ltd is obliged to withhold employees’ tax at a flat rate of 28% from the payments
made to the company because a personal service provider is an ‘employee’ as defined.
6.5.11 Restraint of trade (ss 23(l) and 11(cA))

Section 23(l) prohibits the deduction of restraint of trade payments, except those allowable in terms
of s 11(cA), being payments to natural persons, labour brokers (without employees’ tax exemption
certificates) and personal service providers allowed over the lesser of the term of the contract and
three years (see chapter 12).
6.5.12 Expenditure relating to employment or an office held (s 23(m) and (b))

Section 23(m) prohibits the deduction of expenditure that relates to any employment or office held in
respect of which remuneration is earned other than the specific amounts listed below. This prohibition
does not apply to an agent or representative whose remuneration is derived mainly in the form of
commission based on sales or turnover (mainly means more than 50%).
Only the following s 11 expenditure relating to employment or an office held may be claimed as a
deduction against remuneration earned by an employee whose remuneration does not mainly consist
of commission:
l any contributions to any retirement fund (s 11F) (see 7.4.1)
l any legal expenditure (s 11(c)), wear-and-tear allowance (s 11(e)), bad debt (s 11(i)) or provision
for doubtful debt (s 11( j)) (see chapter 12)
l refund of amounts received in respect of services or any employment or the holding of any office
(s 11(nA)) or refunds of amounts received as a restraint of trade payment (s 11(nB)) (see
chapter 12)
l qualifying rent, cost of repairs or expenses (allowable under s 11(a) or (d)) in connection with any
dwelling house or domestic premises to the extent that the deduction is not prohibited in terms of
s 23(b) as being domestic or private expenditure (see 6.5.2).
Regarding the last item, ss 11(a), 11(d), 23(m)(iv) and 23(b) read together entail that an employee
who earns remuneration that does not consist mainly of commission, can claim a deduction in respect
of the listed types of expenses to the extent that such a deduction is not prohibited under s 23(b) as
being domestic or private expenses. This means that the expenses are incurred in connection with
the part of a dwelling house or domestic premises used as a home office for the purposes of his
trade and
l that part is specifically equipped for purposes of the employee’s trade (proviso (a) to s 23(b)),
and
l that part is regularly and exclusively used for the employee’s trade (proviso (a) to s 23(b)), and
l the employee’s duties are mainly performed in that home office (proviso (b)(ii) to s 23(b)).
In the case of an employee who earns remuneration that mainly consists of commission, the first two
requirements above must also be met. A third requirement for such an employee is that the
employee’s duties must mainly be performed otherwise than in an office provided to him by his
employer (proviso (b)(i) to s 23(b)).
Draft Interpretation Note No. 28 (Issue 3) provides clarity on the deductibility of home office expenses
incurred by persons in employment or persons holding an office. This Note was released as a draft in
May 2021. The Note has been updated to provide further clarity in response to public comments sub-
mitted and, in addition, provides an interpretation that represents a significant change relating to the
deductibility of mortgage bond interest incurred in connection with a home office (see explanation
below). Accordingly, this updated draft has been issued for a second round of comment and it is pro-
posed that it will be issued on 1 March 2022 and be effective for years of assessment commencing
on or after 1 March 2022. Even though it is proposed that the Note will be effective for years of assess-
ment commencing on or after 1 March 2022, the additional clarity given on interpretations that have
139
not changed will provide useful guidance for earlier years of assessment. Additional submissions
must be made on or before 14 January 2022. The following are some key points from Draft
Interpretation Note No. 28 (Issue 3):
l Section 23(b) prohibits a deduction in respect of domestic or private expenditure, including the
rent of, or cost of repairs of, or expenses in connection with any dwelling house or domestic
premises to the extent that it is not occupied for the purposes of trade. The expenditure that is
excluded from the prohibition in s 23(b), and is therefore permitted by s 23(b), is the rent of or
cost of repairs of or expenses in connection with the part of premises occupied for purposes of
trade, that is, the home office.
l In s 23(b), the words ‘in connection with’ appear in the following text: ‘rent of or cost of repairs of
or expenses in connection with any premises . . . or of any dwelling house or domestic premises
. . .’. The words ‘rent’ and ‘cost of repairs’ are expenses directly related to the physical premises
and restrict the scope of the more general words ‘expenses in connection with any premises . . .
or of any dwelling house or domestic premises’ indicating that a more direct relationship with the
physical premises is required. Expenditure incurred on an item used in performing a taxpayer’s
employment duties or office that is located in the premises, for example stationery purchased for
trade purposes, is insufficient on its own to create the required link to the premises itself and
represents a loose or indirect connection to the premises.
l Any cost of repairs to the property must be related to the home office (that is, the part occupied
for purposes of trade) in order for the deduction not to be prohibited under s 23(b).
l Expenses in connection with premises that could qualify for a deduction and not be prohibited
under s 23(b) to the extent the part of the premises is occupied for the purposes of trade
include items such as
– interest on the mortgage bond (see the next point below for detail on a significant limitation in
this regard which means that in most cases interest will not be deductible)
– rates and taxes and any other municipal service charges such as sewerage and refuse
– electricity
– homeowners’ insurance to the extent that it insures against damage to the premises
– costs in relation to security of the premises (other than capital costs), and
– cleaning costs.
l The significant limitation on the deductibility of interest is explained as follows: s 23(m)(iv)
excludes from the prohibition against deduction any deduction that is allowed under s 11(a) or
s 11(d) in respect of expenses in connection with a premises to the extent that the deduction is
not prohibited under s 23(b). Depending on the facts, however, interest incurred on most loans
used to acquire a premises will meet the requirements for deduction under s 24J and will
therefore be deductible under s 24J and not s 11(a). If the interest expense meets the
requirements in s 24J, it means the portion of interest incurred in connection with the part of the
premises used for purposes of trade (the home office) will be prohibited by s 23(m) and is not
deductible.
l Bond insurance is normally a life insurance product and is specifically prohibited from being
deducted. Household insurance is generally not claimable since it relates to the contents of the
premises and not the premises itself.
l Expenditure, such as phone costs (including the monthly charges), stationery, furniture, tea,
coffee and other refreshments, computer and communication equipment and monthly
subscription fees for fibre (see below), are not incurred in connection with a premises and fall
outside of the scope of what is permitted by s 23(b).
l Capital costs such as equipment and furniture which meet the requirements of and qualify for a
wear-and-tear allowance under s 11(e) are excluded from the prohibition in s 23(m)(iv) and
therefore allowed as a deduction.
l It is further explained that, in modern times, many taxpayers have fibre optic cabling (fibre) instal-
led to their homes, which may be used, in part at least, for purposes of their trade. The fibre cabling
terminates in an ‘optical network terminal’ (ONT) on the user’s premises. Under most contracts for
the provision of fibre, the ONT remains the property of the fibre service provider. Ordinarily an
installation fee and connection or activation fee are charged for the initial set up of the fibre, whilst
most service providers supply a free WiFi router, provided that the user remains a client for a
specified period, alternatively that the router be returned in the condition that it was received if
the user terminates the contract before a specified period. It is stated that, under these
circumstances, the initial costs for setting up a fibre installation are not expenses in connection
140
with the premises and fall outside of what is permitted by s 23(b). Further, the initial costs and
monthly subscriptions are prohibited from being deducted by s 23(m). The router, which was
received at no cost to the user, and who does not acquire ownership of the router until the effluxion
of a period, also does not qualify for a wear-and-tear allowance.
Section 23(m) is subject to the limitation placed on the expenditure incurred by labour brokers and
personal service providers (s 23(k) – see 6.5.10). In terms of Interpretation Note No. 13 (Issue 3) it
means that the limitations imposed upon labour brokers (without an exemption certificate) and
personal service providers (‘employees’ as defined), will apply despite the provisions of s 23(m).
6.5.13 Government grants (s 23(n))

Government grants received or accrued in respect of goods or services provided to beneficiaries in
terms of an official development assistance agreement are exempt (s 10(1)(yA)). If such exempt
grant is used to fund the acquisition of any asset or expenditure, no deduction or allowance can be
claimed (s 23(n)).
6.5.14 Unlawful activities (s 23(o))

The deduction of expenditure incurred in respect of unlawful activities (for example the payment of a
bribe or a fine) is prohibited. Other examples of an unlawful act may include unfair marketing, unfair
discrimination, harassment, hate speech, violation of traffic laws and contravention of municipal by-
laws.
Unlawful activities include activities contemplated in Chapter 2 of the Prevention and Combating of
Corrupt Activities Act of 2004 (PCCA Act). Chapter 2 of the PCCA Act addresses the general offence
of corruption and offences in respect of corrupt activities relating to specific persons. It further
provides for offences in respect of corrupt activities relating to both the receiving and the offering of
unauthorised gratification as well as for offences in respect of corrupt activities relating to specific
matters. The reference in the PCCA Act to ‘offences of receiving or of the offering of an unauthorised
gratification’ specifically concerns parties in employment relationships. Specific matters identified for
special consideration are corrupt activities relating to witnesses or evidential material in certain
proceedings, contracts, the procuring and withdrawal of tenders, corrupt activities relating to
auctions, sporting events, gambling games and games of chance.
Fines charged and penalties imposed because of unlawful activities, even if carried out in any other
country, may also not be claimed as deductions (s 23(o)(ii). It is important to note that s 23(o)(i) does
not require that there must be a conviction for the section to apply. Any payment that constitutes an
activity contemplated in Chapter 2 of the PCCA Act will be denied as a deduction for income tax
purposes.
The deduction of any expenditure incurred constituting fruitless and wasteful expenditure, as defined
in and determined in accordance with the Public Finance Management Act, is also prohibited
(s 23(o)(iii)). This means that the deduction of any expenditure that was made in vain and that would
have been avoided if reasonable care had been exercised by the public entity, is prohibited
(s 23(o)(iii)).
The exemption in s 10(1)(zL) (see chapter 5) provides that any amount of fruitless and wasteful
expenditure that was not allowed as a deduction (or that was prohibited as a deduction in terms of
s 23(o)(iii)) and is subsequently recovered by the public entity, is deemed to be exempt during the
year of assessment in which it is received or accrued.
Interpretation Note No. 54 (Issue 2) describes SARS’s interpretation of s 23(o) in more detail.
6.5.15 The cession of policies by an employer (s 23(p) and par 4(2)bis of the Second
Schedule)
An employer who cedes a policy of insurance to an employee (or former employee), a director (or
former director), or a dependant or nominee of such employee or director, or to any retirement fund for
the benefit of any of such persons, may not deduct the value in respect of such cession. In the case
of a cession to a retirement fund, the member of such fund will only be taxed when the fund cedes
such policy to the member (par 4(2)bis of the Second Schedule).
6.5.16 Expenditure incurred in the production of foreign dividends (s 23(q))

The deduction of any expenditure incurred in the production of income in the form of foreign
dividends is prohibited (s 23(q)).
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6.5.17 Premiums in respect of insurance policies against illness, injury, disability,

unemployment or death of that person (ss 23(r) and 10(1)(gI))
The deduction of premiums paid by a person in terms of a policy of insurance, which covers a person
against illness, injury, disability, unemployment or death of that person, is prohibited. The proceeds
of such policies are also exempt from tax (s 10(1)(gI)).
6.6 Prohibition against double deductions (s 23B)

Even though an amount may qualify for a deduction under more than one provision of the Act, no
amount may reduce the taxable income of a taxpayer more than once (s 23B(1)).
If a particular section expressly allows a deduction on the condition that the amount is also deduct-
ible under any other section, such a specific double deduction is allowed (s 23B(2)). The Act
contains no such specific provisions. The intention of this exception is clear, but since a double
deduction is prohibited by the rule in s 23B(1), it is unclear how such exception will work.
Sometimes it might seem that a taxpayer obtains a ‘double deduction’, for example in the case of the
additional deduction in respect of learnership agreements (s 12H). The salaries paid to the learners
are allowed as deductions in terms of s 11(a) and additional fixed amounts are allowed as
deductions in respect of the same learners if certain conditions are met. These types of incentives
are not double deductions of the same amounts but merely additional incentives for a specific
purpose.
Specific deductions take precedence over the general deduction formula. If a specific deduction is
allowed, no deduction in terms of s 11(a) is available, even if there is a limitation on the amount of the
specific deduction or allowance, or if it is available in a different year of assessment (s 23B(3)). The
general deduction formula can therefore not be used to claim the balance of any expenditure for
which there is a specific deduction, but which is limited to a certain amount, as a deduction.
An employer (as policyholder) can claim no deduction in terms of the general deduction formula for
premiums paid under a policy of insurance where the policy relates to death, disablement or illness
of an employee or director, or former employee or director of the employer (s 23B(5)). If the policy
relates to death, disablement or illness arising solely from and in the course of employment of the
employee or director, the employer may however deduct such premiums paid (exclusion in s 23B(5)).
Last-mentioned policies are taken out to safeguard an employer in the case of events happening in
the course of employment, for example travel insurance and general work-related disability insurance
for all employees collectively.
6.7 Limitation of deductions in respect of certain short-term insurance policies

(s 23L)
An insurance contract is viewed as an investment contract if the short-term insurer fails to accept
significant risk from the policyholder in the case of a specified uncertain event. An insurance contract
is a ‘policy’ for income tax purposes if it is a policy of insurance or reinsurance. The policyholder must
therefore have an insurable interest.
No deduction is allowed in respect of any insurance premiums incurred in respect of a policy if such
premiums are not taken into account as an expense in terms of IFRS in either the current year of
assessment or a future year of assessment (s 23L(2)).
Policy benefits received or accrued must be included in gross income but any premiums not allowed
as a deduction in the current or any previous year of assessment reduce the taxable amount of any
benefits received or accrued from such policies (s 23L(3)).
An amendment to s 23(c), effective from 1 January 2021, makes it clear that the rules of s 23L(3)
override the limitation provision of s 23(c).
6.8 Excessive expenditure (s 23(g))

Expenditure can be excessive if it is not actually incurred in the production of the income, as required
by s 11(a), or if it 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.
If the Commissioner disallows the excessive portion of expenditure, the recipient is nevertheless
subject to tax on the full amount (ITC 792 (1954)). It does not follow that, because any amount is not
allowed as a deduction from the income of the payer, it is not taxable in the hands of the recipient (W
F Johnstone & Co Ltd v CIR (1951 A)).
142
There are several reported cases in which the Special Court has had to decide whether remuneration
alleged to be excessive was or was not paid in the production of income. In these cases, the court
considered various factors, for example
l the open market value and the nature of the services rendered
l the nature of the business
l the relationship between the employer and the employee
l the amount of the remuneration in relation to the net profit earned by the employer
l the dependence of the remuneration paid on the profits earned, and
l the presence of motives other than ordinary commercial ones (for example the avoidance of tax
or the expression of family feelings) (ITC 1518 (1989)).
Employers must take care that travel allowances paid to an employee are not out of all proportion to
the amount that the employee would be likely to use for business purposes. It then indicates that the
employer, in arranging, was inspired by some ulterior motive, such as a desire to evade tax. In such
a situation, the Commissioner is entitled to challenge the deduction of the whole or portion of the
travel allowance as not being expenditure incurred in the production of income (ITC 575 (1944)).
Salaries and bonuses paid to members of firms practising in corporate form, such as lawyers, public
accountants, consulting engineers, architects and stockbrokers, were allowed in full as a deduction
to the companies concerned (withdrawn Practice Note No. 29). It is submitted that such companies
will now have to provide proof that salaries are market related and meet the requirements of ‘in the
production of the income’.
6.9 Cost of assets and VAT (s 23C)

The introductory words ‘notwithstanding the Seventh Schedule’ to s 23C refer to the Regulation
determining the ‘determined value’ of company cars in par 7(1) of the Seventh Schedule. The
‘determined value’ used to calculate the fringe benefit arising in the employee’s hands includes VAT
(see chapter 8).
The VAT portion of the cost of an asset or an expenditure incurred has the following impact:
l If the taxpayer is a ‘vendor’ and an input tax deduction is claimed, the amount of the actual input
tax must be excluded from the cost (or the market value) of the asset or the amount of the expend-
iture (s 23C(1)).
l If the taxpayer is a non-vendor and no input deduction is claimed, the VAT portion must be included
in the cost (or the market value) of the asset or the amount of the expenditure.
Section 23C also applies to the notional input tax claimable as a deduction by a vendor when he
acquires ‘second-hand goods’ (as defined in s 1(1) of the VAT Act) in qualifying circumstances
(s 23C read with s 16(3)(a)(ii) of the VAT Act). Where a VAT vendor leases an asset under an
‘instalment credit agreement’, a portion of the input tax paid must reduce each lease rental payment.
The portion is calculated as the amount of the rental divided by the total rental and multiplied by the
amount of the input tax (proviso to s 23C(1)).
Example 6.9. Cost of assets and VAT

XYZ Ltd leased a delivery vehicle in terms of an instalment credit agreement for R30 600 per
month (VAT inclusive) for a period of 36 months. The cash price of the delivery vehicle is
R513 000 (including VAT). Discuss the VAT and normal tax implications of the transaction.
SOLUTION
VAT implication of the transaction:
Total input tax claimable R66 913 (R513 000 × 15/115)
The input tax credit of R66 913 is claimable in full on the earliest of date of payment of any con-
sideration or the date of delivery of the vehicle.
Normal tax implication of the transaction:
The monthly lease payment (exclusive of VAT) is claimable in terms of s 11(a) and s 23C. This
amounts to R28 741 per month, calculated as:
[Instalment inclusive of VAT – (input tax × (instalment this period/total instalments))]
[R30 600 – (R66 913 × (R30 600/(R30 600 × 36)))].
The VAT portion of R1 859 (R30 600 – R28 741) cannot be claimed for normal tax purposes.
143
6.10 Specific transactions

The remainder of this chapter is devoted to the distinction between expenditure and losses that are
allowable in terms of the general deduction formula, and those that are not, taking the decisions of
case law into account. It is important to note that each case is decided upon by the courts, based on
the specific circumstances of that case.
6.10.1 Advertising
Advertising expenditure incurred by a business already in existence (therefore already trading) will
be allowed if the expenditure qualifies as a deduction in terms of the general deduction formula (the
most important requirements in this regard are the ‘in the production of the income’ and ‘not of a
capital nature’ requirements).
When advertising costs result in the acquisition of an asset of a permanent nature (a direct enduring
benefit), they are of a capital nature. For example, in ITC 469 (1940) the taxpayer, a furniture dealer,
erected a model house on a hired site to exhibit his goods. This advertising expenditure was held to
be of a permanent nature and to have created a capital asset and was not allowed as a deduction.
A celebrated case involving large donations was CIR v Pick ’n Pay Wholesalers (1987 A). The principle
that arose was that if a donation is made for moral reasons (to support a good cause) without any
business purpose whatsoever, no deduction will be allowed. The reason is that the expenditure will
not be in the production of income.
Interpretation Note No. 45 (Issue 3) explains that sponsorship generally involves the support or
promotion of an activity such as a sporting event in return for advertising of the sponsor’s products or
services. In terms of security expenditure, a company that, for example, provides an armed response
service or installs security gates may offer to secure a certain premises in return for extensive
advertising of such company’s logo at the premises or at a high-profile event. The sponsorship may
also take the form of the provision of products related to the advancement of crime-initiative projects.
From an income tax perspective, the question has been raised whether contributions to anti-crime
initiatives are deductible in terms of s 11(a) read with s 23(g). In terms of Interpretation Note No. 45,
the deduction will be limited to so much of the contributions as the taxpayer can prove produced
commercial value for the business through exposure of its name or products.
6.10.2 Copyrights, inventions, patents, trademarks and know-how

The cost of taking out a patent is capital expenditure unless a dealer in patent rights incurs it. Simi-
larly, a trader or manufacturer’s costs of registering a trademark or trade name constitute capital
expenditure.
The cost incurred for the outright acquisition of a patent or trademark is capital expenditure unless it
is acquired for the purpose of speculation. It does not matter, it is submitted, that the purchase price
is paid by annual instalments, whether fixed or variable (ITC 1365 (1982)). In these circumstances, the
taxpayer expends an amount to obtain an enduring right to use (and own) an asset. Although the
deduction of costs of a capital nature will not be allowable in terms of the general deduction formula,
other specific deductions are allowed in respect of these costs (ss 11(gB), 11(gC) and 11D – see
chapter 13).
An outright acquisition must be distinguished from the situation where the taxpayer makes a
repetitive payment for the use of an asset. Payments for the use of an asset are of a revenue nature
and will be deductible in terms of the general deduction formula. Examples are lease payments or
rent expenditure for the use of an asset, as opposed to capital expenditure for the outright acquisition
of the asset.
Annual royalty payments for the use of a patent or trademark are clearly deductible, whether they are
paid in fixed or variable amounts, depending, for example, upon the number of articles sold. Once
again, the expenditure relates to the right of use and not to the obtaining of enduring ownership. This
principle was confirmed in BP Southern Africa (Pty) Ltd v CSARS (69 SATC 79).
6.10.3 Damages and compensation

Payments for damages or compensation resulting from negligence will only be deductible if the
negligence constitutes a ‘necessary concomitant’ of the trading operations. A close connection
between the trading operations or income-earning business activities and the action that causes the
liability for damages must exist.
144
In Joffe & Co (Pty) Ltd v CIR (1946 AD) the taxpayer carried on business as engineers in reinforced
concrete. The death of a worker was caused by the negligence of the company in carrying out one of
its contracts, and it was required to pay damages and costs. The company claimed a deduction of
the amount paid. The claim was disallowed, because the construction of a building does not necessarily
lead to its collapse during that construction process. Watermeyer CJ, who delivered the judgment of
the Appellate Division of the Supreme Court, said (at 360):
There is nothing . . . to show that the appellant’s method of conducting his business necessarily leads to
accidents, and it would be somewhat surprising if there were.
This case did not decide that losses occasioned by a taxpayer’s negligence are not deductible. It
merely decided that there was no evidence that losses arising from the negligence of the particular
taxpayer concerned were necessary concomitants of the specific trade carried on by him.
If a taxpayer sells petrol lamps (under a guarantee) as his principal business, there is an inherent risk
of injuries if one of the lamps explodes. Payments for consequential damages and compensation are
incurred in the production of income due to the risk being an ‘inevitable concomitant’ of the trade.
6.10.4 Education and continuing education

The deduction of expenditure incurred by a taxpayer in improving his knowledge or education has
been disallowed on the grounds that either the expenditure is of a capital nature, or it is not incurred
in the production of income, or both.
It is nevertheless suggested that circumstances could arise in which expenditure of this nature would
be incurred in the production of income and would not be of a capital nature (ITC 1433 (1984)). It
was held in Smith v SIR (1968 A) by Steyn CJ (who delivered the judgment of the majority of the
Appellate Division of the Supreme Court) that all expenditure incurred by a taxpayer in the acquisition
of knowledge or education cannot be of a capital nature.
In practice, SARS has ruled that the fees paid by practising attorneys for attending courses conduct-
ed as part of the continuing legal education programme of the Association of Law Societies of South
Africa (the predecessor of the existing Law Society of South Africa) will be allowed under s 11(a) (De
Rebus 332 (1975)). SARS has also ruled that the costs incurred by practising chartered accountants
in attending courses conducted by the South African Institute of Chartered Accountants in its pro-
gramme of continuing education will be allowed on the same basis under s 11(a) (Accountancy SA
(August 1987)).
SARS considers ‘on their merits’ submissions by other taxpayers claiming expenditure of a similar
nature but insists that it be shown that the expenditure is so closely linked with the earning of their
income that it warrants a deduction in terms of s 11(a).
6.10.5 Employment and services rendered

All amounts payable by an employer to an employee in terms of a service agreement are deductible
from the employer’s income, if all the requirements of the general deduction formula are met. If the
amount payable is excessive in relation to the services performed by the employee, SARS is entitled
to disallow such portion as being incurred for some other purpose than ‘in the production of income’
or for purposes other than ‘trade’.
It is the practice of SARS to allow the deduction of bursaries awarded by an employer if the holder of
the bursary binds himself to work for the employer for a certain period after completing his studies,
provided that it is not ‘unduly generous’. SARS cannot give an employer an assurance that a deduc-
tion will be allowed when he operates a bursary scheme that is only open to dependents of employ-
ees, retired employees or the children of deceased employees. SARS considers it advisable to
review all schemes of this nature annually, having regard, amongst other things, to the position held
by the parent of a student when a bursary is granted to a child of an employee, the nature of the course
being followed, the educational institution attended and the amount of the bursary. Based on this infor-
mation, it will decide whether to challenge the deduction claimed by the employer.
The deductibility of voluntary awards (not provided for in a service contract) made by an employer to
an employee will depend on the circumstances surrounding the payment. For example, reasonable
annual bonuses paid to staff are allowed in practice, since their purpose is usually to secure a happy
and contented staff and so spur them on to greater efforts in future; future income will thus be gener-
ated. In a case in which a bonus payable to employees bore a relation to the services they rendered
over several prior years its deduction was refused (ITC 618 (1946)).
A problem also arises when the employer has taken out policies of insurance on the lives of employ-
ees to compensate their heirs or dependants upon their death. Unless the employer can show that it
145
is his established practice to provide such benefits for the heirs or dependants of the employees to
promote a settled and contented staff, he will not be entitled to a deduction of the amount he pays
out. This is the case even if the proceeds of the policies will be taxable in the employer’s hands in
terms of par (m) of the definition of ‘gross income’ in s 1(1). The provisions of s 11(m), however, allow
a deduction in respect of annuities paid to retired employees and dependants of retired employees
(see chapter 12).
6.10.6 Goodwill
An amount paid for the acquisition of the goodwill of a business is expenditure of a capital nature and
is not deductible from income. This is the case if the business is purchased to derive an income and
not for the purpose of resale at a profit (ITC 1073 (1965)). If the purpose is a profitable resale of the
business, the cost of acquisition is properly deductible from the proceeds derived from a resale of
the goodwill.
If the purpose of the acquisition is to derive an income, the fact that the purchase price is payable in
monthly or annual instalments does not affect the position. The amount laid out is for the acquisition
of a capital asset and is therefore of a capital nature. The terms of the agreement can stipulate that
the annual payments are not made for the outright purchase of the goodwill but merely for the right of
use of the goodwill for a certain period and that, on the expiry of the period, the goodwill is to revert
to its owner. In such a situation, the payments would be in the nature of rent and would be deductible
from income (ITC 140 (1929)).
6.10.7 Legal expenditure (s 11(a) and (c))

It was held in Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) that, for legal expenditure to
be deductible under s 11(a), the taxpayer must show that the legal expenditure is linked to an opera-
tion undertaken with the object of producing income and not to operations that merely serve to pro-
tect an existing source of income.
In African Greyhound Racing Association (Pty) Ltd v CIR (1945 TPD) legal expenditure incurred in
connection with the taxpayer’s representation before a commission into whether dog-racing should
be abolished or curtailed was disallowed by SARS as a deduction from its income. It was held that
the expenditure incurred in making its representation was not incurred in the production of income
but for preventing the total or partial extinction of the business from which the taxpayer’s income was
derived; therefore, it was not deductible. Similarly, legal costs incurred in the defence of a taxpayer’s
good name to protect the existence of his business are also not deductible under s 11(a), being not
incurred in the production of income.
If legal expenditure is not deductible under s 11(a), it may nevertheless still be deductible under
s 11(c). For example, legal costs incurred in the protection of income, to prevent a diminution of
income, to prevent an increase in deductible expenditure or to avoid a loss or resist a claim for com-
pensation may be deductible under s 11(c).
6.10.8 Legal expenditure: Of a capital nature (s 11(a) and (c))

Both s 11(a) and (c) require that the legal expenditure should not be of a capital nature. If the pur-
pose of legal costs is to protect trademarks, designs or similar assets and to eliminate competition,
the legal costs are of a capital nature and do not qualify for deduction, even though the overall object
is to increase profits. In SIR v Cadac Engineering Works (Pty) Ltd (1965 A) the court held that legal
costs incurred to protect a design and eliminate competition constituted expenditure of a capital
nature and were not deductible under either s 11(a) or (c).
Legal expenditure incurred in the acquisition of a capital asset is not deductible. All such expenditure
bears a distinct relationship to the capital asset and is consequently expenditure of a capital nature,
specifically prohibited as a deduction by s 11(a).
For example, legal costs paid for the cost of transfer of an income-producing property into the name
of a taxpayer is a capital expenditure. If the property is trading stock for the taxpayer, however, the
legal costs paid for the transfer are deductible.
Legal expenditure laid out to secure an enduring benefit for a trade is of a capital nature. A distinc-
tion must be drawn between
l legal expenditure incurred in the creation of a right to receive income (capital in nature), and
l legal expenditure incurred in the actual earning of the income itself (income in nature).
146
6.10.9 Losses: Fire, theft and embezzlement (s 23(c))
Trading stock
Opening and closing stock are taken into account in the determination of taxable income. Goods lost
or destroyed by fire or theft are not on hand at the end of the year of assessment and the taxpayer
therefore automatically enjoys a deduction of goods lost in these ways.
SARS will allow a loss arising from the theft or destruction of stock by fire only to the extent to which it
exceeds the amount recoverable under any insurance policy or indemnity. This is because no deduc-
tion may be made for any loss that would otherwise be allowable to the extent to which it is recover-
able under a contract of insurance, guarantee, security or indemnity (s 23(c)).
Fixed assets
Losses owing to theft or destruction of fixed assets such as plant, machinery or vehicles by fire
clearly do not rank for deduction under the general deduction formula, since they are of a capital
nature.
Cash
The principle regarding embezzlements and theft of cash is the following:
l If the loss is due to defalcations by the managing director or owner of the business, it will not be
allowed as a deduction (Lockie Bros Ltd v CIR (1922 TPD)).
l Losses suffered due to defalcations by subordinate employees will be allowed as a deduction,
since the risk of theft by such employees can be regarded as being a necessary concomitant of
the business activities. These losses generally arise from a risk that is always present when sub-
ordinate employees are engaged in performing the duties entrusted to them.
6.10.10 Losses: Loans, advances and guarantees
Amounts advanced to a third party (invested amounts)

If it is the custom of a trade or business to make loans or advances to customers as an integral part
of the business carried on for securing business, any losses of moneys lent to someone will be
deductible. In Stone v CIR (1974 A) the inquiry to be answered was whether the capital lost was fixed
or floating (circulating) capital. Corbett AJA, said at (129):
If it was fixed capital, then the loss was of a capital nature; if floating (or circulating) capital, then it was a
non-capital loss. These conclusions would be in conformity with the dicta of Watermeyer CJ [in Port Elizabeth
Electric Tramway Co Ltd v CIR (1936 CPD)] in which the concept of a ‘loss’ is identified with a loss of float-
ing capital.
The question of whether a taxpayer carries on a business of moneylending is a question of fact, to be
decided from the surrounding circumstances and transactions pertaining to the taxpayer. Factors
that have a bearing on the inquiry are, for example, whether there is any degree of continuity of the
transactions, the frequency of the turnover stipulated for by the lender and the rate of interest on the
loans.
A loss sustained by an employer on a loan, or an advance made to an employee that proves to be
irrecoverable is one of a capital nature and not deductible (ITC 249 (1932)). It is submitted that, when
it is the custom of an employer to make advances to employees to meet expenditure necessarily in-
curred by them while carrying out their duties, any consequential irrecoverable losses are deductible
in terms of the general deduction formula.
Losses sustained by lending or advancing money may be refused a deduction when the moneys are
recoverable from some other person under a guarantee or arrangement of suretyship. A loss that
would otherwise be allowable as a deduction, to the extent to which it is recoverable under a contract
of insurance, guarantee, security or indemnity is prohibited (s 23(c)).
Amounts borrowed from a third party

Where losses arise on amounts borrowed from a third party, the purpose of the borrowing must be
considered (CIR v General Motors SA (Pty) Ltd (1982 T)). The purpose could be one of the following:
l To hold the amounts on revenue account. If the amounts are held on revenue account, as working
capital employed for purposes of being turned over at a profit, any loss is deductible. The Gen-
eral Motors case dealt with foreign exchange losses incurred, amongst other things, to purchase
trading stock. A deduction was allowed because of the connection between the purchase of trad-
ing stock and the production of income.
147
l To hold the amounts as fixed capital. If the amounts are raised for capital purposes only, and
losses arise on the loan, no deduction will be allowed (Plate Glass and Shatterprufe Industries
Finance Co (Pty) Ltd v SIR (1979 T)).
6.10.11 Losses: Sale of debts

When a person sells his business, ceases trading and incurs a loss on the sale of the debts due to
him, the loss is not deductible from his income, as this loss is not incurred in the production of income
but after the income has been earned.
It often happens that a trader who requires cash sells the debts due to him to a finance company at a
discount, and in so doing incurs a loss. In practice, SARS will permit the deduction of such a loss as
being a loss incurred in the production of income in terms of s 11(a).
A loss sustained by a taxpayer who buys debts to sell them at a profit or to make a profit on their
collection would be allowable as a deduction, while any profits made would be taxable.
6.10.12 Provisions for anticipated losses or expenditure

Provisions made for anticipated losses or expenditure are not deductible since no loss or expenditure
has been actually incurred as is required by the general deduction formula. Moreover, such a provi-
sion is expressly prohibited by s 23(e). There are, however, provisions that do provide for certain
allowances under specified circumstances. Examples are the allowance granted for doubtful debt
(s 11(j) (see chapter 12) and the deduction of future expenditure on contracts, which is permitted by
s 24C (see chapter 12)).
148
7 Natural persons
Linda van Heerden and Maryke Wiesener
/
l calculate the normal tax payable by a natural person using the framework for the
calculation of taxable income
l explain and practically apply the assessed loss provisions of ss 20 and 20A
l calculate the deductions in respect of expenditure of a private nature that can be
claimed by natural persons in respect of contributions to retirement funds and do-
nations to Public Benefit Organisations
l apply the anti-avoidance provisions of the Act in s 7(2), (2A), (2B), (3) and (4) in
respect of married persons and minor children
l apply the provisions of the Act in respect of antedated salaries
l demonstrate your knowledge by means of an integrated case study or theoretical
advice questions.
Contents
Page
7.1 Overview ........................................................................................................................... 149
7.1.1 Assessed losses (natural persons’ perspective) (ss 20 and 20A) ...................... 152
7.2 Calculation of normal tax payable (ss 6, 6A, 6B and 12T) ............................................... 160
7.2.1 The s 6(2) rebates ................................................................................................ 161
7.2.2 The ss 6A and 6B medical tax credits ................................................................. 162
7.3 Recovery of normal tax payable ....................................................................................... 171
7.4 Deductions (ss 23(b), 23(m), 11F and 18A) ..................................................................... 172
7.4.1 Contributions by members to retirement funds (ss 10C, 11F and 23(g),
par 5(1)(a) or 6(1)(b)(i) of the Second Schedule)................................................ 173
7.4.2 Donations to public benefit organisations and other qualifying
beneficiaries (s 18A) ............................................................................................ 177
7.5 Taxation of married couples (ss 7(2), (2A)–(2C) and 25A)............................................... 182
7.5.1 Deemed inclusion (s 7(2)).................................................................................... 183
7.5.2 Marriages in community of property (ss 7(2A), (2C) and 25A) ........................... 184
7.5.3 ‘Income’ for the purpose of the deeming provisions in s 7 ................................. 187
7.5.4 Expenditure and allowances (s 7(2B)) ................................................................ 187
7.6 Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11))....................... 188
7.7 Minor children (s 7(3) and (4)) .......................................................................................... 189
7.8 Antedated salaries and pensions (s 7A)........................................................................... 191
7.1 Overview
The determination of taxable income for a year of assessment is the first step in the calculation of the
normal tax payable by a taxpayer. The year of assessment for a natural person always runs from the
first day of March in a year to the last day of February of the following year. The year of the February
date indicates the year of assessment; for example, the 2022 year of assessment is from 1 March
2021 to 28 February 2022.
The Act follows a specific sequence in the calculation of a natural person’s taxable income and the
terms ‘gross income’, ‘income’ and ‘taxable income’ lead the way. The definition of ‘gross income’ (as
discussed in chapters 3 and 4), which consists of the ‘general’ definition and specific inclusions, is
the clear starting point to determine the receipts and accruals that must be included in gross income.
149
The Act further contains provisions on deemed inclusions in ‘income’ (for example gains on the vesting
of equity instruments in s 8C). Such deemed inclusions are in effect also included in gross income
through par (n) of the definition of ‘gross income’. The Act lastly contains provisions on deemed
inclusions in ‘taxable income’ (for example taxable capital gains in s 26A) and on deemed accruals
(for example variable remuneration in s 7B).
There are a few specific deductions relating only to natural persons. Some of these deductions are
calculated as a percentage of a specific amount or a subtotal that needs to be calculated first. The
sequence of the deductions therefore affects the taxable income after each deduction, which, in turn,
affects the value of the next deduction. A natural person can also qualify for deductions in terms of
s 11(a), but the fact that specific deductions take precedence over the general deduction formula
(s 23B(3) – see chapter 6) must always be remembered.
The use of the comprehensive framework (the so-called subtotal method) can facilitate the
calculation of the taxable income and the normal tax payable by natural persons. Note that three
separate columns are used due to, inter alia, the following reasons:
l Certain expenses are not allowed to be deducted against severance benefits, retirement fund
lump sum benefits and retirement fund lump sum withdrawal benefits.
l The tax on severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits are calculated in terms of separate tax tables.
l Assessed losses cannot be offset against severance benefits, retirement fund lump sum benefits
and retirement fund lump sum withdrawal benefits.
l The s 6(2) rebates cannot reduce the normal tax payable on severance benefits, retirement fund
lump sum benefits and retirement fund lump sum withdrawal benefits.
If the three separate columns are used, the subtotals in column 3 can then be used as is, or with
minor adjustments, to calculate some of the percentage-based allowable deductions. The taxable
income to which the progressive tax table applies is then also available without further adjustments.
Natural persons can carry on more than one trade and can also receive non-trade income, for
example interest. In light of the provisons regarding the set-off of assessed losses (s 20) and the ring-
fencing of losses from certain trades (s 20A), it is advisable to first calculate the taxable income from
the various trades separately in order to determine the impact of ss 20 and 20A. Also note that
s 23(m) limits the allowable deductions if the trade of the taxpayer is employment (except for agents
and representatives – see 7.4).
Different tax tables are applicable to the taxable income of natural persons. Schedule I to the Act is
published annually and the following tables apply to the taxable income of the three different
columns:
l the ‘R500 000’ tax tables in clauses 9(b)(i) and 9(c)(i) apply to the taxable income from retirement
fund lump sum benefits and severance benefits in column 1 respectively
l the ‘R25 000’ tax table in clause 9(a)(i) applies to the taxable income from retirement fund lump
sum withdrawal benefits in column 2, and
l the progressive tax table for natural persons, deceased estates, insolvent estates, and special
trusts in clause 1 applies to the remainder of the taxable income in column 3.
Remember
Although the use of the subtotal method facilitates the calculation of taxable income and the total
normal tax payable, reference to the column in which an amount must be included is not author-
ity for the inclusion of an amount in gross income. This method was merely created to facilitate
the understanding and application of the provisions applicable to natural persons. The correct
authority for any inclusion is the specific paragraph of the definition of gross income.
Apart from normal tax, natural persons can also be liable for certain withholding taxes (for example the
withholding tax on interest in s 50A–H). Please see chapters 19 and 21 for more details in this regard.
The following abbreviations are used in the comprehensive framework of the

subtotal method:
SB = Severance benefit
Please note!
RFLB = Retirement fund lump sum benefit
RFLWB = Retirement fund lump sum withdrawal benefit
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7.1 Chapter 7: Natural persons
Subtotal method: Comprehensive framework for the 2022 year of assessment

Column 1 Column 2 Column 3
RFLB RFLWB Other
and income and
SB deductions
Gross income – general definition and specific inclusions
s 1(1) including the deemed inclusions in ‘income’, for
example
ss 7 and 8(4)(a) (note 1) ............................................. Rxxx Rxxx Rxxx
Less: Exempt income ss 10 and 10A –10C ............. (xxx)
Income – Subtotal 1 .................................................... Rxxx
Less: Deductions (all the s 11 and other deductions
except ss 11F and 18A) .......................................... (xxx)
Subtotal 2 .................................................................... Rxxx
Less: Assessed loss from a previous year of
assessment – s 20 ................................................... (xxx)
Subtotal 3 .................................................................... Rxxx
Add: Other amounts included in ‘taxable income’,
for example the net travel allowance in terms of
s 8(1)(a) ................................................................... xxx
Subtotal 4 .................................................................... Rxxx
Add: Taxable capital gain in terms of s 26A (note 2) xxx
Subtotal 5 .................................................................... Rxxx
Less: Section 11F – contributions to any retirement
fund ........................................................................ (xxx)
Subtotal 6 .................................................................... Rxxx
Less: Section 18A – donations to PBO ................... (xxx)
Taxable income per column .................................... Rxxx Rxxx Rxxx
Total taxable income (sum of columns 1, 2 and 3) ............................................................ Rxxx
Normal tax determined per the progressive tax table on taxable income in column 3 ..... Rxxx
Less: Section 6(2) and 6quat rebates ............................................................................... (xxx)
Add: Additional tax in terms of s 12T(7)(a) and (b) – see chapter 5 ................................ xxx
Add: Normal tax payable on the taxable income in columns 1 and 2 .............................. xxx
Less: Section 6A and 6B tax credits ................................................................................. (xxx)
Normal tax payable by the natural person (A) .................................................................. Rxxx
Less: PAYE, provisional tax, and the s 35A (non-final) withholding tax in respect of
non-residents ........................................................................................................... (xxx)
Normal tax due by or to the natural person on assessment .............................................. Rxxx
Withholding taxes (final) (in terms of ss 47A–47K, 49A–49H and 50A–50H) in respect
of non-residents ................................................................................................................ Rxxx
Add: Withholding tax on dividends (final) (s 64EA(a)) in respect of ‘beneficial owners’... xxx
Total withholding tax payable by the natural person (B) .................................................. Rxxx
Donations tax payable by resident natural persons (as donors) (ss 54 and 64) (C) ......... Rxxx
Total tax payable by the natural person (A + B + C) ......................................................... Rxxx
Note 1
The amounts included in gross income in columns 1 and 2 are the final taxable income for these
columns and no subtotals are necessary for columns 1 and 2.
Application of this comprehensive framework and the subtotal method will mean that the
subtotals in column 3 can be used unaltered in the calculation of the deductions in respect of
contributions to retirement funds (s 11F) and donations (s 18A). This is because the subtotals
already exclude all the lump sum amounts in columns 1 and 2. The total taxable income of the
natural person will be the sum of the final amounts in the three columns.
continued
151
Note 2
The taxable capital gain of a natural person is determined as follows in accordance with the pro-
visions of the Eighth Schedule:
Sum of a natural person’s capital gains for the year of assessment .................................... Rxxx
Less: Sum of his capital losses for the year of assessment ............................................. (xxx)
Less: Annual exclusion of R40 000 (or R300 000 in the year of death) ............................ (xxx)
Aggregate capital gain ..................................................................................................... xxx
Less: Any assessed capital loss brought forward from the previous year ....................... (xxx)
Net capital gain for the year ................................................................................................. Rxxx
Taxable capital gain: 40% × net capital gain ...................................................................... Rxxx
(See chapter 17.)
It is very important to remember that many words used in the Act have specific meanings. Note,
for example, that the net capital gain is the amount after the deduction of the annual exclusion
and assessed capital loss. The 40% must be applied to this net capital gain to calculate the
taxable capital gain. Students frequently incorrectly swop the sequence of the annual exclusion
and the 40%.
7.1.1 Assessed losses (natural persons’ perspective) (ss 20 and 20A)

Assessed losses (s 20)
An ‘assessed loss’ is defined as an amount by which the deductions admissible under s 11 (read in
conjunction with s 23) exceeds the income from which they are so admissible (s 20(2)). The fact that
s 11(x) brings all other allowable deductions in terms of Part I of the Act (normal tax) into the scope of
s 11, means that all such deductions are also deducted when the assessed loss is determined. An
assessed loss therefore arises when the ‘taxable income’ of a taxpayer for a specific year of
assessment is a negative amount (and an assessment was issued to this effect).
The term ‘balance of assessed loss’ is not defined. It is submitted that, for a natural person, it means
the excess of any assessed losses incurred in the carrying on of any trade in a specific year of assess-
ment (for example the 2022 year of assessment) over the aggregate of the taxable income derived
from the carrying on of any other trade and any other non-trade taxable income in the same year of
assessment (for example the 2022 year of assessment), which is carried forward to the next year of
assessment (the 2023 year of assessment).
The provisions of ss 20(1) and 20(2A)(a) read together make it clear that, when the taxable income of
a natural person is calculated, the following amounts can be set off against the income derived by
him from any trade or the taxable income from non-trade activities:
l a balance of assessed loss incurred by him in any previous year that has been carried forward
from the preceding year of assessment (ss 20(1)(a)(ii) and 20(2A)(a)), and
l an assessed loss incurred by him during the same year of assessment in carrying on any other
trade, either alone or in partnership with others (ss 20(1)(b) and 20(2A)(a)). An assessed loss
incurred as a member of a company whose capital is divided into shares may not be deducted.
The effect of this is that a natural person holding shares in a company may not claim an assessed
loss incurred by the company as a deduction in the determination of his own taxable income.
Since a close corporation is a ‘company’ as defined in s 1, a member of a close

Please note! corporation also may not claim an assessed loss incurred by the close corpor-
ation as a deduction in the determination of his taxable income.
In Conshu (Pty) Ltd v CIR (1994 (4) SA 603 (A), 57 SATC 1) Harms JA indicated that the word
‘income’ in the context of the set-off of assessed losses is not used in its defined sense (in s 1(1), that
is, gross income less exempt income). It should be read as ‘income taxable but for the set-off of
assessed losses’. He further stated that this all simply means that a set-off in terms of s 20 can only
arise if there would otherwise have been taxable income, meaning a pre-tax profit.
Two special concessions are available only to a person other than a company. A natural person may:
l use a balance of assessed loss to reduce non-trade taxable income (s 20(2A)(a)).
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In certain circumstances, s 20A prohibits a natural person from setting off an

assessed loss incurred by him in a trade against the income derived by him
during the same year of assessment from a non-trading activity (s 20A(1)).
Please note! The prohibition will apply to a person whose taxable income exceeds the
amount at which the maximum marginal rate of tax for individuals becomes
payable for the relevant year of assessment. However, the prohibition will only
apply if one of a few other conditions is also met. Please see below for a detailed
discussion of s 20A.
l carry forward a balance of assessed loss even though he has not derived any income during a
year of assessment (s 20(2A)(b)).
In practice, a person whose non-trade expenditure in a particular year of assessment exceeds
his non-trade income for that year is entitled to establish a ‘non-trade’ assessed loss. Subject to
s 20(1), he will not be prevented from carrying forward any balance of assessed loss merely
because he has not derived any income during a particular year of assessment. Consequently,
even though he derives no income in Year 2 or does not carry on a trade in Year 2, he may still
carry forward the balance of the assessed loss established in Year 1 to Year 3. The concession
therefore overrides the decision in SA Bazaars (Pty) Ltd v CIR (1952 AD), which, however, still
applies to companies (see 12.12.2).
Example 7.1. Balance of assessed loss
In Year 1 Mr Nobuntu has an assessed loss from trading of R50 000, in Year 2 a taxable income
of R30 000 from non-trade sources and in Year 3 an assessed loss from trading of R60 000.
Calculate the balance of assessed loss for each year of assessment.
SOLUTION
In Year 1, the balance of assessed loss is R50 000, and in Year 2, R20 000 (R50 000 less R30 000).
In Year 3, the balance of assessed loss is R80 000 (R20 000 + R60 000).
Example 7.2. Set-off of assessed loss against income from another trade
In the current year of assessment, Joseph Shabalala derived a taxable income of R650 000 from
his employment as an engineer. Included in the R650 000 was a severance benefit of R350 000.
He is also a 20% partner in a furniture business that has an assessed loss of R1 400 000 for the
same year.
What is Joseph Shabalala’s taxable income for the current year of assessment?
SOLUTION
Joseph Shabalala is entitled to set off his 20% share of the partnership’s assessed loss, namely
R280 000 (R1 400 000 × 20%), against the taxable income (BUT excluding the severance
benefit) from his employment as an engineer. Thus, R650 000 – R350 000 = R300 000 of taxable
income against which his portion of the partnership assessed loss of R280 000 can be set off.
His final taxable income is therefore R370 000 (R20 000 (R300 000 – R280 000) + R350 000
(severance benefit)).
Limitations regarding the set-off of assessed losses

In terms of s 25C, the insolvent, prior to sequestration, and the insolvent estate are deemed the same
person for the purposes of determining any deduction or set-off to which the insolvent estate may be
entitled. An assessed loss incurred prior to the date of sequestration of a natural person (the
insolvent) can be set off against the income of the insolvent estate from the carrying on of any trade
in South Africa (proviso to s 20(1)(a)).
No person whose estate has been voluntarily or compulsorily sequestrated may, unless the order of
sequestration has been set aside, be entitled to carry forward any assessed loss incurred prior to the
date of sequestration. If the order of sequestration has been set aside, the amount to be carried
forward will be reduced by the amount that was allowed to be set off against the income of the
insolvent estate from the carrying on of a trade (proviso to s 20(1)(a)). For example, if Mr Alfonso had
an assessed loss of R120 000 on sequestration, and R40 000 thereof was set off against the income
153
of the insolvent estate carrying on a trade, R80 000 will be carried forward to Mr Alfonso provided
that the sequestration order has been set aside.
Foreign assessed losses are fully ring-fenced. Assessed losses and any balance of assessed loss
incurred in carrying on any trade outside South Africa cannot be offset against any taxable income
(whether from trade or passive income (for example rentals)) from a South African source (proviso (b)
to s 20(1) read with s 20(2A)(a)). The Explanatory Memorandum on the Revenue Laws Amendment
Bill, 2000 explained that this is to protect the existing tax base as there is no information available
relating to the magnitude of foreign losses and to what extent this may erode the current South
African tax base. This restriction only prevents foreign assessed losses being set off against South
African taxable income, not South African assessed losses being set off against foreign taxable
income. It also does not prevent assessed losses incurred in one foreign country being set off
against taxable income from another foreign country.
An assessed loss or any balance of assessed loss cannot be offset against any amount (included in
taxable income) received by or accrued to a person as a retirement fund lump sum benefit, a
retirement fund lump sum withdrawal benefit, or a severance benefit (proviso (c) to s 20(1)). Such
amounts are kept in separate columns in the subtotal method (columns 1 and 2) and are taxed
separately in terms of the specific tax tables without taking any assessed losses into account.
Assessed losses: Ring-fencing of assessed losses from certain trades (s 20A)
The aforementioned set-off provisions are subject to the ring-fencing provisions in s 20A in respect of
assessed losses from certain trades (ss 20(1), 20(2A) and 20A(1) read together).
Not every activity is a trade and taxpayers often disguise private consumption as a trade so that
expenses and losses can be set off against other income, for example salary income. According to
the Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, s 20A was introduced to
prevent that taxable income is reduced by deducting expenditure and losses associated with what
was called ‘suspect trades’, such as ‘hobby activities’.
Ring-fencing means that an assessed loss from a specific trade can only be deducted against
income from that same trade. Offsetting assessed losses from suspect trades against other taxable
income (from both trade and non-trade activities) is therefore restricted by ring-fencing the losses
from suspect trades.
The ring-fencing of an assessed loss from a certain trade applies only to certain natural persons (not
to companies or trusts). The SARS Guide on the Ring-Fencing of Assessed Losses Arising From
Certain Trades Conducted by Individuals (second issue dated 8 October 2010) highlights the fact
that natural persons who trade in a partnership are, however, included in the provisions of s 20A. This
Guide further explains that there are four steps contained in s 20A, which will determine if an
assessed loss can be ring-fenced if all four these requirements are met, namely
l the maximum marginal rate of tax requirement (s 20A(2))
l the ‘three-out-of-five-years’ requirement or alternatively, the ‘listed suspect trade’ requirement
(s 20A(2)(a) and (b))
l the ‘facts and circumstances’ test, i.e., the escape clause (s 20A(3)), and
l the ‘six-out-of-ten-years’ requirement, i.e., the ‘catch all’ provision (s 20A(4)).
Before ring-fencing can apply, the sum of the natural person’s taxable income (ignoring the
provisions of s 20A) and any assessed loss or balance of assessed loss set-off in determining the
taxable income must, firstly, be equal to or exceed the amount at which the maximum marginal tax
rate applicable to natural persons (currently 45%) becomes applicable. The effect is that the taxable
income, before taking any assessed loss or balance of assessed loss into account must, for the 2022
year of assessment, be equal to or exceed R1 656 601. Secondly, the natural person must also meet
one of the requirements as contained in s 20A(2)).
The heart of the ring-fencing doctrine lies in s 20A(1), which provides that
l when the requirements in s 20A(2) apply to a trade (see below)
l a natural person is prohibited
l from setting off an assessed loss incurred by him in that trade
l against the income derived by him during the same year of assessment from another trade or a
non-trading activity (s 20A(1)).
Ring-fenced losses are ring-fenced forever and may only be set off against income from that same
suspect trade (s 20A(5)). Natural persons may not use ring-fenced losses against income from other
trades or against non-trade income either during the current tax year during which the ring-fenced
losses occur or in a subsequent year (in the form of a carry-forward). This rule applies
‘notwithstanding s 20(1)(a)’, confirming that s 20A overrides s 20(1)(a).
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Example 7.3. Permanent ring-fencing

An accountant maintains a guesthouse that qualifies as a listed suspect trade. In 2022, he
generates R1 750 000 taxable income as an accountant and R12 000 as an assessed loss from
the guesthouse. He is unable to demonstrate a reasonable prospect of generating taxable
income.
Explain the effect to the accountant.
SOLUTION
The accountant’s taxable income before the assessed loss of R1 750 000 exceeds the amount
at which the maximum marginal rate becomes applicable, being R1 656 601.
Rental from residential accommodation is a suspect trade and no reasonable prospect of
generating taxable income can be demonstrated.
The assessed loss of R12 000 from the guesthouse activities is therefore ring-fenced in 2022.
This means that the accountant will not be able to set off the assessed loss against any other
income derived from another trade. This treatment of the R12 000 assessed loss will continue
for all subsequent years after 2022 (s 20A(5)).
The following diagram illustrates the working of s 20A:
Does the maximum marginal rate of tax (45%)

apply to the natural person?
YES NO
Is this trade specifically listed as a suspect trade? (s 20A(2)(b))
YES NO
Did the natural person incur losses in this trade for at least three out
of five years? (s 20A(2)(a))
YES NO
Escape clause: The escape clause is not available if the natural

Is there a reasonable prospect of taxable person incurred losses in his suspect trade (as
income within a reasonable period? listed in s 20A(2)(b)) for at least six out of ten
years, except for farmers.
YES
NO
S 20A IS APPLICABLE S 20A IS NOT APPLICABLE
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The s 20A(2) requirements

The s 20A(2) requirements involves an enquiry into two matters:
l The first enquiry focuses on the taxpayer’s level of taxable income. The taxable income of the
natural person for the year of assessment, before setting-off any current or preceding years’
assessed losses from any trade, is looked at. It must equal or exceed the amount at which the
maximum marginal rate of tax becomes applicable per the progressive tax table. For the year of
assessment ending on 28 February 2022, the maximum marginal rate of tax of 45% becomes
payable when the taxable income of a natural person exceeds R1 656 600. It is consequently only
necessary to proceed to the second enquiry if a natural person’s taxable income is equal to or
exceeds R1 656 601.
If the taxable income for the 2022 year of assessment is below R1 656 601, there
Please note! is no need to proceed to the second enquiry and the ring-fencing of assessed
losses from certain trades will not be applicable (s 20A).
l The second enquiry focuses on the loss-generating activity. A taxpayer will be subject to potential
ring-fencing if either
– he has incurred losses in at least ‘three-out-of-five-years’ in that specific trade (see
s 20A(2)(a) – the ‘three-out-of-five years’ requirement), or
– that specific trade has been explicitly listed as a suspect trade in s 20A(2)(b) (the ‘suspect
trade’ requirement).
Ring-fencing will apply if any one of the ‘either/or’ tests is applicable (after meeting the required level
of taxable income).
‘Three-out-of-five-year’ trade loss

A loss-generating activity is treated as a suspect trade if assessed losses arise during any three
years out of the past five-year period ending on the last day of that year of assessment. The current
year of assessment is therefore included in the five years. Assessed losses in three consecutive
years will therefore, for example, render a trade a suspect trade at the end of year three. The
assessed losses are determined without regard to any balance of assessed loss carried forward
(s 20A(2)(a)). The SARS Guide explains that it is not necessary to wait for five years before the ring-
fencing provisions can be applied. A profit made in any year of assessment can, however, delay the
potential ring-fencing.
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 states that ‘sustained
losses of this kind are frequently an indicator of a suspect trade because natural persons would
rarely continue with a trade generating losses on a long-term scale, as it does not make sense from
an economic perspective unless tax motives are present’.
Example 7.4. Three-out-of-five-year trade loss
Explain the effect of the following assessed losses to Mr Mabena:

(a) Mr Mabena carries on a trade during the 2018 to 2022 tax years, generating assessed
losses of R12 000, R15 000, R20 000, R6 000 and R3 000 respectively in each of the years
in question.
(b) Mr Mabena’s trade results in an assessed loss of R12 000 in 2018, R4 000 taxable income in
2019, R2 000 taxable income in 2020, and assessed losses of R20 000 and R3 000 in 2021
and 2022 respectively.
SOLUTION
(a) The trade is a suspect trade from the 2020 year of assessment and onwards as Mr Mabena
has incurred assessed losses for three years during a five-year period.
(b) In this instance, his trade becomes a suspect trade in the 2022 year of assessment. The tax-
able income arising in 2019 and 2020 counts in his favour, thereby delaying the ‘suspect
trade’ treatment. The R12 000 assessed loss in 2018 is ignored in determining whether 2019
and 2020 will qualify as years in which an assessed loss is incurred.
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Specific suspect trade list

As an alternative to the ‘three-out-of-five-years’ requirement, ring-fencing will apply if the trade in
respect of which the assessed loss was incurred constitutes any one of the nine specified activities
listed in s 20A(2)(b). The word ‘relative’ is used in seven of these activities and is specifically defined
for the purposes of s 20A. It means ‘a spouse, parent, child, stepchild, brother, sister, grandchild or
grandparent of that person’ (s 20A(10)). The definition in s 1(1) does therefore not apply. The
specified activities are:
l Sport practised by the taxpayer or any relative. The fact that the sport must be practised
suggests a hobby element, in contrast to a mere passive investment in which the taxpayer has no
active operational involvement. This will include, for example, any form of sport, hunting, yachting
or boat racing, water-skiing and scuba diving.
l Dealing in collectibles by the taxpayer or any relative. This will include, for example, cars,
stamps, coins, antiques, militaria, art, and wine.
l The rental of residential accommodation unless
– at least 80% of such residential accommodation is used by persons who are not relatives of
the taxpayer for at least half of the year of assessment.
This will include the rental of holiday homes, bed-and-breakfast establishments, guesthouses,
and dwelling houses.
l The rental of vehicles, aircraft or boats as defined in the Eighth Schedule, unless
– at least 80% of the vehicles, aircraft or boats are used by persons who are not relatives of the
taxpayer for at least half of the year of assessment.
l The showing of animals in competitions by the taxpayer or his relative. This will include, for example,
the showing of horses, dogs and cats.
l Farming or animal breeding, unless the taxpayer carries on farming, animal breeding or activities
of a similar nature on a full-time basis. In other words, farming or animal breeding by the taxpayer
other than on a full-time basis, such as weekend or casual farming, is a suspect trade. One not-
able activity within this suspect class would be game farming.
l Performing or creative arts practised by the taxpayer or his relative. This will include, for example,
acting, singing, film-making, photography, writing, pottery and carpentry. Since the art must be
practised, mere passive investment in these activities is not a suspect trade.
l Gambling or betting practised by the taxpayer or any relative. This will include trying one’s luck at
a casino regularly, card playing, lottery purchases and sports betting. It does not include the
owning of racehorses, but owners of racehorses are still subject to the three-out-of-five-year rule.
l The acquisition or disposal of any crypto asset.
All farming activities carried on by a person are deemed to constitute a single trade carried on by him
or her (s 20A(7)). The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003 pointed
out that assessed losses from a single trade can be set off only against income from the same trade.
Whether one or more related activities constitute the same trade or multiple trades is a question of
fact. However, since multiple farming activities are deemed to constitute a single trade for the
purposes of s 20A, this unified treatment (or concession) is appropriate, since farming typically
entails multiple diverse activities.
The s 20A(3) ‘facts and circumstances’ escape clause

Despite meeting the requirements of the ‘either/or’ test as set out in s 20A(2)(a) or (b), there is an
escape clause if the taxpayer can prove that the activity at issue is a legitimate trade despite its
classification. The facts and circumstances escape clause applies to any trade contemplated in
s 20A(2)(a) or (b) that constitutes a business in respect of which there is a reasonable prospect of
deriving taxable income (other than a taxable capital gain) within a reasonable period (s 20A(3)).
The use of vague expressions such as a ‘business’, ‘reasonable prospect’ and ‘reasonable period’
creates uncertainty. Determinations in this regard must take the surrounding facts and circumstances
listed in the six objective factors (s 20A(3)(a)–(f)), into account. The burden of proof rests upon the
taxpayer in terms of s 102 of the Tax Administration Act 28 of 2011. What is clear is that, for an activ-
ity to escape the ‘suspect taint’, it must constitute a business in contradistinction to a mere hobby or
isolated venture.
157
The six objective factors are:

l The proportion of the gross income derived from that trade in relation to the amount of the
allowable deductions incurred in carrying on that trade during a year of assessment (s 20A(3)(a)).
If a taxpayer derives relatively small amounts of gross income and incurs large deductions, this
disproportionate result highlights a risk to the fiscus (and vice versa).
l The level of activities carried on or the amount of expenses incurred on advertising, promoting or
selling while carrying on the trade (s 20A(3)(b)). Trading requires regular selling and marketing
initiatives in terms of time and expense. Hobby activities often tend to involve large amounts of
expenses or losses, while the level of selling activity is minimal. The taxpayer must demonstrate
selling or advertising efforts in terms of activities performed or expenses incurred.
l Whether the trade is carried on in a commercial manner, taking into account the following:
– the number of full-time employees appointed for purposes of his trade; employees providing
services of a domestic or private nature, such as domestic servants and residential gardeners,
are excluded for this purpose, regardless of whether they are also involved in the trade
– the commercial setting of the premises where the trade is carried on; for example, whether the
business is in a commercial district and the business-like nature of its appearance
– the extent of the equipment used exclusively for the trade: mixed-use property, for example a
yacht, is excluded from qualifying as a favourable factor, and
– the time that the taxpayer concerned spends at the premises conducting the business
(s 20A(3)(c)).
l The number of years of assessment during which assessed losses have been incurred by the
person while carrying on the relevant trade in relation to the total period of carrying on that trade
taking into account:
– any unexpected or unforeseen events that may give rise to losses, such as heavy rains or
droughts that would provide grounds for mitigating sustained losses for farmers, and
– the nature of the business, for example whether the business typically has a long start-up
period, such as olive farming (s 20A(3)(d)).
l The business plans of the person concerned, together with changes thereto, to ensure that future
income is derived from carrying on the trade. Favourable consideration will be given to the
business plans and steps put in place by the taxpayer concerned to prevent or limit further
losses. Consideration will also be given to whether the taxpayer intervened strategically to ensure
that the activity will ultimately be profitable (s 20A(3)(e)).
l The extent to which any asset attributable to the trade is used, or is available for use, by the per-
son concerned, or any relative, for recreational purposes or personal consumption (s 20A(3)(f)).
The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2003, points out that this
factor goes to the heart of the matter, but is often the most difficult to prove or disprove. The onus
rests upon the taxpayer to prove that the asset was generally unavailable or not actually used by
the taxpayer or his relative for recreational use or personal enjoyment. For example, in the case of
a holiday home at the coast, the taxpayer will have to prove that the property was not readily
available for personal use. He will also be required to provide details of periods when persons
other than the taxpayer or his relatives occupied the home during the year of assessment.
Limitation on the facts and circumstances escape clause: the ‘six-out-of-ten-year’ trade loss prohibition
The facts and circumstances escape clause is not altogether absolute. If the taxpayer has incurred
an assessed loss (before taking into account any balance of assessed loss carried forward) in at
least six of the last ten years, including the current year of assessment, in carrying on any trade on
the specific suspect trade list (in s 20A(2)(b)) (other than farming), the escape clause cannot apply.
Meeting the six-out-of-ten-year prohibition means that the facts and circumstances escape clause is
not applicable and the ring-fencing provisions of s 20A(1) will apply.
This automatic ring-fencing from year six onwards assumes that, from an economic perspective, a
person cannot afford a legitimate trade indefinitely if continuous losses are sustained. Such trading
will indicate that motives other than profit were present. Farming is excluded from the ‘six-out-of-ten-
year’ prohibition (s 20A(4)) since many forms of legitimate farming entail long-term losses before the
expectation of profit can be realised.
Only assessed losses for tax years commencing on or after 1 March 2004 are taken into account for
both the ‘three-out-of-five-years’ requirement and the ‘six-out-of-ten-year’ prohibition (s 20A(9)).
158
Miscellaneous provisions
Set-off against recoupment
Generally, as noted above, ring-fenced losses can be freely used against income from that specific
trade. The income derived from any suspect trade includes the recoupment under s 8 of allowances
from the disposal of assets used in carrying on that trade. These disposals can occur while still
trading or after cessation of that trade (s 20A(6)). This provision ensures that, for example, losses of a
suspect trade can similarly be used against income from recoupments under s 8(4)(a) associated
with that trade, even if the disposal took place after cessation of the trade.
This use of ring-fenced losses against recoupment income stems from the assumption that any recoup-
ment most likely originates from depreciation or other losses that were ring-fenced.
In contrast, ring-fenced losses cannot be offset against capital gains associated with the same trade,
since capital gains represent investment profits as opposed to trading profits.
Reporting requirement
Natural persons with a suspect trade to which s 20A applies must indicate the nature of the business
in his annual return as referred to in s 66 (s 20A(8)). Under this rule, a taxpayer is obliged to report a
suspect trade under the ‘three-out-of-five-year’ test or the ‘suspect activity’ list in his annual return.
Example 7.5. Ring-fencing of assessed losses
Rara, the manager/owner of a flower shop, is also an enthusiastic tennis player and a partner in a
biltong shop (all of which are South African trades). Her share of the taxable income (or assessed
loss) stemming from each of these businesses for the 2020 until the 2022 years of assessment, is
as follows:
Taxable income or (assessed loss) Salary from
Tennis Biltong shop
for the year of assessment: flower shop
R R R
2020 1 690 000 *(25 000) 30 000
2021 1 595 000 *(15 000) *(5 000)
2022 1 700 000 2 000 *(20 000)
* Assume Rara will be unable to prove to SARS a reasonable prospect of earning taxable income within a
reasonable period during that specific year of assessment.
Explain the impact of the assessed losses and calculate Rara’s taxable income for the 2020 until
the 2022 years of assessment. The maximum marginal tax rate of 45% for the 2020 to 2022 years
of assessment applies to a taxable income above R1 500 000, R1 577 300 and R1 656 600 per
annum respectively.
SOLUTION
2020
Ring-fenced assessed loss in terms of s 20A(1):
Section 20A(1) will be applicable and the assessed loss of R25 000 from tennis will be
permanently ring-fenced, because:
l the taxpayer is a natural person carrying on a trade with an assessed loss, and
l the taxpayer is taxed at the maximum marginal rate (taxable income before any assessed loss
of (R1 690 000 (flower shop) less R25 000 (tennis) plus R30 000 (biltong shop) plus R25 000
(tennis) (in terms of s 20A(2)) = R1 720 000 versus R1 500 001 (the amount at which the
maximum tax bracket starts to apply in the 2020 tax table), and
l although the three-out-of-five-year rule does not apply, it is a listed suspect trade (s 20A(2)(b)(i))
as it relates to a sport practised by the taxpayer, and
l the trade does not constitute a business in respect of which there is a reasonable prospect to
derive taxable income (not a taxable capital gain) within a reasonable period (s 20A(3)) (given
in the scenario).
The R25 000 assessed loss from the tennis can only be used against future taxable income from
tennis.
Rara’s taxable income will be R1 690 000 (salary) + R30 000 (biltong shop) = R1 720 000.
continued
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2021
Section 20A(1) will not apply to the assessed loss of R5 000 from the biltong shop. The taxpayer
is a natural person, carrying on a trade with an assessed loss and the taxpayer is taxed at the
maximum marginal rate (taxable income, before any assessed loss and ignoring the tennis loss
because it has been ring-fenced since 2020, of R1 595 000 (flower shop) less R5 000 (biltong
shop) plus R5 000 (biltong shop) (in terms of s 20A(2)) = R1 595 000 versus R1 577 301). The
three-out-of-five-year rule does, however, not apply to the biltong shop (s 20A(2)(a)) (first year in
which an assessed loss is made) and it is also not a listed suspect trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss of R5 000 incurred in the same year of assessment from one trade (biltong shop) of a
taxpayer against the taxable income of R1 595 000 from another trade (flower shop) will be
allowed.
Rara’s taxable income will be R1 595 000 (salary) – R5 000 (biltong shop) = R1 590 000.
Ring-fenced losses are ring-fenced forever and may only be set off against income from that
same suspect trade (s 20A(5)). The R25 000 (2019) + R15 000 (2020) = R40 000 assessed loss
from tennis can only be used in future against taxable income from tennis.
2022
l The R40 000 balance of assessed loss from tennis will be limited to the taxable income of
R2 000 from the tennis, as it was ring-fenced in terms of s 20A(1) in a previous year of assess-
ment (s 20A(5)) The new balance of assessed loss of R38 000 (R40 000 – R2 000) will be
carried forward to the 2023 year of assessment.
l Section 20A(1) will not apply to the assessed loss of R20 000 from the biltong shop. The
taxpayer is a natural person, carrying on a trade with an assessed loss and the taxpayer is
taxed at the maximum marginal rate (taxable income before any assessed loss of R1 700 000
(flower shop) less R20 000 (biltong shop) plus R20 000 (biltong shop) (in terms of s 20A(2)) =
R1 700 000 versus R1 656 601). The three-out-of-five-year rule does, however, not apply
(s 20A(2)(a)) (second year in which an assessed loss is made) and it is also not a listed
suspect trade (s 20A(2)(b)).
The general rule contained in s 20(1)(b) will therefore apply, that is, the set-off of an assessed
loss incurred in the same year of assessment from one trade (biltong shop) of a taxpayer against
the taxable income from another trade (flower shop) will be allowed.
Rara’s taxable income will be R1 700 000 (salary) – R20 000 (biltong shop) = R1 680 000.
R2 000 of the R40 000 assessed loss carried forward from tennis will be set off against the R2 000
taxable income from tennis, and an assessed loss of R38 000 is carried forward.
7.2 Calculation of normal tax payable (ss 6, 6A, 6B and 12T)

Different tax tables are used to calculate the normal tax payable on the taxable incomes of an
individual as calculated per columns 1 to 3 of the subtotal method. Considering the wordings of ss 6,
6A and 6B read together, it is advised that the normal tax payable on the taxable income in column 3
be calculated first. Please take note that the words ‘normal tax payable’ mean the normal tax that the
natural person must pay and does therefore take all rebates and medical tax credits into account but
does not take any normal tax already paid (for example employee’s tax and provisional tax) into
account (also see the comprehensive framework of the subtotal method in 7.1).
The first step is to determine the normal tax payable on the taxable income in column 3 per the
progressive tax table applicable to natural persons, deceased estates, insolvent estates and special
trusts. The primary, secondary and tertiary rebates in s 6(2) only reduce normal tax payable on the
taxable income in column 3 and not the normal tax payable on lump sum benefits and severance
benefits (s 6(1)). Students’ answers must clearly indicate that the rebates cannot reduce the normal
tax payable on retirements fund lump sum benefits and severance benefits in columns 1 and
retirement lump sum withdrawal benefits in column 2. If the individual is a resident whose taxable
income includes amounts from countries other than South Africa, the s 6quat rebate for foreign taxes
must also be deducted in determining the normal tax payable on the taxable income in column 3 (see
chapter 21). The amount remaining after the deduction of all such s 6(2) and s 6quat rebates is the
normal tax payable on the taxable income in column 3.
Any additional tax in terms of s 12T(7)(a) and (b) (see chapter 5) is deemed to be normal tax
payable, and must also be added to the normal tax payable on the taxable income in column 3.
The next step is to calculate the normal tax payable on the taxable income from any lump sum
benefits (as defined) and severance benefits in columns 1 and 2. This is calculated separately and in
terms of separate tax tables applying the cumulative principle (see chapter 9). The normal tax pay-
able on the taxable income in columns 1 and 2, respectively, must now be added to the normal tax
160
payable on the taxable income in column 3 (after the deduction of the s 6(1) and 6quat rebates) and
the additional tax in terms of s 12T(7)(a) and (b).
A natural person can deduct the medical tax credits (s 6A and 6B) in determining the ‘normal tax
payable by any natural person’. This means that the medical tax credits can reduce all the amounts
of normal tax payable as discussed above. The normal tax payable by a natural person is therefore
the net result of all the aforementioned. Both rebates and credits reduce the final amount of ‘normal
tax payable’.
The specific sequence as indicated in the comprehensive framework of the subtotal method in 7.1 is
an application of all the aforementioned provisions read together.
7.2.1 The s 6(2) rebates

The s 6(2) rebates are non-refundable (they cannot be used as the basis for a refund) and cannot be
carried forward to the next year of assessment. The s 6(2) rebates are as follows:
2021 2022
Primary rebate .................................................... R14 958 R15 714
Secondary rebate (65 years or older) ................ R8 199 R8 613
Tertiary rebate (75 years or older) ..................... R2 736 R2 871
The primary rebate is available to any taxpayer who is a natural person. The primary rebate divided
by the lowest tax rate for natural persons (18%) is the tax threshold (‘tax threshold’ as defined in par 1
of the Fourth Schedule). This means that a natural person will only become liable for normal tax in the
2022 year of assessment if his or her taxable income exceeds R87 300 (R15 714 divided by 18%).
In addition, if a taxpayer was or would have been, had he lived, 65 years or older on the last day of
the year of assessment, he is also entitled to the secondary rebate. If a taxpayer was or would have
been, had he lived, 75 years or older on the last day of the year of assessment, he is entitled to the
primary, secondary and tertiary rebates.
Broken periods of assessment (that is, periods shorter than 12 months) only arise in a year of assess-
ment in which a natural person is born, dies or is declared insolvent. The primary, secondary and
tertiary rebates must be proportionately reduced in such cases according to the same ratio as the
period assessed bears to 12 months (s 6(4)). (Take note that it is the practice of SARS to use the
number of days in the period of assessment relative to the total number of days in the relevant year of
assessment.)
When a natural person emigrates, the year of assessment will end on the date immediately before the
day on which he or she ceases to be a resident (s 9H(2)(b)) and a return should be made for the
period commencing on the first day of the year of assessment and ending on the day before the date
that the person ceases to be a resident (s 66(13)(a)(iii)). The next year of assessment will commence
on the day the natural person ceases to be a resident (s 9H(2)(c)). In practice, the SARS eFiling
system only allows for the submission of one return for the year in which emigration occurs albeit with
two separate spreadsheets. One spreadsheet will be for the period pre ceasing to be a resident and
the residence-based system of tax (meaning being taxed on worldwide income) must be applied,
and one will be for the period post ceasing to be a resident and the source-based system of tax must
be applied. This practise seems to apply the provisions of s 9H(2)(b) and (c) discussed above. As
explained in Interpretation Note No. 3 (Issue 2) and chapter 3, a person ceases to be ordinarily
resident on the day he or she emigrates, meaning the day he or she boards the aircraft. It is
submitted that a natural person who emigrates will qualify for the full allowable s 6 rebates for the
year of assessment during which he or she emigrates, and that it will not be apportioned between the
period pre ceasing to be a resident and the period post ceasing to be a resident due to the inability
of the SARS eFiling system to process two returns for the year of emigration.
The Minister annually announces the amendments to the s 6(2) rebates in the annual budget. These
amendments come into effect on the date determined in the announcement and apply for a period of
12 months from that date, subject to legislation passed by Parliament in this regard.
*
Remember
(1) When answering questions, students must use the correct sequence (see the comprehen-
sive framework) to clearly indicate that the s 6(2) rebates are only deductible against the
normal tax payable on the taxable income in column 3. The s 6A and 6B medical tax credits
are deductible against any normal tax payable.
(2) The s 6(2) rebates and the s 6A and 6B medical tax credits reduce the normal tax payable
by a natural person, and not the taxable income of a natural person (like deductions in terms
of the Act).
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Example 7.6. Proportionate reduction of rebates
Mr Y died on 30 April 2021 at the age of 57 years. Calculate Mr Y’s rebates for his 2022 year of
assessment.
SOLUTION
Primary rebate........................................................................................................... R15 714,00
Since Mr Y was a taxpayer from 1 March to 30 April (61 days), the rebate
61
must be reduced to × R15 714 ..................................................................... R2 626
365
Example 7.7. Computing tax liability: Natural person
Marie, who is a resident aged 67, received and paid the following amounts during the year of
assessment ended 28 February 2022:
Salary .............................................................................................................................. R150 000
Interest (from a source within South Africa) .................................................................... 38 000
Dividends accrued (from South African companies) ...................................................... 12 000
Deductible expenditure .................................................................................................. 3 000
Taxable capital gain (40% of net capital gain of R12 500) ............................................. 5 000
Calculate Marie’s total tax payable for the year of assessment ended 28 February 2022.
SOLUTION
Salary ............................................................................................................................. R150 000
Interest ........................................................................................................................... 38 000
Dividends ....................................................................................................................... 12 000
Gross income ................................................................................................................. R200 000
Less: Exempt income
Interest (s 10(1)(i)(ii)) .......................................................................................... (34 500)
Dividends (s 10(1)(k)(i)) ...................................................................................... (12 000)
Income ........................................................................................................................... R153 500
Less: Deductible expenditure ...................................................................................... (3 000)
R150 500
Add: Taxable capital gain ........................................................................................... 5 000
Taxable income.............................................................................................................. R155 500
Normal tax determined per the tax table:

On R155 500 @ 18% ...................................................................................................... R27 990
Less: Primary rebate .................................................................................................... (15 714)
Secondary rebate ............................................................................................... (8 613)
Normal tax payable .......................................................................................... R3 663
Add: Withholding tax on dividends (20% × R12 000) (already paid over to SARS
by the South African companies)........................................................................ 2 400
Total tax payable .......................................................................................................... R6 063
7.2.2 The s 6A and 6B medical tax credits

Since the medical tax credits (ss 6A and 6B) are credits and not deductions, they cannot be used as
the basis for a refund of tax, cannot exceed the amount of normal tax payable and cannot be carried
forward to the next year of assessment. The Minister annually announces the amendments to the s 6A
and 6B credits in the annual budget. These amendments come into effect on the date determined in
the announcement and apply for a period of 12 months from that date, subject to legislation passed
by Parliament in this regard.
The medical scheme fees tax credit – s 6A

When the normal tax payable by a natural person is determined, the s 6A medical scheme fees tax
credit (s 6A credit) allowed to that natural person must be deducted (s 6A(1)). This allowable s 6A
credit is the sum of the amounts allowed to that natural person in terms of s 6A(2), which is subject to
162
s 6A(3A). In order to qualify for such a credit in terms of s 6A(2), a natural person must pay fees to a
registered South African medical scheme or a (similarly registered) foreign medical fund (s 6A(2)(a)).
The fees paid must relate to benefits from that fund in respect of ‘that person’ (the person paying the
fees) or of any person that is a dependant of that person (s 6A(2)(a)). For the purposes of the s 6A
credit, the word ‘dependant’ means a dependant as defined in s 6B(1), which means
(a) a person’s spouse (as defined in s 1(1))
(b) a person’s child and the child of his or her spouse (the reference here to ‘child’ refers to a child
as defined in s 6B(1) and read with the definition of ‘child’ in s 1(1))
(c) any other member of a person’s family* (therefore not persons falling in paras (a) and (b) above)
in respect of whom he or she is liable for family care and support (for example the person is
liable for family care and support in respect of his mother)), or
(d) any other person (therefore not persons falling in paras (a) to (c) above) who is recognised as a
dependant of that person in terms of the rules of a medical scheme or fund
at the time the fees or the ‘qualifying medical expenses’ were paid or the expenditure in respect of
the physical impairment or disability was necessarily incurred and paid.
* In terms of the Guide on the Determination of Medical Tax Credits (Issue 12), the phrase ‘any other
member of a person’s family’ includes relations by blood, adoption, marriage, etc.
A natural person can only be a member of, or be registered as a dependant on, one medical scheme
(in a specific month). A specific natural person can, however, pay fees to more than one medical
scheme, for example when a child also pays the fees of a parent (who depends on him for family
care and support) to that medical scheme. It is not a requirement that the person paying the fees and
his or her dependants must all be on the same medical scheme for that person to qualify for the s 6A
credit. Such a person will still qualify for the credits in s 6A(2)(b), if the fees paid relate to benefits
granted by that fund to that specific person or any dependant of that specific person. The ‘key’ to
determine the specific amounts in s 6A(2)(b) that will be allowed as monthly credits to the person
paying the fees, is the total number of persons in respect of whom benefits are received from the
various funds to which fees were paid by that specific person during a specific month.
Medical scheme fees can be payable in advance or in arrears. If medical scheme fees are payable in
arrears, it can happen that the executor of the estate of a deceased person must pay the fees after
the date of death of a person, but the fees paid relate to benefits received for the month during which
the person died. Such fees are deemed to have been paid by the deceased on the day before his or
her death (s 6A(3)(a)) and the deceased will therefore qualify for the s 6A credit for that month. The
Guide on the Determination of Medical Tax Credits (Issue 12) states that contributions paid by a
person other than the natural person will not be considered to determine the s 6A credit, except for
contributions paid by the estate of a deceased taxpayer ‘for the period up to the date of the
taxpayer’s death’.
Fees paid by the employer of a natural person are included in gross income (par (i) read with
par 12A of the Seventh Schedule) and are consequently deemed to have been paid by that natural
person (s 6A(3)(b)). The practical implication is that the total of all fees paid by the natural person, his
estate and his employer (to the extent that the amount paid by the employer has been included in the
income of the person as a taxable benefit in terms of the Seventh Schedule) are regarded as fees
paid by the natural person for the purposes of the s 6A credit.
To summarise, to determine the sum of the amounts allowed as credits to a specific person in terms
of s 6A(2),
l the total number of persons in respect of whom benefits are received from the various funds to
which fees were paid by that person, and
l the number of months in respect of which such fees were paid
must first be determined.
The amounts allowed as s 6A credits for each month are then determined based on the total number
of qualifying persons for that month. The amounts are stated in s 6A(2)(b)(i) and (b)(ii) as:
S 6A(2)(b)(i)(aa) R332, in respect of benefits to ‘the person’ (the person paying the fees), or if ‘the
person’ is not a member of a medical scheme or fund, in respect of benefits to a
dependant who is a member of a medical scheme or fund or a dependant of a
member of a medical scheme or fund;
S 6A(2)(b)(i)(bb) R664, in respect of benefits to the person and one dependant; or
S 6A(2)(b)(i)(cc) R664, in respect of benefits to two dependants; and
S 6A(2)(b)(ii) R224 in respect of benefits to each additional dependant.
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If only one qualifying person receives benefits from a medical scheme, the maximum s 6A credit
allowed to the person paying the fees is R332. If two qualifying persons receive benefits, the max-
imum s 6A credit allowed to the person paying the fees is R664. For each additional qualifying
person receiving benefits, an additional amount of R224 per person is allowed to the person paying
the fees.
Examples of the words ‘a dependant who is a member of a medical scheme or fund or a dependant
of a member of a medical scheme or fund’ are:
l Albert, who is not a member of a medical scheme, paid the fees in respect of his mother for
whom he is liable for family care and support (his dependant), and who is a member of a medical
scheme.
l Albert is not a member of a medical scheme, but his mother, for whom he is liable for family care
and support (his dependant), is a member of medical scheme B. Albert pays the fees in respect
of his brother, who is a dependant on his mother’s medical scheme (therefore a dependant on
the medical scheme of Albert’s dependant).
Section 6A(3A) was enacted to address the anomaly that previously allowed each of the persons who
share the responsibility to pay the medical scheme fees in respect of a single individual who is a
dependant of both of the persons paying the fees to independently claim the full s 6A credit for each
of the shared dependants. An example is if two persons are both liable for family care and support
for their mother. Where more than one person pays any fees in respect of benefits to a specific
person or dependant, the amount allowed to be deducted as a s 6A credit in respect of those fees
must be apportioned (s 6A(3A)). The burden of proving that an amount was paid by more than one
person, and that a pro rata s 6A credit may be claimed by each person, will rest on the persons
(‘taxpayer’ in s 102 of the Tax Administration Act). The Guide on the Determination of Medical Tax
Credits (Issue 12) explains that where contributions or fees in respect of a dependant have been
made to a different medical aid to the one to which the person paying the fees belongs, SARS will
accept an affidavit in which the person indicates that the contributions or fees claimed for the
dependant have been paid by the person (either directly or indirectly).
The ‘total amount in respect of that person or dependant’ is proportionally allocated between the
persons who paid the fees (s 6A(3A)). The apportionment must be done in the same ratio that the
fees paid by each person bear to the total amount of the fees payable (s 6A(3A)). It is unclear how
the ‘the total amount in respect of that person or dependant’ must be determined.
The Guide on the Determination of Medical Tax Credits (Issue 12) (the Guide) contains the following
formula that can be used to determine the medical tax credit that may be claimed by each person:
Contributions payable by the person

× Total medical tax credit
Total contributions payable
The example in this Guide is in respect of the 2021 year of assessment, is simplistic and entails two
children (let’s say A and B), who are both liable for family care and support of their mother. Each
pays half of the total medical scheme fees for their mother who is a member of her own medical
scheme. In the example neither A nor B are members of a medical scheme. The mother is a
‘dependant’ of both A and B in terms of par (c) of the definition of ‘dependant’ in s 6B(1). The Guide
explains that the total amount of the s 6A credit in respect of the one dependant will be R319. Both A
and B paying half of the medical scheme fees in respect of this dependant will therefore qualify for a
s 6A credit of R159,50 (R319 divided by 2) per month in respect of their mother. A and B will
therefore each claim a maximum s 6A credit of R1 914 (12 × R159,50) in respect of this dependant.
The practical application of s 6A(3A) becomes a very grey area where the persons paying the
dependant’s fees (A and B) are members of their own medical schemes, and the mother is registered
as a dependant on one of either A or B’s medical scheme or is a member of her own medical
scheme. It is uncertain how the amount of the s 6A credit claimable by A and B respectively, in
respect of their mother as dependant, will then be determined. The total amount allowable as s 6A
credit is determined separately for each of A and B, who pays fees in respect of qualifying persons.
The total number of persons to whom benefits are paid by all the medical schemes to which A and B
respectively paid fees must be determined.
It is submitted that the actual application of s 6A(3A) in determining the normal tax payable by a
natural person, on assessment by SARS, remains uncertain even in the updated Issue 12 of the
Guide. The sequence in which all the dependants of A and B are considered by SARS on assess-
ment is not clear from the wording in s 6A. The deduction of the s 6A credit is not a ‘field’ that is
completed by the natural person when completing the ITR12, but it is a determination that is made by
SARS and is reflected on the assessment as a credit. This raises the question whether SARS will
164
apply the contra fiscum rule (meaning SARS must apply the interpretation which is in favour of the
specific taxpayer) in respect of s 6A(3A). The following further questions arise regarding the
sequence in which all the dependants of a specific person are considered on assessment:
l will the sequence of the dependants as listed in the definition in s 6B(1) be used by SARS in
order to determine the ‘total medical tax credit’ in respect of a dependant, or
l will the date sequence in which all dependants were registered as dependants on the scheme be
used (provided that all funds must provide this information on the tax certificates)?
To illustrate:
Assume that A and B are siblings and are both liable for family care and support of their mother, C. A
is a member of medical scheme ABC and his spouse, his child and C are registered as dependants
on his medical scheme. A pays the full contributions in respect of himself, his spouse and his child,
and 50% of the contributions in respect of C.
B belongs to her own medical scheme and is the only member of that medical scheme. B pays her
own contributions and 50% of the contributions in respect of C.
In order to determine the sum of the amounts allowed to A and B respectively in terms of s 6A(2), the
following possibilities arise:
Regarding A:
l If we assume the sequence of the dependants as listed in the definition in s 6B(1) will be used by
SARS, the monthly s 6A credit for A will be R1 000. This is R664 in respect of benefits to A and
one dependant (his spouse), R224 in respect of his child and R112 (R224 × 50%) in respect of
his mother.
l If we assume that the sequence of registration as dependants will be used by SARS and that C
was a dependant on A’s medical scheme even before A was married, the monthly s 6A credit for
A will be R946. This is R332 in respect of A, R166 (R332 × 50%) in respect of his mother, and
R224 in respect of each of his spouse and his child (therefore R448).
Regarding B:
l The monthly s 6A credit for B will be R498, being R332 in respect of B and R166 (R332 × 50%) in
respect of C.
The wording in s 6A(3A) therefore potentially leads to the total monthly s 6A credit in respect of C as
a dependant being different amounts for A, namely either R112 or R166 depending on the sequence
in which the dependants are considered. It also potentially leads to different total monthly s 6A
credits for A of either R1 000 or R946. It is doubtful that this could be the Legislator’s intention with
s 6A(3A).
It also potentially leads to A and B claiming different monthly s 6A credit amounts, namely R112 and
R166 respectively, in respect of the same dependant (C). It is submitted that the practical
assessment issues with s 6A(3A) are legion and that it could not be a true reflection of the
Legislator’s intention with s 6A(3A) that the s 6A credit in respect of one specific person could be
various amounts depending on the circumstances of the case.
The details regarding medical schemes requested by SARS on the ITR12 are requested per medical
scheme to tie the tax certificates issued by the funds up to the number of persons in respect of whom
benefits are granted by that fund. Until SARS clarifies the practical application of s 6A(3A), it is
suggested that the section be applied contra fiscum.
1. The s 6A credit is not limited to the actual fees paid by the person. In rare
circumstances, the s 6A medical tax credit might therefore exceed the fees
paid by the person.
2. If an employer continues to pay fees to a medical scheme after an
employee has retired, it is still a ‘taxable benefit’ (as defined in par 2 of the
Seventh Schedule) even though it has no value as fringe benefit
(par 12A(5)(a) of the Seventh Schedule). If the employer pays the total fees
Please note! of such an ex-employee after retirement, the taxable benefit will have no
value. The retired employee is deemed to have paid any amount paid by
his employer to the extent that the amount has been included in the income
as a taxable benefit (in terms of s 6A(3)(b)). The retired employee is con-
sequently deemed to have paid Rnil (no value) for those months. The s 6A
credit applies in respect of fees paid by a person and since Rnil is included
in income and Rnil is deemed to be paid by the retired employee, such
retired employee cannot claim any s 6A(2)(b) credit for the months after
retirement.
continued
165
If the retired employee, however, has paid any portion of the fees during the
months after retirement, he will be able to claim the full s 6A(2)(b) credit for
those months. Even though Rnil is included in the person’s income in respect of
Please note! any portion paid by the employer in respect of the months after retirement, it is
still deemed that the person has paid that amount of Rnil plus the portion of the
fees contributed by him or her. The total contributions are consequently
deemed to be paid by the same person and the apportionment in terms of
s 6A(3A) is not applicable in such a case.
The additional medical expenses tax credit – s 6B

Taxpayers are grouped into three categories for the s 6B tax credit, namely (i) persons who are
65 years or older, (ii) persons with a disability factor, and (iii) all remaining taxpayers. The s 6B med-
ical tax credit is calculated in the same manner for the first two categories, but differently for the last
category – see the summary in the table after the discussion of the relevant theory.
Two amounts are considered for the tax credit in terms of s 6B:
l excess medical scheme fees (calculated in terms of s 6B(3)), and
l ‘qualifying medical expenses’ paid by a person (or his or her estate or employer – see s 6B(4)) in
respect of the person or a dependant.
In order to know which persons are ‘dependants’, who is regarded as the ‘child’ of a person, and
what the words ‘qualifying medical expenses’ and ‘disability’ mean, the following definitions in s 6B(1)
are relevant:
A ‘dependant’ of a person is:
(a) his or her spouse (as defined in s 1(1))
(b) his or her child (as defined in s 6B(1) and read with the definition of ‘child’ in s 1(1)) and the child
of his or her spouse
(c) any other member of his or her family* (therefore not persons falling in paras (a) and (b) above) in
respect of whom he or she is liable for family care and support (for example the member’s mother
who lives with her as she is reliant on her daughter for family care and support), or
(d) any other person (therefore not persons falling in paras (a) to (c) above) who is recognised as his
or her dependant in terms of the rules of a medical scheme or fund
at the time the fees or the ‘qualifying medical expenses’ were paid or the expenditure in respect of
the disability was necessarily incurred and paid.
* In terms of the Guide on the Determination of Medical Tax Credits (Issue 12), the phrase ‘any other
member of a person’s family’ (in category (c)) includes relations by blood, adoption, marriage, etc.
It is submitted that the words ‘who is recognised as his or her dependant in terms of the rules of a
medical scheme or fund’ (in category (d)) refers to dependants of a person who are eligible for
benefits under the rules of the medical scheme, which implies that they are registered as dependants
of the member and that contributions are paid in respect of them.
The category (b) dependant refers to the word ‘child’, which is defined in both s 1(1) and s 6B(1).
l The definition in s 1(1) includes an adopted child. If the child is adopted under the law of any
other country, the adoptive parent must have been ordinarily resident in such other country at the
time of adoption. In practice, SARS accepts that the deduction may also be claimed for illegit-
imate children, if the taxpayer can prove that an illegitimate child is his child. The effect of this
definition on the s 6B credit is that the qualifying medical expenses incurred in respect of
adopted children will also be taken into account if the child meets the requirements in s 6B(1).
l The definition in s 6B(1) refers to both the person’s child and the child of his or her spouse. By
virtue of the definition of the word ‘spouse’ in s 1(1), the child of any person meeting that defin-
ition will be included. It further distinguishes between four categories with different requirements.
These requirements must be met on the last day of the year of assessment before a taxpayer can
take any qualifying medical expenses incurred in respect of such a child into account. The words
‘on the last day of the year of assessment’ refer to the last day of February (s 5(1)(c)).
The child must be alive for a portion of the year and if the child dies during the year of
assessment, it must be determined whether the requirements would have been met had the child
lived on the last day of February. Even if the person claiming the s 6B credit dies during the year
of assessment, the age or would-be age of any child must still be determined on the last day of
February. The only impact that the death of a taxpayer has on the s 6B credit is that only
qualifying medical expenses paid by the person before death or by the estate of such deceased
person which is deemed to be paid by the person on the day before death (s 6B(4)(a)) in respect
166
of a child as defined will be considered in the calculation of the s 6B credit. Although a child
needs to be alive only during a portion of the year of assessment, he or she must be unmarried
on the last day of the year of assessment, that is, throughout the year. If a child marries during the
year, no qualifying medical expenses in respect of such child can be considered.
Subparagraphs (a)(i), (ii) and (iii) of the definition require that the child, on the last day of the year
of assessment, was not or would not have been over the age of 18 years, 21 years or 26 years. A
person who turns 18 is over the age of 18 on the day of his 18th birthday. A child who turns 18 on
the last day of the year of assessment will, for example, not qualify as a child under the relevant
subpar (a)(i) of the definition of ‘child’, since during a portion of that last day, he or she would
have been over the age of 18. Such a child can, however, still qualify as a child in terms of
subpar (a)(ii) or (iii) if those requirements are met.
The following table summarises the requirements and categories of children:
Definition of ‘child’ in s 6B(1) Par (a)(i) Par (a)(ii) Par (a)(iii) Par (b)
Age <18 < 21 < 26 Any
Status Unmarried Unmarried Unmarried Any
Dependent for maintenance (wholly or partially) N/a Yes Yes Yes
Liable for normal tax N/a No No No
Full-time student at an educational institution of a

public nature N/a Yes/No Yes Yes/No
Disability No No No Yes
A person’s 27-year-old child (without a disability) does therefore not meet the requirements of the
definition of a ‘child’ in s 6B(1), and is consequently not a ‘dependant’ in terms of category (b). If
such child is recognised by the medical scheme as a dependant (meaning the person pays contri-
butions in respect of the child), the taxpayer can still take the qualifying medical expenses of that
child into account. This is because the child is a dependant in terms of category (d) of the definition
of ‘dependant’, even though he or she is not a dependant in terms of category (b) of that definition.
A ‘wholly or partially dependent’ child under the ages of 21 and 26 must not be liable for the payment
of normal tax. Since every natural person is entitled to at least the primary rebate, a child who has
derived a taxable income will not be liable to pay normal tax as long as the normal tax on that income
will be reduced to zero by the primary rebate.
The person who paid the qualifying medical expenses can claim the s 6B medical tax credit.
‘Qualifying medical expenses’ are
l all amounts paid by the person in respect of the person or any dependant of the person during
the year of assessment to various doctors, hospitals and pharmacies (for prescribed medicine).
These amounts include expenditure incurred both inside and outside South Africa but exclude
recoverable amounts (paras (a) and (b) of the definition of ‘qualifying medical expenses’).
l expenditure, as prescribed by the Commissioner (recoverable amounts excluded), necessarily
incurred and paid by the person in consequence of any physical impairment or disability in
respect of the person or any dependant of the person (par (c) of the definition of ‘qualifying
medical expenses’). ‘Prescribed by the Commissioner’ refers to a list of qualifying physical
impairment or disability expenditure that is contained in Annexure B of the Guide on the Deter-
mination of Medical Tax Credits (Issue 12). The prescribed list of expenditure is effective from
1 March 2020.
The terms ‘necessarily incurred’ and ‘in consequence of’ are not defined in the Act. They retain
their ordinary dictionary meaning. This means that a prescribed expense does not automatically
qualify as a deduction by mere reason of its inclusion in the list. The expense must also be neces-
sary for the alleviation of the restrictions on a person’s ability to perform daily functions.
A ‘disability’ is defined is s 6B(1) and means a moderate to severe limitation of a person’s ability to
function or perform daily activities as a result of a physical, sensory, communication, intellectual or
mental impairment, if the limitation
l has lasted longer or has a prognosis of lasting more than a year, and
l is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by
the Commissioner.
167
Form ITR-DD must be completed by the medical practitioner and is valid for ten years if the disability
is of a more permanent nature. In the case of a temporary (shorter than ten years) disability, the form
is valid only for one year, and must be renewed annually (Guide on the Determination of Medical Tax
Credits (Issue 12)).
The term ‘physical impairment’ is not defined in the Act. However, in the context of s 6B(1), it is
regarded as a disability that is less restraining than a ‘disability’ as defined. This means the restriction
or limitation on the person’s ability to function or perform daily activities after maximum correction is
less than a ‘moderate to severe limitation’. Maximum correction in this context means appropriate
therapy, medication and use of devices (Guide on the Determination of Medical Tax Credits
(Issue 12)).
The combined effect of the ss 6A and 6B medical tax credits for the 2022 year of assessment can be
summarised as follows:
Category Section 6A(2)(b) medical tax credit Section 6B medical tax credit
The person is 65 years or older R332 (in respect of benefits to 33,3% of
(s 6B(3)(a)) only the person or, if the person is [the excess of {(the s 6A(2)(a)
OR not member of a medical scheme contributions paid by the person)
The person, his or her spouse or or fund, to a dependant who is a less (3 × the s 6A(2)(b) credit to
his or her child is a person with a member of a medical scheme or which that person is entitled)}
disability fund or to a dependant of a mem- plus
ber of a medical scheme or fund),
(s 6B(3)(b)) or the sum of all the amounts in
paras (a), (b) and (c) of the def-
R664 (in respect of benefits to the inition of ‘qualifying medical
person plus one dependant), or expenses’ paid by the person (the
R664 (in respect of benefits to two out-of-pocket qualifying medical
dependants), and expenses)]
R224 per further dependant for
each month in respect of which
fees are paid by the person
(remember, only the pro rata por-
tion of a specific person’s medical
tax credit can be claimed if the
fees for such a person are paid by
more than one person)
All other cases R332 (in respect of benefits to 25% of
(s 6B(3)(c)) only the person or, if the person is [the excess of {(the s 6A(2)(a)
not member of a medical scheme contributions paid by the person)
or fund, to a dependant who is a less (4 × the s 6A(2)(b) credit to
member of a medical scheme or which that person is entitled)}
fund or to a dependant of a plus
member of a medical scheme or
fund), or all the amounts in paras (a), (b)
and (c) of the definition of ‘qualify-
R664 (in respect of benefits to the ing medical expenses’ paid by the
person plus one dependant), or person (the out-of-pocket qualify-
R664 (in respect of benefits to two ing medical expenses)
dependants), and less
R224 per further dependant 7,5% of the taxpayer’s taxable
for each month in respect of which income* (excluding any RFLB,
fees are paid by the person RFLWB or SB)]
(remember, only the pro rata por- * The ‘taxable income’ in this cal-
tion of a specific person’s medical culation is therefore the taxable
tax credit can be claimed if the income in Column 3 of the sub-
fees for such a person are paid by total method.
more than one person)
168
1. Even though the definition of ‘qualifying medical expenses’ includes a phys-

ical impairment or disability in respect of any dependant, only a disability as
defined (and not a physical impairment which is a less than a moderate to
severe limitation and therefore not a disability as defined) in respect of the
person, his or her spouse and his or her child (therefore only the persons in
par (a) and (b) of the definition of ‘dependant’) will cause the person to
qualify for the increased 33,3% in s 6B(3)(b). If a par (c) or (d)-type depend-
ant is the person with the disability, the 25% in terms of the s 6B(3)(c) credit
Please note! applies.
2. Medical expenses in respect of a disability or a physical impairment must be
both necessarily incurred and paid to qualify for deduction.
3. Married couples under the age of 65 with no disability factor will obtain the
biggest tax advantage in terms of s 6B if the spouse with the lowest taxable
income pays the qualifying medical expenses.
4. The s 6A medical tax credit must be deducted from the employees’ tax to be
withheld (par 9(6)(a) of the Fourth Schedule). If the taxpayer is 65 years or
older, the s 6B medical tax credit (as calculated in terms of s 6B(3)(a)(i))
must also be deducted from the employees’ tax to be withheld (par 9(6)(b) of
the Fourth Schedule). This means that only 33,3% × (the total contributions
paid less (3 × the s 6A(2)(b) credit)) must be deducted by the employer.
Remember
The fact that only the ’excess’ medical scheme fees are taken into account for the s 6B(3)(a)(i),
(3)(b)(i) and (3)(c)(i) medical tax credit means that the amount of the difference between the
s 6A contributions paid and three or four times the s 6A medical tax credit must be a positive
amount and is limited to Rnil. It can therefore not be a negative value (amount) that reduces the
part of the s 6B medical tax credit relating to the qualifying medical expenses (see s 6B(3)(a)(ii),
(3)(b)(ii) and (3)(c)(iii)).
Example 7.8. Medical tax credits
Gary is a 44-year-old employee. He is married out of community of property and has no children.
His only source of income is his salary, which amounted to R136 000 for the current year of
assessment. During the year he paid qualifying medical expenses of R13 000 and fees of
R21 760 to a medical scheme. His wife is a dependant on his medical scheme. His employer
contributed R9 240 to the medical scheme on his behalf during the 2022 year of assessment.
Gary has also paid 60% of the fees of his mother’s total medical scheme fees of R6 000 during
the 2022 year of assessment. His mother depends on him for family care and support.
Calculate the taxable income of and normal tax payable by Gary for the 2022 year of assess-
ment.
SOLUTION
Salary .......................................................................................................................... R136 000
Add: Fringe benefit – par 12A Seventh Schedule ...................................................... 9 240
Taxable income ................................................................................................. R145 240
Normal tax determined per table
R145 240 × 18% .......................................................................... R26 143
Less: Primary rebate ................................................................. (15 714)
Section 6A credit R798 (R664 + R134 (60% × R224*))
× 12 = .............................................................................. (9 576)
Section 6B credit (note 1) ................................................ (527)
Normal tax payable ..................................................................... R326
* If we assume that s 6A(3A) is applied contra fiscum.
continued
169
Note 1
Fees paid to a medical scheme = R31 000 (R21 760 by Gary plus
R9 240 by employer) plus R3 600 (60% × R6 000) in respect of his
mother ...................................................................................................... R34 600
Less: 4 × s 6A medical tax credit
= 4 × R9 576 (R7 968 (R664 × 12) + R1 608 (R134 × 12)) ............ (38 304)
Subtotal (R3 704) limited to Rnil ............................................................... Rnil
Plus: Qualifying medical expenses .......................................................... 13 000
R13 000
Less: 7,5% × R145 240 ............................................................................ (10 893)
R2 107
Section 6B medical tax credit (25% × R2 107) ....................................... R527
Example 7.9. Medical tax credits and s 11F

Nobuntu (40 years old) is divorced, with a child aged 10. Her child is a dependant on her med-
ical scheme. During the year of assessment, she received a salary of R150 000, paid fees of
R18 000 to a medical scheme and paid qualifying medical expenses of R10 000. She is a
member of a provident fund, to which she contributed R12 000 during the year of assessment.
Her employer made no contributions to the provident fund.
Calculate the taxable income of and normal tax payable by Nobuntu for the 2022 year of assess-
ment.
SOLUTION
Salary .......................................................................................................................... R150 000
Less: Provident fund contributions (s 11F): Actual R12 000, limited to the lesser of
l R350 000 (s 11F(2)(a))
l 27,5% × R150 000 = R41 250 (s 11F(2)(b)(i) and (ii))
l R150 000 (s 11F(2)(c))
Therefore, limited to actual ................................................................................ (12 000)
Taxable income ................................................................................................. R138 000
Normal tax determined per table
R138 000 × 18% .......................................................................... R24 840
Less: Primary rebate .................................................................. (15 714)
Section 6A medical tax credit (R664 × 12) ...................... (7 968)
Section 6B medical tax credit (note 1) ............................ (Rnil)
Normal tax payable ................................................................. R1 158
Note 1
Fees paid to a medical scheme R18 000
Less: 4 × s 6A medical tax credit = 4 × R7 968 (R664 × 12)................ (31 872)
Subtotal (R13 872) limited to ................................................................. Rnil
Add: Qualifying medical expenses ....................................................... 10 000
R10 000
Less: 7,5% × R138 000 ......................................................................... (10 350)
Total is negative therefore it is limited to ............................................... Rnil
There will therefore be no s 6B medical tax credit.
Example 7.10. Medical tax credits and retirement
Edgar is a 65-year-old employee. He is married out of community of property and has no

children. His spouse is a dependant on his medical scheme. He paid qualifying medical
expenses of R76 800 during the year of assessment. His employer paid 50% of his total monthly
fees of R6 500 to the medical scheme and he paid 50%. Edgar retired on 31 May 2021. He
remained a member of the medical scheme and his employer continued to pay the previously
mentioned fees.
Calculate Edgar’s s 6A and 6B medical tax credits for the 2022 year of assessment.
170
7.2–7.3 Chapter 7: Natural persons
SOLUTION
The s 6A medical tax credit is granted for the number of months in respect of which the person
pays fees. Edgar has paid 50% of the fees for 12 months and is deemed to have paid all the
contributions paid by his employer to the extent that it was included in income (R9 750 in total).
Since he has paid fees monthly, he will qualify for the full s 6A medical tax credit of R7 968 (12 ×
R664).
The s 6B medical tax credit is calculated as follows:
Fees paid to the medical scheme
l paid by Edgar (12 × R3 250)............................................................................... R 39 000
l paid by employer and taxed as fringe benefit (3 × R3 250)................................ 9 750
l paid by employer but no value in terms of par 12A(5)(a) of the Seventh
Schedule (9 × R0) ............................................................................................... nil
Subtotal ..................................................................................................................... R48 750
Less: 3 × s 6A medical tax credit (3 × R7 968) ........................................................ (23 904)
Subtotal ..................................................................................................................... R24 846
Add: Qualifying medical expenses ........................................................................... 76 800
Total .......................................................................................................................... R101 646
Section 6B medical tax credit = 33,3% × R101 646 = R33 848
7.3 Recovery of normal tax payable

The normal tax payable by a natural person is recovered by SARS through
l employees’ tax in the form of PAYE (see chapter 10)
l provisional tax payments (see chapter 11)
l withholding tax on the sale of immovable property in South Africa if the individual is a non-
resident (see chapter 21), and
l a final settlement on assessment, if necessary.
The final amount is either due to the taxpayer by SARS or due by the taxpayer to SARS.
Example 7.11. Final assessment of normal tax payable
During the year of assessment ended 28 February 2022 Zoleka, aged 30 and a resident,
received a salary of R200 000 and rental from a source within South Africa of R84 300.
Employees’ tax amounting to R23 460 was withheld from her salary during the year of
assessment, and she made provisional tax payments of R23 000.
Calculate the outstanding amount of tax that will be payable or refundable once her final
assessment is issued for the 2022 year of assessment.
SOLUTION
Tax payable by Zoleka
Salary ....................................................................................................... R200 000
Rental ....................................................................................................... 84 300
Taxable income .......................................................................... R284 300
Normal tax determined per the tax table on R284 300:
On R216 200 ............................................................................................ R38 916
On R68 100 (26% of R68 100) ................................................................. 17 706
R56 622
Less: Primary rebate ............................................................................... (15 714)
Normal tax payable .................................................................... R40 908
Less: Provisional tax paid ....................................................................... R23 000
Employees’ tax paid....................................................................... 23 460 (46 460)
Balance refundable on assessment (due to Zoleka) .................. (R5 552)
171
7.4 Deductions (ss 23(b), 23(m), 11F and 18A)

Natural persons can carry on various trades during the same year of assessment and may therefore
claim all the deductions discussed in chapters 6 and 12 to 16 if applicable to any specific trade.
Deductions claimable against remuneration from employment

Employment is included in the definition of ‘trade’ in s 1. Section 23(m) places a limitation on the
deduction of any expenditure, loss or allowance contemplated in s 11, which relates to any
employment of, or office held by, any person in respect of which he or she derives remuneration. This
limitation does not apply to agents or representatives who normally earn remuneration mainly (more
than 50%) in the form of commission based on their sales or the turnover attributable to them. Such
agents and representatives may deduct all expenditure incurred under any relevant provision of the
Act if the specific requirements of that provision have been met.
The prohibition in s 23(m) applies to certain specific s 11 deductions only and does not affect deduc-
tions for donations to PBOs (s 18A). Please see the detailed discussion of s 23(m), read with s 23(b),
in 6.5.2 and 6.5.12.
If a deduction for a home office was claimed in respect of a primary residence, the provision, which
allows a capital gain to be disregarded completely if the proceeds do not exceed R2 million, is not
applicable when the primary residence is disposed of (par 45(4)(b) of the Eighth Schedule).
Example 7.12. Home office use in respect of property sold for equal or less than R2 million
Mr Hadeeb lived in a house that he bought on 1 July 2002 for R650 000. The house was his pri-
mary residence for 20 years before he sold it. For the entire period of 20 years, prior to selling it,
he used approximately 20% of the area of the house as a home office in which he conducted his
trade. He disposed of the house for R1 850 000.
Calculate the taxable capital gain that should be included in the taxable income of Mr Hadeeb.
SOLUTION
Mr Hadeeb’s taxable capital gain is determined as follows:
Total Trade use Residenti
(20%) al use
R R (80%)
R
Capital gain (Note 1) ......................................................... 1 200 000 240 000 960 000
The primary residence exclusion in terms of par 45(2)(a)
(R2 million limited to R960 000) ......................................... (960 000) (0) (960 000)
Balance subject to CGT .................................................... 240 000 240 000 0
Annual exclusion ............................................................... (40 000)
Aggregate capital gain ...................................................... 200 000
Taxable capital gain (R200 000 × 40%) ............................ 80 000
Note 1:
Of the capital gain of R1 200 000 (R1 850 000 – R650 000) made on the disposal of the house,
R240 000 (R1 200 000 × 20% (part)) will be taxable as a capital gain since it is attributable to
non-residential or trade use. The balance of the capital gain, that is, R960 000 (R1 200 000 –
R240 000) will qualify for the primary residence exclusion of up to R2 million and R240 000 would
be included in the aggregate capital gain or aggregate capital loss.
Please note: If a deduction for a home office was claimed in respect of a primary residence, the
provision, which allows a capital gain to be disregarded completely if the proceeds do not
exceed R2 million (par 45(1)(b)), is not applicable when the primary residence is disposed of
(par 45(4)(b) of the Eighth Schedule). The R2 million exclusion rule (par 45(1)(a)) can still be
applied.
The prohibition in s 23(m) applies to the specific s 11 deductions only and does not affect deductions
for donations to PBOs (s 18A).
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7.4.1 Contributions by members to retirement funds (ss 10C, 11F, and 23(g), par 5(1)(a) or
6(1)(b)(i) of the Second Schedule)
Before 1 March 2016, contributions made to a provident fund were not allowable as a deduction.
Only contributions to pension funds and retirement annuity funds were, subject to certain limits,
allowed as deductions (s 11(k) and (n)). This has an impact on the ‘balance of unclaimed
contributions’ for the purposes of s 11F and will be explained below.
As part of the wider retirement reform objectives, the tax deductibility of contributions to all retirement
funds were harmonised and the total amount of the deduction allowed is now determined in terms of
s 11F(2). Section 11F applies ‘notwithstanding s 23(g)’, which confirms that the s 11F deduction can
be claimed against both trade and non-trade income.
The s 11F deduction applies to all amounts contributed to any pension fund, provident fund and
retirement annuity fund during a specific year of assessment (s 11F(1)). Section 11F(3) must be read
with s 11F(1), and the deemed contributions in terms of s 11F(3) therefore influence the determination
of the total amount contributed during a year of assessment.
Any amount contributed to any fund during any previous year of assessment and which has been dis-
allowed solely because the amount contributed exceeded the amount of the allowable deduction (this
can be called the ‘balance of unclaimed contributions’), is deemed to be contributed in the next year
of assessment, subject to certain rules (s 11F(3)).
The balance of unclaimed contributions
The first important point to remember is that the ‘balance of unclaimed contributions’ can be applied
in three different ways.
The ‘balance of unclaimed contributions’ can be
l applied as a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule to calculate
the taxable amount of any lump sum benefit to be included in gross income in terms of par (e) of
the gross income definition, or
l claimed as an exemption against any qualifying annuities received from any retirement fund in
terms of s 10C, or
l claimed as a s 11F deduction.
Section 23(i) prohibits a deduction (submittedly in terms of s 11F) of any expenditure, loss or
allowance (unclaimed contributions) to the extent that it is claimed as a deduction from any retire-
ment fund lump sum benefit or retirement fund lump sum withdrawal benefit in terms of par 5 or 6 of
the Second Schedule. This merely confirms that the balance of unclaimed contributions can only be
applied once, but also confirms the starting point of the sequence how it should be applied under the
three different ways. It is submitted that a taxpayer will derive the greatest benefit if the balance of
unclaimed contributions is used as soon as possible, meaning at the first allowable opportunity. It is
further submitted that the normal reduction process in the calculation of taxable income (gross
income less exemptions less deductions as explained in the subtotal method) must be followed.
The second important point to remember is that the determination of the amount of the ‘balance of
unclaimed contributions’ for the purposes of s 11F differs from the other two instances due to the
wording of the applicable sections and paragraphs.
Determination of the balance of unclaimed contributions for the purposes of s 11F

Since the contributions made to a provident fund until 29 February 2016 have never been allowed as
deductions, it cannot be said that it ‘was disallowed solely because the contributions exceed the
amount of the allowable deduction’ (as required by the wording in s 11F(3)). Consequently, such
contributions cannot be taken into account as part of the ‘balance of unclaimed contributions’
deemed to be contributed in the next year of assessment for the purposes of s 11F. The contributions
made to a provident fund until 29 February 2016 will consequently never be included in the
determination of the total amount contributed during a year of assessment for the s 11F deduction.
Please note that any amounts contributed during the current year of assessment, but not allowed as a
s 11F deduction due to the limitations on the allowable deduction in terms of s 11F(2), will never form
part of the ‘balance of unclaimed contributions’ for the current year. This is because s 11F(3)
specifically refers to amounts contributed during any previous year of assessment.
For the purposes of s 11F(3), the ‘balance of unclaimed contributions’ at the end of the 2021 year of
assessment is deemed to be contributed in the 2022 year of assessment except to the extent that it
has been
l allowed as a deduction (in terms of s 11F) in any year of assessment (this means any year of
assessment up to the end of the 2021 year of assessment since a s 11F deduction is only allowed
once a year on assessment by SARS)
173
l applied as a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule (this will
include lump sum benefits received during the 2022 year of assessment), or
l taken into account in determining amounts exempt under s 10C (this will include qualifying
annuities received during the 2022 year of assessment) (s 11F(3)).
Determination of the balance of unclaimed contributions for the purposes of par 5(1)(a) or 6(1)(b)(i) of
the Second Schedule and s 10C
Any unclaimed pre-1 March 2016 provident fund contributions can, however, be deducted in terms of
par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and it can also qualify for an exemption in terms of
s 10C. This is due to the same wording in par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and in
s 10C, which is different from the wording contained in s 11F(3). The wording in these paragraphs
and in s 10C is ‘that did not rank for a deduction against the person’s income in terms of s 11F’. It is
clear that the only requirement is that the contributions were not allowable as a deduction in terms of
s 11F. Due to this wording, all the unclaimed pre-1 March 2016 provident fund contributions, that
have never been allowed as a deduction, can qualify for either deduction in terms of par 5(1)(a) or
6(1)(b)(i) of the Second Schedule or for exemption in terms of s 10C if the requirements thereof are
met.
In summary:
For the purposes of s 11F, the ‘balance of unclaimed contributions’ will consist of the sum of any
unclaimed contributions in respect of a pension fund or a retirement annuity fund and only the
unclaimed contributions to a provident fund made on or after 1 March 2016.
For the purposes of both par 5(1)(a) or 6(1)(b)(i) of the Second Schedule and s 10C, the ‘balance of
unclaimed contributions’ will consist of the sum of any unclaimed contributions in respect of a
pension fund or a retirement annuity fund and any unclaimed contributions to a provident fund
whether made before or after 1 March 2016. Please note that in respect of the contributions made
before 1 March 2016, the total amount of the contributions will be unclaimed, but this is not neces-
sarily the case in respect of contributions on or after 1 March 2016.
Following the normal reduction process in the calculation of taxable income (gross income less
exemptions less deductions as explained in the subtotal method), any ‘balance of unclaimed
contributions’ at the end of the 2021 year of assessment is applied in the following sequence during
the 2022 year of assessment:
l firstly, to claim a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule when the
par (e) gross income amount in respect of any qualifying retirement fund lump sum benefit or
retirement fund lump sum withdrawal benefit received during the 2022 year of assessment is
calculated,
l secondly, to claim an exemption in terms of s 10C against any ‘qualifying annuities’ received
during the 2022 year of assessment, and
l lastly, to add any remaining balance of unclaimed contributions to the contributions made to any
retirement fund during the 2022 year of assessment. This total amount of contributions is called
the ‘actual contributions’ in the explanation that follows, and is used as the starting point in the
calculation of the allowable deduction in terms of s 11F(2).
The s 11F(2) deduction
The total deduction allowed in terms of s 11F(2) is the actual contributions, limited to the lesser of
(a) R350 000 (this limit is never apportioned for the s 11F(2) calculation, although it is apportioned for
the monthly calculation of employees’ tax – please see chapter 10) (s 11F(2)(a)); or
(b) 27,5% of the higher of the person’s
– ‘remuneration’ (excluding any retirement fund lump sum benefits, retirement fund lump sum
withdrawal benefits and severance benefits) as defined in the Fourth Schedule (this means all
the amounts of ‘remuneration’, as defined, received from all employers and included in
column 3 of the comprehensive framework in 7.1) (s 11F(2)(b)(i)), or
– ‘taxable income’ (excluding any retirement fund lump sum benefits, retirement fund lump sum
withdrawal benefits and severance benefits) determined before allowing deductions for contri-
butions to retirement funds (s 11F(2)), for donations to PBOs (s 18A) and for non-recoverable
foreign taxes paid by a resident in terms of s 6quat(1C) (this means the taxable income after
the taxable capital gain in subtotal 5 of the comprehensive framework in 7.1) (s 11F(2)(b)(ii)); or
(c) the ‘taxable income’ (excluding any retirement fund lump sum benefits, retirement fund lump
sum withdrawal benefits and severance benefits) of that person before allowing the ss 11F(2),
6quat(1C) and 18A deductions and before including any taxable capital gain (this means the
taxable income in subtotal 4 of the comprehensive framework in 7.1) (s 11F(2)(c)).
174
The effect of the wording of s 11F(2)(c) is that the creation or increase of an assessed loss through
the s 11F deduction is prevented (see Examples 7.13(b) and 7.13(c)).
In terms of s 11(l), employers can claim deductions in respect of all amounts paid or contributions
made to any retirement fund on behalf of or for the benefit of any employee, former employee and the
dependent of any deceased employee. The cash equivalent of such contributions is included as a
fringe benefit in the hands of the employees in terms of
l paras 2(l) and 12D of the Seventh Schedule in the case of contributions to pension and provident
funds (because in practice employers must make the contributions to these ‘employer funds’ in
terms of the rules of the funds), and
l paras 2(h) and 13 of the Seventh Schedule if the fund is a retirement annuity fund (because it is
an ‘independent fund’ and it is the employee’s responsibility to pay the contributions and since
the employer pays it, it amounts to the payment of a debt on behalf of an employee).
Due to these inclusions in the employee’s gross income, the cash equivalents of such contributions
are deemed to have been contributed by the employee (s 11F(4)) and must be added to determine
the total actual contributions made.
A partner in a partnership is deemed an employee of the partnership, and a partnership is deemed
an employer of a partner for the purposes of s 11F (s 11F(5)), s 11(l) and par 12D of the Seventh
Schedule. This means that
l a partner’s contributions to retirement funds will be allowed as deductions in terms of s 11F
l a partnership’s contributions on behalf of partners will be included as a fringe benefit in terms of
par 12D of the Seventh Schedule, and
l the partnership can claim a deduction in terms of s 11(l) in respect of such contributions made.
Please refer to chapter 18 for a more detailed discussion and examples regarding partnerships.
Example 7.13(a). Deductions in terms of s 11F(2))
During the year of assessment ended 28 February 2022 Zurelda, aged 30 and a resident,
received a salary of R300 000 and rental income from a source within South Africa of R264 300.
Her monthly contributions to the pension fund amounted to R4 500 and she contributed R10 000
to a retirement annuity fund monthly. Her employer made no contributions to any fund. She
realised a taxable capital gain of R58 000. The balance of unclaimed contributions to all her
retirement funds on 28 February 2021 amounted to R8 000.
Calculate Zurelda ’s taxable income for the 2022 year of assessment.
SOLUTION
Salary .......................................................................................................................... R300 000

Rental income ............................................................................................................. 264 300
Subtotal 1 ................................................................................................................... R564 300
Subtotal 2 .................................................................................................................... R622 300
Less: Section 11F(2) deduction:
Actual contributions (in terms of s 11F(3)) = R54 000 (R4 500 × 12) + R120 000
(R10 000 × 12) + R8 000 = R182 000
Limited to the lesser of
l R350 000, or
l 27,5% × the higher of
– R300 000 (remuneration) or
– R622 300 (taxable income after the taxable capital gain)
Therefore 27,5% × R622 300
= R171 133, or
l R564 300 (taxable income before the taxable capital gain)
The deduction is therefore limited to ........................................................................... (171 133)
(The excess of R10 867 (R182 000 – R171 133) is carried forward to the 2023 year
of assessment (s 11F(3).)
Taxable income ................................................................................................ R451 167
175
Example 7.13(b). Deductions in terms of s 11F(2)

During the year of assessment ended 28 February 2022 Zurelda, aged 30 and a resident, received
rental income from a source within South Africa of R400 000. Her monthly contributions to the
retirement annuity fund amounted to R14 500. Her assessed loss from the 2021 year of assess-
ment amounted to R550 000. She realised a taxable capital gain of R200 000 during the 2022
year of assessment. The balance of unclaimed contributions to all her retirement funds on
28 February 2021 amounted to R8 000.
Calculate Zurelda’s taxable income for the 2022 year of assessment.
SOLUTION
Rental income ............................................................................................................. R400 000
Less: Assessed loss brought forward ......................................................................... (550 000)
Subtotal 1 .................................................................................................................... (R150 000)
Subtotal 2 .................................................................................................................... R50 000
Actual contributions (in terms of s 11F(3)) = R174 000 (R14 500 × 12) + R8 000 =
R182 000
l R350 000, or
– R0 (remuneration), or
Therefore 27,5% × R50 000
= R13 750, or
l (Rnil) (because subtotal 1 (before the taxable capital gain) is a loss and
s 11F(2)(c) only refers to taxable income). The effect of this limitation is that
the increase of the assessed loss through the s 11F deduction is prevented.
The deduction is therefore limited to Rnil ................................................................... (nil)
(The total contribution of R182 000 is carried forward to the 2023 year of
assessment (s 11F(3).)
Taxable income ................................................................................................... R50 000
Example 7.13(c). Deductions in terms of s 11F(2)
During the year of assessment ended 28 February 2022, Zurelda, aged 30 and a resident,
received rental income from a source within South Africa of R400 000. Her monthly contributions
to the retirement annuity fund amounted to R14 500. Her assessed loss from the 2021 year of
assessment amounted to R380 000. She realised a taxable capital gain of R200 000 during the
2022 year of assessment. The balance of unclaimed contributions to all her retirement funds on
28 February 2021 amounted to R8 000. Zurelda made a R50 000 donation to a PBO and
received the required certificate.
Calculate Zurelda’s taxable income for the 2022 year of assessment.
176
SOLUTION
Rental income ............................................................................................................. R400 000
Less: Assessed loss brought forward ......................................................................... (380 000)
Subtotal 1 .................................................................................................................... R20 000
Subtotal 2 ................................................................................................................... R220 000
Actual contributions = R174 000 (R14 500 × 12)) + R8 000 = R182 000
l R350 000, or
– R0 (remuneration), or
Therefore 27,5% × R220 000
= R60 500, or
l R20 000 (taxable income before the taxable capital gain). The effect of this limi-
tation is that the creation of an assessed loss through the s 11F deduction is
prevented.
The deduction is therefore limited to ........................................................................... (20 000)
(The excess of R162 000 (R182 000 – R20 000) is carried forward to the 2023 year
of assessment (s 11F(3).)
Subtotal 3 .................................................................................................................... R200 000
Less: Section 18A deduction: R50 000 limited to 10% x R200 000 = R20 000........... (20 000)
(The excess of R30 000 (R50 000 – R20 000) can be carried forward to the 2023
year of assessment (proviso to s 18A(1)(B).)
Taxable income ................................................................................................ R180 000
7.4.2 Donations to public benefit organisations and other qualifying beneficiaries (s 18A)
Section 18A(1) permits a deduction for bona fide donations, in cash or property in kind, actually paid
or transferred by any taxpayer to specified beneficiaries during the year of assessment. The words
‘actually paid or transferred’ include payments by electronic fund transfer, credit card, postal order or
debit card, but they do not include promissory notes, pledges, payments to be made in future
instalments or post-dated cheques.
It is submitted that a donation is made when the legal formalities for a valid donation have been com-
pleted, and not when the subject matter is delivered to the donee. No deduction can be claimed
unless a receipt meeting certain specifications is issued by the public benefit organisation, institution,
board, body or agency, programme, fund, High Commissioner, office, entity or organisation or the
department concerned to the taxpayer (s 18A(2)). A public benefit organisation, institution, board,
body or department may only issue such receipts to the extent that the donation will be used solely to
provide funds or assets to a public benefit organisation, institution, board or body contemplated in
s 18A(1)(a), which will use those funds or assets solely in carrying on activities contemplated in
Parts I and/or II of the Ninth Schedule (s 18A(2A)).
The following payments or transfers are more examples from the Basic Guide to Section 18A
Approval (Issue 3) of amounts that do not qualify for a deduction under section 18A:
l amounts paid to attend a fundraising event such as a dinner or charity golf day
l memorabilia and other assets donated to be auctioned to raise funds
l amounts paid for raffle or lottery tickets
l prizes and sponsorships donated for a fundraising event such as a charity golf day
l tithes and offerings to churches or other faith-based organisations in support of their religious
activities
l membership fees.
No deduction shall be allowed for the donation of
l any property in kind that consists of, or is subject to any fiduciary right, usufruct, or other similar
right, or
l which consists of an intangible asset, or
l a financial instrument, unless that financial instrument is a share in a listed company or is issued
by an eligible financial institution as defined in the Financial Sector Regulation Act (s 18A(3B)).
177
Specified beneficiaries
The specified beneficiaries to whom a donation may be made are
l approved public benefit organisations (PBO)
l an institution, board or body (contemplated in s 10(1)(cA)(i) – see below) that carries on certain
activities and has been approved by the Commissioner (see below)
l approved PBOs that provide for funds or assets to any PBO, institution, board, body or any depart-
ment in the government of the Republic in all spheres (a conduit PBO) and has been approved by
the Commissioner
l any specialised agency (of the United Nations) that carries on certain activities (see below) and
that has furnished SARS with a written undertaking that the agency will comply with the s 18A
requirements, waives diplomatic immunity and has been approved by the Commissioner, or
l any department or government of the Republic on the national, provincial or local sphere contem-
plated in s 10(1)(a) which has been approved by the Commissioner to be used for the purposes of
certain activities (see below) (s 18A(1)).
Each of these beneficiaries must comply with the requirements set in its constitution or founding docu-
ment and any additional requirements prescribed by the Minister (in terms of s 18A(1A)).
The activities referred to above are
l public benefit activities contemplated in Part II of the Ninth Schedule under the headings:
– welfare and humanitarian
– health care
– education and development
– conservation, environment and animal welfare
– land and housing, or
l any other activity determined by the Minister of Finance by notice in the Gazette.
An approved institution, board or body established under s 10(1)(cA)(i) is
l one established by law
l that, in the furtherance of its sole or principal object
– conducts scientific, technical or industrial research, or
– provides necessary or useful commodities, amenities or services to the State or members of
the general public, or
– carries on activities (including financial assistance) to promote commerce, industry or agriculture.
The Minister may by regulation prescribe additional requirements with which a PBO or other
qualifying entity must comply before donations to it will be allowed as a deduction (s 18A(1A)).
The s 18A deduction

The deduction of all qualifying donations actually paid or transferred by the taxpayer during the year
of assessment is limited to
l 10% of the taxable income (excluding any retirement fund lump sum benefit, any retirement fund
lump sum withdrawal benefit or any severance benefit) of the taxpayer
l as calculated before allowing any deduction under s 18A (donation) or s 6quat(1C) (non-recover-
able tax paid by a resident to the government of another country).
This deduction is a deduction from ‘taxable income’ and therefore a taxpayer with no
Please note! taxable income or an assessed loss will not be allowed to claim the deduction (10%
× Rnil = Rnil). The excess unclaimed donation under s 18A can be carried forward to
the next year of assessment (proviso to s 18A(1)(B)).
The s 18A deduction available to a portfolio of a collective investment scheme is calculated using a
special formula (s 18A(1)(A)). All other taxpayers will continue to calculate the s 18A deduction by
using the 10% limitation discussed above.
178
Example 7.14. Donations made during the year of assessment
During the current year of assessment, Mr Gratuity promises to pay R5 000 to a PBO in 10 equal
annual instalments of R500. The PBO accepts the donation during the 2022 year of assessment
and all the other legal formalities are completed in the same year.
Determine the amount of the donation made by Mr Gratuity during the 2022 year of assessment.
SOLUTION
It is considered that the donation of R5 000 has been made during the 2022 year of assessment
since all the legal formalities were met and that it cannot be contended that a separate donation
is being made in each of the subsequent years as each instalment is paid. The deductibility of
the donation in terms of s 18A is, however, influenced by the words ‘actually paid or transferred’
and therefore only R500 will qualify for a deduction in the 2022 year of assessment. The balance
of donations of R4 500 (R5 000 – R500) can be carried forward to the 2023 year of assessment.
This situation must be distinguished from that in which Mr Gratuity promises to pay R500 a year
for 10 years but retains the right to revoke the payment of any instalment. In such a situation, it is
considered that a donation is made only as Mr Gratuity pays each year’s instalments.
Any balance of donations can be carried forward and will be allowed as a deductible donation in the
following year (subject to the limits set out above). The excess can be carried forward from year to
year until it is fully deductible (proviso to s 18A(1)(B)).
Example 7.15. Excess deductible donations
Emily donated R100 000 to an approved public benefit organisation (a PBO) on 1 June 2020.
She donated another R50 000 to the same PBO on 1 April 2021.
She had taxable income of R850 000 for the 2021 year of assessment and R950 000 for the 2022
year of assessment before any s 18A deduction was considered.
Calculate the s 18A deduction available to Emily for the 2021 and 2022 years of assessment. You
can assume that she was in possession of the relevant s 18A certificates.
SOLUTION
Year ended 28 February 2021
Donation of R100 000, but maximum s 18A deduction limited to 10% × R850 000 =
R85 000 (excess deductible donation of R15 000 rolled over to the 2022 year of
assessment (proviso to s 18A(1))) .................................................................................. (R85 000)
Total deductible donations of R50 000 (2022) plus R15 000 (excess deductible
donation rolled over from 2021) = R65 000. The maximum deduction will be limited
to 10% of taxable income of R950 000 = R95 000, but limited to total deductible
donations of R65 000 ...................................................................................................... (R65 000)
The s 18A deduction is the last deduction when calculating taxable income according to the subtotal
method for natural persons (s 18A(1)(B)). This implies that a taxable capital gain will increase the
deduction that a taxpayer can claim for donations, since it will be included in the subtotal before the
s 18A deduction is calculated.
Donations in kind
Section 18A(3) deals with the valuation of donations in kind. It states that if a deduction is claimed by
a taxpayer under s 18A(1) in respect of a donation of property in kind, other than immovable property
179
of a capital nature where the lower of market value or municipal value exceeds cost (s 18A(3A) – see
below), the amount of the deduction must be determined as follows:
Type of property donated Amount of donation for s 18A purposes

A financial instrument (if taxpayer’s trading stock) The lower of
l fair market value on the date of the donation, or
l the amount that has been taken into account for
the purposes of s 22(8)(C)
Trading stock (including livestock or produce of a The amount that has been taken into account for
farmer) the purposes of
l s 22(8)(C), or
l par 11 (for livestock or produce)
Asset used by the taxpayer for the purposes of his The lower of
trade (not trading stock) l fair market value on the date of the donation, or
l cost to the taxpayer of the property less any
allowance allowed to be deducted from his
income under the Act
Asset not used by the taxpayer for the purposes of The lower of
his trade (not trading stock) l fair market value on the date of the donation, or
l cost
For movable property that has deteriorated in
condition, the fair market value or cost must be
reduced by a depreciation allowance calculated
using the reducing-balance depreciation allowance
at the rate of 20% a year
Purchased, manufactured, erected, assembled, The lower of
installed, or constructed by or on behalf of the tax- l fair market value of the property on the date of
payer to form the subject of the donation the donation, or
l cost
Other No deduction is allowed for the donation.
l subject to any fiduciary right, usufruct or other This prohibition applies unless the financial
similar right, or instrument is a share in a listed company or is issued
l that constitutes an intangible asset, or by a qualifying financial institution (s 18A(3B))
l financial instrument
Deduction for qualifying donations of immovable property of a capital nature where the lesser of market
value or municipal value exceeds cost (appreciated immovable property)
The s 18A(1) deduction available for any donation of immovable property of a capital nature that has
increased in value is calculated using a special formula. The deduction is limited to
A = B + (C × D)
Where:
l A is the amount deductible in respect of s 18A(1).
l B is the cost of the immovable property being donated.
l C is the amount of a capital gain (if any) that would have been determined in terms of the Eighth
Schedule had the immovable property been disposed of for an amount equal to the lower of the
market value or the municipal value (to prevent excessive deductions because of artificial
valuations) on the day the donation is made.
l D is 60% in the case of a natural person or special trust or 20% in all other instances (s 18A(3A)).
Thus, the deductible donations will be limited to the cost of the immovable property plus the portion
of the capital gain (which would have realised had the property been sold at the lesser of market
value or the municipal value) left after deducting the taxable portion of the capital gain.
Often landowners own land for long periods before they decide to donate it (many consider making a
99-year private endorsement for the promotion of a national park or nature reserve). The tax
deduction for the donation was limited to the lesser of cost or fair market value, with fair market value
in most instances far more than the cost. Thus, most of the tax benefit of the donation for environmental
conservation was therefore eliminated. This provision tries to rectify this situation and enhances the
incentive to donate land for environmental conservation purposes (Explanatory Memorandum on the
Taxation Laws Amendment Bill, 2013).
180
Binding General Ruling No. 24 (issue 2) (issued 15 February 2016) gives an

exception to the rule that no deduction will be allowed if a s 18A certificate (re-
quired under s 18A(2)) has not been issued.
Please note!
If an amount qualifies under s 37C(3) or (5) (expenditure actually incurred to con-
serve or maintain land, which is deemed to be a donation for s 18A – see chap-
ter 13), a deduction will be allowed irrespective of whether a certificate was issued.
Example 7.16. Donation of appreciated immovable property
Jessica Wilbert owns a farm with a cost (and base cost) of R350 000. Jessica undertakes a
99-year endorsement of the farmland in terms of the Department of Environmental Affairs’
biodiversity stewardship programme. At the time of the donation, the farm had a market value of
R4 500 000 and a municipal value of R4 000 000. Jessica has taxable income of R2 500 000 for
the year of assessment during which the endorsement was undertaken.
Calculate the s 18A deduction available to Jessica for the 2022 year of assessment.
SOLUTION
Deductible donation (A) = B + (C × D)
A = R350 000 + ((R4 000 000 – R350 000) × 60%)
A = R350 000 + R2 190 000 = R2 540 000 (s 18A(3A)), but maximum s 18A
deduction limited to 10% × R2 500 000 = R250 000 (excess deductible donation
of R2 290 000 (R2 540 000 – R250 000) carried forward to the 2023 year of
assessment (proviso to s 18A(1))) .................................................................................. (R250 000)
Section 22(8) requires that the market value of the property must be included in
Please note! the income of the taxpayer who donated trading stock. If the donation qualifies for
a s 18A deduction, the cost price is included (s 22(8)(C)).
Example 7.17. Donations to public benefit organisations and other qualifying beneficiaries
Albert donates (a) R400, (b) R1 200, and (c) R3 300 to a PBO. His taxable income or assessed
loss before any deduction under s 18A for donations is (i) taxable income of R100, (ii) taxable
income of R30 000, (iii) assessed loss of R1 000.
What is his final taxable income or assessed loss in each instance?
SOLUTION
(a) Actual donation R400 (i) (ii) (iii)
Taxable income or assessed loss before deduction ........................... R100 R30 000 (R1 000)
The deduction is limited to 10% of taxable income.
In this instance the limit will therefore be ................................ (R10) (R400) Rnil
Final taxable income or assessed loss ................................... R90 R29 600 (R1 000)
(b) Actual donation R1 200
Taxable income or assessed loss before deduction ........................... R100 R30 000 (R1 000)
In instance (ii) 10% of taxable income is R3 000 and
the limit will therefore be the amount donated ........................ (R10) (R1 200) Rnil
Final taxable income or assessed loss ................................... R90 R28 800 (R1 000)
(c) Actual donation R3 300
Taxable income or assessed loss before deduction ..................... R100 R30 000 (R1 000)
In instance (ii) 10% of taxable income is R3 000 .................... (R10) (R3 000) Rnil
Final taxable income or assessed loss .......................................... R90 R27 000 (R1 000)
181
Documentation
A claim for a deduction under s 18A for a donation will not be allowed unless supported by a receipt
issued by the PBO or other qualifying entity concerned. The receipt must contain
l the reference number of the PBO, institution, board, body or agency, programme, fund, High
Commissioner, office, entity or organisation or the department concerned
l the date of the receipt of the donation
l the name and address of the PBO or other qualifying entity that received the donation
l the name and address of the donor
l the amount of the donation or the nature of the donation (if not made in cash)
l a certificate to the effect that the receipt is issued for the purposes of s 18A and that the donation
has been or will be used exclusively for the object of the PBO or other qualifying entity concerned
l such further information as the Commissioner may prescribe by public notice.
(s 18A(2)(a)).
An employee can donate to a qualifying entity by way of a deduction from his remuneration. The
employer then makes the donation on behalf of the employee. The employee will be able to rely on
the employer tax certificate (IRP 5) to substantiate the deductible donation for purposes of his annual
tax return (the original receipt will be in possession of his employer) (s 18A(2)(b)). The employer will
take such a donation into account in the calculation of the employees’ tax to provide the employee
with a cash flow benefit (par 2(4)(f) of the Fourth Schedule – see chapter 10). The amount deducted
for employees’ tax purposes is based on 5% of the balance of remuneration and is therefore not
calculated in the same way as the s 18A deduction.
Legal obligations, offences and punishment

The details regarding this are not discussed and can be found in s 18A(2A)–(2D) and 18A(5)–(7).
7.5 Taxation of married couples (ss 7(2), (2A)–(2C) and 25A)

Each spouse in a marriage is taxed separately on his or her own taxable income for a particular year
of assessment, unless one of the deemed inclusion rules of s 7(2) or 7(2A) applies. Marriage, separ-
ation, divorce or the death of a spouse during the year of assessment will therefore have no effect on
the determination of the normal tax payable by a natural person unless s 7(2) or 7(2A) applies.
The word ‘spouse’ is defined in s 1(1) of the Act and, apart from a marriage in terms of the Laws of the
Republic, it includes unions recognised as a marriage in terms of religion as well as live-together unions
of a permanent nature. In the absence of proof to the contrary, a marriage in terms of religion and live-
together unions of a permanent nature are deemed to be out of community of property (proviso to the
definition). A marriage in terms of the Laws of the Republic is by default in community of property. The
taxable incomes of spouses married in community of property but separated in circumstances which
indicate that the separation is of a permanent nature, are calculated as if the marriage was out of
community of property (s 25A)).
If an antenuptial contract exists, the marriage will be out of community of property. Couples married
out of community of property can also elect that the accrual principle applies to them (see chapter 27
for detail).
Example 7.18. Marriage out of community of property
Mervin’s salary for the 2022 year of assessment is R164 600 and his interest income from a
source in the Republic is R35 000. He is 68 years old. His wife, Wanda, aged 53, derives income
from a business of R115 500 for the year of assessment, while her interest income from a source
in the Republic is R5 500. They are married out of community of property.
Calculate the normal tax payable by Mervin and Wanda for the 2022 year of assessment.
182
SOLUTION
Mervin:
Salary ..................................................................................................................... R164 600
Interest ............................................................................................... R35 000
Less: Interest exemption (s 10(1)(i)(i) ............................................... (34 500) 500
Taxable income ..................................................................................... R165 100
On R165 100 @ 18% .............................................................................................. R29 718
Less: Primary rebate ............................................................................................. (15 714)
Secondary rebate ....................................................................................... (8 613)
Normal tax payable ............................................................................... R5 391
Wanda:
Business income .................................................................................................... R115 500
Interest ............................................................................................... R5 500
Less: Interest exemption (s 10(1)(i)(ii).............................................. (5 500) –
Taxable income ..................................................................................... R115 500

On R115 500 @ 18% .............................................................................................. R20 790
Less: Primary rebate ............................................................................................. (15 714)
Normal tax payable ............................................................................... R5 076
7.5.1 Deemed inclusion (s 7(2))

Section 7(2) is an anti-avoidance provision aimed at preventing married couples (irrespective of
whether they are married in or out of community of property) from reducing their liabilities for normal
tax by arranging for taxable income to be split between the spouses.
If a spouse (the recipient spouse) receives income in consequence of a donation, made by his or her
spouse (the donor spouse) with the sole (100%) or main (>50%) purpose to reduce, postpone or
avoid tax, the donor spouse will be taxed on that income of the recipient spouse received in
consequence of the donation (s 7(2)(a)).
Example 7.19. Deemed inclusion: S 7(2)(a)
Alfred (aged 53 years) donated money to his wife Betty (aged 50 years) that enabled her to earn
interest. His sole purpose was to reduce his own normal tax liability. They are married out of
community of property.
Salary: Alfred .................................................................................................................... R82 000
Business profits: Betty ...................................................................................................... 40 000
Interest received from a source in the Republic: Alfred ................................................... 8 500
Betty ..................................................... 19 000
Director’s fees: Alfred ....................................................................................................... 4 800
Calculate the normal tax payable by Alfred and Betty for the 2022 year of assessment.
183
SOLUTION
Alfred:
Salary .............................................................................................................................. R82 000
Director’s fees ................................................................................................................. 4 800
Interest: Own .............................................................................................. R8 500
Betty’s (deemed to accrue to Alfred in terms of s 7(2)(a)) ........... 19 000
R27 500
Less: Interest exemption s 10(1)(i)(ii) ........................................................ (23 800) 3 700
Taxable income ................................................................................................. R90 500
Normal tax determined per the tax table on R90 500 @ 18% ......................................... R16 290
Less: Primary rebate ....................................................................................................... (15 714)
Normal tax payable ........................................................................................... R576
Betty:
Business profits............................................................................................................... R40 000
Taxable income ................................................................................................. R40 000
Normal tax determined per the tax table on R40 000 @ 18% ......................................... R7 200
Less: Primary rebate ....................................................................................................... (15 714)
Normal tax payable ........................................................................................... Rnil
If the recipient spouse receives income exceeding ‘reasonable income’ from

l a trade connected to that of the donor spouse, or
l a trade that the recipient spouse carries on in partnership or association with the donor spouse,
or
l the donor spouse or a partnership of which the donor spouse was a member, or
l a private company of which the donor spouse was the sole or main holder of shares or one of the
principal holder of shares
the donor spouse will be taxed on any ‘excessive income’ and the recipient spouse on the ‘reason-
able income’ (s 7(2)(b)). This ‘reasonable income’ must be established in the light of the nature of the
relevant trade, the extent of the recipient’s participation in that trade, the services rendered by the
recipient or any other relevant factor.
For example: Mrs A works as a secretary for her husband’s sole trader business and earns R400 000
annually but the reasonable income for such services amounts to R180 000. Mrs A will be taxed on
the R180 000 and her husband on the excessive R220 000 (R400 000 – R180 000). Unless a
deduction is disallowed due to being excessive and not in the production of income, Mrs A’s
husband will be allowed a deduction of R400 000. If the excessive portion is disallowed, the
deduction will be R180 000 (R400 000 – R220 000), which equals the amount included in Mrs A’s
gross income.
Section 7(2)(b) ensures that married couples who genuinely work together in a trade are treated in
the same way as other couples engaged in separate trades. Section 7(2)(b) is therefore an effective
anti-avoidance rule directed against the diversion of income and is in place to discourage the erosion
of the tax base.
7.5.2 Marriages in community of property (ss 7(2A), (2C) and 25A)

The assets and liabilities of both spouses married in community of property, acquired or incurred by
either spouse before or during the marriage, constitute their joint estate. Each spouse has a 50%
share therein. Assets (and income earned therefrom) can, however, be specifically excluded from the
joint estate. This can, for example, happen if the will or act of grant through which the spouse obtains
the asset stipulates that the spouse is granted an independent title to the asset and that the asset
may not form part of any joint estate. Similar stipulations can also be made regarding the income
from such asset, or regarding both the asset and the income therefrom. If the will or act of grant does
not stipulate anything regarding the asset or the income, such asset and income falls in the joint
estate.
184
The tax implications of four types of provisions in wills and acts of grant in respect of assets and
income bequeathed or donated to a person married in community of property can be summarised as
follows:
Provision in will or Provision in will or Provision in will or No provision in will

act of grant: Only act of grant: Only act of grant: Both or act of grant
the asset is the income from the asset and the regarding any
excluded from the the asset is income from the exclusion from the
joint estate excluded from the asset are excluded joint estate
joint estate from the joint
estate
Effect on the Capital gain on Deemed to be a Capital gain on Deemed to be a
capital gain when disposal is exclud- disposal made in disposal is disposal made in
assets so obtained ed from the joint equal shares by excluded from the equal shares by
are subsequently estate and only the each spouse. Cap- joint estate and each spouse.
disposed of spouse making the ital gain on dis- only the spouse Capital gain on dis-
disposal must in- posal is part of the making the disposal is part of the
clude it in his or joint estate and posal must include joint estate and
her total capital each spouse must it in his or her total each spouse must
gains (par 14(b) of include 50% there- capital gains include 50%
the Eighth Sched- of in his or her total (par 14(b) of the thereof in his or her
ule) capital gains Eighth Schedule) total capital gains
(par 14(a) of the (par 14(a) of the
Eighth Schedule) Eighth Schedule)
Effect on the Income from the Income from the Income from the Income from the
income received asset is part of the asset is excluded asset is excluded asset is part of the
from the assets so joint estate and from the joint from the joint joint estate and
obtained each spouse must estate and only the estate and only the each spouse must
include 50% there- spouse receiving spouse receiving include 50% there-
of in his or her the income must the income must of in his or her
gross income include it in his or include it in his or gross income
(s 7(2A)(b)) her gross income her gross income (s 7(2A)(b))
(s 7(2A)(b)) (s 7(2A)(b))
According to common law principles, income accrues equally to each spouse married in community
of property, except in certain circumstances. To avoid confusion, s 7(2A) and (2C) set out specific
rules that determine to whom the income of couples married in community of property accrues. A
distinction is made between trade and non-trade income received by the spouses.
Trade income (s 7(2A)(a))

Income derived from the carrying on of a trade by only one spouse is deemed to accrue only to the
spouse who carried on the trade (s 7(2A)(a)(i)). Although the letting of any type of property is
included in the definition of ‘trade’ in s 1(1), rental income from letting fixed property is, for the
purposes of s 7(2A), specifically excluded from the rules regarding income from the carrying on of a
trade (s 7(2A)(a)). Any rental income from letting fixed property is specifically included in the ‘equal
share rule’ regarding non-trade (or passive) income (s 7(2A)(b) – see below). In other words, rental
income from fixed property is shared equally between spouses married in community of property
(each includes 50% thereof in gross income) unless one of the spouses enjoys independent title to
the income, due to the income being specifically excluded from the joint estate (see table above).
Rental income from letting movable property will, for the purposes of s 7(2A), still be income from the
carrying on of a trade and will consequently only accrue to the person/s carrying on the trade.
Where both spouses carry on the trade jointly, the income is deemed to have accrued to both
spouses in the proportions determined by the agreement. In the absence of an agreement the
income is deemed to have accrued in the proportions to which each spouse would reasonably be
entitled, taking into account the nature of the trade, the extent of each spouse’s participation, the ser-
vices rendered by each spouse or any other relevant factor (s 7(2A)(a)(ii)). The provisions regarding
the joint trade of spouses are specifically made subject to s 7(2)(b), which means that trading income
will be split between spouses married in community of property to the extent only that the split is
substantiated by their agreement or bona fide separate efforts.
Certain types of income are deemed to be income derived by a spouse from a trade carried on by
him or her (s 7(2C)). These incomes are any benefits (meaning both lump sum benefits and
annuities) received from retirement funds or preservation funds, s 10A annuities and income from
patents, designs, trademarks, copyrights, and property of a similar nature.
185
Rental from fixed property and non-trade income (s 7(2A)(b))

Rental income derived from the letting of fixed property and any income derived other than from the
carrying on of a trade (also called passive income) are deemed to have accrued in equal shares (50-
50) to both spouses (s 7(2A)(b)). Examples of non-trade (or passive) income are interest, dividends
and annuities, other than s 10A annuities and annuities from retirement funds, since those two types
of annuities are deemed to be derived from a trade carried on by the specific spouse (s 7(2C)(a) and
(b)).
If the spouses divorce during the year of assessment, only non-trade income received or accrued up
to the day before the date of divorce is split 50-50, since from the day of the divorce they are no
longer married in community of property. The same principle will apply if one of the spouses dies
during the year of assessment.
Rental income from fixed property and other non-trade income which does not fall into the joint estate
due to the income being specifically excluded from the joint estate in a will or act of grant, as
discussed in the table above, is deemed to have accrued only to the spouse who is entitled to it
(proviso to s 7(2A)(b)).
Capital gains
The tax implications of the capital gains on the disposal of assets by spouses married in community
of property are discussed in par 14 of the Eighth Schedule (see chapter 17) and the donations tax
implications of assets donated by spouses married in community of property are discussed in s 57A
(see chapter 26).
Example 7.20. Marriage in community of property

Calculate the taxable income of Patricia and Quincy, who are married in community of property
and are both 40 years old. Their receipts for the 2022 year of assessment were as follows:
Salary: Patricia ............................................................................................................. R60 000
Profit from trade carried on only by Quincy ................................................................. 14 000
Interest received by Patricia from a source in the Republic ........................................ 45 600
Rental received by Quincy (from a fixed property in the joint estate) ......................... 6 000
Rental received by Patricia (from a fixed property – both the asset and the income
therefrom are specifically excluded from the joint estate) ........................................... 10 000
Rental received by Patricia (from movable property – the trade is only carried on by
her) .............................................................................................................................. 25 000
Proceeds from the sale of their primary residence, the base cost of which is
R300 000 ..................................................................................................................... 3 000 000
SOLUTION
Patricia
Salary ...................................................................................................... R60 000
Interest received (R45 600 × 50%) ....................................................... R22 800
Less: Interest exemption (s 10(1)(i)(ii)) (limited to interest received) .... (22 800) nil
Rental received from fixed property in the joint estate (R6 000 × 50%) 3 000
Rental received from fixed property excluded from the joint estate ..... 10 000
Rental received from movable property ................................................ 25 000
Taxable capital gain (note 2) ................................................................ 124 000
Taxable income ......................................................................... R222 000
Quincy
Profit from trade .................................................................................... R14 000
Interest received (R45 600 × 50%) ....................................................... R22 800
Less: Interest exemption (s 10(1)(i)(ii)) (limited to interest received) .... (22 800) nil
Rental received fixed property in the joint estate (R6 000 × 50%)........ 3 000
Taxable capital gain (note 2) ................................................................ 124 000
Taxable income ......................................................................... R141 000
continued
186
Notes
(1) Both spouses are entitled to a s 10(1)(i) exemption.
(2) The taxable capital gain is determined as follows:
Patricia Quincy Total
Proceeds ................................................................. R1 500 000 R1 500 000 R3 000 000
Less: Base cost....................................................... (150 000) (150 000) (300 000)
R1 350 000 R1 350 000 R2 700 000
Less: Primary residence exclusion (par 45(2) of
the Eighth Schedule) ............................................... (1 000 000) (1 000 000) (2 000 000)
Capital gain ............................................................. R350 000 R 350 000 R700 000
Less: Annual exclusion ........................................... (40 000) (40 000)
Net capital gain ....................................................... R310 000 R310 000
Taxable capital gain (40%) ..................................... R124 000 R124 000
7.5.3 ‘Income’ for the purpose of the deeming provisions in s 7

The meaning of the term ‘income’ for purposes of s 7(2) to (8) of the Act can be widely argued and
remains an uncertainty (Van Wyk and Dippenaar, in an article published in South African Journal of
Economic and Management Sciences in 2017). The authors found that, in terms of the literal
approach of interpretation, unless the context otherwise indicates, the term ‘income’ in s 7(2) to (8) of
the Act should be ascribed its ordinary meaning, as defined in s 1(1) of the Act. Based on their study
performed, however, the context of s 7(2) to (8) of the Act sometimes indicates a different meaning.
Following the purposive approach to determine the meaning of the term ‘income’ that is used in s 7(2)
to (8) of the Act, they established that different authors interpret the meaning of the term ‘income’
differently, and the interpretations also differ among the various subsections of s 7.
In the Simpson case (CIR v Simpson (1949 AD)), Watermeyer, J noted that it was the object of Act
31 of 1941 (1941 Act) to tax a person’s profits or gains, in other words, after deducting allowable
expenditure incurred in making those profits or gains, and not ‘income’ as defined in the 1941 Act
(which is similar to the current definition of ‘income’, namely ‘gross income’ less exempt income).
Watermeyer, J opined that it was reasonable to accept that the legislature’s intention was that a
husband (later ‘donor spouse’) should pay tax on his wife’s (later ‘recipient spouse’) profits or gains
after deducting allowable expenditure (in other words ‘taxable income’) and not on her ‘income’ as
defined. Based on the rule laid down in Halsbury, Laws of England, the court found that to use the
literal (defined) meaning of ‘income’ would undermine the purpose of the section, since then the
donor spouse would not be authorised to deduct expenditure incurred by the recipient spouse.
Watermeyer, J reasoned that, in practice, the donor spouse would surely be entitled to all the
deductions which the recipient spouse would have been entitled to, had she been the taxpayer.
Van Wyk and Dippenaar are of the opinion that it must have been the legislature’s intention that s 7(2)
and (2A) referred to ‘income’ as defined, or to ‘gross income’, otherwise s 7(2B) would not have been
added in 1992 to specifically allow for the deduction of expenditure. Consequently, they held that the
interpretation of ‘income’ in the 1949 Simpson case, namely that s 7(2) refers to ‘taxable income’,
cannot be applied. Davis et al (1999) also agree that it appears then that the Simpson case does not
hold for s 7(2) and (2A). The authors opined that the legislature’s intention, albeit possibly unfair in
terms of not allowing deductions or exemptions throughout s 7, was for the term ‘income’ to be
interpreted as ‘gross income’ in s 7(2), (6) and (7) and as ‘income’ in s 7(3), (4), (5) and (8). They
suggested that it is imperative that application guidance is issued or that the wording in s 7(2) to (8)
be amended to reflect the intended meaning of the legislature, where it is not meant to be ‘income’ as
defined in s 1(1) of the Act. No amendments in this regard have been made.
7.5.4 Expenditure and allowances (s 7(2B))

Section 7(2B) ensures that any expenditure or allowance which relates to a portion of income in s 7(2)
and (2A) which is taxed in the donor spouse’s hands is matched with such income. In other words,
when income of the recipient spouse is deemed the income of the donor spouse, the expenditure or
allowances relating to that income will also be deemed available for the benefit of the donor spouse.
If the amount of income must be split between the spouses, the expenditure or allowances will be
split accordingly.
The normal rules will, however, continue to apply in respect of expenditure that is deductible for tax
purposes but does not specifically relate to any particular income. In the case of medical expenses,
for instance, the expenditure will still be deductible in the hands of the spouse who paid the medical
expenses, notwithstanding the fact that the expenditure was discharged from funds belonging to the
joint estate.
187
In the case of contributions to a retirement fund, the contributions are deductible in the hands of the
member of the fund.
7.6 Separation, divorce and maintenance orders (ss 21, 10(1)(u) and 7(11))
A change in marital status during a year of assessment does not affect the tax situation of a natural
person unless there is an application of s 7(2) or (2A).
Maintenance payments are normally paid monthly from the after-taxed income of the paying spouse.
It therefore makes sense that the receiving spouse should not again be taxed on such amounts. If the
paying spouse refrains from paying, the receiving spouse can request the court to grant a mainten-
ance order instructing the paying spouse’s retirement fund to pay the total maintenance due out of
the minimum individual reserve of the paying spouse’s retirement fund. Such a maintenance order
and consequential payment is, however, normally a once-off event and the tax implications are set
out in s 7(11) (see chapter 4 for the detailed discussion).
In the case of non-residents who receive alimony, allowance or maintenance payments, the same
rules apply, if the source of the alimony is in South Africa. The source of the alimony or maintenance
is determined in terms of the originating cause principle (see chapter 5 and the Lever Bros case). It is
from a South African source if the order of divorce or judicial separation was granted in South Africa
or the written agreement of separation was entered into in South Africa.
Example 7.21. Separation and divorce after 21 March 1962
Altus and Berta were divorced on 10 September 2016. There were three children out of the
marriage, all of them under 18 years of age. Two of the children lived with Altus, their father, and
were maintained by him. The other child lived with Berta, the mother, and was partly maintained
by her. Altus derived a salary of R190 000 and dividend income (from a South African company)
of R3 000, and Berta derived a salary of R46 500 and interest from a source in the Republic of
R1 500 for the year of assessment. Altus paid maintenance of R26 000 to Berta during the year
from his after-tax income.
Calculate the normal tax payable by Altus and Berta for the 2022 year of assessment. Both are
under 65 years of age.
SOLUTION
Altus
Salary ...................................................................................................................... R190 000
Dividends ................................................................................................................ 3 000
Gross income .......................................................................................................... R193 000
Less: Dividend exemption (s 10(1)(k)(i)) ................................................................ (3 000)
Taxable income ...................................................................................... R190 000
(Altus cannot deduct the R26 000 maintenance paid.)
Normal tax determined per the tax table on R190 000 @ 18%................................. R34 200
Less: Primary rebate ................................................................................................ (15 714)
Normal tax payable ................................................................................. R18 486
The company paying the dividend to Altus must withhold an amount of R600
(20% dividend tax) in terms of s 64E.
Berta
Salary ....................................................................................................................... R46 500
Maintenance ............................................................................................................. 26 000
Interest ..................................................................................................................... 1 500
Gross income ........................................................................................................... R74 000
Less: Maintenance exemption (s 10(1)(u)(i)) ........................................................... (26 000)
Interest exemption (s 10(1)(i)(ii)) .................................................................... (1 500)
Taxable income ....................................................................................... R46 500
Normal tax determined per the tax table on R46 500 @ 18%................................... R8 370
Normal tax payable ................................................................................. Rnil
188
7.7 Minor children (s 7(3) and (4))

When a minor child or stepchild receives taxable income in his own right, the income is subject to tax
in his own hands, unless s 7(3) or (4) applies. These sections only apply if the income is received by
the minor child or stepchild by reason of any ‘donation, settlement or other disposition’ by a parent.
Paragraph 69 of the Eighth Schedule contains an attribution rule similar to s 7(3) and (4) in respect of
any capital gain vesting in a minor child as a result of a donation, settlement or other disposition by a
parent. Contrary to s 7(3) and (4), par 69 only refers to a minor child and no reference is made to a
minor stepchild.
In terms of the Children’s Act, children become majors at the age of 18 years. In terms of the
Marriage Act, a person must be 18 years of age to enter a legal marriage. Permission to marry may
however be granted to persons younger than 18 in certain specific circumstances. If a person enters
a legal marriage, that person becomes a major. To determine whether a child is a minor for the
purposes of s 7(3) and (4), it must be established whether the child has reached the age of 18 years
on the date of receipt or accrual of the income (and not on the date of the donation).
The courts concluded that the expression ‘donation, settlement or other disposition’ should be read
as ‘donation, settlement or other similar disposition’. The word ‘disposition’ was interpreted to mean
any disposal of property made wholly or to an appreciable extent gratuitously out of the liberality or
generosity of the disposer. The s 7 anti-avoidance rules do not apply to dispositions made at full
value or settlements made for full consideration.
For details regarding s 7(5) to (10) and s 7C also dealing with donations and interest-free or low-
interest loans made to trusts, please refer to chapter 24. Any donations tax implications because of a
donation, settlement or other disposition of property can still apply – see chapter 26.
Section 7(3) – minor child or stepchild

Section 7(3) provides that income received by or accrued to a minor child or stepchild, or which has
been expended for the maintenance, education or benefit of the child, by reason of any donation,
settlement or other disposition made by the parent of such child, is deemed to be received by or
accrued to the parent of that child.
The words ‘by reason of’ indicate that the donation need not be made directly to the minor child or
stepchild. The causal link between the donation made by the parent and the income-benefit to the
minor child or stepchild is what must be established. Therefore, if a father donates an interest-
bearing investment to a trust of which his minor child is a beneficiary, any interest earned on such
investment and distributed to the minor child will be deemed the income of the father in terms of
s 7(3). The interest is therefore taxed in the parent’s hands and not in the minor child’s hands.
By contrast, income from a donation made by a parent to a major child is taxable in the child’s hands,
unless some other anti-avoidance provision is brought into effect, such as s 80A.
Case law confirms that the question of whether such income is received by reason of such a donation,
settlement or other disposition must be determined from the facts in each particular instance. There
are, however, contradictory decisions regarding the tax consequences of reinvested income (or
‘income upon income’). In one case it was held that s 7 did not apply to income received by the
minor from the use or reinvestment of the original income that had been derived. In another case it
was held that such income upon income was received by reason of the original donation and that s 7
applies.
Section 7(4) – cross donations involving a minor child

Section 7(4) is intended to prevent a parent from attempting to escape liability for tax in terms of
s 7(3) through the intervention of a third party via a cross donation. Section 7(4) deems the income
received by a minor child or stepchild from a donation, settlement or other disposition made by a
third party to be received by the child’s parent, if the child’s parent or his or her spouse has made a
cross-donation, settlement or other disposition to the third party or his or her family.
For example, A donates R10 000 to the minor child or stepchild of B and B, or his spouse,
reciprocates by donating R10 000 to A or his family. Any income received by the minor child or
stepchild of B is deemed to be received by B. The tax implications of any income accruing to A or his
family because of the donation made by B is determined by the status of the person who receives the
income. If A’s major child, for example, receives income because of the donation by B, the major
child will be taxed thereon.
189
In the following instances, determine to whom the income accrues:
Example 7.22(a). Minor children – continued
A father gratuitously transferred a sum of money into a savings account for the benefit of and in
the name of his child M, aged 17, and a further sum in the name of his stepchild N, aged 16. In
this manner, the child M received R4 500 interest, while the stepchild N received R6 000 interest.
SOLUTION
Both M’s interest of R4 500 and N’s interest of R6 000 are deemed to accrue to the father
(s 7(3)).
Example 7.22(b). Minor children – continued
A minor child received R5 000 interest during a year on a donation of R100 000 made to him by
his father. The R5 000 was used to purchase shares in a company, and the child received a
dividend of R2 000 from the company.
SOLUTION
The R5 000 interest received by the minor child is deemed to accrue to the father (s 7(3)).
Whether s 7(3) also applies to the dividend will depend on the specific facts. It must be proved
that the income on the reinvested money (income upon income) was received ‘as a result of’ the
donation of the father. Case law has given different judgments regarding the notion of ‘income
upon income’.
Example 7.22(c). Minor children – continued

A man who is married out of community of property donated R100 000 to a trust. In terms of the
trust deed, his minor child has a vested right to the income, but the income must be
accumulated for the benefit of his minor child and the income will only be paid out only when he
reached the age of 25. His wife would succeed to the capital of the trust. During the year, the
trustees received R6 000 interest, which was accumulated as stipulated.
SOLUTION
The R6 000 interest received by the trustees is deemed to accrue to the father. Section 7(3)
can apply, since the income is received ‘in favour of’ and being accumulated for the benefit of
the minor child who has a vested right thereto. The fact that the capital is not donated to the
child is irrelevant.
In practice, SARS applies s 7(5) whenever there is a withholding of income in terms of the trust
deed, no matter whether the beneficiaries have a vested right to the income or merely a
contingent right or whether their right to income depends upon the exercise of the trustee’s
discretion. It is therefore submitted that s 7(5) can alternatively apply to the R6 000, with the
same outcome, namely that the amount is deemed to accrue to the father.
Example 7.22(d). Minor children – continued
A minor child works in her father’s business and receives a salary of R30 000 for the year. She
received a cash legacy during the year from a deceased uncle and received R1 000
interest on the investment of this sum.
SOLUTION
The salary of R30 000 received from the father is assessed in the hands of the minor child, since
it has not been received by reason of any gift or donation made by the father. Section 7(3) is not
applicable. The R1 000 interest received on the investment of the cash legacy is taxed in the
hands of the child. Section 7(3) is not applicable since the amount has not been received by
reason of a donation, settlement or other disposition from a parent, but a legacy from an uncle.
190
7.7–7.8 Chapter 7: Natural persons
Example 7.22(e). Minor children

X (aged 17) and Y (aged 23) received donations from K. The interest from these donations was
R7 500 for X, and R6 000 for Y during a tax year. Z, the father of X and Y, reciprocated and
donated a sum of money to K’s child M, aged 16. M received interest amounting to R4 500 for
the year of assessment on the investment of this sum.
SOLUTION
X’s interest of R7 500 is deemed to accrue to Z (s 7(4)). Y’s interest of R6 000 is assessed in his
own hands. Section 7(4) does not apply since Y is a major child. M’s interest of R4 500 is
deemed to accrue to K (s 7(4)).
7.8 Antedated salaries and pensions (s 7A)

Section 7A provides for the spread, in arrears, of an ‘antedated salary or pension’.
An ‘antedated salary or pension’ is a salary (excluding any bonus) or pension payable with retro-
spective effect in respect of a period ending on or before the date of the grant (s 7A(1)).
If the accrual period dates to before 1 March of the current year of assessment, the taxpayer can
elect as follows to spread the taxability of the payment:
l Accrual period commences not more than two years before 1 March of the current year of
assessment: apportion the total accrual period on the basis of the number of months in each year
of assessment (s 7A(2)(a)).
l Accrual period commences 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 annual instalments. One-third will be taxed in each of the current and previous two
years of assessment (s 7A(2)(b)). The previous two years’ assessments will be reopened and
reassessed.
The employer who pays a s 7A amount must obtain a directive from SARS regarding the amount of
employees’ tax that must be withheld and paid over to SARS in respect of the s 7A amount. If the
employee makes no election, the full amount will be taxed in the year of receipt. A taxpayer will make
the election if his average tax rate in the previous years of assessment is lower than the current year
of assessment.
Example 7.23. Antedated salaries and pensions

Mrs A, the widow of the late Mr A, is awarded a permanent grant, made with retrospective effect,
of an increase in the pension she receives from the employer of the late Mr A. The increase in
pension, which amounts to R4 500, becomes effective and is paid to Mrs A on 28 February 2022.
The retrospective increase relates
(a) to the period 1 September 2020 to 28 February 2022, and
(b) to the period 1 September 2018 to 28 February 2022.
What amount is deemed to accrue to Mrs A in terms of s 7A for the years of assessment ending
on the last day of February 2019, 2020, 2021 and 2022 if she elects to enjoy the application of
the section?
SOLUTION
‘Antedated pension’ = R4 500
‘Accrual period’
Under (a): 1 September 2020 to 28 February 2022 (18 months).
Commences not more than two years before 1 March 2021 (commencement of
year of assessment during which actual receipt takes place).
Under (b): 1 September 2018 to 28 February 2022 (42 months).
Commences more than two years before 1 March 2021.
The antedated pension is deemed to have accrued as follows:
Years of assessment
2019 2020 2021 2022
(year of actual accrual)
Under (a) ......................... – – R1 500 (6/18) R3 000 (12/18)
Under (b)......................... – R1 500 (1/3) R1 500 (1/3) R1 500 (1/3)
191
Example 7.24. The tax calculation of a natural person

ABC Ltd employs Kelvin, aged 32 and unmarried, as a sales manager. He also carries on a small
business as a sole trader. His income and expenditure for the year of assessment that ended
28 February 2022 were as follows:
Income:
Salary from ABC Ltd ...................................................................................... R150 000
Non-pensionable commission from ABC Ltd ................................................. 50 000
Interest received
From a source outside the Republic........................................................... R4 800
From a source in the Republic ................................................................... 4 000 8 800
Income from trade.......................................................................................... 29 400
Expenses:
Deductible expenses related to trade............................................................ R24 550
Pension fund contributions made by Kelvin................................................... 18 000
Retirement annuity fund contributions made by Kelvin.................................. 9 000
Donations to an approved public benefit organisation (the required
receipt was obtained) .................................................................................... 7 000
Qualifying medical expenses (not a member of a medical scheme) ............. 24 400
Other:
Aggregated capital gains .............................................................................. 51 000
Assessed loss ................................................................................................ 10 000
Calculate the normal tax payable by Kelvin for the year of assessment ended 28 February 2022.
SOLUTION
Salary ....................................................................................................... R150 000
Commission ............................................................................................. 50 000
Interest received ...................................................................................... 8 800
Income from trade .................................................................................... 29 400
Gross income ........................................................................................... R238 200
Less: Exempt income
Interest exemption (s 10(1)(i)(ii))
– interest from a source in the Republic ........................................ R4 000 (4 000)
Income (Subtotal 1) .................................................................................. R234 200
Less: Deductions
Deductible expenses related to trade............................................ (24 550)
Subtotal 2 ................................................................................................. R209 650
Less: Assessed loss (s 20) ...................................................................... (10 000)
Subtotal 3 ................................................................................................. R199 650

Add: Taxable capital gain (s 26A) R11 000 (R51 000 – R40 000) ×
40% ................................................................................................ 4 400
Subtotal 4 ................................................................................................. R204 050
Less: Actual contributions to retirement funds (s 11F)
= R27 000 (R18 000 + R9 000)
l R350 000 (s 11F(2)(a)), or
– Remuneration of R200 000 (R150 000 + R50 000)
– Taxable income of R204 050 (subtotal 4 after the taxable
capital gain)
Therefore 27,5% × R204 050 = R56 114 (s 11F(2)(b)), or
l R199 650 (s 11F(2)(c)) (subtotal 3 taxable income before the
taxable capital gain)
Therefore R56 114, but deduction is limited to actual contributions ........ (27 000)
Subtotal 5 ................................................................................................. R177 050
Less: Donation to public benefit organisations (s 18A)
Actual donation (R7 000) limited to
l 10% × R177 050 = R17 705 (limited to actual donation) ........... (7 000)
Taxable income ................................................................................ R170 050
Normal tax determined per the tax table on R170 050 @ 18% ................ R30 609
Less: Primary rebate ...................................................................... (15 714)
Section 6B credit (note 2) .................................................... (2 912)
Normal tax payable .......................................................................... R11 983
192
Notes
(1) The limitation in s 18A refers to taxable income, which therefore also includes taxable capital
gains.
(2) There is no s 6A medical tax credit (not a member of a medical scheme) and the s 6B med-
ical tax credit is calculated as follows: (R24 400 – R12 754 (7,5% × R170 050)) = R11 646 ×
25% = R2 912.
193
8 Employment benefits
Linda van Heerden, Maryke Wiesener and Angela Jacobs

l apply the provisions of the Act, the Seventh Schedule and the VAT Act in respect of
employment benefits in both practical calculation questions and theoretical advice
questions
l demonstrate your knowledge with regard to employment benefits by means of an
integrated case study.
Contents
Page
8.1 Overview .......................................................................................................................... 196
8.2 Allowances and advances (s 8(1)) .................................................................................. 197
8.3 Specific allowances ......................................................................................................... 199
8.3.1 Travel allowances (ss 8(1)(a)(i)(aa) and 8(1)(b)) ................................................ 199
8.3.2 Subsistence allowances (ss 8(1)(a)(i)(bb) and 8(1)(c))...................................... 208
8.3.3 Allowances to public officers (ss 8(1)(a)(i)(cc) and 8(1)(d)–(g)) ........................ 210
8.4 Seventh Schedule taxable benefits ................................................................................. 210
8.4.1 Benefits granted to relatives of employees and others ...................................... 211
8.4.2 Consideration paid by the employee .................................................................. 211
8.4.3 Employer’s duties ................................................................................................ 212
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5) ............................ 212
8.4.5 Use of sundry assets (paras 2(b) and 6) ............................................................ 215
8.4.6 Right of use of motor vehicles (paras 2(b) and 7) .............................................. 217
8.4.7 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8) ..... 224
8.4.8 Residential accommodation (paras 2(d) and 9) ................................................. 225
8.4.9 Holiday accommodation (paras 2(d) and 9) ....................................................... 228
8.4.10 Free or cheap services (paras 2(e) and 10) ....................................................... 229
8.4.11 Low-interest debts (paras 2(f), 10A and 11) ....................................................... 230
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12) .................................... 233
8.4.13 Release from or payment of an employee’s debt (paras 2(h) and 13)............... 234
8.4.14 Contributions to medical schemes (benefit funds) (paras 2(i) and 12A) ........... 235
8.4.15 Costs relating to medical services (paras 2(j) and 12B) .................................... 236
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C) ......................... 238
8.4.17 Contributions by an employer to pension and provident funds
(paras 2(l) and 12D) ............................................................................................ 238
8.4.18 Contributions by an employer to bargaining councils (paras 2(m) and 12E) .... 240
8.5 Right to acquire marketable securities (s 8A) ................................................................. 240
8.6 Broad-based employee share plans (s 8B) ..................................................................... 240
8.7 Taxation of directors and employees at the vesting of equity instruments (s 8C) .......... 243
8.7.1 Restricted versus unrestricted instruments ........................................................ 244
8.7.2 Vesting as the tax event ...................................................................................... 244
8.7.3 Calculation of gain or loss upon vesting ............................................................. 245
8.7.4 Impact of s 8C on capital gains tax .................................................................... 248
8.8 Mauritius and United Kingdom Double Tax Agreements (DTAs): Income from
employment (Article 14) ................................................................................................... 248
195
8.1 Overview
Income from employment can consist of a combination of a cash salary, non-cash benefits, allow-
ances and advances and even dividends.
Amounts, including any voluntary award, (other than allowances and advances in terms of s 8(1) and
gains in terms of ss 8B and 8C) received or accrued in respect of services rendered (or to be
rendered) or employment in the form of cash (like a salary), are included in gross income in terms of
par (c) of the definition of gross income. Paragraph (c) of the definition of gross income excludes
taxable (fringe) benefits as these are included in gross income in terms of par (i) of that definition
(proviso (i) to par (c)) (see chapter 4 for a detailed discussion in this regard).
Benefits or advantages given by employers to employees by virtue of employment or as a reward for
services rendered or to be rendered, in a form other than cash, are defined as ‘taxable benefits’ in
par 1 of the Seventh Schedule (see 8.4 for detail) 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’. Employers can also pay cash
allowances or advances to employees. All cash allowances and advances are included in taxable
income (and not in gross income – please refer to the comprehensive framework in chapter 7) of the
recipient (s 8(1)). Taking the provisions of s 8(1) into account, either the net amount or the gross
amount of allowances or advances are included in taxable income.
Employees may obtain equity instruments as remuneration in certain instances. Section 8B (which
replaced s 8A) and s 8C contain the rules regarding the tax implications of the acquisition of such
equity instruments by employees.
Any dividends (included in gross income in terms of par (k) to the gross income definition) received
by a person, for services rendered or by virtue of employment, will not be exempt from tax (as is
usually the case) where the dividends are ceded to an employee as a reward for services rendered
rather than arising on shares in their employer which they actually own (par (ii) to the proviso to
s 10(1)(k)(i)). Additional rules contained in paras (dd), (jj) and (kk) to the proviso to s 10(1)(k)(i) apply
to certain dividends from share schemes. Such dividends are included in the Fourth Schedule
definition of remuneration and are therefore subject employees’ tax.
The following table summarises the differences and similarities regarding employment benefits:
Include in gross income Include in income Include in taxable income
The cash equivalent of any tax- Section 8B(1): gain on disposal of The net amount of any allowance
able benefit in terms of the Sev- a qualifying equity share (except or advance (after deducting any
enth Schedule (including taxable specific exclusions) portion thereof expended for spe-
benefits with no value) (par (i) of cified business purposes) in the
the definition of gross income) case of
l travel allowances
l subsistence allowances
l allowances for holding a public
office
(s 8(1)(a)(i))
Section 8A gain (only valid in re- Section 8C(1): gain on the vesting The gross amount of any other
spect of rights acquired before of an equity instrument obtained allowance or advance not listed
26 October 2004) (par (i) of the by virtue of employment or office above (s 8(1)(a)(i))
definition of gross income) as a director
In terms of par (k) of the definition
of gross income, the gross
amount of any dividends received
for services rendered which are
not exempt – in paras (dd), (ii), (jj)
and (kk) of the proviso to
s 10(1)(k)(i).
Except where otherwise stated, for the purposes of this chapter, the employer is a registered VAT
vendor and references to paragraphs in this chapter are references to paragraphs of the Seventh
Schedule. The cash equivalents of taxable benefits and the amount that respresents ‘remuneration’
are not always the same. The rules contained in the Fourth Schedule that must be applied by
employers in order to calculate the ‘remuneration’ amount (the amount on which employees’ tax must
be withheld) are also briefly discussed at each taxable benefit (see chapter 10 for detail).
196
8.2 Chapter 8: Employment benefits
8.2 Allowances and advances (s 8(1))

Meaning of terminology
A principal (as defined) can grant an allowance or advance to an employee to incur business-related
expenditure or can merely reimburse an employee for such expenditure. A ‘principal’, as defined,
includes an employer, as well as the authority, company, body, or other organisation in relation to
which an office is held, or any associated institution in relation to the aforementioned (s 8(1)(a)(iii))
(see 8.3.1).
Interpretation Note No. 14 (Issue 5) dated 30 March 2021 explains the difference between the terms
‘allowance’, ‘advance’ and ‘reimbursement’:
l An allowance is an amount of money granted by an employer to an employee to incur business-
related expenditure on behalf of the employer, without an obligation on the employee to prove or
account for the business-related expenditure to the employer. The amount of the allowance is
based on the anticipated business-related expenditure.
l An advance is an amount of money granted by an employer to an employee to incur business-
related expenses on behalf of the employer, with an obligation on the employee to prove or
account for the business-related expenditure to the employer. The amount of the advance is
based on the anticipated business-related expenditure. The employer recovers the difference
from the employee if the actual expenses incurred are less than the advance granted and vice
versa.
l A reimbursement of business-related expenditure occurs when an employee has incurred and
paid for business-related expenditure on behalf of an employer without having had the benefit of
an allowance or an advance and is subsequently reimbursed for the exact expenditure by the
employer after having proved and accounted for the expenditure to the employer.
Interpretation Note No. 14 (Issue 5) further states that the nature of allowances, advances and reim-
bursements is frequently misunderstood, as are the reasons for granting recipients such amounts. In
this regard, it states that:
l Any allowance, advance or reimbursement reflects business-related expenditure or anticipated
business-related expenditure of the employer. A payment to an employee under the disguise of
an allowance, but actually for services rendered or to be rendered, is subject to tax under the
normal provisions of ‘gross income’ and is not treated as an allowance under s 8(1)(a). The label
of a payment does not necessarily correctly reflect the true nature of the payment.
l The judgment in ITC 1523 (54 SATC 194) confirmed that when the word ‘allowance’ is used in an
employee-employer relationship, it means a grant of something additional to ordinary wages. The
taxpayer, in that case, had received a salary and sought to claim a deemed subsistence
expenditure deduction against his salary. The court held that he had not received an allowance
as he had not received anything extra and was not automatically entitled to the deduction
provided for in s 8(1).
l A typical misconception is that the quantum of an allowance or advance does not have to reflect
the anticipated business expense. This misconception is sometimes caused by the incorrect
understanding that an allowance can, without reference to the actual expenditure anticipated, be
based on the amounts of expenditure that are deemed to have been incurred by the Act under
specified circumstances and that the employee will automatically be entitled to a tax deduction
against that “allowance”. The misconception means that employees sometimes receive
allowances that are much greater than the true anticipated business expense.
General overview of allowances and advances

All amounts paid or granted by a principal to a recipient (the person receiving the amount, for
example the employee) as an allowance or advance must be included in taxable income, excluding
any portion thereof that
l is exempt from normal tax under s 10, or
l has actually been expended for the three specific purposes stated in s 8(1)(a)(i)(aa)–(cc).
The three specific purposes entail amounts actually expended by the recipient
l on travelling on business
l on any accommodation, meals and incidental costs incurred while the recipient must spend at
least one night away from his/her usual place of residence for work purposes, and
l by reason of his/her duties as the holder of a public office.
197
The effect of the exclusion of the aforementioned amounts specifically expended for business pur-
poses is that the net amounts (meaning the gross allowance or advance received less any portion
spent for business purposes) of travel allowances, subsistence allowances and allowances for hold-
ing a public office are included in the taxable income of that person (s 8(1)(a)(i)(aa)–(cc)) (see 8.3).
To determine the effect and disclosure of the exclusion of any portion of a s 8(1) allowance or
advance that is exempt from normal tax under s 10(1), these two sections and par (c) of the definition
of gross income must be read together. This was discussed in detail in chapter 4.4. In short,
irrespective of following viewpoint one or two as discussed in chapter 4.4, such exempt portions of a
s 8(1) allowance will have no effect on the taxable income of a recipient. This further implies that no
employees’ tax needs to be withheld from such exempt amounts since it is not ‘income’ as defined,
which is a requirement of the definition of ‘remuneration’ in the Fourth Schedule.
Since the gross amounts in respect of all other allowances or advances are included in taxable
income (as the final taxable amount), no expenditure can reduce the amount of such allowances or
advances to be included in taxable income. The full gross amounts of all other allowances, for
example clothing allowances, child-care allowances, allowances for the use of a cell phone or
entertainment allowances, are consequently included in taxable income as the final taxable amount.
Any allowance or advance to government employees who are stationed outside South Africa or
persons rendering services for an employer in the public service are excluded from the provisions of
s 8(1) if they are attributable to services rendered by that person outside South Africa (s 8(1)(a)(iv)).
Specific provisions regarding reimbursements

It is clear from the explanations of the terms ‘advance’ and ‘reimbursement’ that the amount of the
business-related expenditure incurred by the employee and proven to the employer will, in the end,
be equal to the amount of the advance or reimbursement. It consequently seems fair that the
definition of ‘remuneration’ excludes ‘any amount paid or payable to an employee wholly in reimburse-
ment of expenditure actually incurred by such employee in the course of his employment’ (specific
exclusion (vi) to the definition of ‘remuneration’ in the Fourth Schedule).
Until 28 February 2021, an amount paid by a principal as reimbursement or advance is not included in
the recipient’s taxable income if it is or will be used for expenditure incurred or to be incurred by him
l on the instruction of his principal in the furtherance of the principal’s trade (s 8(1)(a)(ii)(aa)); and
l where the recipient must account to his principal for the expenditure incurred and must provide
proof that the expenditure was wholly so incurred (s 8(1)(a)(ii)(bb)).
Where an employee is, for example, obliged to be away from the office on a day trip, and such
employee purchases meals and incurs incidental costs (for example purchases lunch, uses an Uber
or the Gautrain, uses airport parking) in the furtherance of the employer’s trade, but the employee
has not been explicitly instructed by the employer to purchase meals and incur incidental costs as
required by s 8(1)(a)(ii)(aa), the reimbursement is subject to tax in the employee’s hands. Where
such expenditure is incurred to acquire an asset, the ownership of the asset must vest in the principal
(proviso to s 8(1)(a)(ii)).
The aforementioned strict requirement regarding the specific instruction of the employer in
s 8(1)(a)(ii)(aa) is amended with effect from 1 March 2021. Either
l such instruction, or
l being allowed by the employer to incur expenditure on meals and other incidental costs while
obliged to spend a day or part of a day away from the employee’s usual place of work or employ-
ment, not exceeding the amount determined by notice in the Gazette,
will from that date cause the reimbursement of expenditure incurred in the furtherance of the
employer’s trade not to be included in the employee’s taxable income.
The definition of ‘variable remuneration’ in s 7B includes any such reimbursement of expenditure in
terms of 8(1)(a)(ii). This means that such amount accrues to the employee and is deductible by the
employer on the date on which the employer pays the reimbursement or advance to the employee.
This might seem to indicate that such reimbursements and advances will be taxable, but since
s 8(1)(a)(ii) makes it clear that reimbursements and advances meeting the requirements of that sec-
tion are not included in taxable income, it is suggested that the inclusion of reimbursement of expend-
iture in the variable remuneration definition of s 7B merely governs the timing of the employer’s
deduction of the reimbursement.
198
8.2–8.3 Chapter 8: Employment benefits
Interpretation Note No. 14 (Issue 5) makes it clear that

l the aforementioned non-inclusion of reimbursements in the specific circumstances does not
apply to what is called ‘travel reimbursements’ made by an employer to an employee. The
meaning of ‘travel reimbursements’ is explained as ‘reimbursements for the actual business kilo-
metres travelled at an employer-agreed rate per kilometre’, and
l the provisions of ss 8(1)(a)(i) and 8(1)(b) must still be applied to ‘travel reimbursements’ when
determining the amount, if any, which must be included in the recipient’s taxable income.
In the context of travel, an allowance or advance therefore includes both a fixed travel allowance and
a travel reimbursement (a reimbursive travel allowance – see 8.3.1). A recipient who receives a travel
allowance and a travel reimbursement must add the amount of the travel reimbursement to the
amount of the travel allowance and then deduct the calculated allowable deduction based on the
business kilometres travelled to determine the net amount to be included in taxable income.
8.3 Specific allowances

The three specific allowances or advances and the expenditure listed in s 8(1)(b) to (d), deductible
against it in the calculation of the net amounts to be included in taxable income, are explained below.
8.3.1 Travel allowances (ss 8(1)(a)(i)(aa) and 8(1)(b))

An employer (the principal) can pay two types of travel allowances to an employee (the recipient):
l a fixed travel allowance, which means that the employee receives the same amount as an
allowance monthly, irrespective of the actual business kilometres travelled by the employee in
any motor vehicle (it is interesting to note that Interpretation Note No. 14 (Issue 5) refers to ‘a
private motor vehicle’ while the Act refers to ‘any motor vehicle’). Both allowances in respect of
transport expenses (s 8(1)(b)(i)) and allowances for defraying expenditure in respect of any
motor vehicle used for business purposes (s 8(1)(b)(ii)) can be paid as monthly fixed travel
allowances, or
l a reimbursive travel allowance or advance based on the actual business kilometres travelled by
the employee in any motor vehicle (s 8(1)(b)(iii)). The employee therefore first travels for business
and the employer then pays the reimbursive allowance calculated at an employer-agreed rate
per kilometre based on the actual business kilometres travelled.
A recipient who receives a travel allowance and a travel reimbursement must add the amount of the
travel reimbursement to the amount of the allowance and calculate the allowable deduction for the
number of business kilometres travelled. By allowing expenditure incurred by the recipient for
business travel as a deduction, the effect is that the employee will only be taxable on the portion of
the travel allowance expended in using any motor vehicle for private travel.
Both travel allowances for defraying expenditure in respect of any motor vehicle used for business
purposes (s 8(1)(b)(ii)) and reimbursive travel allowance (s 8(1)(b)(iii)) are included in the definition of
‘variable remuneration’ (s 7B, par (b) of the definition). This means that the allowances are only
deemed to accrue to the employee, and to be incurred by the employer, when it is paid to the
employee. This allows for the timely matching of the inclusion in the employee’s taxable income, the
deduction by the employer and the responsiblity of the employer to withhold employees’ tax on travel
allowances.
Travel reimbursements paid by an employer are deemed to accrue to a recipient on the date that
they are paid. Often, business travel undertaken in one year of assessment was only reimbursed to
an employee in the following year of assessment. This created the problem that taxpayers who
undertook business mileage in, for example, February of a calendar year, but who received their
travel reimbursement in March of that calendar year, had the result that the mileage was undertaken
in a different year of assessment to that in which the travel allowance accrued. No deduction was
thus allowed for this mileage. To resolve this anomaly, the provisos to both travel allowances for
defraying expenditure in respect of any motor vehicle used for business purposes (s 8(1)(b)(ii)) and
reimbursive travel allowances (s 8(1)(b)(iii)) make it clear that any distance travelled for business
purposes is deemed to have taken place in the year of assessment that the travel reimbursement is
paid. If an employee has, for example, travelled business kilometres in February 2022, but the reim-
bursive travel allowance in respect thereof is only paid in March 2022 (in the 2023 year of assess-
ment), the employee can claim the business kilometres travelled in February 2022 in March 2022.
199
Interpretation Note No. 14 (Issue 5) gives the following examples of private travel:
l a tax consultant employed by a law firm in Johannesburg travels from home in Pretoria to the law
firm’s office: the travel between home and the office
l an assistant employed to work as a shop assistant at a V&A Waterfront store in Cape Town (the
employer has stores all over South Africa, including other 14 stores in the Cape Town area)
travels from a friend’s house to the V&A Waterfront store: the travel between the friend’s house
and the store, and
l an assistant employed to work as a shop assistant at a V&A Waterfront store in Cape Town for
two days a week and the Canal Walk Store in Cape Town for three days a week (the employer
has stores situated all over South Africa, including other stores in the Cape Town area) travels
from home to a store: the travel between home and either of the stores.
In terms of Interpretation Note No. 14 (Issue 5) examples of business travel include, where
l an employee whose place of employment is in Johannesburg leaves the office at lunch time to
attend a business conference in Krugersdorp: the travel between the office and the conference
venue in Krugersdorp
l a consultant stops to see a client en route to his place of employment: the travel between home
and the client’s premises and the travel after the meeting from the client’s premises to the office
l a sales assistant normally works at an employer’s store in the V&A Waterfront, Cape Town travels
directly from home to the employer’s store in Pretoria to assist with an annual stock count: the
travel between home in Cape Town and Pretoria
l an employee located in Kimberley is required to assist a client in Upington over a five-day period:
the travel from Kimberley to Upington, and
l a computer programmer who is allowed to work from home permanently (that is, the home office
is the place of employment) travels to a client’s premises to discuss system requirements and
functionality: the travel from the home office to the clients’ premises.
Expenditure incurred on outsourced travel (Interpretation Note No. 14 (Issue 5))

In recent years, it has become more common for persons who travel for business purposes to use
transportation other than their own vehicles. The most common method uses mobile application-
based ridesharing platforms (apps) that match passengers looking for transportation, with drivers
with vehicles for hire like Uber.
Section 8(1)(a)(i)(aa), read with s 8(1)(b)(i), permit the deduction of transport expenses incurred on
this form of travelling, provided that the travel was undertaken for business and not private purposes,
and the taxpayer is able to provide sufficient evidence to show that the travel was undertaken for
business purposes.
Most app-based ridesharing platforms provide a receipt to a passenger upon completion of the trip.
Typically, these receipts show the time, commencement and termination point, distance travelled,
and cost, in respect of the trip. However, this data is not sufficient for a taxpayer to claim a deduction,
because it does not explain the ‘reason for trip’ requirement as required by SARS. A taxpayer will
thus still be required to maintain detailed records of each instance of business travel that records the
‘reason for trip’ as set out in Interpretation Note No. 14 (Issue 5) and discussed below under the
subheading ‘Fixed travel allowance’.
The principles regarding what constitutes business travel and what constitutes private travel will
apply equally to ridesharing trips. The availability of a deduction for expenditure incurred on out-
sourced travel costs is not limited to travel undertaken using ridesharing apps. Meter-taxis may be
used for business travel, or commuter rail systems such as the Gautrain, or other forms of public
transport. In order to claim a travel deduction for such travel, the information regarding the reason for
the trip is also required. A taxpayer would not be able to prove a Note No. entitlement to a deduction
if the transport providers do not provide the taxpayer with proof of expenditure incurred.
Fixed travel allowance

Where a fixed travel allowance or advance is paid monthly, the portion of the travel allowance that is
expended in using any motor vehicle to travel for business purposes is effectively tax-free. Only that
part associated with private travelling 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)).
200
The portion of the allowance expended to travel for business purposes can be calculated based on
actual cost or on deemed cost, but both are linked to the actual business kilometres travelled. In
terms of Interpretation Note No. 14 (Issue 5), if a taxpayer wants to claim the cost of business travel,
he/she must base the claim on the actual business kilometres travelled and is required to prove the
business kilometres travelled to the satisfaction of the Commissioner. Written records of this
information are often referred to as a logbook. It is not necessary to record details of private travel (for
example, that the recipient went to the movies on ‘x’ date and the distance travelled was ‘y’
kilometres) or daily opening and closing odometer readings. A logbook that taxpayers may use is
available on the SARS website. For both the actual cost and deemed cost method, amounts
expensed for business purposes can only be claimed if the taxpayer keeps an accurate logbook of
the business kilometres travelled.
The employee can use any motor vehicle for this purpose. The Act does not define the term ‘motor
vehicle’. The normal dictionary meaning (being a road vehicle powered by a motor or engine, which
will include a motor cycle) must be attached to it, and not the meaning given to the word ‘motor car’
in the VAT Act. In terms of Interpretation Note No. 14 (Issue 5) logbooks must include, at a minimum,
the following information:
l the odometer reading on the first day of the tax year
l the odometer reading on the last day of the tax year
l for all business travel
– the date of the travel
– the kilometres travelled, and
– business travel details (where and reason for trip).
The reason for trip is a crucial element of a logbook. SARS will not be able to fulfil its obligation under
the law to test the validity of a travel claim where the reason for trip is recorded in a logbook as
simply ‘meeting’, ‘client’, ‘business’ or similar vague particulars. The information that taxpayers
provide under reason for trip must therefore be sufficient to allow SARS to verify that the travel under-
taken was for business purposes and qualifies for a deduction.
At the very least, this should include the following information:
l specific details of why the travel was undertaken, for example ‘presentation to board’, ‘meeting
with supplier’ or ‘delivery to client’
l details of the person with or for whom the engagement was undertaken, for example ‘head office
of ABC Ltd’, ‘Mr A at LMN Supplies (Pty) Ltd’ or ‘delivery to client Mr Z’
l if contact details are available, these should also be provided.
If a taxpayer has the right of use of a par 7 company car and also receives a
fixed or a reimbursive travel allowance in respect of the same vehicle from
his employer, the net amount of the travel allowance is not included in
taxable income. In such a case
l the full travel allowance will be included in taxable income
Please note!
l no deductions are allowed against the travel allowance (see Interpre-
tation Note No. 14 (Issue 5), par 5.4.1), and
l the company car is taxed in terms of par 7 and the par 7(7) and 7(8)
reductions will be allowed against the value of private use of that com-
pany car (see 8.4.6).
The two ways to calculate the portion of the allowance or advance expended to travel for business
are as follows:
l Actual business kilometres travelled during the year of assessment multiplied by the deemed rate
per kilometre which is determined by reference to the table of rates annually published by the
Minister of Finance.
l Actual business kilometres travelled during the year of assessment multiplied by the actual rate
per kilometre. The actual rate per kilometre is the total actual travel expenditure (as supported by
accurate records kept) divided by the total kilometres travelled.
The table of rates prescribed from 1 March 2021 (Notice 174 of GG 44229, dated 5 March 2021) is
applicable in respect of the 2022 year of assessment and is reproduced in Appendix C.
201
The deemed rate per kilometre

The deemed rate per kilometre is determined as the sum of the three components in the table of
rates. Please note that the fixed cost component is given in rand, while the fuel and maintenance
components are given in cents per kilometre (with one decimal given in the table). This firstly implies
that the three components cannot merely be added together to calculate the deemed rate per
kilometre, since they are not all expressed on the same basis. It is therefore necessary to ensure that
all three cost components are either in cent per kilometre or rand per kilometre before they are added
together. The table of rates uses the ‘value’ of the vehicle to determine the amounts for the three cost
components of the deemed rate per kilometre and must be determined first.
The ‘value’ of the vehicle (see Appendix C) is
l the original cost, including VAT but excluding any finance charges or interest payable in respect of
the acquisition of the motor vehicle, where the vehicle was acquired under a bona fide agreement
of sale or exchange
l the cash value, including VAT paid under the lease, if the vehicle was held by the recipient of the
allowance under a lease under which the rent consists of a stated amount of money, which
includes finance charges, or was held by him under a financial lease, or
l 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 2020 tax year Rate per Kilometre Schedule (an external annexure to the SARS Guide for employers
in respect of allowance for the 2022 tax year) explains that where an employer sells his/her motor
vehicle to his/her employee and pays the employee a travelling allowance, the value of the vehicle,
which must be applied for purposes of s 8(1)(b), is the selling price (i.e., the price paid by the
employee for the vehicle) and not the original purchase price (value) to the employer. No such external
annexure is available for the 2021 or 2022 tax years, but it is submitted that the same rule will apply.
Interpretation Note No. 14 (Issue 5) explains that the value of the vehicle includes the cost of a main-
tenance plan when the vehicle is the subject of a maintenance plan which commences at the same
time the motor vehicle is acquired by the recipient. This is irrespective of whether the cost of the plan
is invoiced separately or included in the vehicle purchase price. The effect of this is that the main-
tenance cost component must not be added in the calculation of the deemed cost per kilometre if the
vehicle was the subject of a maintenance plan when it was acquired by the recipient, since the value
of the vehicle will effectively already include an element for maintenance (see below).
The deemed rate per kilometre is determined as the sum of the following three components:
l The fixed cost component
The fixed cost component represents the rand value of the cost of wear and tear, interest,
licence, and insurance for both private and business kilometres for a full year of assessment. If
the vehicle is used for business purposes for less than the full year, the rand value must therefore
firstly be apportioned on the days in a full year (365 days, and presumably 366 days in a leap
year due to the words ‘during the year of assessment’ used in par 2(a) of the Regulation in
Appendix C) to calculate the rand value of the fixed cost for the period it was used. Thereafter it
is divided by the total kilometres travelled (for both private and business purposes) during the
same period that the vehicle was so used, in order to calculate the rand value of the fixed cost
per kilometre.
Interpretation Note No. 14 (Issue 5) explains that the word ‘used’ means the period that the
vehicle was put into service or action during which the taxpayer had the ability to use the vehicle,
that is, when it was available for the taxpayer to use. The period of business use will thus
commence from the date that an employee becomes required to use a vehicle for business
purposes and has a vehicle available for such purpose. A vehicle therefore does not need to be
used every day during a particular period for that day to qualify as a period of ‘use’.
Since the fixed cost component is given in rand while the other two components are given in cent per
kilometre, we suggest that this rand value of the fixed cost per kilometre (for example R3 8736) must
be changed to a rate of fixed cost in cent per kilometre by multiplying the rand value by 100 (to be
387,4c) in order to add it to the other two elements that are given in cent per kilometre.
l The fuel cost component
This is the fuel cost in cent per kilometre per the table. The recipient of the allowance must have
borne the full cost of the fuel used in the vehicle to claim this component. Binding General Ruling
No. 23 states that where employees are provided with a principal-owned petrol or garage card,
the employees are regarded as having borne the full cost of fuel if the amount expended on the
card is included in the employee’s travel allowance.
202
l The maintenance cost component

This is the maintenance cost in cent per kilometre per the table. The recipient must have borne
the full cost of maintaining the vehicle including the cost of repairs, servicing, lubrication, and
tyres to claim this component. In terms of Interpretation Note No. 14 (Issue 5) the recipient will be
considered to bear the full cost of maintenance if
– the recipient takes out a maintenance plan, either as a top-up or add-on plan after the acqui-
sition of the vehicle and the recipient is responsible for the cost of that maintenance plan, and
– the recipient is responsible for all the maintenance costs not covered by the maintenance
plan (for example top-up fluids, tyres or maintenance required because of abuse of the motor
vehicle).
Please note the difference between a maintenance plan taken out on acquisition as discussed
under the ‘value’ of the vehicle, and a top-up or add-on maintenance plan taken out after acquisition.
The sum of the three cost components (for example 601,30c per kilometre) must be divided by 100 to
calculate a rand per kilometre rate (R6,013). This rand per kilometre rate is then multiplied by the
actual business kilometres travelled to calculate the amount deductible from the gross travel allow-
ance to calculate the net amount to be included in taxable income.
The actual rate per kilometre

The actual rate per kilometre is based on the actual travel expenditure incurred and the total actual
kilometres travelled during the period that the travel allowance was received. The taxpayer must be
able to prove the actual travel expenditure and the actual kilometres travelled by keeping accurate
records of data. To calculate the actual rate per kilometre, the sum of all the actual travel expenditure
is divided by the total actual kilometres travelled (for both private and business purposes). The
deductible amount in respect of the business kilometres travelled is the actual rate per kilometre
multiplied by the business kilometres.
Examples of the type of expenditure that may be included are wear and tear, lease payments, fuel,
oil, repairs and maintenance, car licence, insurance, toll fees and finance charges. The following
specific provisions must be taken into account:
l In the case of a vehicle that is leased (financial lease or operating lease), the total payments
taken into account as actual cost for the year may not exceed the rand amount of the fixed cost in
the table of rates used for the deemed cost per kilometre for the category of vehicle used by the
taxpayer (s 8(1)(b)(iiiA)(aa)).
l In 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 R665 000 and the
finance charges must be limited to an amount as if the original debt had not exceeded R665 000
(s 8(1)(b)(iiiA)(bb)). Please note that the five-year period of wear and tear in Binding General
Ruling No. 7 (Issue 2) therefore does not apply when the wear and tear is calculated as part of
the actual travel expenditure.
Remember
(1) The ‘value’ of the vehicle used in calculating the taxable portion of a travel allowance
includes VAT but excludes finance charges or interest.
(2) The total kilometres travelled for both business and private purposes during the year of
assessment in which the travel allowance was received is used to calculate the fixed cost
per kilometre as part of the deemed rate per kilometre.
(3) The recipient of the travel allowance must pay the full fuel costs and/or maintenance cost
before that specific cost component can possibly be taken into account in the calculation of
the deemed rate per kilometre.
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Example 8.1. Travel allowance

Xolani owns a motor vehicle that cost him R132 000, inclusive of VAT and R12 000 in respect of
finance charges. No maintenance plan was taken out on acquisition. 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 2022 year of assessment of which 4 000 km was travelled for
business purposes. Xolani kept an accurate logbook. The following actual costs (which include
VAT where applicable) were incurred by Xolani:
l Fuel costs ........................................................................... R8 000
l Maintenance costs ............................................................. 4 000
l Insurance ........................................................................... 2 400
l Finance charges ................................................................ 12 000
l Licence cost ....................................................................... 400
Calculate the taxable amount of the travel allowance to the greatest benefit of Xolani.
SOLUTION
If deemed costs are claimed:
Allowance received ......................................................................................................... R19 200
Total kilometres travelled ......................................................................... 22 000 km
Less: Private kilometres ........................................................................... (18 000 km)
Business kilometres ................................................................................. 4 000 km
Fixed cost component according to table for a vehicle with a value of
R120 000 (R132 000 – R12 000) .................................................................. R52 226
R52 226 ×
Fixed cost per kilometre 100 ( )
.................................................. 237,4c
22 000 km
Fuel cost per kilometre (as per table) ...................................................... 116,2c
Maintenance cost per kilometre (as per table) ........................................ 48,3c
Total cost per kilometre ............................................................................ 401,9c
Deduction for business use (4 000 kilometres × R4,02 per kilometre) ........................... (16 080)
Taxable amount if deemed costs are claimed ...................................................... R3 120
If actual costs are claimed:
Allowance received ...................................................................................................... R19 200
Less: Deduction for business use (4 000 kilometres × R1, 997) .................................. (7 988)
Actual costs
l Wear and tear R120 000/7.................................................................. R17 143
l Fuel costs ........................................................................................... 8 000
l Maintenance costs ............................................................................. 4 000
l Insurance............................................................................................ 2 400
l Finance charges ................................................................................. 12 000
l Licence cost ....................................................................................... 400
Total actual costs R43 943
Actual rate per kilometre = R43 943/22 000 km = R1,997
Taxable amount if actual costs are claimed............................................. R11 212
Xolani must claim deemed costs since the taxable amount of the travel allowance will then be
smaller.
continued
204
Notes
(1) The fixed-cost component is based on the value of the vehicle, which is the cost including
VAT but excluding finance charges or interest.
(2) Xolani is not obliged to use the table and is entitled instead to furnish an acceptable calcu-
lation based upon accurate data. If actual costs are used it will include the following
l wear and tear on the vehicle (take s 8(1)(b)(iiiA)(bb)(A) into account – this means that
the cost of the vehicle for wear-and-tear purposes is limited to R665 000)
l actual fuel costs
l actual maintenance cost
l insurance
l finance charges (take s 8(1)(b)(iiiA)(bb)(B) into account – this means that the finance
cost must be limited to an amount that would have been incurred had the original debt
been R665 000)
l licence cost, and
l toll fees.
The total actual costs are added together and the actual rate per kilometre = total cost/total
kilometres. The deductible amount is the actual rate per kilometre multiplied by the business
kilometres.
Example 8.2. Travel allowance: Vehicle used for less than a full year
Barry owns a motor vehicle that cost him R46 500, inclusive of VAT but exclusive of any finance
charges. He used his motor vehicle for business during the last seven months of the 2022 year of
assessment and received a travel allowance of R30 000 from his employer for the seven months.
He travelled a distance of 24 000 km during the seven months of which his business mileage
amounted to 13 500 km.
Calculate the taxable amount of the travel allowance.
SOLUTION
Allowance received .................................................................................. R30 000
Business kilometres ................................................................................. 13 500 km
Fixed cost component according to table for vehicle with a value of
R46 500 .................................................................................................... R29 504
Fixed cost per kilometre (R29 504 ×

100 )×
212
365
...................................... 71,4c
24 000 km
Fuel cost per kilometre (as per table) ...................................................... 104,1c
Maintenance cost per kilometre (as per table) ........................................ 38,6c
Total cost per kilometre ............................................................................ 214,1c
Deduction for business use (13 500 kilometres × R2,14 per km) ............ (28 890)
Taxable amount included in taxable income .............................. R1 110
Reimbursive travel allowance

When an allowance or advance is based upon the actual business kilometres already travelled by the
recipient and it is paid out at the employer-agreed rate per kilometre, it is a reimbursive allowance.
Interpretation Note No. 14 (Issue 5) makes it clear that a recipient who only receives a travel
reimbursement must still determine the allowable deduction because, depending on the facts, the
rate at which the recipient was reimbursed may exceed the allowable deduction. The allowable
deduction is determined by applying the actual cost, deemed rate per kilometre method or the
specified rate per kilometre.
The amount expended on business is, unless the contrary appears, deemed to be the cost per the
table of rates in Appendix C (or Notice 174 of Government Gazette 44229 dated 5 March 2021)
(s 8(1)(b)(iii)). The words ‘unless the contrary appears’ indicate that the taxpayer has a choice
between the deemed cost and the actual costs incurred, supported by accurate records, if the actual
costs incurred exceeds the deemed cost.
If a taxpayer who received a reimbursive allowance meets the following two requirements, he has a
third choice, namely to use a simplified method to calculate the cost of the business kilometres. This
choice is explained in par 4 of Notice 174. In terms thereof, a fixed rate per business kilometre (as
205
determined by the Minister of Finance by notice in the Government Gazette) may be deducted from
the allowance. This rate is currently 382 cents per kilometre. The two requirements that must be met
are:
l The provisions of s 8(1)(b)(iii) must be applicable, which means that the allowance is based on
the actual distance travelled for business or such actual distance is proven to the Commissioner.
l No other travel allowance or reimbursement (other than for parking or toll fees) is payable by the
employer to the employee.
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a travel allowance. In such a case, it will not be possible to
use the simplified method to calculate the cost of the business kilometres since one of the two
requirements is not met.
Example 8.3. Reimbursive travel allowance

Brent owns a motor vehicle that cost him R61 000, inclusive of VAT but exclusive of any finance
charges. He received a travel allowance of R4,10 per kilometre travelled on business from his
employer during the 2022 year of assessment. He travelled 16 000 km in the vehicle during the
year, and he maintained an accurate logbook of business travels. Brent paid all the costs in
respect of maintenance and fuel and travelled 9 000 km for business purposes.
Calculate the taxable amount of the travel allowance for the 2022 year of assessment on the
assumption that Brent would elect the most beneficial option available to him.
Explain the employees’ tax consequences of the reimbursive travel allowance to Brent.
SOLUTION
Calculation of the taxable amount
Since the travel allowance is based on actual kilometres travelled for business, it is a reimbursive
travel allowance and he qualifies for the simplified method. No actual costs are given and
therefore the best option between the deemed cost and the simplified method cost must be
used.
The deemed cost per kilometre is R3,27 and is calculated as follows:
Fixed cost based on a vehicle with a value of R61 000 = R29 504
Fixed cost per kilometre is R29 504/16 000 = R1,844 (or 184,4c)
Fuel cost and maintenance cost per kilometre is 104,1c and 38,6c
The total deemed cost per kilometre is 184,4c + 104,1c + 38,6c = 327,1c or R3,27
The rate per kilometre for business travelling in terms of the simplified method is R3,82. The
simplified method is therefore more beneficial.
The amount applicable to business travelling is therefore R34 380 (9 000 km × R3,82), and the
taxable amount is accordingly R2 520 (R36 900 (R4,10 per km × 9 000 km) – R34 380).
Employees’ tax consequences
The excess portion of a reimbursive travel allowance is ‘remuneration’ in terms of par (cC) of the
definition in the Fourth Schedule. The excess portion is the difference between the rate per
kilometre paid by the employer and the rate per kilometre in the simplified method multiplied by
the actual business kilometres travelled, therefore an amount of R2 520 for the 2022 year of
assessment.
The detail was only given for the total year of assessment, but the employer must include the
monthly excess portion in the calculation of ‘remuneration’ and withhold employees’ tax thereon.
Anti-avoidance rule
The anti-avoidance rule in s 8(1)(b)(iv) is aimed at preventing an employee from letting his own motor
vehicle to his employer and then being awarded the right of use of the same vehicle as a fringe
benefit. This rule was inserted in 1990, mainly to prevent tax avoidance schemes due to the differ-
ence in the rules used to calculate the taxable benefit from travel allowances as opposed to the right
of use of a company car at that stage. These rules have been amended numerous times since then.
Where a motor vehicle owned or leased by an employee, his spouse or his child (the lessor) has
been let to the employer or an associated institution in relation to the employer
l the sum of the rental paid, and any expenditure incurred by the employer is deemed to be a
travel allowance paid to the employee,
l the rental paid by the employer will be deemed not to have been received by the employee (and
therefore no costs will be deductible against such ‘rental’), and
206
l it will be deemed that the employee has not received the right of use of the vehicle (therefore no
par 7 fringe benefit).
Such employee is taxed as if he received a travel allowance, and not as if he was granted the right of
use of a vehicle.
Example 8.4. Travel allowance in respect of a motor vehicle let to employer
Zanele leases a motor vehicle with a cost price of R100 000 (VAT included) for R5 000 per
month. He then lets the motor vehicle to his employer for R5 000 per month and is granted the
right of use of the motor vehicle by his employer. Zanele bears the full fuel cost and cost of
maintenance in respect of the motor vehicle. Zanele travelled 28 000 km during the 2022 year of
assessment of which 10 000 km was travelled for business purposes.
Calculate the tax implications for Zanele in this situation.
SOLUTION
Rental income (rental paid by employer is deemed not to have been
received – s 8(1)(b)(iv)) ................................................................................. –
Lease rental (expenditure incurred by employee is not deductible –
s 8(1)(b)(iv)) ................................................................................................... –
Use of the motor vehicle (It will be deemed that the employee has not
received a fringe benefit in terms of par 7 of the Seventh Schedule) ...... –
Travel allowance (R5 000 × 12) (rental paid by employer is deemed to be
a travel allowance – s 8(1)(b)(iv)) ............................................................ R60 000
Less: Deduction for business use 10 000 km × R 3,51 per km (see below) (35 100)
Taxable amount ............................................................................................. R24 900
Fixed cost per km (R52 226 x 100) /28 000 km ............................................. 186,5c
Fuel per km.................................................................................................... 116,2c
Maintenance per km ...................................................................................... 48,3c
Total cost per km (per table) ......................................................................... 351,0c
Business km: 28 000 km – 18 000 km = 10 000 km
Employees’ tax
The employees’ tax implications of fixed travel allowances are as follows:
l 80% of a fixed travel allowance is included in remuneration (par (cA) of the definition of ‘remuner-
ation’ in the Fourth Schedule)
l only 20% of a fixed travel allowance is included in remuneration (par (cA) of the definition of
‘remuneration’ in the Fourth Schedule) if the employer is satisfied that at least 80% (therefore 80%
or more) of the use of the motor vehicle for a year of assessment will be for business purposes. In
terms of the Guide for employers iro Allowances (PAYE-GEN-01-G03), this determination must be
done on a monthly basis. An employee’s accurate logbook can be used to prove his business
use.
The employees’ tax implication of reimbursive travel allowances is that 100% of the excess reim-
bursive travel allowance is included as remuneration (par (cC) of the definition of ‘remuneration’ in the
Fourth Schedule). The excess is the difference between the rate per kilometre paid by the employer
and the rate per kilometre in the simplified method of R3,82, multiplied by the business kilometres
travelled. This inclusion is therefore irrespective of how much business kilometres were travelled.
Employees’ tax will therefore be deducted monthly in respect of only a portion of a reimbursive travel
allowance, but the full amount of the reimbursive travel allowance must be reflected on the employ-
ee’s tax certificate (IRP 5).
The Guide for Employers iro Allowances (PAYE-GEN-01-G03-A01) states that:
l Where the reimbursive allowance does not exceed the prescribed rate per kilometre AND no
other compensation is paid to the employee, the amount is not subject to employees’ tax but the
full amount must be reflected on the IRP5 certificate under code 3703.
l Where the reimbursive allowance does not exceed the prescribed rate per kilometre, but other
compensation is paid to the employee (travel allowance code 3701), the amount is not subject to
employees’ tax but the full amount must be reflected on the IRP5 certificate under code 3702.
207
l Where the reimbursive allowance exceeds the prescribed rate per kilometre (irrespective of the
kilometres travelled), the full amount above the prescribed rate is subject to employees’ tax.
Example: Prescribed rate is R3,82 and employer pay R4,82 and the employee travelled 1 000 km.
Therefore – Code 3702 = R3 820 (R3,82 × 1 000 km) (not subject to employees’ tax) Code 3722
= R1 000 (R1.00 × 1 000 km) (subject to employees’ tax).
l Where the reimbursive allowance exceeds the prescribed rate per kilometre (irrespective of the
kilometres travelled) and other compensation (a travel allowance) was paid, the full amount
above the prescribed rate is subject to employees’ tax. Example: Prescribed rate is R3,82 and
employer pay R4,82 and the employee travelled 1 000 km. Travel allowance of R5 000 was paid.
Therefore – Code 3702 = R3 820 (R3,82 × 1 000 (not subject to employees’ tax)) Code 3722 =
R1 000 (R1,00 × 1 000 (subject to employees’ tax)) Code 3701 = R5 000.
On assessment of the individual’s (employee’s) personal income tax return, SARS will combine the
codes 3701 + 3702 + 3722 and the employee can be entitled to claim expenses incurred for busi-
ness travel as a deduction on assessment against all values (R3 820 + R1 000 + R5 000 = R9 820).
If both a fixed travel allowance and a reimbursive travel allowance are received, both amounts will be
combined on assessment and treated as a taxable travel allowance. It will then not be possible to use
the simplified method to calculate the cost of the business kilometres since the requirement that no
other travel allowance or reimbursement (other than for parking or toll fees) is payable by the
employer to the employee, is not met. The full travel allowance must be disclosed on the IRP 5.
8.3.2 Subsistence allowances (ss 8(1)(a)(i)(bb) and 8(1)(c))

Most employers grant subsistence allowances to employees who must spend at least one night away
from their usual place of residence in the Republic by reason of the duties of his or her office or
employment (s 8(1)(a)(i)(bb)). The reason that the recipient is away from home must be related to the
recipient’s office or employment, indicating that he or she is away for business purposes. Inter-
pretation Note No. 14 (Issue 5) explains the words ‘away from his usual place of residence’ by stating
that an employee must spend at least one night away from his or her usual place of residence in the
Republic. The Interpretation note also uses the words ‘away from his home’ as an alternative. This is
the place where one lives permanently and the determination of the usual place of residence is one
of fact. The word ‘night’ refers to one full period from sunset of one day to sunrise of the next.
Subsistence allowances are paid to cover personal subsistence and incidental costs (for example
accommodation, meals, drinks and parking). Only the portion of the allowance that exceeds the
actual costs or deemed costs (except in the case of accommodation) is included in the recipient’s
taxable income (s 8(1)(a)(i)(bb)). The deduction is always limited to the amount of the allowance
paid.
The expenditure actually incurred in respect of accommodation, meals or other incidental costs can
be claimed if proved to the Commissioner. The supporting documents must be kept for five years
from the date when SARS received the income tax return that included the claim for deduction
(Interpretation Note 14 (Issue 5), par 5.3.2).
A deemed amount, based on rates annually published in the Government Gazette, can be claimed in
respect of meals and incidental costs for each day or part of a day that the employee spends away
from his usual place of residence. This applies where the employee has not provided proof of actual
expenditure.
Please note that only actual proven costs, and not deemed costs, can be claimed in respect of
accommodation. If the service provider levies a single rate for bed and breakfast, the cost of the
breakfast may be regarded as part of the cost of accommodation (Interpretation Note No. 14 (Issue 5),
par 5.3.3).
The following deemed rates apply for the 2022 year of assessment:
l For travel within South Africa:
– R139 per day or part of a day if the allowance is granted to defray incidental costs only, or
– R452 per day or part of a day if the allowance is granted to defray the cost of meals and inci-
dental costs.
l For travel outside South Africa actual costs in respect of accommodation can be claimed. If an
allowance is received to cover the cost of meals and incidental costs, an amount per day
determined in terms of the table in Income Tax Notice 268 of GG 42258 (dated 1 March 2019) for
the country where the accommodation is situated can be claimed (there were no changes to this
table for the 2021 or 2022 years of assessment).
208
The amounts laid down in respect of travelling abroad will only apply to employees who are ordinarily
resident in the Republic in respect of continuous periods spent outside the Republic (Guide for
Employers in respect of Allowances). See chapter 15 for a discussion of the s 25D translation rules
for foreign exchange amounts.
(1) The amount deemed to be expended without proof of actual expenditure is

given as ‘per day or part of a day’ (s 8(1)(c)(ii)). The absence requirement
(s 8(1)(a)(i)(bb)) is given as ‘per night’ spent away from his usual place of
residence. This is beneficial to the employee. It means that an employee
Please note! can, for example, receive R904 (2 × R452) for one night spent away from
his usual place of residence as required in terms of s 8(1)(a)(i)(bb), without
having a taxable inclusion.
(2) Deemed unproven costs can only be claimed in respect of meals and
incidental costs, and not in respect of accommodation.
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 (proviso to s 8(1)(c)(ii)(aa)).
An employee can only claim expenditure against a subsistence allowance if the allowance is paid on
an ad hoc basis. No deduction is allowed if an employee’s remuneration package is structured to
include a fixed amount for subsistence purposes. In terms of the Guide for employers iro Allowances
(PAYE-GEN-01-G03) a subsistence allowance is intended for abnormal circumstances and therefore
an allowance of this nature cannot form part of the remuneration package of an employee. It is an
amount paid by an employer to the employee in addition to the employee’s normal remuneration.
It is essential that the taxpayer must have received a subsistence allowance before any relief can be
claimed under the provisions of s 8(1)(c).
Employees’ tax
Generally, 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 by the last day of the month following the payment of a subsistence allow-
ance, either
l spent a night away from his usual place of residence, or
l paid the allowance back to his employer,
that amount is deemed not to be paid as a subsistence allowance in the month that it was paid to the
employee. It will then be deemed that the employee has received a payment for services rendered in
the following month (proviso to subpar (ii) of par (bA) of the definition of ‘remuneration’ in the Fourth
Schedule). Such amount must be included in the employee’s gross income in terms of par (c). The
amount will also be remuneration (in terms of par (a) of the definition) in such following month, and
employees’ tax must be deducted at that stage. The full amount must then be included as part of the
salary on the IRP 5.
Example 8.5. Subsistence allowances

Sipho is obliged to spend one night away from his usual place of residence for business pur-
poses during the 2022 year of assessment. He receives an allowance of R1 580 from his
employer. Calculate the taxable amount of the allowance if:
(a) Sipho travels within South Africa and can prove that he incurred actual expenditure of
R1 650 on meals, accommodation and other incidental costs.
(b) The employer pays for Sipho’s accommodation within South Africa and Sipho pays R350 for
meals and other incidental costs, but he does not keep the documentation to prove this
expenditure.
(c) The employer pays for Sipho’s accommodation in Angola and Sipho 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.
209
SOLUTION
(a) Allowance received ...................................................................................................... R1 580
Less: Actual expenditure incurred by Sipho ................................................................ (1 650)
Taxable amount (limited to Rnil) ................................................................................... Rnil
(b) Allowance received ...................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × R452) ......................................................... (904)
Taxable amount ........................................................................................................... R676
(c) Allowance received ...................................................................................................... R1 580
Less: Deemed expenditure by Sipho (2 × $303 × R10) = R 6 060 (6 060)
Taxable amount (limited to Rnil) ................................................................................... Rnil
8.3.3 Allowances to public officers (ss 8(1)(a)(i)(cc) and 8(1)(d)–(g))

The holder of a public office can claim a deduction in his return of certain listed expenditure actually
incurred by him and not recovered (s 8(1)(a)(cc)).
Numerous persons falling under the heading ‘holder of a public office’ over a wide spectrum,
including the national, provincial, and local government, as well as non-profit organisations, are listed
(s 8(1)(e)).
A wide range of expenditure relevant to the holding of a public office is listed. Examples are expend-
iture in respect of secretarial services, stationery and travelling. It is required that this expenditure
must have been actually incurred by the holder of the office for the purposes of the office to be
deductible (s 8(1)(d)).
An allowance is deemed to be paid to holders of a public office (as listed in s 8(1)(e)(i)), when they
must incur the listed expenditure out of their salaries (s 8(1)(f)). A certain amount of their salaries is
then automatically deemed to be an allowance against which they can claim qualifying expenditure.
The National Assembly or the President must determine this ‘deemed allowance’. For Premiers, Mem-
bers of Executive Councils and Members of the Provincial Legislature the allowance is deemed to be
R120 000 (effective from 1 April 2009 as per Proclamation R97 GG 32739). The R120 000 is appor-
tioned if the public office is held for less than a year (s 8(1)(g)).
Employees’ tax
SARS requires the deduction of employees’ tax from 50% of the allowance and the disclosure of the
full allowance (100%) on the IRP 5 (par (c) of the definition of ‘remuneration’ in the Fourth Schedule).
8.4 Seventh Schedule taxable benefits

The cash equivalent of the taxable benefits listed in par 2 of the Seventh Schedule are included in
gross income (par (i) to the gross income definition in s 1). The definition of ‘taxable benefit’ in par 1
means all the taxable benefits listed in par 2, whether granted voluntary or otherwise, but excludes
certain benefits, namely
l benefits that are exempt in terms of s 10
l medical services and other benefits provided by a benefit fund
l lump sum benefits from a retirement fund or a benefit fund
l benefits received by government employees stationed outside the Republic in respect of services
rendered outside the Republic, and
l severance benefits.
Paragraph 2 describes the different types of taxable benefits and all the requirements of each sub-
paragraph must be met before it is a taxable benefit and an inclusion in terms of the Seventh Sched-
ule is required. The cash equivalents of the various taxable benefits granted by virtue of employment
are then determined in terms of paras 5 to 13. Taxable benefits in terms of par 2 are generally
referred to as ‘fringe benefits’. The phrase ‘by virtue of such employment’ has the meaning ‘because
of’ or ‘in consequence of’ and it therefore follows that par 2 only comes into operation if there is a
causal connection between the employee’s employment and the granting of the advantage. The tax-
able benefit must be granted because of this employer-employee relationship, or as a reward for
services rendered. This means that benefits granted on compassionate grounds or grounds
unrelated to employment of services rendered might arguably not be taxable benefits.
210
The Seventh Schedule contains ‘no value’ provisions in respect of each type of
Please note! taxable benefit. This means that the specific benefit is a par (i) taxable benefit,
but that the cash equivalent thereof is Rnil. Such ‘no value’ benefits cannot be
included in gross income in terms of par (c).
The concepts ‘employer’, ‘employee’ and ‘associated institution’ are all defined in par 1. The concept
‘employer’ is also defined in par 1 of the Fourth Schedule, where the payment of any amount by way
of remuneration renders that person an employer. Both the definitions of ‘employer’ and ‘employee’ in
the Seventh Schedule refer to this definition of ‘employer’ in the Fourth Schedule.
The definition of ‘employee’ in the Seventh Schedule only excludes employees who retired due to
age, ill health or other infirmity before 1 March 1992. If a taxpayer’s previous employer therefore
continues to grant a fringe benefit to him/her after retirement, he/she remains an ‘employee’ receiving
a taxable benefit. No normal tax or employees’ tax implication will, however, arise in respect of the ‘no
value’ provisions in the Seventh Schedule.
If the employer is a company, the definition of ‘employee’ in the Seventh Schedule also specifically
includes directors and former employees and directors who are or were the sole, or one of the
controlling holders of shares, of the company. Lastly, the definition of ‘employee’ specifically includes
a person who was released from the obligation to repay a debt due to the employer after retirement.
If an associated institution in relation to the employer grants any taxable benefit to an employee, it is
deemed that the employer has granted the benefit (par 4). This means that the employer, and not the
associated institution, must withhold employees’ tax on such taxable benefits. Associated institutions
include companies managed or controlled by substantially the same persons as the employer, or by
the employer or a partnership of which the employer is a member. It also includes funds established
for the benefit of the employees of the employer or an associated institution.
There is no employment relationship between a partner and a partnership. A

partner in a partnership is, however, for the purposes of par 2, deemed an
employee of the partnership (par 2A). This means that any par 2 taxable benefit
(fringe benefit) received by a partner from a partnership must be included in the
partner’s gross income in terms of par (i) of the definition of gross income.
The partnership is not specifically deemed to be an employer for the purposes of
par 2 (par 2A) or for purpose of the Fourth Schedule. The definition of ‘remu-
neration’ does not per se require that an employer must pay the amount to an
Please note! employee. This means that, even though a fringe benefit received by a partner is
‘remuneration’ as defined in the hands of the partner, no employees’ tax needs to
be withheld by the partnership from fringe benefits granted to partners.
Note, however, that the wording in ss 11F and 11(l) and par 12D deems a
partnership to be the employer of the partner and a partner to be an employee of
the partnership. It consequently seems that it was the intention of the Legislator to
allow a partner to claim a s 11F deduction based on the ‘remuneration’ paid to the
partner. Please refer to chapter 18 for a more detailed discussion and examples
regarding partnerships.
8.4.1 Benefits granted to relatives of employees and others

Taxable benefits granted to a relative (as defined in s 1(1)) of an employee or any other person by
virtue of the employee’s employment or services rendered or to be rendered to the employer, are
deemed to be granted to the employee. These benefits are not taxed in the hands of the relative or
the other person receiving the benefits, but in the hands of the employee (par 16).
8.4.2 Consideration paid by employee

When the cash equivalent of taxable benefits is calculated, the value determined in terms of the valu-
ation rules in par 5 to par 13 must be reduced by any consideration paid by the employee. The
definition of ‘consideration’ excludes any consideration in the form of services rendered or to be
rendered by the employee (par 1).
The consideration paid by the employee should be determined in one of the following two ways:
(i) If the asset acquired from the employer is an asset where the input tax was previously denied in
terms of s 17(2) of the VAT Act, then s 8(14)(a) of the VAT Act deems the supply to be otherwise
than in the course or furtherance of his business. If s 8(14)(a) then applies, the consideration is
used as is and no amount of VAT is taken out.
211
(ii) If the asset acquired by the employee is an asset where the input tax was previously allowed
(thus an asset used for taxable supplies and not denied in terms of s 17(2) of the VAT Act), the
consideration includes VAT at 15%. If the VAT portion must be excluded to calculate the cash
equivalent of a taxable benefit, the tax fraction (15/115) must be applied to the amount of the
consideration.
8.4.3 Employer’s duties

The employer who granted the taxable benefit has the responsibility to determine the cash equivalent
(par 3(1)). If no determination is made or if the determination appears to be incorrect, the Commis-
sioner may recalculate the cash equivalent. The Commissioner may then issue the employer with an
assessment in terms of s 96 of the Tax Administration Act for the outstanding employees’ tax that was
required to be deducted or withheld from such recalculated cash equivalent. Alternatively, the Com-
missioner may recalculate the cash equivalent when the employee’s assessment is issued (par 3(2)).
The employer must prepare and furnish a fringe-benefit certificate to every employee within 30 days
after the end of a year or period of assessment during which the employee has enjoyed a taxable
benefit (par 17(1)). The Commissioner may extend this period. The certificate must show the nature of
the taxable benefit and the full cash equivalent. The employer must also deliver a copy of this fringe-
benefit certificate to the Commissioner within the same 30-day period or authorised extended period
(par 17(3)). Fringe-benefit certificates need not be prepared if an IRP5 containing the cash equiva-
lents of such remuneration is issued to the employee and employees’ tax was deducted by the
employer. If the cash equivalent was understated in the IRP5, a fringe-benefit certificate must be
issued for the understated amount (par 17(6)).
An employer must make a declaration of fringe benefits on the employee’s tax reconciliation called
for by par 14 of the Fourth Schedule. The employer must declare that all taxable benefits enjoyed by
his employees during the period are declared on the IRP5s (par 18(1)). The return submitted by a
company must be certified as being correct by one of its directors (par 18(2)).
The various taxable benefits listed in the Seventh Schedule are discussed below.
8.4.4 Assets acquired at less than actual value (paras 2(a) and 5)
Reference in the Act

Type of taxable benefit Assets consisting of any goods, commodity, Par 2(a)
financial instrument or property of any nature
(other than money) acquired by the employee
for no consideration or for a consideration
given by the employee which is less than the
value of the asset as determined under
par 5(2) (this can be the market value or cost)
Exclusions from taxable If the asset is one of the following:
benefit l money Par 2(a)
l meals and refreshment benefits and resi- Par 2(a)(i), (c) and (d)
dential accommodation
l marketable securities Par 2(a)(ii) and s 8A
l qualifying equity share Par 2(a)(iii) and s 8B
l equity instruments Par 2(a)(iv) and s 8C
l residential accommodation owned by the Par 10A(2)
employer and occupied by the employee
at a percentage based rental, if it is
acquired by the employee, his spouse or
minor child in terms of an agreement with
the employer at a price which is not less
than the market value of the accom-
modation on the date that the agreement
was concluded
continued
212

Definitions Long service: initial unbroken period of Par 5(4)
service of not less than 15 years or any sub-
sequent unbroken period of service of not
less than 10 years
Remuneration proxy is: Section 1(1)
l the remuneration derived in the preceding
l the annual equivalent of
– the previous year’s remuneration (if only
employed for a portion of that year), or
– first month’s remuneration (if not em-
ployed in the previous year)
Cash equivalent Value of the asset* less any consideration Par 5(1)
– general rule given by employee
*Value of the asset if VAT was claimed back = Par 5(2) and s 23C (see discus-
market value (VAT excluded) on the date of sion of the determination of the
acquisition by employee cost or market value below)
*Value of the asset if VAT was NOT claimed
back = market value (VAT included) on the date
of acquisition by employee
Cash equivalent Assets that are movable property (other than Par 5(2) (first proviso) and
– special rules marketable securities or an asset of which the s 23C (see discussion of the
employer had the use prior to acquiring determination of the cost or
ownership thereof) acquired by the employer market value taking VAT into
to dispose of it to the employee: Value of the account below)
asset = cost to employer
Assets that are marketable securities (irre- Par 5(2) and the first proviso
spective of whether they are trading stock) thereto, and s 23C (see discus-
and assets of which the employer had the use sion of the determination of the
prior to acquiring ownership thereof (for cost or market value taking VAT
example an asset that was leased and the into account below)
lease is discontinued): Value of the asset =
market value on the date of acquisition by
employee
Assets held by employer as trading stock: Par 5(2) (first and second pro-
Value of the asset = lower of cost to employer visos) and s 23C (see discus-
or market value sion of the determination of the
cost or market value taking VAT
into account below)
Assets given as an award for bravery: The Par 5(2)(a)
value of the asset as previously determined is
reduced by the lesser of the cost to employer
and R5 000
Assets given as an award for long service: The Par 5(2)(b) and 5(4)
value of the asset as previously determined is With effect from 1 March 2022,
reduced by the lesser of the cost to employer assets (including gift vouchers,
and R5 000 (subject to the proviso) for example) are included in this
provision. The new proviso to
par 5(2)(b) states that the
aggregate value of all long
service awards given in the
form of assets, gift vouchers,
right of use of assets, free or
cheap services and cash must
not exceed R5 000
continued
213

No values (a) Fuel or lubricants supplied by an em- Par 5(3)
ployer to his employee for use in a com-
pany car
(b) Immovable property used for residential Par 5(3A)
purposes acquired by the employee,
either for no consideration or for a consid-
eration given by the employee which is
less than the value of the immovable
property. This no value exception does
NOT apply if the
l remuneration proxy of the employee Section 1(1): definition of
exceeds R250 000, or remuneration proxy
l the market value of the immovable
property exceeds R450 000, or
l the employee is a connected person
in relation to the employer
The determination of the If the employer is a VAT vendor, and has Section 23C, which is inter-
‘cost to the employer’ or claimed an input tax deduction in respect of preted to also be applicable to
the ‘market value’ of the aquisition of the asset, VAT is excluded the Seventh Schedule
assets, taking VAT into from both the cost to the employer and the
account market value
If the employer is not a VAT vendor, and has
not claimed an input tax deduction in respect
of the aquisition of the asset, VAT stays
included in both the cost to the employer and
the market value
Remuneration for PAYE Cash equivalent Par (b) of the definition of ‘remu-
neration’ in the Fourth Schedule
Amount on IRP 5 Cash equivalent
Example 8.6. Assets acquired at less than actual value
Determine the cash equivalent in respect of the following assets acquired by employees during
the 2022 year of assessment:
(1) An asset was acquired by the employer who is a VAT vendor at a cost of R115 000 including
VAT and used in the business for three years. It is sold to an employee for R80 000. The
market value (including VAT) of the asset on the date of sale is R90 000.
(2) A gold watch, which cost the employer R6 270 (including 15% VAT), was bought for an
employee as a long-service award after he had completed 20 years of service. The
employer is a VAT vendor. The market value (including 15% VAT) of the watch on the date of
the presentation is R6 840.
(3) The employees of company A are required to wear special uniforms, clearly distinguishable
from ordinary clothing, when on duty. Uniforms with a market value of R6 900 (including 15%
VAT) were given to a new employee. The employer is a VAT vendor.
SOLUTION
(1) Value of the asset (market value, VAT is excluded because the employer could
have claimed it (s 23C): R90 000 – VAT of R11 739 (R90 000 × 15/115)) .............. R78 261
Less: Consideration (Input tax was previously allowed and therefore the
consideration includes VAT which must be excluded: R80 000 – VAT of
R10 435 (R80 000 × 15/115) ......................................................................... (69 565)
Cash equivalent ...................................................................................................... R8 696*
continued
214
* The deemed output tax in terms of s 18(3) of the VAT Act will be R1 134
(R8 696 × 15/115). This amount is also allowed as a deduction in the hands of
the employer in terms of s 11(a) as it is seen as a salary.
(2) Value of the asset (cost to the employer because the asset was acquired by the
employer in order to dispose of it to the employee, excluding VAT: R6 270 ×
100/115) .................................................................................................................. R5 452
Less: Exempt portion .............................................................................................. (5 000)
Cash equivalent………………………………………………………………………….. R452
(3) Since the asset is a special uniform meeting the requirements in terms of s 10(1)(nA), it will
be exempt from normal tax and it is not a taxable benefit as defined. Consequently, no cash
equivalent needs to be determined and the Seventh Schedule is not applicable. The R6 000
must be included in the employee’s gross income in terms of par (c) of the gross income
definition, but will be exempt in terms of s 10(1)(nA) (also refer to the discussion in chap-
ter 4.4 in this regard).
8.4.5 Use of sundry assets (paras 2(b) and 6)

Type of taxable benefit Free private (or domestic) use of various Par 2(b)
assets (or for a consideration less than the
value of private use as determined in terms of
par 6)
Free private (or domestic) right of use of a Par 2(b)
company car (or for a consideration less than
the value of private use as determined in
terms of par 7) (see 8.4.6 for discussion)
Exclusions from taxable Residential accommodation or household Par 2(b)
benefit goods supplied with such accommodation
Cash equivalent Value of private (or domestic) use less any Par 6(1)
– general rule consideration given by the employee or any
amount spent by the employee on the
maintenance or repair of such asset
Cash equivalent Asset is leased by the employer: Value of Par 6(2)(a)
– special rules private (or domestic) use = rent paid by
employer in respect of period used
Asset is owned by employer: Value of private Par 6(2)(b)
(or domestic) use = 15% × lesser of the asset’s
cost to employer and market value on first day
of use × (period used / 365 (or 366) days)
Employee has the sole right of use of an asset Proviso to par 6(2)(b)
for a period extending over the useful life of
the asset or a major portion (meaning more
than 50%) thereof: Value of private (or
domestic) use = cost of asset to employer
(accrual on the day when the right of use was
first granted)
No values (a) Private (or domestic) use of asset is Par 6(4)(a): this no-value rule
incidental to the use thereof for the pur- does not apply in respect of
poses of the employer’s business clothing
(b) Asset is provided as an amenity to be Par 6(4)(a)
enjoyed
– at the employee’s place of work, or
– for recreational purposes at the em-
ployee’s place of work, or
– at a place of recreation provided by
the employer for the use of his em-
ployees in general
continued
215

(c) Asset is any equipment or machine and Par 6(4)(b)
can be used by employees in general for
short periods and the value of the private
use does not exceed an amount deter-
mined on a basis as set out in a public
notice issued by the Commissioner
(d) Asset is a telephone or computer equip- Par 6(4)(bA)
ment which the employee uses mainly
(> 50%) for purposes of the employer’s
business
(e) Asset consists of books, literature, Par 6(4)(c)
recordings or works of art
(f) Private (or domestic) use of asset Par 6(4)(d), which comes into
granted by an employer to an employee operation on 1 March 2022. The
for long service as defined in par 5(4) to new proviso to par 6(4)(d) states
the extent that it does not exceed R5 000 that the aggregate value of all
(subject to the proviso) long service awards given in the
form of assets (including gift
vouchers, for example) right of
use of assets, free or cheap
services and cash must not
exceed R5 000
Remuneration for PAYE Cash equivalent (an appropriate portion is cal- Par 6(3) and par (b) of the def-
culated monthly) inition of ‘remuneration’ in the
Fourth Schedule
Example 8.7. Use of sundry assets
(a) Gert has the right of use of a personal computer, which is owned by his employer, for private
purposes. The computer cost the employer R11 500 (including VAT at 15%). Gert does not
pay anything for the use of the computer. The employer is a VAT vendor.
Calculate the taxable amount of the fringe benefit if:
(i) Gert uses the computer continuously for three months.
(ii) Gert uses the computer for its useful life or over a major portion of its useful life.
(iii) Gert uses the computer for one year. The useful life of the computer is 4 years. Gert
used the computer for private purposes 25% of the time.
(b) All employees of company B (a VAT vendor) are required to wear a specific brand of jeans
to work on Fridays. Company B bought the jeans at a cost price of R1 000 (excluding VAT)
per jean. On 1 March 2021, the employees were granted the sole right of use of the jeans
over the useful life thereof, on the condition that it may only be worn to work on Fridays and
that any private use thereof must be incidental. What is the cash equivalent of this taxable
benefit for each employee? Will the answer be different if a printed logo of the company was
sewn onto the jeans?
216
SOLUTION
(a) (i) Cash equivalent = R10 000 (cost excluding VAT) × 15% × 3/12 = R375 (R125 per
month).
(ii) Cash equivalent = R10 000 (the whole amount is included in remuneration in the first
month of use).
(iii) The cash equivalent is Rnil since the requirements of the nil value rule in par 6(4)(bA)
are met. The asset is a computer, and the employee uses the asset mainly for business
purposes.
(b) The no value rule in respect of the incidental private use of assets in terms of par 6(4)(a) is
not applicable since the jeans are normal clothing or a non-special uniform and is not a
special uniform clearly distinguishable from ordinary clothing. Since the sole right of use
over the useful life of the jeans is granted to the employees, the cost of the asset (R1 000)
accrues to each employee on the day the right was first granted, being 1 March 2021. If a
printed logo of the company was sewn on the jeans, the jeans would be clearly distin-
guishable from ordinary clothing and would qualify as a special uniform. The R1 000 will
then be included in gross income in terms of par (c) of the gross income definition and will
be exempt in terms of s 10(1)(nA).
8.4.6 Right of use of motor vehicles (paras 2(b) and 7)
The meanings of the core terms used in par 7 are as follows:

Value of private use (par 7(4)) (3,5% or 3,25% × determined value) per
month
Cash equivalent (par 7(2)) Value of private use less any consideration
given by employee
Please note!
Par 7(7) adjustment Value of private use × business km/total km
Taxable income from a par 7 Cash equivalent less par 7(7) adjustment
fringe benefit less par 7(8) adjustment
Remuneration Cash equivalent × 80% or 20% (depending
on the extent of business travels)

Type of taxable benefit Free private or domestic use of a motor Par 2(b)
vehicle (company car) (or for a consideration
less than the value of private use)
Exclusions from None
taxable benefit
Definitions Determined value* of motor vehicles owned or Par 7(1)(a), s 23A(1): definition of
leased (other than an ‘operating lease’ in operating lease
terms of s 23A) by the employer = The retail Par 7(1)(b). In terms of par 7(3)
market value (excluding finance charges) as (b)(ii) this value also applies if an
determined by the Minister by Regulation. The employer transfers his rights and
retail market value of the motor vehicle at the duties in terms of a lease agree-
time when the employer first acquired the ment to the employee
vehicle, or the right of use thereof, or manu-
factured the vehicle is used
*The determined value is reduced by 15% per Proviso (a) of par 7(1)
year (reducing balance method) for every
completed 12-month period between the date
of acquisition by the employer and the date of
granting the right of use to the employee for
the first time if the motor vehicle, or the right of
use thereof, was acquired by the employer not
less than 12 months before the date on which
the employee was granted the right of use
continued
217

This reduction does not apply if both the Proviso (b) of par 7(1)
employee and the asset are transferred to an
associated institution
Maintenance plan = contract covering all main- Par 7(11). If a question does not
tenance costs for a period terminating at the clearly state that the motor ve-
earlier of the end of three years or the date on hicle is subject to a maintenance
which a distance of 60 000 km is travelled plan at the time of acquisition by
the employer, the 3,5% must be
applied. One cannot assume that
a maintenance plan was taken
out
Please note the following in respect of the
retail market value:
Regulation R.362 in GG 38744, dated 23 April Par 7(1)(c)
2015, contains the provisions in respect of the See Silke 2015 for the rules appli-
retail market value applicable with effect from cable to motor vehicles acquired
1 March 2015 before 1 March 2015
Because the retail market value will be given

to students in terms of the SAICA syllabus, the
regulation is not discussed in detail, but take
note of the following:
l Distinction is made between the different
industries
l Distinction is made between new and
second-hand motor vehicles
l It is specified which percentage of the
retail market value must be used as the
determined value and in which year of
assessment it must be used and whether
VAT must be included or excluded
l With effect from 1 March 2018, both the
cost to the employer to acquire the motor
vehicle and the market value (where the
employer acquires it at no cost) include
VAT
Cash equivalent – Value of private use (see below) less any Par 7(2)
general rule consideration given by the employee (other The cash equivalent, which is
than consideration given by an employee in calculated by the employer
respect of licence, insurance, maintenance, or monthly, is not influenced by the
fuel) par 7(7) and 7(8) adjustments
If par 7(3)(a) applies, the rentals
payable by the employee under
the lease shall be deemed to be
a consideration payable by him
for the right of use
Value of private use – In all cases other than vehicles acquired by the
special rules employer under an operating lease:
Value of private use = 3,5% × determined Paras 7(4)(a)(i) and 7(3), where
value × number of months used during year of the employer is deemed to grant
assessment an employee the right of use for
the remainder of the period of the
lease if the employer has hired
the motor vehicle under a lease
and has transferred his rights
and obligations under the lease
OR to his employee
continued
218

Value of private use = 3,25% × determined Par 7(4)(a)(i): the 3,25% is only
value × number of months used during year of used if the motor vehicle is the
assessment subject of a ‘maintenance plan’ at
the time of acquisition by the
employer
Please note that
1. The private use of a vehicle includes Par 7(4)(a)(i). Please see the
travels between the employee’s place of exception to the rule in par 7(8A)
residence and place of employment, as
well as all other private travels
2. If the employee is only entitled to use the Par 7(4)(b) and 7(5)
motor vehicle for a part of a month, the
value of the private use is apportioned
based on days. No reduction is made
simply because the vehicle is for any
reason temporarily not used by the
employee
3. If an employee uses more than one com- Par 7(6). Interpretation Note
pany car primarily for business purposes, No. 72 indicates that ‘primarily
he will only be taxed on the company car used for business purposes’
with the highest value of private use, means that more than 50% of the
unless the Commissioner decides on total distance travelled in the
application of the employee, to designate vehicle was for business pur-
another vehicle poses. The taxpayer must apply
for the application of par 7(6) in
his or her return. The employee
must keep and submit an accu-
rate logbook of business and
private kilometres for this pur-
pose. Please note that par 7(6)
and par 7(7) or 7(8) cannot be
applied simultaneously. The tax-
payer should therefore only apply
for par 7(6) if it is the most bene-
ficial option
If the par 7(6) concession is
applied for, SARS requires full
details of the reasons why it was
necessary to make more than
one vehicle available to the em-
ployee
In the case of vehicles acquired by the
employer under an operating lease:
Value of private use = sum of the actual cost Par 7(4)(a)(ii) and s 23A(1)
for employer under the operating lease and The par 7(8) adjustments do not
the cost of fuel in respect of the motor vehicle apply to company cars acquired
in terms of an ‘operating lease’ as
defined in s 23A. The par 7(7)
adjustment can, however, still
apply for such vehicles
continued
219

Reduction of the value The calculation of the par 7 fringe benefit is Par 7(7) (reduction for business
of private use on based on the employee being entitled to use a purposes) and 7(8) (reduction if
assessment company car for private purposes. The cal- employee bears the full cost of
culation in par 7 is therefore, as a convenient specific expenses). Interpretation
starting point, based on the implicit assump- Note No. 72 specifies the same
tions that there have been no business use of details regarding the logbook to
the vehicle and that all operating expenses be kept by the taxpayer as Inter-
are incurred by the employer pretation Note No. 14 (Issue 4)
It will usually happen that such a company car does in respect of travel allow-
is also used for business purposes. The em- ances (see 8.3.1)
ployee is then entitled to a reduction in the Interpretation Note No. 72 also
value of the private use on assessment to take states that the employee bearing
account of actual business use in terms of the ‘full cost’ means that the
par 7(7) employee must bear 100% of the
SARS must make the following adjustments in cost, without any form of reim-
terms of par 7(7) and 7(8) on assessment: bursement, for the entire period
the employee had the use of the
If the employee keeps an accurate logbook of
motor vehicle during the year of
the distances travelled for business purposes,
assessment. The determination of
the value of private use must be reduced by
whether an employee has borne
the calculated adjustment in terms of par 7(7)
the full cost of fuel only takes
The par 7(7) adjustment (accurate records of place on assessment. The em-
business kilometres are kept) = Value of pri- ployee is responsible for making
vate use × (business kilometres/total kilo- this determination (provision is
metres) made in the ITR12 income tax
If the employee bears the full cost of specific return).
expenses (and not the employer as in the
implicit assumption above) and keeps an
accurate logbook of the distances travelled for
private purposes, the value of private use
must be reduced by the calculated adjustment
in terms of par 7(8) to provide for the fact that
the employee paid the costs
Remember: The value of private
use is the amount before any
compensation paid by the em-
ployee is deducted
The par 7(8) adjustments (accurate records of
private kilometres are kept) =
Full cost paid by Reduce the value
employee of private use with
Cost of licence, Cost × (private
insurance, and kilometres/total kilo-
maintenance metres)
Cost of fuel for Private kilometres × The example in Interpretation
private use deemed cost fuel Note No. 72 bases the rate per
rate per kilometre kilometre used in the par 7(8)
as per the deemed calculation on the same ‘deter-
cost table for travel mined value’ used to calculate
allowances the value of private use in that
example. Par (c) of the definition
of ‘value’ in the Schedule used
for s 8(1)(b)(ii) and (iii) states that
the value in any other case is the
‘market value at the time when
the recipient first obtained the
vehicle or the right of use
thereof’. It is submitted that the
determined value (being the retail
market value or the reduced retail
market value) will equate the
market value and that the same
determined value used to calcu-
late the value of private use must
be used for the purposes of the
fuel calculation in par 7(8).
continued
220

Please note that:
1. The par 7(7) and 7(8) adjustments must be
made only when the taxable income is
calculated by a student in a question or by
SARS on assessment. It is not also made
when the cash equivalent or the ‘remu-
neration’ for PAYE purposes is calculated
by a student in a question or by an
employer
2. The par 7(8) adjustments do not apply to
company cars acquired in terms of an
‘operating lease’ as defined in s 23A. The
par 7(7) adjustment can, however, still
apply for such vehicles
3. The par 7(7) adjustment is based on the
value of private use and not on the cash
equivalent
4. Paragraph 7(8A) makes an exception in Par 7(8A)
respect of certain private kilometres
travelled by a ‘judge’ or a ‘Constitutional
Court judge’ (as defined in s 1 of the
Judges’ Remuneration and Conditions of
Employment Act 47 of 2001). The kilo-
metres travelled between the judge’s
place of residence and the court over
which the judge presides is deemed to be
kilometres travelled for business purposes
and not for private purposes
No values (a) If the vehicle is available to and is used Par 7(10)(a)
by employees in general, and the private
use of the vehicle by the specific em-
ployee is infrequent or is merely incidental
to its business use, and the vehicle is not
normally kept at the employee’s residence
(this is normally referred to as a ‘pool car’)
(b) If the nature of the employee’s duties Par 7(10)(b)
regularly requires him to use the vehicle
for his duties outside his normal hours of
work, and his private use thereof is limited
to travelling between his place of resi-
dence and his place of work, or is infre-
quent or merely incidental to its business
use
Remuneration for l 80% of the cash equivalent if the employer Par (cB) of the definition of ‘remu-
PAYE is satisfied that the business use will be neration’ in the Fourth Schedule.
less than 80% The words in the Act ‘taxable
l 20% of the cash equivalent if the employer benefit calculated in terms of
is satisfied that the business use will be at par 7’ means the cash equivalent
least 80% before it is adjusted for par 7(7)
and 7(8) where applicable. This
is because those adjustments
must only be made by SARS on
assessment and the employer
calculates remuneration monthly
It is submitted that the employee
will have to provide an accurate
logbook to the employer to ‘be
satisfied’ regarding the percent-
age business use. The deter-
mination regarding the percent-
age used for business purposes
is made monthly
221
Remember
The 3,5% or 3,25% is in respect of each month. The number of months for which the right of use was
granted in the year of assessment must therefore be used in the calculation of the cash equivalent
(and not the number of months divided by 12).
Example 8.8. Use of a motor vehicle granted more than 12 months after employer
obtained the vehicle
Reaboka was granted the right to use the employer-owned motor vehicle with effect from 1 June
2021. The employer originally acquired the vehicle on 1 March 2019 at a retail market value of
R91 200.
Calculate the cash equivalent of the value of the taxable benefit to Reaboka for the 2022 year of
assessment.
SOLUTION
Retail market value .................................................................................................... R91 200
Less: R13 680 (R91 200 × 15% (first period of 12 months)) + R11 628 (R77 520 ×
15% (second period of 12 months) ........................................................................... (25 308)
Adjusted determined value (alternative method of calculation is R91 200 × 85% ×
85% = R65 892) ........................................................................................................ R65 892
Cash equivalent = R65 892 × 3,5% = R2 306 per month × 9 months ...................... R20 754
Example 8.9. Use of motor vehicle
Tertius enjoys the right to use a motor vehicle that was acquired by his employer, A Ltd, on
1 March 2020. The retail market value was R114 000. Tertius is transferred to B Ltd, a subsidiary
of A Ltd. B Ltd purchases the motor vehicle of which Tertius has the right of use for R80 000
(excluding VAT).
Calculate the monthly and annual cash equivalent of the value of the taxable benefit if Tertius
retains the right of use of the motor vehicle.
SOLUTION
Cash equivalent = R114 000 × 3,5% = R3 990 per month or R47 880 per year. The determined
value of the motor vehicle remains R114 000 in terms of proviso (b) of par 7(1).
Example 8.10. Use of a motor vehicle for part of a month

With effect from 15 March 2021, Nomsa is granted the right to use a motor vehicle bought by the
employer on 15 March 2021. The retail market value of the vehicle is R100 000. Calculate the
cash equivalent of the taxable benefit for March.
SOLUTION
The cash equivalent of the taxable benefit for March is:
R100 000 × 3,5% = R3 500 × 17/31 = R1 919.
(15 March to 31 March is 17 days)
222
Example 8.11. Use of two motor vehicles

Mbali is granted the right to use two motor vehicles that were acquired by her employer at a cost
of R114 000 (Vehicle 1) and R171 000 (Vehicle 2). Both amounts include VAT and no main-
tenance plan was taken out in respect of the vehicles. Mbali bears no costs in respect of the
vehicles.
Calculate the monthly cash equivalent of the value of the taxable benefit, as well as the taxable
amount (on assessment) if Mbali is granted the right of use of both vehicles and if
(a) Mbali uses both vehicles primarily for business purposes and kept an accurate logbook
proving that 12 000 km of the total 23 000 km travelled with each of the vehicles was travel-
led for business purposes. Mbali did not apply for the application of par 7(6) in her return.
(b) Mbali uses both vehicles primarily for business purposes. She kept an accurate logbook
proving that 12 000 km of the total 23 000 km travelled with each of the vehicles was travel-
led for business purposes. Mbali did apply for the application of par 7(6) in her return.
SOLUTION
(a) Since an accurate logbook was kept and she did not apply for par 7(6), par 7(7) must be
applied. Therefore, the cash equivalent for both vehicles must be calculated. Since Mbali
paid no consideration, the value of the private use equals the cash equivalent.
Cash equivalent each month is the sum of
R171 000 × 3,5% = ................................................................................................. R5 985
R114 000 × 3,5% = ................................................................................................. 3 990
(Par 7(4)(a))............................................................................................................. R9 975
Taxable amount on assessment = R57 248 (R119 700 (R9 975 × 12) – (R119 700 ×
12 000/23 000))
(b) Because Mbali applied for par 7(6) and an accurate logbook was kept, the cash equivalent
for each month is based on the vehicle having the highest value of private use. Para-
graph 7(7) cannot be applied if par 7(6) is applied.
Monthly cash equivalent based on the highest value of private use = R171 000
× 3,5% = R5 985 (par 7(6))
Taxable amount on assessment = R5 985 × 12 = R71 820
Example 8.12. Paragraph 7(7) and 7(8) adjustments
Jan had the right of use of a luxury employer-owned motor vehicle with a retail market value of
R741 000 up and until his retirement on 30 September 2021. A maintenance plan (as defined) in
respect of the motor vehicle was included in the cost price of the vehicle. Jan travelled 21 000
kilometres with the motor vehicle from the beginning of the year of assessment until his retire-
ment. The accurate logbook proves that 11 000 kilometres thereof was travelled for business pur-
poses. Assume all travels were evenly spread over the year and that Jan provided his logbook to
his employer for PAYE purposes. Jan had to bear the total fuel cost of private use and paid the
full licence cost of R890. The Commissioner accepted the logbook as accurate. Jan monthly
pays R200 as consideration for the right of use of the company car.
Calculate the value of private use, the cash equivalent, the taxable amount that must be included
in Jan’s gross income as well as the remuneration in respect of the right of use of the company
car for the 2022 year of assessment.
SOLUTION
Value of private use: 3,25% × R741 000 × 7 ............................................................ R168 578
Cash equivalent = R168 578 less R1 400 (R200 × 7) .............................................. R167 178
Paragraph 7(7) adjustment (R168 578 × 11 000/21 000) ......................................... (R88 303)
Paragraph 7(8) adjustments (R424 + R17 510) ........................................................ (R17 934)
Licence cost: R890 × 10 000/21 000 = R424
Fuel: 10 000 km × R1,751 = R17 510
Taxable amount included in gross income = Cash equivalent of R167 178 less par 7(7) and 7(8)
adjustments
= R167 178 – R106 237 (R88 303 + R17 934) = R60 941
Because his business use is only 52% (11 000 km/21 000 km), his remuneration is 80% × the
cash equivalent of R167 178 = R133 742.
223
Example 8.13. Operating lease
Jabu had the right of use of a luxury motor vehicle with a retail market value of R741 000 since
1 March 2020. This vehicle was leased by his employer, Protea Ltd, at R15 000 per month under
an operating lease. Jabu travelled 21 000 kilometres in total with the motor vehicle and the
accurate logbook proves that 11 000 kilometres thereof was travelled for business purposes.
Protea Ltd also paid the fuel cost amounting to R2 500 per month. The Commissioner accepted
the logbook as accurate. Jabu bears no costs in respect of the vehicle.
Calculate the amount that must be included in Jabu’s taxable income in respect of the right of
use of the company car in the 2022 year of assessment.
SOLUTION
Taxable income in respect of the right of use of the company car:
Value of private use and the cash equivalent: 12 × (R15 000 + R2 500) ................. R210 000
Less: Paragraph 7(7) adjustment (R210 000 × 11 000/21 000) ............................. (110 000)
Taxable income ........................................................................................................ R100 000
Alternative calculation: R210 000 × 10 000/21 000 = R100 000. Please note that this
alternative calculation can only be applied if the employee gave no consideration for
the taxable benefit. This is because the value of private use is then equal to the cash
equivalent.
Please note that if the alternative calculation is applied where there is a consideration
and the value of private use is not equal to the cash equivalent, an incorrect taxable
value will be calculated.
8.4.7 Meals, refreshments and meal and refreshment vouchers (paras 2(c) and 8)

Type of taxable benefit Free meals, refreshments and refreshment Par 2(c)
vouchers (or for a consideration less than
the value of the meal, refreshment or
voucher)
Exclusions from taxable Board or meals provided with residential Par 2(c)
benefit accommodation in par 2(d)
Definitions None
Cash equivalent Value of meals, refreshments and Par 8(1)
– general rule refreshment vouchers less consideration
given by employee
Cash equivalent Value = cost to the employer of meals, Par 8(2)
– special rules refreshments and refreshment vouchers
No values A meal or refreshment supplied by an em-
ployer to his employee:
l in a canteen, cafeteria or dining room Par 8(3)(a)
wholly or mainly used by his employees,
or
l on the business premises of the Par 8(3)(a)
employer, or
l during business hours or extended Par 8(3)(b)
working hours, or
l on a special occasion Par 8(3)(b)
A meal or refreshment enjoyed by an em- Par 8(3)(c)
ployee when he must entertain someone
on behalf of the employer
Remuneration for PAYE Cash equivalent Par (b) of the definition of ‘re-
muneration’ in the Fourth Schedule
224
Example 8.14. Meal vouchers
An employer pays R20 a meal for his employees at a dining place close to where his business is
situated. He provides each employee with 20 coupons per month for which the employee must
pay R160 (R8 per coupon). One meal can be enjoyed at the dining place for each coupon.
Calculate the taxable value of the benefit.
SOLUTION
Cost to employer 20 coupons × R20 ........................................................................ R400
Less: Cost to employee (20 coupons × R8)........................................................... (160)
Taxable value of the benefit ...................................................................................... R240
8.4.8 Residential accommodation (paras 2(d) and 9)

Type of taxable benefit Free residential accommodation (or for a con- Par 2(d)
sideration less than the rental value of the
accommodation)
Exclusions from taxable None
benefit
Cash equivalent Rental value (determined in terms of sub- Par 9(2) specifies that the tax-
– general rule par (3), (3C), (4) or (5)) of the accommodation able benefit is derived from the
less any rental consideration given by the occupation of residential accom-
employee modation. Please see below
under ‘Remuneration for PAYE’
for the impact of par 9(8)
Cash equivalent Accommodation is owned by employer or an The definition of ‘remuneration
– general rule associated institution in relation to the proxy’ in s 1 is the remuneration
employer: The rental value = formula value in terms of the Fourth Schedule
(subject to the provisions of par 9(3C) (accom- for the prior year of assessment
modation obtained from a non-connected (where applicable) excluding
person) and 9(4) (holiday accommodation)) the cash equivalent of residen-
tial accommodation in terms of
par 9(3)
Formula value = (A –B) × C/100 × D/12 Par 9(3)
A = the ‘remuneration proxy’ The Commissioner may deter-
B = R87 300, but Rnil if mine a lower rental value if he is
l the employee or his spouse directly satisfied that the rental value is
or indirectly controls the employer lower than the cash equivalent
(who is a private company), or (par 9(5))
l the employee, his spouse or minor
child have a right of option or pre-
emption granted by the employer, any
other person by arrangement with the
employer or an associated institution
in relation to the employer, to directly
or indirectly become the owner of the
accommodation by virtue of a con-
trolling interest in a company or other-
wise
C = a quantity of 17, or 18 (if the house, flat or The term ‘room’ is not defined
apartment has at least four rooms and is either but it is submitted that it indi-
furnished or power or fuel is supplied) or 19 (if cates a living or sleeping room
the house has four rooms and is furnished and and would exclude kitchens and
power or fuel is supplied) toilets. This view is accepted by
SARS.
continued
225

D = the number of months entitled to the
accommodation
In terms of par 9(3B), the for-
mula also applies when an em-
ployee has an interest in accom-
modation. Par 9(10) determines
that such interest includes
ownership, an increase in value
and an option to acquire.
Par 9(9) determines that the rent
paid by the employer is deemed
not to be received by the
employee in such a case, and
therefore the employee cannot
claim any expenses in respect
of such accommodation
Cash equivalent Full ownership does not vest in the employer Par 9(3C)
– special rules or an associated institution in relation to the
employer, but accommodation is rented by the The formula value does not take
employer or associated institution in relation to the location of the house into
the employer in terms of an arm’s length trans- account. This is addressed by
action from a non-connected person: The ren- using the lower of the formula
tal value is the lower of value and the actual expend-
l the formula value iture
l the expenditure incurred by the employer
or associated institution
Cash equivalent The employee is provided with accommo- Par 9(6)
– special rules dation consisting of two or more residential
units situated at different places: The rental
value = value of the unit with the highest rental
value over the full period of entitlement to
occupy more than one unit
No values (a) Any accommodation (in or outside the Par 9(7). Par 9(7) cannot apply
Republic) supplied while the employee (a if the residential accommoda-
resident) is away from his usual place of tion consists of two or more
residence in the Republic for work pur- units
poses
(b) Any accommodation in the Republic sup- Par 9(7A)
plied to an employee (a non-resident)
away from his usual place of residence
outside the Republic
l for a period two years after date of Par 9(7A)(a)
arrival in the Republic, or
l for a period <90 days in the year of Par 9(7A)(b)
assessment
Exception to No values The aforementioned two years-exception Par 9(7B)
(par 9(7A)(a)) for non-resident employees is
not applicable
(a) if the employee was present in the If 89 days are exceeded, the
Republic for a period exceeding 90 days accommodation will have a full
during the year of assessment immedi- taxable value (not only the days
ately preceding the date of arrival, or in excess of 89), unless the
par 9(7A)(a) read with par 9(7B)
exception applies
(b) to the excess of the cash equivalent over Example: employer pays rent of
an amount of R25 000 multiplied by the R40 000 per month for one year.
number of months during which the Even though the period is less
accommodation is supplied than two years, R180 000 (12 ×
R15 000 (R40 000 – R25 000))
will be taxable
continued
226

neration’ in the Fourth Schedule.
Residential accommodation must
be occupied before a taxable
benefit arises (par 9(2)). The
requirement in par 9(8), that an
appropriate portion of the cash
equivalent must be apportioned
to each period during the year
of assessment in respect of
which any cash remuneration is
paid, can therefore only be
applied prospectively from the
date that occupation takes
place. The words ‘an appropri-
ate portion’ refers to the fraction
considering the number of
months over which apportion-
ment must be made, taking the
date of occupation into account
Example 8.15. Residential accommodation
Ayize’s employer provided him with residential accommodation for the entire 2022 year of
assessment at an annual rental of R4 000. Ayize is not a shareholder in the employer company.
The accommodation is an apartment with one bedroom, a living room, a bathroom and a small
kitchen. It is provided unfurnished and without any services. Ayize’s remuneration from his
employer in the previous year of assessment comprised a cash salary of R203 024 only.
Calculate the cash equivalent of the taxable benefit arising from Ayize’s right of occupation of the
accommodation, if
(a) the accommodation is owned by the employer
(b) the employer rents the accommodation from the owner at a cost of R10 000 per year.
SOLUTION
Cash equivalent = Rental value less Rent payable
C D
(a) Rental value = (A – B) × ×
100 12
A = Remuneration proxy = R203 024 (Ayize’s remuneration for the previous year of
assessment excluding residential accommodation)
B = R87 100
C = 17 (the accommodation is unfurnished and provided without services)
D = 12
17 12
? Rental value = (R203 024 – R87 300) × ×
100 12
= R19 673
? Cash equivalent = R19 673 – R4 000
= R15 673
(b) Taxable benefit is the lower of
C D
l the formula value: (A – B) × × (As calculated above) ................. R19 673
100 12
l the total amount paid by the employer ............................................................. R10 000
Taxable benefit = ................................................................................................... R10 000
Less: Consideration paid by employee................................................................... (4 000)
Cash equivalent of the taxable benefit .................................................................... R6 000
227
8.4.9 Holiday accommodation (paras 2(d) and 9)

Type of taxable benefit Free holiday accommodation (or for a consid- Par 2(d)
eration less than the rental value of the
accommodation)
benefit
Definitions None
Cash equivalent Rental value of holiday accommodation less Par 9(2) and 9(4)
– general rule any consideration given by the employee
Cash equivalent Rental value if the employer rents the accom- Par 9(4)(a)
– special rules modation from a person other than an asso-
ciated institution in relation to the employer =
costs for employer in respect of rental, meals,
refreshments and other services
Rental value in any other case = prevailing Par 9(4)(b)
rate per day at which the accommodation The words ‘any other case’
could normally be let to a person who is not includes the employer being the
an employee owner of the holiday accommo-
dation or the employer renting
the holiday accommodation from
an associated institution in rela-
tion to the employer
No values None
Example 8.16. Holiday accommodation

Thabo earns a monthly cash salary. Thabo’s employer provided him, his wife and two children
with free holiday accommodation in the employer’s cottage at the coast for ten days during
December 2021. The employer owns the cottage.
Calculate the cash equivalent of the taxable benefit to Thabo if
(a) the cottage is normally let for R5 000 a day
(b) the cottage is normally let for R800 per person per day.
Explain the employees’ tax consequences of these taxable benefits.
SOLUTION
The cash equivalent of the taxable benefit is therefore:
(a) R5 000 × 10 = R50 000
(b) R800 × 10 × 4 = R32 000.
For employees’ tax purposes, Thabo’s employer must, in terms of par 9(8), apportion an appro-
priate portion of the cash equivalent to each period during the year of assessment in respect of
which any cash remuneration is paid. Read with the requirement of occupation in par 9(2), this
means that Thabo’s employer can therefore only apportion the respective cash equivalents of
R50 000 or R32 000 over three months, namely December 2021, January 2022, and February
2022. An amount of R16 667 (R50 000/3) or R10 667 (R32 000/3) will therefore be remuneration
for employees’ tax purposes during those three months.
Remember
If the rate is given per person per day, the employee’s family member’s benefit will be taxed in
the employee’s hands in terms of par 16.
228
8.4.10 Free or cheap services (paras 2(e) and 10)

Type of taxable benefit Any services rendered to the employee at the Par 2(e)
expense of the employer and used by the em- An example of services used by
ployee for his private or domestic purposes, an employee for private pur-
and no consideration is given by the em- poses is an employer who pays
ployee or a consideration less than the a tax expert to render assist-
respective cash equivalents below is given ance to its expatriate employees
*BMW South Africa (Pty) Ltd v CSARS 2019 to fulfil their obligations to
ZASCA 107. The primary questions to be SARS*
asked are whether an advantage or benefit was
granted by an employer to an employee and
whether it was for the latter’s private or
domestic purposes
Exclusions from taxable Services relating to residential accommoda- Par 2(e)
benefit tion (par 9(4)(a)), medical services (par 2(j))
and payments to insurers for the benefit of
employees (par 2(k))
Definitions None
Cash equivalent If a travel facility is granted by an employer Par 10(1)(a)
– general rule engaged in the business of conveying pas-
sengers for reward by sea or air, to an
employee or the employee’s relative to travel
to a destination outside the Republic for
private or domestic purposes:
l the lowest fare less any consideration given
by the employee or his relative
In all other cases: Par 10(1)(b)
l the cost to the employer less any consid- Sometimes the cost is the mar-
eration given by the employee ginal cost for the employer such
as in the case where a lecturer’s
child studies free of charge at a
university
Cash equivalent None
– special rules
No values (a) A travel facility granted to enable an Par 10(2)(a)
employee or the employee’s spouse or
minor child to travel to
l any destination in the Republic
l overland to any destination outside the
Republic, or
l any destination outside the Republic if
the travel was undertaken on a normal
flight and no firm advance reservation
of the seat or berth could be made
(b) A transport service rendered to employ- Par 10(2)(b)
ees in general to travel between their
homes and work
(c) Any communication service provided to Par 10(2)(bA)
an employee which is used mainly for the
purposes of the employer’s business
(d) Services rendered by an employer to his Par 10(2)(c)
employees at their place of work
l for the better performance of their duties,
or
l as a benefit to be enjoyed by them at
that place, or
l for recreational purposes at that place
or a place of recreation provided by the
employer for the use of his employees
in general
continued
229

(e) Any travel facility granted to the spouse Par 10(2)(d)
or minor child of an employee to travel
between the employee’s usual place of
residence and the business place where
the employee is stationed if
l the employee is stationed further than
250 km away from his usual place of
residence, and
l the employee is required to work at that
place for more than 183 days during
the year of assessment
(f) Any services granted by an employer to Par 10(2)(e), which comes into
an employee for long service as defined operation on 1 March 2022. The
in par 5(4) to the extent that it does not new proviso to par 10(2)(e)
exceed R5 000 (subject to the proviso) states that the aggregate value
of all long service awards given
in the form of assets (including
gift vouchers, for example) right
of use of assets, free or cheap
services and cash must not
exceed R5 000
Remuneration for PAYE Cash equivalent Par (b) of the definition of
‘remuneration’ in the Fourth
Schedule
8.4.11 Low-interest debts (paras 2(f), 10A and 11)

Type of taxable benefit Debt owed by the employee to the employer Par 2(f)
or to any other person by arrangement with This provision applies if the
the employer or any associated institution in debt is granted due to services
relation to the employer at no interest or at a rendered. If the debt is granted
lower rate than the official interest rate due to the holding of shares,
the deemed dividend provisions
in s 64E(4) will apply
Exclusions from taxable Debts to enable employees to buy qualifying Par 2(a)
benefit equity shares in terms of s 8B or to pay stamp
duty or securities transfer tax thereon
Debts in respect whereof par 2(gA) subsidies
are payable (see 8.4.12)
Definitions Official interest rate: South African repurchase Section 1(1):
rate + 1% (debt in rand) and equivalent of The South African repurchase
South African repurchase rate + 1% (debt in rate is not defined for the pur-
other currency) poses of the Act. The South
African Reserve Bank (SARB) in
terms of its monetary policy
fixes this interest rate. It is the
rate levied by the SARB when
lending to other local banks
(see Appendix B)
Where a new repurchase rate or
equivalent repurchase rate is
determined, the new rate applies
from the first day of the month
following the date on which the
amendment came into operation
continued
230

Cash equivalent – Interest calculated on the amount owing in Par 5(1)
general rule respect of the debt at the official interest rate In terms of par 11(3), the Com-
less the actual interest incurred during the missioner may, on application
year by the taxpayer, approve
another method to calculate the
cash equivalent if such method
achieves substantially the same
result
This taxable benefit is an anti-
avoidance provision. In terms of
s 7D, where the interest that
would have accrued or have
been incurred in respect of any
loan or debt must be calculated
at a specific rate of interest,
neither the statutory nor the
common law in duplum rule
(see chapter 24) applies in
respect thereof. The general
rule to determine the cash equi-
valent using the official interest
rate will therefore apply despite
the limitations of the in duplum
rule. The interest must be cal-
culated as simple interest and
is calculated daily (s 7D(b))
If the taxpayer has used the debt
in the production of income, the
same amount of the cash equiv-
alent is deemed to be interest
actually incurred and he or she
can claim a s 11(a) deduction
for the amount (par 11(5))
Cash equivalent – A portion of the cash equivalent accrues to Par 11(2)(a)
special rules employee
l on each date on which interest is payable
(if interest in respect of the debt is payable
at regular intervals)
l on the last day of each period in respect
of which cash remuneration is payable (if
irregular intervals or no interest)
Deemed loan Residential accommodation is taxed as a low Par 10A(1)
interest loan* if:
1. the employee lives in an employer-owned
house
2. the employee, his spouse or minor child
is entitled or obliged to acquire the house
from the employer at a future date at a
price stated in an agreement, and
3. the employee is required to pay for his
occupation a rental calculated wholly or
partly as a percentage of the future pur-
chase price stated in the agreement.
*The employer is deemed to have granted the
employee a loan equal to the future purchase
price at an interest rate equal to the per-
centage in (3)
Cash equivalent = purchase price × (official
interest rate less interest rate in (3))
No values (a) A debt owed by an employee to his or her Par 11(4)(a)
employer if such debt or the aggregate of ‘Such debt’ refers to short-term
such debts does not exceed R3 000 at debt granted to employees on
any relevant time irregular basis and not to all
debts purely because it is less
than R3 000
continued
231

(b) A debt owed by an employee to his or her Par 11(4)(b)
employer for the purpose of enabling the
employee to further the employee’s own
studies
(c) A debt owed by an employee to his or her Par 11(4)(c)
employer in consequence of a loan by the
employer as does not exceed an amount
of R450 000 if
l the debt was assumed to acquire
immovable property used for residen-
tial purposes by the employee
l the market value of the immovable
property acquired does not exceed
R450 000
l the remuneration proxy of the em-
ployee does not exceed R250 000,
and
l the employee is not a connected per-
son in relation to the employer
Example 8.17. Debts
A company made the following loans to its employees during the year of assessment ending on
28 February 2022:
(1) an interest-free loan of R20 000 to Alfons on 1 September 2021
(2) a loan of R50 000 at an interest rate of 2% to Bert on 1 September 2021 to enable him to
buy a small rent-producing investment
(3) an interest-free loan of R1 500 to Carol on 15 October 2021 to help her meet unexpected
medical bills, which was repaid in November
(4) an interest-free loan of R6 000 to Don on 7 January 2022 to enable him to pay the university
fees for his studies.
Calculate the cash equivalent of the taxable benefit, if any, from each of these loans. All the
loans, except that made to Carol, were still outstanding at the end of the year of assessment. The
repurchase rate has been 3,50%% since 1 August 2020.
SOLUTION
(1) The cash equivalent of the taxable benefit to Alfons will be:
R20 000 × 4.05% × 181/365 = R446
(2) The cash equivalent of the taxable benefit to Bert will be:
R50 000 × (4.05% – 2%) × 181/365 = R620
The cash equivalent of the taxable benefit included in Bert’s income is deemed for the pur-
poses of s 11(a) of the Act to be interest actually incurred by him in respect of the loan. If he
had actually incurred this amount as interest, it would have been incurred in the production
of his income. While a taxable benefit of R620 will be included in his income, the same
amount will be allowed as a deduction under s 11(a) against rental income earned
(par 11(5)). The 2% paid by him will also be allowed as a deduction under s 11(a).
(3) There will be no taxable benefit to Carol since the amount is less than R3 000 and therefore
does not give rise to a taxable benefit (par 11(4)(a)).
(4) The loan to Don does not give rise to a taxable benefit since it was granted to him for the
purpose of enabling him to further his studies (par 11(4)(b)).
232
Example 8.18. Residential accommodation: Employee has an option to acquire

the accommodation
Wandile is granted an option to acquire a house owned by his company at a price of R160 000 at
a time when its market value is R140 000. In the meantime, he is granted the right to occupy the
house on 1 March 2016 at a fixed annual rental of 2% of the option price. The house cost the
company R110 000. Calculate the cash equivalent of the taxable benefit arising from Wandile’s
right of occupation of the house and the taxable benefit, if any, that will arise if he exercises his
option and buys the house for R160 000 when the market value amounted to R230 000. The
repurchase rate has been 3,05% since 1 August 2020.
SOLUTION
Wandile is deemed by par 10A(1) to have been granted a loan of R160 000 and to have paid
interest at the rate of 4% a year on this loan. The cash equivalent of the taxable benefit arising
from the deemed loan will therefore be R4 000 ((4,50% – 2%) × R160 000). This is the difference
between interest calculated at the official rate (repurchase rate of 3,05% plus 100 basis points
(or 1%)) and the deemed interest paid (2%).
There will be no taxable benefit when Wandile exercises his option, since the purchase price of
the house will not be less than its market value at the time of the agreement (R140 000)
(par 10A(2)).
8.4.12 Subsidies in respect of debts (paras 2(g), (gA) and 12)

Type of taxable benefit Subsidies paid by an employer in respect of Par 2(g) and (gA)
interest or a repayment of capital payable by
employee in respect of any debt of the em-
ployee
benefit
Definitions None
Cash equivalent Pay subsidy to employee: Amount of the sub- Par 12 and 2(g)
ದgeneral rule sidy
Pay subsidy to a third party: Amount of the Par 12 and 2(gA)
subsidy
(In terms of par 2(gA) this is only applicable if Par 4.8 of the Guide for Em-
the sum of the subsidy and the actual interest ployers in respect of Fringe Ben-
paid by the employee is more than the interest efits explains that a par 2(gA)
on the debt at the official interest rate. The tax fringe benefit occurs if an em-
consequences if the sum is less are not ployer pays a subsidy to a third
addressed in the Act or in the Guide for party in respect of a low interest
Employers in respect of fringe benefits) loan or interest free loan grant-
ed by the third party to the
employee
No values None
233
8.4.13 Release from or payment of an employee’s debt (paras 2(h) and 13)

Type of taxable benefit The employer has Par 2(h)
l directly or indirectly paid a debt owing by Indirect payment is when the
the employee to a third person without employer makes the payment to
requiring reimbursement by the employee, the third party via somebody
or else (including the employee)
l has released an employee from an obliga- If an employer pays the con-
tion to pay a debt owing by the employee tributions to a retirement annuity
to the employer fund for the benefit of an
employee, it will be a fringe
benefit in terms of this para-
graph since it is the payment of
an employee’s debt on his or
her behalf. Such amount will be
deemed to have been contrib-
uted by the employee due to
being included as a taxable
benefit (s 11F(4)(b))
Exclusions from taxable Contributions by an employer to a benefit fund Par 2(h)
benefit (medical schemes) (par 2(i)) fringe benefit)
Costs in respect of medical services paid by There are no CGT consequen-
employer (par 2(j) fringe benefit) ces in respect of the discharge
of a debt – par 12A(6)(c) of the
Eighth Schedule
Definitions The definition of ‘employee’, for the purpose of Par 1 – see definition of ‘em-
par 2(h) and 13, includes a person who retired ployee’ for other exclusions
prior to 1 March 1992 and is released by his
employer after his retirement from an obliga-
tion that arose before his retirement
Cash equivalent The amount released or paid by the employer Par 13(1)
– general rule
Cash equivalent Deemed release of debt if the debt is extin- Proviso to par 2(h)
– special rules guished by prescription A debt prescribes three years
after the debt became claim-
able or payable
No values (a) Employees’ subscriptions paid by an Par 13(2)(b)
employer to a professional body if mem-
bership of such body is a condition of the
employee’s employment
(b) Insurance premiums paid by the em- Par 13(2)(bA)
ployer indemnifying an employee solely
against claims arising from negligent acts
or omissions of the employee in rendering
services to the employer
(c) The value of a benefit paid by a ‘former Par 13(2)(c)
member of a non-statutory force or
service’ to the ‘Government Employees’
Pension Fund’
(d) The payment of an employee’s bursary or Par 13(3)
study loan debt by the employee’s current
employer to the employee’s previous
employer
The benefit will have no value if the em-
ployee has undertaken to work for the
second employer at least for the unex-
pired period that he would have been
obliged to work for the first employer
234
Example 8.19. Payment or release of obligation
A company paid or waived the following amounts during the 2022 year of assessment:
(1) It paid R5 000 in settlement of debts owing by a director (but not a shareholder), Themba.
(2) It paid Fezile’s subscriptions due to SAICA. Fezile is the financial accountant, and it is a
condition of his employment that he is registered as a CA(SA).
(3) It waived a debt of R300 owing by Dumisa, a wage clerk, after he resigned and took up
alternative employment.
Calculate the cash equivalent of the taxable benefits, if any, involved in these transactions.
SOLUTION
(1) The cash equivalent of the taxable benefit to Themba will be R5 000 (par 13(1)).
(2) The payment of Fezile’s subscription to SAICA has no taxable value (par 13(2)(b)).
(3) There will be no taxable benefit, because Dumisa was no longer an ‘employee’ (as defined
in par 1) of the company when his debt was waived.
8.4.14 Contributions to medical schemes (benefit funds) (paras 2(i) and 12A)

Type of taxable benefit Direct or indirect contributions to par (b) ‘ben- Par 2(i). Such amount will be
efit funds’ as defined by an employer for the deemed to have been contribut-
benefit of an employee or his dependants ed by the employee due to be-
ing included as a taxable bene-
fit (s 6A(3)(b))
benefit
Definitions Benefit fund: Medical schemes are included Section 1 and par 2(i)
in par (b) of this definition
Cash equivalent The amount of the contributions paid by the Par 12A
– general rule employer
Cash equivalent If the contributions by the employer in respect Par 12A(2)
– special rules of an employee and his dependants cannot
specifically be attributed, it is deemed that the
contribution is equal to the total contributions
by the employer divided by the number of
employees in respect of whom the contribu-
tions were made
The Commissioner can, on application by the Par 12A(3)
taxpayer, allow an alternative fair and reason-
able manner of apportionment
No values The benefit is derived by
(a) a person who has retired from employ- Par 12A(5)(a)*
ment by reason of age, ill-health or other
infirmity, or
(b) the dependants of a person (who was an Par 12A(5)(b)
employee at the date of death) after his or
her death, or
(c) the dependants of an employee after his or Par 12A(5)(c)
her death, if that person retired from * Please refer to chapter 7
employment by reason of age, ill-health or regarding the link between
other infirmity par 12A(5)(a) and the s 6A
medical tax credit
Remember that the employer
must take the s 6A medical tax
credit into account when cal-
culating the employees’ tax
(par 9(6)(a) of the Fourth Sched-
ule)
235
Example 8.20. Contributions to medical schemes

FGH Ltd pays R1 500 a month to a medical scheme for the benefit of one of its employees,
Khwezi, who turned 65 during the year of assessment. Khwezi himself does not contribute to the
scheme. He does not have any dependants.
(a) Khwezi worked for the full 2022 year of assessment. Calculate the cash equivalent of the
taxable benefit that must be included in the taxable income of Khwezi for the 2021 year of
assessment. Also explain the employees’ tax consequences of this taxable benefit.
(b) Explain the tax implications if Khwezi retired on 1 July 2021 due to old age and FGH Ltd
paid his full contributions for the full 2022 year of assessment.
SOLUTION
(a) Cash equivalent = Contributions paid by FGH Ltd (R1 500 × 12) ....................... R18 000
The fringe benefit does not have ‘no value’ because Khwezi has not retired.
Khwezi will qualify for the medical scheme fees tax credit. The remuneration
for employees’ tax purposes is R1 500 per month and the employer must
deduct the medical scheme fees tax credit of R332 monthly in the calculation
of the employees’ tax in terms of par 9(6) of the Fourth Schedule.
(b) Khwezi is an ‘employee’ as defined in the Seventh Schedule for the whole of
the 2020 year of assessment.
The cash equivalent in terms of par 12A will be ((R1 500 × 4) + (R0 × 8)
(par 12A(5)(a)) and is included in gross income in terms of par (i) ..................... R6 000
Khwezi will be deemed to have paid the R6 000 in terms of s 6A(3)(b) and will
therefore qualify for a medical scheme fees tax credit of R332 per month for
the first four months of the year of assessment. Khwezi will not qualify for a
medical scheme fees tax credit for the last eight months because Rnil is
included as a fringe benefit for these months, and he is therefore deemed to
have paid Rnil during those months.
FHG Ltd can consequently only deduct the R332 per month as a medical
scheme fees tax credit in terms of par 9(6) of the Fourth Schedule in the first
four months when calculating the monthly employees’ tax of Khwezi.
8.4.15 Costs relating to medical services (paras 2(j) and 12B)

Type of taxable benefit Costs paid by employer in respect of Par 2(j)
various medical, dental, hospital or
nursing services or medicines provided to
the employee, his or her spouse, child,
family member or dependant
Exclusions from taxable benefit None
Definitions None
Cash equivalent Amount incurred by the employer Par 12B(1)
– general rule
Cash equivalent If the payment by the employer in respect Par 12B(2)
– special rules of an employee or his dependants cannot
specifically be attributed, it is deemed that
the payment is equal to the total payments
by the employer divided by the number of
employees in respect of whom the contri-
butions were made
continued
236

No values (a) Treatments listed by the Minister of Par 12B(3)(a)
Health as prescribed minimum benefits
provided to an employee, his or her
spouse or children in terms of a medical
scheme run by the employer as a
business
If not run as a business, the aforemen-
tioned persons must not be beneficiaries
of another medical scheme, or, if they are,
the employer must recover the total cost
of such treatment from such medical
scheme before the no value will apply
(b) Services rendered or medicines supplied Par 12B(3)(aA)
for the purposes of complying with any
law of the Republic (for example HIV/AIDS
medicine)
(c) Benefits derived by
l a person who retired by reason of Par 12B(3)(b)(i)
age, ill health or other infirmity, or
l the dependants of an employee Par 12B(3)(b)(ii)
(who was an employee at the date
of death) after his or her death, or
l the dependants of an employee after Par 12B(3)(b)(iii)
his or her death, if that person retired
from employment by reason of age, ill-
health or other infirmity
l a person entitled to the over 65 rebate Par 12B(3)(b)(iv)
(d) Services rendered to employees in Par 12B(3)(c)
general at their place of work for the
better performance of their duties
Example 8.21. Medical services

Employer A has a scheme (which does not constitute the business of a medical scheme) in terms
whereof medical services are provided to employees, spouses and dependants. The following
payments are made by employer A:
Employee Barry: Payment of dental services ................................................................... R4 000
(Barry is a member of a medical scheme and employer A
recovered the full R4 000 from Barry’s medical scheme.)
Employee Candice: Payment of hospital account for open heart operation ................... R26 000
(Candice is 66 years old.)
Employee Driaan: Payment of medicine for epilepsy ....................................................... R3 000
(Driaan was employed by employer A but died during the year.
The R3 000 was paid on behalf of his wife after Driaan’s death.)
Calculate the cash equivalent of the taxable benefits resulting from employer A’s payments on
behalf of the respective employees.
SOLUTION
Employee Barry
The payment of the R4 000 has no taxable value for Barry since employer A has recovered the full
R4 000 from Barry’s medical scheme (par 13(3)(a)(ii)(bb)).
Employee Candice
The payment of the R26 000 has no taxable value for Candice since she is entitled to the above-
65 rebate (par 13(3)(b)(iv)).
Employee Driaan
The payment of the R3 000 on behalf of Driaan’s wife has no taxable value since Driaan was
employed by employer A at his death and his wife was dependent on him (par 13(3)(b)(ii)).
237
8.4.16 Benefits in respect of insurance policies (paras 2(k) and 12C)

Type of taxable benefit The employer has made any payment to any Par 2(k)
insurer under an insurance policy directly or
indirectly for the benefit of the employee or his
or her spouse, child, dependant or nominee
Exclusions from taxable An insurance policy that relates to an event Proviso to par 2(k)
benefit arising solely out of and in the course of An example of this is a policy
employment of the employee that pays out if the employee is
injured in an accident at work
Definitions None
Cash equivalent Amount of premiums paid by the employer Par 12C(1)
– general rule
Cash equivalent Where it cannot be determined which pre- Par 12C(3)
– special rules miums paid by an employer relates to a
specific employee, the amount attributed to
that employee is deemed to be an amount
equal to the total expenditure divided by the
number of employees in respect of whom the
expenditure is incurred
No values None
Amount on IRP 5 Remuneration for PAYE Cash equivalent
8.4.17 Contributions by an employer to pension and provident funds (paras 2( l) and 12D)

Type of taxable benefit Contributions by employer to any pension and Par 2(l). Such amount will be
provident fund for the benefit of an employee deemed to have been contrib-
A defined contribution fund is a fund where uted by the employee due to
the contributions and the benefits at retire- being included as a taxable
ment correlate benefit (s 11F(4)(a))
A defined benefit fund is a fund where the The proviso to this paragraph
contributions are based on the retirement ensures that transfers of actu-
funding employment income but the benefits arial surpluses between or with-
at retirement are calculated per fund member in retirement funds of the same
category in terms of a formula employer do not create a fringe
benefit in the employee’s hands.
This is even though such trans-
fers are deemed to be contrib-
utions made by the employer
(through the fact that the fund is
an associated institution in rela-
tion to the employer)
Exclusions from None
taxable benefit
Definitions Benefit: any amount payable to a member, a Par 12D(1)
dependant or nominee of the member by the
fund
Defined benefit component: a benefit receiv-
able from a retirement fund other than a
defined contribution component or underpin
component
continued
238

Defined contribution component: a benefit A risk benefit policy means a policy
receivable from a retirement fund based on under which the risk benefit provided
the contributions paid by the member and by the fund directly or indirectly for the
the employer plus any fund growth and benefit of a member of the fund is
other credits to the member’s account less provided by a means other than a
expenses determined by the board; or a policy of insurance
benefit that consists of a risk benefit if it is
provided by means of a policy of insurance
or a risk benefit policy
Fund member category: any group of mem-
bers where the employers and members
make contributions in the same equal rate
and the value of the benefits are calculated
using the same method
Member: any member or former member,
but not a person who has received all the
benefits that may be due by the fund and
thereafter terminated membership
Retirement-funding income: That part of the
employee’s income considered in the deter-
mination of the contributions made. In the
case of a partner in a partnership, it is that
part of the partner’s share of profits consid-
ered in the determination of the contributions
made Risk benefit: a benefit payable in
respect of the death or permanent disable-
ment of a member
Underpin component: a benefit receivable
from a retirement fund the value of which is
the greater of a defined contribution com-
ponent or a defined benefit component
other than a risk benefit
Cash equivalent Where the benefits payable to a fund Par 12D(2)
– general rule member category of the fund consists solely
of defined contribution components: the total
amount contributed by the employer in
respect of the employee
Where the taxable benefits payable to a Par 12D(3)
fund member category of the fund consists Par 12D(4): the board of a fund must
of components other than only defined provide contribution certificates which
contribution components: an amount contain the fund member category
determined in accordance with the following factor to the employer in respect of this
formula: benefit. A corrected contribution cer-
X = (A × B) – C tificate must be issued where an error
Where occurred in calculating the fund mem-
A = the fund member category factor of the ber category factor (par 12D(4)(c)).
employee The corrected certificate will have
effect from the first day of the month
B = the retirement funding employment
following the month in which the cor-
income of the employee
rected certificate was received. Where
C = the contributions by the employee the fund category factor has changed
excluding voluntary contributions and buy- during the year of assessment, the
back contributions contribution certificate must be supplied
to the employer no later than one month
after the day on which the changes
became effective (par 12D(4)(d)).
Par 12D(5) states that the Minister may
make regulations prescribing the man-
ner in which funds must determine the
fund member category factor and the
information that the contribution certifi-
cate must contain
continued
239

Cash equivalent None
– special rules
No values The taxable benefit derived from any contri- Par 12D(6)
bution made by an employer
l for the benefit of a member of a fund that
has retired from that fund, or
l in respect of the dependants or nominees
of a deceased member of that fund
Remuneration for PAYE Cash equivalent Par (b) of the definition of ‘re-
muneration’ in the Fourth Sched-
ule
8.4.18 Contributions by an employer to bargaining councils (paras 2(m) and 12E)

Type of taxable benefit Contributions by employer to any bargaining Par 2(m)
council for the benefit of an employee
Exclusions from taxable Any payment in respect of a pension fund or
benefit provident fund as contemplated in par 2(l)
Definitions None
Cash equivalent Amount of premiums paid Par 12E(1)
– general rule
Cash equivalent Where it cannot be determined which pre- Par 12E(2)
– special rules miums paid by an employer relate to a
specific employee, the amount attributed to
that employee is deemed to be an amount
equal to the total expenditure divided by the
number of employees in respect of whom the
expenditure is incurred
No values None
8.5 Right to acquire marketable securities (s 8A)

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, in whole or in part, of a right to
acquire any marketable security (as defined in s 8A(10)) 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. Section 8A is only applicable to a right obtained by a taxpayer before 26 October 2004.
Considering the long lapse of time, this section will no longer be discussed in detail. The 2014
version of Silke can be studied for a full discussion thereof. Section 8A was replaced by s 8C and the
taxation of rights obtained on or after 26 October 2004 is discussed in 8.7.
8.6 Broad-based employee share plans (s 8B)

The acquisition of shares by employees (over standard salary) can motivate productivity because
employees obtain a stake in the future growth of the entity. Section 8B was originally introduced to
lighten the tax burden where shares are transferred to employees on a broad basis. Section 8B
applies to ‘qualifying equity shares’ (as defined) acquired in terms of a broad-based employee share
plan (as defined). To prevent an employee, who leaves the services of an employer, from not being
taxed on the gain on disposal, the word ‘employee’ was substituted by the word ‘person’.
240
A ‘qualifying equity share’ is defined as an equity share acquired in terms of a ‘broad-based

employee share plan’. The total market value of all such shares acquired in the current year and the
four immediately preceding years of assessment, on the date of the grant, does not exceed R50 000.
This limit can be interpreted in different ways. One interpretation is that s 8B will apply to the extent
that the market value of the qualifying shares does not exceed R50 000. Another is that, if a grant will
cause the R50 000 limit to be exceeded, s 8B will not apply in respect of the total of such grant and
that s 8C must then be considered. The value of qualifying equity shares acquired because the per-
son already held other qualifying equity shares (for example through a capitalisation issue or at
unbundling) are not taken into account in calculating the R50 000 limit (s 8B(2A) and the definition of
‘qualifying equity share’ read together).
A ‘broad-based employee share plan’ (as defined in s 8B(3)) must meet the following requirements:
l 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 (s 8B(3)(a))
l employees who participate in any other equity scheme are not entitled to participate and at least
80% of all other employees employed on a full-time basis for at least one year on the date of
grant are entitled to participate (s 8B(3)(b))
l the employees who acquire the equity shares are entitled to all dividends, foreign dividends and
full voting rights in relation to those equity shares (s 8B(3)(c)), and
l no restrictions have been imposed in respect of those equity shares, other than
– a restriction imposed by legislation
– a right of any person to acquire the shares from the employee or former employee at the lower
of market value on the date of grant and the market value on the date of acquisition by the
person if the employee or former employee is or was guilty of misconduct or poor performance,
or
– a right of any person to acquire the equity shares from the employee or former employee at the
market value on the date of the acquisition by that person, or
– a restriction that the employee or former employee is not permitted to dispose of the share for a
period which may not extend beyond five years from the date of grant (s 8B(3)(d)).
The acquisition of the qualifying equity share

Paragraph 2(a)(iii) excludes the acquisition of any qualifying equity share from taxable benefits. The
amount (being the market value of the equity share less any consideration paid by the employee) is
therefore not included in gross income in terms of par (i) of the ‘gross income’ definition. The amount
is also specifically excluded from gross income in terms of par (c) of the ‘gross income’ definition to
avoid a possible scenario of double taxation. The amount is, however, exempt from tax in terms of
s 10(1)(nC) – refer to chapter 5. There must be an inclusion in gross income before an amount can be
exempt, and it is therefore submitted that the amount must be included in gross income in terms of the
general definition of gross income. The s 10(1)(o)(ii) apportionment can exempt a part of the amount if
the services were rendered both inside and outside the RSA. A debt incurred by an employee in
favour of the employer or an associated institution to pay the consideration for the s 8B shares, is
excluded as a fringe benefit (par 2(f) of the Seventh Schedule).
The gain on the disposal of the qualifying equity share
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 or her ‘income’
(s 8B(1)). Please remember that any amounts included in ‘income’ in terms of any other provision of the
Act are effectively included in gross income in terms of par (n). The date of grant is the date on which
the granting of the equity share is approved (s 8B(3)). If the person sells the shares after this five-year
period, s 8B will not apply and the person’s gains will generally be of a capital nature and will
therefore attract CGT in terms of the Eighth Schedule. The intention of the taxpayer will be defining.
Section 8B contains no provision in respect of the tax implication if the disposal of a s 8B share leads
to a loss. It is suggested that such a loss is of a capital nature since deduction thereof will be
prohibited in terms of s 23(m).
The provisions of s 8B are applicable notwithstanding the provisions of s 9C, which deems income
from the sale of equity shares to be of a capital nature if the shares were held for at least three
consecutive years. This means that the provisions of s 8B override those of s 9C and that a disposal
of a qualifying equity share after three years but before five years will still result in a s 8B inclusion in
income and not in CGT. Section 8C does not apply if s 8B is applicable (s 8C(1)(b)(ii)).
241
The following disposals within five years from the date of grant are excluded from the provisions of
s 8B:
l disposals in exchange for another qualifying equity share as contemplated in s 8B(2) (s 8B(1)(a))
(these disposals are also seen as ‘no disposal’ in terms of par 11(2)(m) of the Eighth Schedule)
l disposals on the death of that person (s 8B(1)(b)), and
l disposals on the insolvency of that person (s 8B(1)(c)).
Section 9HA causes a deemed disposal of s 8B shares in the case of death on or after 1 March 2016.
The provisions of s 25 are not applicable in respect of a disposal on death (s 8B(4)). Generally, if a
person ceases to be a resident, the person is deemed to have immediately disposed of all his assets
in terms of s 9H. There is, however, no deemed disposal of s 8B qualifying equity shares allocated to
a person less than five years before the person ceases to be a resident (s 9H(4)(d)). If a person
disposes of qualifying equity shares solely in exchange for any other equity share in the employer or
an associated institution, the new equity shares are deemed to be qualifying equity shares acquired
on the date the first qualifying equity shares were obtained, and for the same consideration (s 8B(2)).
If a person sells his right or interest in qualifying equity shares, the acquisition cost attributable to that
right or interest is calculated as follows:
Acquisition cost multiplied by (the amount received for the disposal divided by the market value of the
qualifying equity shares immediately before the disposal) (s 8B(2B)).
Section 11(lA) provides for a deduction for the employer in respect of the qualifying equity shares
issued. This deduction is limited to R10 000 per employee per year (see chapter 12 for details). Sec-
tion 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or 8C from donations tax. Section 8B is dis-
cussed in Interpretation Note No. 62.
Employees’ tax
The employer is subject to special PAYE and reporting requirements in terms of qualifying equity
shares (see par 11A of the Fourth Schedule). This is to ensure that the gain on the disposal of
qualifying equity shares within five years from the date of the grant is taxed. The gain on disposal of
qualifying equity shares by an employee within five years from date of grant is ‘remuneration’ (par (d)
of the definition of ‘remuneration’ in the Fourth Schedule). The employer must therefore withhold
PAYE on the gain (see chapter 10 for details) and the gain on disposal must also be shown on the
IRP 5.
Example 8.22. Broad-based employee share plan

XYZ Ltd. grants 2 500 of its shares to each of its permanent employees on 23 February 2021.
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 2026 unless the employee
is retrenched or resigns. If an employee leaves the employment of XYZ Ltd. before 23 Feb-
ruary 2026, 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 admin-
istered under the plan.
Aviwe, an employee of XYZ Ltd., resigns on 15 January 2027 and subsequently disposes of his
shares on the open market for R16 250.
Benno, an employee of XYZ Ltd., resigns on 1 February 2023. The market value of the equity shares
was R5 on 1 February 2022. 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.
SOLUTION
All the shares constitute qualifying equity shares under s 8B(2), and there is therefore no taxable
fringe benefit in terms of par 2(a) of the Seventh Schedule on the issue of the shares to the
employees. Any amount received in the form of qualifying equity shares (R4,50 (R5,50 –
R1 paid) per share) is included in gross income in terms of the general definition of gross
income but is also exempt in the hands of the employees in terms of s 10(1)(nC).
XYZ Ltd. can claim a deduction in terms of s 11(lA) in respect of all the shares granted at (R5,50
– R1) = R4,50 per share, therefore 2 500 × R4,50 = R11 250 per employee. The deduction for
the 2021 year of assessment is limited to R10 000 per employee. The excess of R1 250 (R11 250
– R10 000) is transferred to the 2022 year of assessment and is deemed to be the market value
of shares granted in that year to that specific employee. XYZ Ltd. can deduct the R1 250 in the
2022 year of assessment.
continued
242
8.6–8.7 Chapter 8: Employment benefits
Aviwe: The proceeds from the disposal of the shares in 2027 do not constitute income (capital in
nature) since they were not disposed of within five years from the date of the issue of the shares,
and therefore s 8B is not applicable. The disposal will result in a capital gain of R13 750
(R16 250 proceeds less R2 500 nominal value paid) in terms of the Eighth Schedule.
Benno: Section 8B will apply since the shares were sold within five years from the date of grant.
The disposal of the equity shares by Benno on 1 February 2023 results in a profit of R10 000
(2 500 × (R5 – R1)). This profit must be included in Benno’s income and XYZ Ltd. must withhold
employees’ tax on it in terms of par 11A(2) of the Fourth Schedule.
8.7 Taxation of directors and employees at the vesting of equity instruments

(s 8C)
Over the years, a few equity-based incentives have been developed for top management (for
example directors and executives) that allow top management to receive various forms of equity with
minimal tax cost and to incentivise retention of key employees. Section 8C regulates the vesting of
equity instruments.
The rules and terms of equity instrument schemes differ, and it is important to note that ‘vesting’ for
the purposes of s 8C is not necessarily the same as vesting in terms of the rules of the scheme. The
rules of a scheme can, for example, determine that the shares are awarded subject to the condition
that the shares only vest after a period, or after certain conditions are met. The rules of the scheme
may also first grant a conditional option to acquire equity shares, and then set different dates for
when that option vests, when the option may be exercised, and when all the restrictions fall away.
Interpretation Note No. 55 (Issue 2), issued on 31 March 2011, describes SARS’ interpretation of s 8C
in more detail.
The definition of the term ‘equity instrument’ in s 8C(7) includes the following:
l a share (both equity and non-equity shares – see par 4.2(a)(ii) of Interpretation Note No. 55
(Issue 2)
l a member’s interest in a company
l share options or an option to obtain a member’s interest
l any financial instrument that is convertible to a share or member’s interest (for example a convert-
ible debenture), and
l any contractual right or obligation the value of which is determined directly or indirectly with ref-
erence to a share or member’s interest (for example a contingent or vested right in a trust that
holds shares).
Section 8C(1) is triggered by the vesting, and not the acquisition, of equity instruments acquired by
directors and employees by virtue of their employment or office, or by virtue of any restricted equity
instrument held (for example as a capitalisation issue or at the unbundling of the company. The
acquisition of equity instruments can be from the employer-company, from any person by arrange-
ment with the employer-company or from an associated institution in relation to the employer-
company (s 8C(1)(a)(i)–(iii)).
The acquisition of the equity instrument

Paragraph 2(a)(iv) of the Seventh Schedule specifically excludes the receipt of an asset consisting of
any equity instrument as contemplated in s 8C as a fringe benefit (see 8.4.4 for detail). Any amount
received (that is, the market value of the share on the date of acquisition less any consideration paid
by the employee) by an employee which consists of an equity instrument acquired is therefore not
included in gross income in terms of par (i) of the ‘gross income’ definition. The amount is also
specifically excluded from gross income in terms of par (c) of the ‘gross income’ definition. This
amount is, however, exempt in terms of s 10(1)(nD) as long as vesting has not taken place on the
date of aquisition – see chapter 5. There must, however, be an inclusion in gross income before an
amount can be exempt, and therefore it is submitted that the amount received by way of the aquisition
of an asset consisting of an equity share which has not yet vested must be included in gross income in
terms of the general definition of gross income. Any amount received as consideration for the disposal
of an equity share, which has not yet vested, is similarly included in gross income in terms of the
general definition of gross income and exempt in terms of s 10(1)(nD). A fringe benefit may arise in
relation to a debt granted by an employer to buy s 8C shares (in contrast with s 8B shares) since
par 2(f) of the Seventh Schedule only excludes s 8B.
243
The gain on the vesting of the equity instrument

The gain on the vesting of an equity instrument (as determined in terms of s 8C(2)(a)) is included in
income, and the loss (as determined in terms of s 8C(2)(b)) is deducted from income (s 8C(1)).
Please remember that any amounts included in ‘income’ in terms of any other provision of the Act are
effectively included in gross income in terms of par (n).
The provisions of s 8C(1) are applicable notwithstanding the provisions of ss 9C and 23(m), which
means that the provisions of s 8C override those of the said sections (s 8C(1)(a)). This means that
s 8C will apply even though vesting takes place after three years (s 9C) and that losses are deduct-
ible irrespective of the prohibition of s 23(m).
The ‘equity instrument’ is taxed when it ‘vests’ in an employee or director. To establish when an
‘equity instrument’ ‘vests’ in an employee or director, it is important to first establish if it is a ‘restricted
equity instrument’ or an ‘unrestricted equity instrument’, as different rules regarding the vesting of
these instruments apply.
8.7.1 Restricted versus unrestricted instruments

A ‘restricted equity instrument’ is an instrument with any number of restrictions imposed on it. Sec-
tion 8C(7) lists the following instruments that fall within the restriction status (also see the examples in
par 4.2 of Interpretation Note No. 55):
l Disposal restrictions. This means that the employee or director cannot freely dispose of that
instrument at fair market value at any given time.
l Forfeiture restrictions. This means that the restriction could result in forfeiture of the instrument or
the right to obtain the instrument, or that the taxpayer can be penalised financially in any other
manner. If the employee or director must, for example, sell the instrument back at cost (or
surrender the instrument for nothing) if employment terminates before a specific date, it is a
restricted instrument.
l Right to impose disposal or forfeiture restrictions. This means that any person has a right to
impose a ‘disposal restriction’ or a ‘forfeiture restriction’ on the disposal of that equity instrument.
l Options on restricted equity instruments. An option will be viewed as a restricted instrument if the
equity instrument, which can be acquired in terms of that option, is a restricted instrument.
l Financial instruments convertible into restricted equity instruments. Financial instruments
(qualifying as equity instruments) that are convertible into a share will be restricted if convertible
only into a restricted share.
l Employee escape clauses. This means that the employer, an associated institution or other
person in arrangement with the employer undertakes to cancel or repurchase the equity instru-
ment at a price exceeding its market value if there is a decline in the value of the equity instru-
ment.
l Event. This means that the equity instrument is not deliverable to the taxpayer until the happening
of an event, whether fixed or contingent.
An ‘unrestricted equity instrument’ means an equity instrument that is not a ‘restricted equity
instrument’.
8.7.2 Vesting as the tax event

An ‘unrestricted equity instrument’ will ‘vest’ at the time of acquisition of the instrument (s 8C(3)(a)). A
‘restricted equity instrument’, as per s 8C(3)(b), will ‘vest’ at the earliest of the following five events:
l when all restrictions causing ‘restricted equity instrument’ status are lifted
l immediately before the employee or director disposes of the ‘restricted equity instrument’ (unless
it is exchanged for another equity instrument or sold to a connected person)
l immediately after an option that qualifies as a ‘restricted equity instrument’ or a financial instru-
ment terminates
l immediately before the employee or director dies, if the restrictions relating to that equity instru-
ment are or may be lifted after death, or
l on disposal of a restricted equity instrument for an amount that is less than the market value or if
a disposal by way of release, abandonment or lapse of an option or financial instrument occurs.
244
8.7.3 Calculation of gain or loss upon vesting

The vesting of an equity instrument will result in an ordinary income gain or loss as if the vested
amount were an adjustment to the salary of the employee or director. The taxable gain or loss will be
calculated as the difference between the market value of the equity instrument at vesting and any
cosideration paid by the taxpayer for the equity instrument (s 8C(2)(a)(ii) and (b)(ii)). A special rule
applies if an option or financial instrument is disposed of by way of release, abandonment or lapse,
namely amount received, less the consideration paid (s 8C(2)(a)(i)(bb) and (b)(i) (bb)).
A return of capital or foreign return of capital in respect of a restricted equity instrument is also,
subject to certain exclusions, included in his or her income (s 8C(1A)). The policy intent underlying
the inclusion of a return of capital or a foreign return of capital is that capital distributions will gen-
erally trigger ordinary revenue, except if the capital distribution consists of another restricted equity
instrument. If this is the case, the capital distribution will be treated as a non-event. A taxpayer must,
include any amount received by or accrued to him or her in respect of a restricted equity instrument if
that amount does not constitute:
l a return of capital or foreign return of capital by way of a distribution of a restricted equity
instrument)
l a dividend or foreign dividend in respect of that restricted equity instrument, or
l an amount that must be taken into account in determining the gain or loss in respect of that
restricted equity instrument
(section 8C(1A)).
If, for example, an employee holds restricted equity shares and 90 per cent of the shares are bought
back before the date that the restrictions will end, the amount received as a dividend in respect of
this buyback will not be exempt as it consists of consideration paid in respect of the share buyback.
The s 10(1)(k)(i) dividend exemption does not apply to dividends received in respect of services
rendered other than a dividend received in respect of a restricted equity instrument (proviso (ii) to
s 10(1)(k)(i)). This prevents an employer from paying an employee’s salary as a dividend.
Two specific provisos deal with the situations where restricted instruments held by employees are
liquidated in return for an amount qualifying as dividend. The dividend exemption does not apply to
any dividend in respect of a restricted equity instrument acquired in the circumstances of s 8C(1) if
that dividend constitutes
l an amount received or accrued in anticipation or during the winding up, liquidation, deregistra-
tion or final termination of a company, or
l an equity instrument that does not qualify, at the time of the receipt or accrual of that dividend, as
a restricted equity instrument as defined in s 8C
(proviso (jj) to s 10(1)(k)(i), which applies notwithstanding the provisions of par (dd) and (ii)).
The dividend exception further does not apply in respect of a restricted equity instrument acquired in
the circumstances of s 8C(1) if that dividend constitutes
tion of any share in that company, or
l an amount received or accrued in anticipation or during the winding up, liquidation, deregistra-
tion or final termination of a company
(proviso (kk) to s 10(1)(k)(i), which applies notwithstanding the provisions of paras (dd) and (ii)).
The terms ‘market value’ and ‘consideration’ are defined in s 8C(7). ‘Market value’, in relation to an
equity instrument, means
l In the case of a private company an amount determined in terms of a method of valuation which
gives a fair value and which is used consistently. This method must be used to determine the
price for both purchases and sales of such equity instruments, or
l In the case of any other company, the price at which an instrument could be obtained between a
willing buyer and a willing seller on the open market at arm’s length.
‘Consideration’ in respect of an equity instrument means any amount given (other than in the form of
services rendered)
l by the taxpayer in respect of the equity instrument
l by the taxpayer in respect of another restricted equity instrument which has been disposed of by
the taxpayer in exchange for that equity instrument
245
l by any person not dealing at arm’s length or any connected person limited to the amount the
taxpayer would have given to acquire that restricted equity instrument (par (c) of the definition of
‘consideration’ in s 8C(7)).
If an employee exchanges a restricted equity instrument in his employer or an associated institution
for another restricted equity instrument, for example because of a corporate restructuring, a roll-over
relief is provided. The new instrument is deemed to have been acquired as a result of employment
and is therefore taxable (s 8C(4)(a)).
A taxable gain or deductible loss arises where, in addition to the exchange of shares, the employer
pays the employee cash to balance the exchange of instruments (s 8C(4)(b)). A portion of the con-
sideration that the employee paid for the original instrument must be apportioned to the cash
received. The employee will be taxed on the profit from the cash received less the consideration
attributable to the cash received.
No specific deduction is available to employers, and only a s 11(a) deduction can therefore be
claimed if all the requirements are met. Section 56(1)(k)(ii) exempts any gain in terms of s 8A, 8B or
8C from donations tax.
Employees’ tax
The same amount referred to in s 8C which must be included in the income of the employee, is also
included in the definition of ‘remuneration’ in the Fourth Schedule (par (e)). Such amounts will there-
fore be subject to employees’ tax (see chapter 10 and par 11A of the Fourth Schedule for detail). The
full gain must be shown on the IRP 5. Any dividend received in respect of a restricted equity
instrument is included in ‘remuneration’ in terms of par (g). The employees’ tax implications in respect
of these dividends are contained in par 11A of the Fourth Schedule and applies from 1 March 2018.
Example 8.23. Vesting of equity instruments
CCC Ltd employs Brendon. In the 2017 tax year Brendon acquires a share in CCC Ltd in
exchange for a R100 note when that share had a value of R100. Brendon may not sell the share
until after leaving the employment of CCC Ltd. Brendon eventually leaves the employment of
CCC Ltd in 2022 when the market value of the share is R250 but does not sell the shares.
Discuss the tax consequences of the above transactions.
SOLUTION
The share in CCC Ltd will be a restricted share in terms of s 8C as Brendon is not entitled to sell
the share before he leaves the company. The share therefore only vests in Brendon in 2022 when
he leaves the company as all restrictions are lifted on that date. On the receipt of the share in
2017, no amount will be included in gross income since the market value of the share is equal to
the consideration given by Brendon.
Brendon must include in his 2022 income an amount of R150 (R250 market value of the share
less the R100 consideration paid). The R250 is the base cost for future disposals by Brendon.
Example 8.24. Vesting of equity instruments
Anja, an employee of X Ltd, is granted an option in Year 1 to acquire 1 000 equity shares in X Ltd
for a consideration of R10 per share. The value of the option at the time is R15 per share. The
award is subject to a restriction in that having exercised the option, she may not sell the equity
shares for a period of three years thereafter. The equity shares are therefore treated as restricted
equity instruments and the option qualifies as a restricted equity instrument.
Anja exercises the option in Year 3 when the equity shares have a market value of R27 per share.
In Year 6 when the restriction falls away and she becomes entitled to sell the equity shares, their
value is R48 per share. She holds the equity shares on capital account and sells them in Year 8
for R60 000.
Discuss all the tax consequences for Anja.
246
SOLUTION
(1) Year 1
On receipt of the option, an amount of R5 000 (1 000 × R15 – R10) accrues to Anja in terms
of the general definition of gross income. The amount is, however, not subjected to tax as
s 10(1)(nD) exempts the receipt of an equity instrument which has not vested from tax.
(2) Year 3
On the exercise of the option, Anja makes a gain of R17 (R27 less R10) which is not taxable
as the instruments have not vested (and s 10(1)(nD) will be applicable). Nor is she taxed on
the exercise of the option as she has disposed of one restricted instrument (the option) for
another restricted instrument (the shares), which does not amount to a vesting (of the
option).
(3) In Year 6 when the restriction falls away, Anja is liable for tax on the gain in terms of s 8C,
Market value on vesting date (1 000 × R48) ......................................................... R48 000
Less: Consideration paid (1 000 × R10) ............................................................... 10 000
Inclusion in taxable income ................................................................................... R38 000
(4) On disposal of the shares which were held on capital account, there is a capital gain or loss
calculated with reference to the difference between the proceeds and the market value of
the shares at vesting date, which must be treated as the base cost in terms of par 20(1)(h)
of the Eighth Schedule. The capital gain therefore amounts to R60 000 less R48 000 (1 000
× R48) = R12 000.
Example 8.25. Swap of restricted equity instruments
As a result of a corporate restructuring an employee disposes of a restricted equity instrument

held by him to his employer and in return receives another restricted equity instrument worth
R140 and cash of R60. When the employee had exercised his option to acquire the original
equity instrument he paid a consideration of R100.
Discuss the tax consequences for the employee.
SOLUTION
The new restricted equity instrument is deemed to be acquired by virtue of the employee’s
employment and will be subject to tax when the restrictions on it are lifted. A gain is determined
because of the receipt of the cash of R60. The portion of the consideration attributable to the
cash received is calculated as follows:
R60/R200 × R100 = R30.
The gain to be included in income is R60 – R30 = R30
The non-arm’s-length disposal of a restricted equity instrument or the disposal to a connected person
will not be regarded as vesting of the equity instrument. It will therefore not attract a taxable gain or
loss (s 8C(5)(a)). The connected person or non-arm’s-length person will therefore step into the shoes
of the employee or director. This means that any vesting event in the hands of the transferee creates
a taxable income or loss for that employee or director (and therefore not for the connected person or
non-arm’s-length person). This does not apply where a taxpayer disposes of a restricted equity
instrument (including by way of forfeiture, lapse or cancellation) to his employer for an amount that is
less than the market value (s 8C(5)(c)).
For example, say an employee acquires 1 000 restricted equity instruments from his employer for a
total cost of R2 000 in Year 1. He thereafter disposes of the instruments to his daughter for R3 000
while they remain restricted. The instruments vest in Year 3 when their market value is R5 000. A tax-
able gain of R3 000 arises in Year 3, calculated as the difference between the market value (at
vesting date) less the consideration (R5 000 less R2 000). Moreover, the employee will be deemed to
have donated to his daughter amounting to R2 000 (R5 000 less R3 000) by virtue of s 58(2), which is
subject to donations tax.
The same deeming rule applies where the instrument is acquired by a person other than the taxpayer
by virtue of the taxpayer’s employment or office of director, without a transfer from the taxpayer, for
example, by his spouse. In such a case, the equity instrument is deemed to have been so acquired
by the taxpayer and disposed of to the other person, and the taxpayer will be treated as obtaining the
gain or sustaining the loss at vesting date (s 8C(5)(b)).
247
What happens if an employee or a director transfers a restricted instrument (by way of a non-event)
to a person (A) and thereafter A transfers the restricted equity instrument to another person (B)? The
second transfer is also treated as a non-event and on vesting of the instrument in B the employee or
director will be taxable on the gain or entitled to deduct a loss (s 8C(6)).
8.7.4 Impact of s 8C on capital gains tax

Paragraph 13(1)(a)(iiB) defers the time of disposal of an equity instrument by a share incentive trust
to the employee beneficiary until the equity instrument is unrestricted and vests in the hands of the
employee beneficiary for the purposes of s 8C. If the equity instrument is disposed of after vesting,
the base cost will be equal to market value on the date that instrument vests (par 20(1)(h)(i) of the
Eighth Schedule).
Generally, if a person ceases to be a resident, that person is subject to an immediate deemed dis-
posal of all qualifying assets in terms of s 9H. However, s 8C equity instruments, which had not yet
vested at the time that the person ceases to be a resident, are exempt from this provision, because
these instruments will only be subject to ordinary gain or loss when vesting takes place (s 9H(4)(e)).
8.8 Mauritius and United Kingdom Double Tax Agreements (DTAs): Income from
employment (Article 14)
Income from employment (salaries, wages and other similar remuneration) paid by a South African
employer to a resident of Mauritius or the United Kingdom respectively
l may only be taxed in the country of residence (Article 14(1) of the Mauritius and UK DTAs),
unless
l the employment is exercised in South Africa (the country of source), in which case it may be
taxed in South Africa (Article 14(1) of the Mauritius and UK DTAs).
Notwithstanding these rules, Article 14(2) states that such income shall only be taxable in the country
of residence (either Mauritius or the United Kingdom) if
l the recipient is present in South Africa for a period or periods not exceeding in the aggregate
183 days in the calendar year concerned (in the case of the Mauritius DTA) and in the aggregate
183 days in any twelve-month period commencing or ending in the fiscal year concerned (in the
case of the United Kingdom DTA), and
l the remuneration is paid by or on behalf of an employer who is not a resident of the country of
source (South Africa), and
l the remuneration is not borne by a permanent establishment which the employer has in the
country of source (South Africa).
The main objective of the above exemption is that short-term employees should not be taxed in the
source State where their employer is not entitled to a tax deduction of their salaries, on the basis that
the employer is not resident, and the employer does not have a permanent establishment therein.
Regarding the phrase ‘borne by a permanent establishment’, the OECD Model Tax Convention on
Income and on Capital, in par 7 of its commentary to Article 15 (The taxation of Income from Employ-
ment), indicates that this requirement must be read considering its purpose. The requirements in
paras (b) and (c) are contained in treaties to ensure that the relief provided for in Article 15(2) does
not apply to remuneration that could give rise to a deduction in the hands of the payer, having regard
to the principles of Article 7. Article 7 deals with business profits, and the nature of the remuneration,
in computing the profits of a permanent establishment situated in the State in which the employment
is exercised (country of source). When assessing whether remuneration is ‘borne by’ a permanent
establishment of the employer in the country of source, the fact that the employer has, or has not,
actually claimed a deduction for the remuneration in computing the profits attributable to the per-
manent establishment is not necessarily conclusive. The proper test is whether any deduction other-
wise available with respect to that remuneration should be taken into account in determining the
profits attributable to the permanent establishment. That test would be met, for instance, even if no
amount was actually deducted as a result of the permanent establishment being exempt from tax in
the source country or if the employer simply decided not to claim a deduction to which it was entitled.
Article 22 (in the case of the Mauritius DTA) and Article 21 (in the case of the UK DTA) contain the
rule regarding allowing deductions or credits to prevent double taxation.
Please note that Article 14(1) of the Mauritius DTA is subject to the provisions of Articles 15, 17, 18
and 20 of that DTA, and that Article 14(1) of the United Kingdom DTA is subject to the provisions of
Articles 15, 17 and 18 of that DTA.
248
9 Retirement benefits
/
l apply the provisions of the Act in respect of lump sums received from an employer
in both practical calculation questions and theoretical advice questions
l apply the provisions of the Second Schedule in respect of retirement fund lump
sum benefits and retirement fund lump sum withdrawal benefits in both practical
calculation questions and theoretical advice questions
l apply the provisions of the Act in respect of qualifying annuities received in both
practical calculation questions and theoretical advice questions
l demonstrate your knowledge of the topic in a case study.
Contents
Page
9.1 Overview ........................................................................................................................... 249
9.2 Lump sums from employers that are not retirement funds ............................................... 252
9.2.1 Compensation for termination of employment or office (par (d)(i) definition of
‘gross income’ and definition of ‘severance benefits’ in s 1(1)) and the cumu-
lative principle ..................................................................................................... 252
9.2.2 Commutation of amounts due (par (f) definition of ‘gross income’) ................... 253
9.3 RSA fund benefits (par (e) definition of ‘gross income’, ss 9(2)(i), 10(1)(gC)(ii) and
the Second Schedule, Article 17 of the Mauritius and United Kingdom Double Tax
Agreements (DTAs) with South Africa) ............................................................................. 254
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), 2(1)(c), 4(3), 5, 6 and 6A) . 262
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6) ........... 267
9.3.3 Public sector pension funds (par (eA) definition of ‘gross income’, par 2A) ...... 274
9.3.3.1 Transfers to provident fund (par (eA) definition of ‘gross income’) ...... 275
9.3.3.2 Lump sum benefits from a public sector pension fund (par 2A) .......... 275
9.4 Exemption of qualifying annuities (ss 10C, 11F and par 5(1)(a) and 6(1)(b)(i)) .............. 276
9.5 Rating concession (average rating formula) (s 5(10)) ...................................................... 278
9.5.1 Member of a proto team (s 5(9)) ......................................................................... 279
9.1 Overview
All paragraph references in this chapter are references to the Second Schedule to the Income Tax
Act and sections refer to the Income Tax Act, except where indicated otherwise. In this chapter, the
words ‘retirement funds’ will be used as a collective name to refer to all pension funds, provident
funds, retirement annuity funds and preservation funds registered in the RSA. The Second Schedule
is only applicable to lump sum benefits (as defined) received from RSA funds and this chapter is
written from that perspective when addressing the provisions thereof.
On termination of services and/or membership of retirement funds, various benefits can become
payable by employers that are not funds and/or by funds. A fund is also an ‘employer’ if benefits are
paid to a member since such benefits are ‘remuneration’ as defined in the Fourth Schedule. The
benefits can include annuities, lump sums, lump sum benefits and lump sum benefits in the form of
life policies (see 9.3).
Annuities
Any annuities, living annuities (as defined in s 1(1) and discussed in chapter 4), qualifying annuities
(as defined in s 10C) or ‘annuity amounts’ in s 10A received by a taxpayer are included in gross
249
income by way of par (a) of the definition of ‘gross income’ in s 1(1) (in column 3 of the compre-
hensive framework in chapter 7). The normal tax payable on the total taxable income in column 3 is
calculated in terms of the progressive tax table applicable to natural persons.
Only qualifying annuities (as defined in s 10C) can be exempt in terms of s 10C if all the requirements
in s 10C(2) are met (see 9.4). Please note that the definition of ‘qualifying annuity’ in s 10C only refers
to annuities received from RSA funds, and that only such annuities can qualify for the s 10C exemp-
tion.
Lump sums from an employer that is not a fund

Lump sums paid by an employer that is not a fund are included in the gross income of the employee
in terms of paras (d)(i)–(iii) and (f) of the definition of ‘gross income’ in s 1(1). Only two of these four
lump sums, namely lump sums received in respect of the termination of employment (par (d)(i)) and
in commutation of amounts due under an employment contract (par (f)), can qualify as severance
benefits if the requirements of the definition are met (see chapter 4.6). No deductions are allowed
against severance benefits.
The gross amounts of severance benefits received are included in gross income (in column 1 of the
comprehensive framework in chapter 7). The normal tax payable on a severance benefit is calculated
in terms of the separate tax table applicable to severance benefits, based on the cumulative principle
(see 9.2.1). If a lump sum from an employer that is not a fund does not qualify as a severance benefit,
the gross amount is included in gross income (in column 3 of the comprehensive framework in chap-
ter 7), and it is taxed in terms of the normal progressive tax table applicable to natural persons.
An employer can pay the proceeds of a policy of insurance as a lump sum to an employee, or depend-
ant or nominee of the employee (par (d)(ii)). An employer can also cede a policy of insurance to an
employee, or dependant or nominee of the employee (par (d)(iii)). Both these amounts are specifical-
ly excluded in the definition of ‘severance benefit’ and can never be a severance benefit. Please note
that the cession of a policy of insurance (par (d)(iii)) does not necessarily happen on the termination
of services.
Lump sum benefits from RSA retirement funds

The Second Schedule only applies to ‘lump sum benefits’ paid by RSA retirement funds. The term
‘lump sum benefit’ is defined in par 1 of the Second Schedule and includes
l any amount in respect of the commutation of an annuity or portion of an annuity, and
l any fixed or ascertainable amount (other than an annuity)
payable by or provided in consequence of membership of any of the five RSA retirement funds.
The term ‘lump sum benefit’ is also defined in s 1(1) of the Act. The definition in s 1(1) merely states
that it means the two types of lump sum benefits from retirement funds, namely a ‘retirement fund
lump sum benefit’ and a ‘retirement fund lump sum withdrawal benefit’ (s 1(1)). Similarly, par (e) of
the definition of ‘gross income’ also merely states that these two types of lump sum benefits must be
included in gross income.
The specific definitions for these two types of lump sum benefits in s 1(1) explain how the amount to
be included in terms of par (e) definition of ‘gross income’ is determined. The amount of the lump
sum benefit is the ‘amount determined’ in terms of par 2(1)(a) or (c) (in the case of a retirement fund
lump sum benefit), and in terms of par 2(1)(b) (in the case of a retirement fund lump sum withdrawal
benefit) (s 1(1)). It is therefore clear that the provisions of the Second Schedule explain the types of
lump sum benefits in detail and also determine how the amount to be included in gross income must
be calculated.
The ‘amount determined’ is in effect the net amount, being the amount of the lump sum benefit re-
ceived from the RSA retirement fund less the allowable deductions calculated in terms of par 5, 6 or
6A (par 2(1)). This net amount must be included in gross income (in either column 1 or 2 of the com-
prehensive framework in chapter 7) in terms of par (e) of the ‘gross income’ definition (s 1(1)). The
normal tax payable in respect of all lump sum benefits from RSA retirement funds is calculated in
terms of either the separate tax table applicable to retirement fund lump sum benefits or the separate
tax table applicable to retirement fund lump sum withdrawal benefits, based on the cumulative prin-
ciple. The type of lump sum benefit is determined by the event leading to the receipt of the lump sum
benefit. There are four specific events in respect of retirement fund lump sum benefits (par 2(1)(a)(i)–
(iii) and par 2(1)(c)). There are two specific events (par 2(1)(b)(iA) and (iB)) and one general ‘catch-
all’ event (par 2(1)(b)(ii)) in respect of retirement fund lump sum withdrawal benefits. See the dis-
cussions in 9.3, 9.3.1 and 9.3.2 for more detail in this regard.
Any capital gain or capital loss in respect of a disposal that resulted in a person receiving a lump
sum benefit must be disregarded (par 54 of the Eighth Schedule).
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9.1 Chapter 9: Retirement benefits
The tax implications of all the aforementioned lump sums from an employer that is not a fund and
lump sum benefits from an RSA retirement fund can be summarised as follows:
Receive a severance Receive a lump sum Receive a retirement Receive a retirement
benefit (as defined) which is not a severance fund lump sum benefit fund lump sum with-
from an employer that is benefit (as defined) from from an RSA retirement drawal benefit from an
not a fund an employer that is not a fund RSA retirement fund
fund
Include the gross Include the gross Include the net amount Include the net amount
amount in gross income amount in gross income in gross income in colin gross income in col-
in column 1 of the Com- in column 3 of the Com- umn 1 of the Compre- umn 2 of the Compre-
prehensive framework in prehensive framework in hensive framework in hensive framework in
chapter 7 chapter 7 chapter 7 chapter 7
Paragraph (d)(i) or (f) of Paragraph (d)(i)–(iii) or Paragraph (e) of the Paragraph (e) of the def-
the definition of ‘gross (f) of the definition of definition of ‘gross in- inition of ‘gross income’
income’ ‘gross income’ come’ and par 2(1)(a)(i)– and par 2(1)(b)(iA),(iB)
(iii) and 2(1)(c) and (ii)
The tax table applicable The progressive tax The tax table applicable The tax table applicable
to severance benefits is table applicable to natu- to retirement fund lump to retirement fund lump
used to calculate the ral persons is used to sum benefits is used to sum withdrawal benefits
normal tax payable calculate the normal tax calculate the normal tax is used to calculate the
payable on the taxable payable normal tax payable
income in column 3
The cumulative principle The cumulative principle The cumulative principle
applies when calculating applies when calculating applies when calculating
the normal tax payable the normal tax payable the normal tax payable
Lump sums, pension or annuities received by residents from foreign funds

The Second Schedule does not apply to lump sums received by residents from foreign funds. Indus-
try members have asked SARS to issue specific guidance in respect of the treatment of foreign
retirement funds (in general). The limited discussion regarding amounts received by residents from
foreign funds below focuses on the impact of the exemption in terms of s 10(1)(gC)(ii).
Lump sums, pensions or annuities received by or accrued to a resident from sources in and outside
the Republic are included in gross income since residents are taxed on a worldwide basis. If a resi-
dent receives such an amount from a source outside the Republic in respect of services rendered
outside the Republic, it is exempt from normal tax (s 10(1)(gC)(ii)). The term ‘source outside the
Republic’ refers to the originating cause that gives rise to the pension income, namely where the
services have been rendered (par 3 of Binding General Ruling (Income Tax) No. 25 (Issue 2)).
(Please note that even though this Ruling only applied until 4 October 2018, no other Ruling has
replaced it and it is submitted that the principle will still apply.) Amounts received from a source outside
the Republic will include amounts received from foreign employers or foreign funds and the causal
link to services rendered outside the Republic must exist. If the resident has rendered services partly
within and partly outside the Republic, it is important to note that only the portion of the amounts
received from foreign funds relating to the services rendered outside the Republic is exempt.
The exemption in s 10(1)(gC)(ii) is not applicable to amounts received from RSA retirement funds as
defined in s 1(1), or from a company that is a resident and is registered as a long-term insurer. The
exemption will, however, also apply if the amount is transferred to an RSA fund or resident insurer
from a source outside the Republic in respect of the resident member and is then paid out by the
RSA fund or resident insurer (s 10(1)(gC)(ii)). Since the Second Schedule and s 10C do not apply to
lump sums and annuities received by residents from foreign funds, it must be noted that all such
amounts received by a resident must be included in column 3 of the comprehensive framework in
chapter 7. The lump sum from a foreign fund will therefore not be included in either column 1 or 2 of
the comprehensive framework and the Second Schedule does not apply to it. The exemption in
s 10(1)(gC)(ii) must be considered in respect of all types of benefits (lumps sums, pensions and
annuities) received by a resident from foreign funds.
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9.2 Lump sums from employers that are not retirement funds
The provisions of the Second Schedule are only applicable to lump sum
benefits received from RSA retirement funds. The Second Schedule is not
Please note! applicable to lump sums received from employers that are not retirement funds.
The Second Schedule can therefore never apply to severance benefits as
defined, since severance benefits are lump sums received from employers that
are not retirement funds.
9.2.1 Compensation for termination of employment or office (par (d)(i) definition of ‘gross
income’ and definition of ‘severance benefits’ in s 1(1)) and the cumulative principle
The provisions relating to the taxability of lump sums received for the termination of employment or
office in terms of par (d ) was discussed in detail in chapter 4. In respect of the par (d) lump sums,
only a lump sum envisaged in par (d)(i) can be a severance benefit as defined, and it is only such
lump sums that are taxed by applying the cumulative principle and using the special tax table applic-
able to severance benefits.
The cumulative principle

Severance benefits, retirement fund lump sum benefits (see 9.3.1) and retirement fund lump sum
withdrawal benefits (see 9.3.2) are all taxed on a cumulative basis. This means that the taxable
amounts of all previous severance benefits and lump sum benefits received after specific dates, but
before the current severance benefit or lump sum benefit, influence the normal tax payable on the
current severance benefit or lump sum benefit. This causes the current severance benefit or lump
sum benefit to be taxed at a higher marginal rate. The determination of the date sequence in which
all severance benefits and lumps sum benefits are received over the lifetime of a natural person is the
very important first step when calculating the tax on the current severance benefit or lump sum
benefit.
The tax tables used to calculate the normal tax payable on severance benefits and retirement fund
lump sum benefits are exactly the same (the first R500 000 is taxed at 0%). A separate tax table is
used to calculate the normal tax payable on retirement fund lump sum withdrawal benefits (the first
R25 000 is taxed at 0%). The application of the cumulative principle ensures that a maximum of
R500 000 in respect of all severance benefits, retirement fund lump sum benefits and retirement fund
lump sum withdrawal benefits received over a natural person’s entire lifetime can be taxed at 0%.
The following previous severance benefits and lump sum benefits qualify to be taken into account in
the application of the cumulative principle and are added to the current severance benefit or lump
sum benefit:
l retirement fund lump sum benefits received or accrued on or after 1 October 2007
l retirement fund lump sum withdrawal benefits received or accrued on or after 1 March 2009, and
l severance benefits received or accrued on or after 1 March 2011.
Application of the cumulative principle to the calculation of normal tax payable on a severance benefit
Place all qualifying severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits in sequence according to the dates of receipt or accrual.
Calculate the sum of
l the current severance benefit, and
l all previous severance benefits, retirement fund lump sum benefits and retirement fund lump sum
withdrawal benefits received by or accrued to the person on or after the specified dates in the severance
benefit tax table
(Please note: The taxable amounts included in gross income in terms of par (d)(i) or (e) are used.)
Use the tax table applicable to the current severance benefit for both the calculations in step 1 and step 2.
l STEP 1 Calculate the normal tax payable on the sum as determined above.
l STEP 2 Calculate the ‘tax that would be leviable’ (the hypothetical tax) on the sum of all previous
severance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal
benefits (therefore excluding the current severance benefit).
(Please note: The hypothetical tax will not necessarily be equal to the actual tax paid on these severance
benefits and lump sum benefits.)
Normal tax payable on the current severance benefit = tax in step 1 less tax in step 2.
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The normal tax payable on severance benefits, retirement fund lump sum benefits and retirement
fund lump sum withdrawal benefits that are received by or accrues to a natural person during a year
of assessment is calculated in the sequence of their receipt or accrual during that year of
assessment. SARS has confirmed that, should a severance benefit and a retirement fund lump sum
benefit be received on the same date, the taxable amounts of the severance benefit (lump sum) and
the retirement fund lump sum benefit (lump sum benefit) will be added when calculating the normal
tax on this lump sum and lump sum benefit using the cumulative principle. This is possible because
the same tax table applies to these two types of benefits. The total normal tax payable on the sum of
two such amounts in one calculation will be the same as the total normal tax payable if one of the two
amounts is deemed to be received before the other and the normal tax payable is calculated
separately applying the cumulative principle. See Example 9.5 for a practical illustration of the
aforementioned.
The table applicable to severance benefits and retirement fund lump sum benefits is set out below:
Taxable income Rate of tax
Not exceeding R500 000 0% of taxable income
Exceeding R500 000 but not exceeding R700 000 R0 plus 18% of taxable income exceeding R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding
R1 050 000
Examples 9.5 and 9.7 illustrate the calculation of the tax liability on a severance benefit.
Amounts included in gross income in terms of par (d) or (e) (see 9.3) are
‘remuneration’ (as defined in par 1 of the Fourth Schedule). Employers that are
not funds paying a severance benefit, as well as all retirement funds paying a
lump sum benefit are ‘employers’ for employees’ tax purposes. The employer
(that is not a fund) paying the severance benefit, or the RSA retirement fund
paying the lump sum benefit, is required to obtain a directive from the
Commissioner regarding the amount of employees’ tax to be withheld (par 9(3) of
the Fourth Schedule). If the directive, for example, specifies a rate of 25%, the
employees’ tax to be withheld is 25% of the amount of the remuneration (being
the gross or net amount (or the taxable amount) included in gross income in
Please note! terms of par (d) or par (e) respectively).
When calculating normal tax payable, the primary, secondary and tertiary rebates
(s 6(2)) cannot be set off against the normal tax payable on a severance benefit
or any lump sum benefit from an RSA retirement fund (s 6(1)). Students must
clearly indicate that these s 6(2) rebates are only deductible against the normal
tax payable on the taxable income in column 3 of the comprehensive framework
in chapter 7 (and not against normal tax payable on the taxable income in col-
umns 1 and 2).
Students must also clearly indicate that the s 6A and 6B medical tax credits may
be deducted from the normal tax payable on the taxable income in columns 1, 2
and 3 of the comprehensive framework in chapter 7 (contrast the wording of
ss 6A and 6B with the wording of s 6(1)). The sequence as used in the com-
prehensive framework in chapter 7, clearly illustrates the correct treatment of the
s 6(2) rebates and the s 6A and 6B credits.
9.2.2 Commutation of amounts due (par (f) definition of ‘gross income’)

Any amount received or accrued in commutation of amounts due under a contract of employment or
service must be included in gross income (par (f) of the definition of ‘gross income’ in s 1(1)).
‘Commutation’ means ‘substitution’. An employee may, for example, commute (or substitute) his right
to have a coffee break into a cash payment that will be included in his gross income in terms of
par (f). Paragraph (f) amounts can also be severance benefits if the requirements of the definition
thereof are met.
It may therefore happen that an amount falls into both par (d) and par (f). It may, however, be taxed
only once.
The taxability of par (f) amounts is the same as lump sum amounts received on the termination of
employment (par (d)(i)) discussed in chapter 4.
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9.3 RSA fund benefits (par (e) definition of ‘gross income’, ss 9(2)(i), 10(1)(gC)(ii)
and the Second Schedule, Article 17 of the Mauritius and the United Kingdom
Double Tax Agreements (DTAs) with South Africa)
A: Types of retirement funds and membership
Retirement funds include pension funds, pension preservation funds, provident funds, provident
preservation funds and retirement annuity funds registered in the RSA. All these funds are estab-
lished by law and/or registered in terms of the Pension Funds Act which implies that all are RSA
funds. The Commissioner must approve all these funds and for this all the requirements in terms of
the respective definitions in s 1(1) and in par 1 must be met. The Second Schedule is only applicable
to lump sum benefits from RSA funds. This means that
l only such lump sum benefits can be categorised as either a retirement fund lump sum benefit or
a retirement fund lump sum withdrawal benefit, and
l only such lump sum benefits can be included in either column 1 or 2 of the comprehensive
framework in chapter 7.
The definition of ‘qualifying annuity’ in s 10C also only refers to annuities received from RSA funds,
and therefore only such annuities can qualify for the s 10C exemption.
Pension funds, provident funds and retirement annuity funds

Pension funds and provident funds are employer funds, meaning that only employees of the specific
employer can be members of that specific fund. Pension funds and provident funds can be ‘private
sector’ funds or ‘public sector’ funds depending on the sector in which the employer falls.
Retirement annuity funds, for example funds administered by Allan Gray or Coronation, are normally
funded by independent individuals and any person can be a member of these funds. No member of a
retirement annuity fund shall become entitled to any benefit prior to reaching normal retirement age
(proviso (b)(v) of the definition of ‘retirement annuity fund’ in s 1(1)). If such a member discontinues
contributions prior to his or her retirement date, he or she will only be entitled to make an election
regarding annuities and/or a lump sum benefit on the retirement date (proviso (b)(x)(aa) of the
definition of ‘retirement annuity fund’ in s 1(1)).
Members of these three funds must make annual contributions of a recurrent nature in accordance
with specified scales and the funds keep separate records for each member in respect of these
contributions. The employers of members of pension and provident funds normally deduct the
contributions from the salaries of the members and pay it over to the fund, but members of retirement
annuity funds normally pay the contributions directly to the fund. Members can claim a s 11F
deduction in respect of these contributions, and a balance of unclaimed contributions can arise (see
chapter 7). SARS also keeps a record of all contributions, deductions allowed and any unclaimed
balance of contributions per taxpayer based on the returns and assessments of the taxpayer. This
record is used when SARS must issue a directive in terms of par 9(3) of the Fourth Schedule in
respect of the employees’ tax that must be withheld when the fund pays out a lump sum benefit to a
member.
The ‘minimum individual reserve’ of a member of a fund is the balance of all the member’s
contributions plus growth over his or her whole period of membership at any given stage of his or her
membership. The ‘retirement interest’ of a member is the member’s share in the value of a fund as
determined in terms of the rules of the fund on the date on which he or she elects to retire from that
fund or transfer to a pension preservation fund, provident preservation fund or retirement annuity fund
(definition in s 1(1)). The words ‘the date on which he or she elects to retire’ in the definition of
‘retirement interest’ refer to the ‘retirement date’ (par (a) of the definition of ‘retirement date’ in s 1(1)).
The two values (minimum individual reserve and retirement interest) of a member will only be equal
on the elected retirement date.
Pension preservation funds and provident preservation funds

Membership of preservation funds is limited. Only
l former members of any other pension funds, provident funds and pension- and provident preser-
vation funds
l persons who have elected to transfer an award in terms of a divorce order from a pension fund,
pension preservation fund, provident fund or provident preservation fund
l former members of a pension fund or provident fund, and, from 1 March 2022, also former mem-
bers of a pension preservation fund, or provident preservation fund, who have elected to transfer
a lump sum benefit after normal retirement age but before retirement date, and
254
l former members of any fund in respect of whom an unclaimed benefit is due by the fund
may be members.
No contributions can be made to a preservation fund. Only certain amounts can be transferred to
preservation funds (those listed in par 2(1)(a)(ii), (b) and (c)). A member of a preservation fund only
becomes entitled to a benefit on his or her retirement date (proviso (d) to the definitions of pension-
and provident preservation funds).
Not more than one amount can be paid out to a member during the period of membership of preser-
vation funds (par (c) of the definitions of pension- and provident preservation funds). With effect from
1 March 2019, the single allowable withdrawal from pension- and provident preservation funds does
not apply to a retirement interest that was transferred to the preservation fund after normal retirement
age but before retirement date (in terms of par 2(1)(c)). There is one exception to this, namely to the
extent that it is an amount to which the member is entitled due to emigration from the Republic or
departure from the Republic after a work visa has expired as discussed below.
B: Benefits payable by retirement funds

The Commissioner may not approve any pension fund, provident fund or retirement annuity fund
unless he is satisfied that the fund is a permanent fund, bona fide established for the sole or main
purpose of
l providing annuities or other benefits for employees on retirement date or for the dependants or
nominees of deceased employees (in the case of a pension fund) (proviso (i) to par (c) of the
definition of pension fund)
l providing benefits for employees on retirement date or for the dependants or nominees of
deceased employees (in the case of a provident fund) (proviso (i) of the definition of provident
fund), or
l providing life annuities for the members of the fund or annuities for the dependants or nominees
of deceased members (in the case of a retirement annuity fund) (proviso (a) of the definition of
retirement annuity fund).
A further purpose, contained in both the definitions of pension funds and provident funds, is to
provide benefits contemplated in par 2C of the Second Schedule or s 15 or 15E of the Pension Funds
Act.
In line with these sole or main purposes of funds, it is the right to annuities (and not the right to lump
sum benefits) that accrues to members of pension funds and retirement annuity funds on retirement
date (see 9.3.1 for the definition of ‘retirement date’).
The word ‘annuities’ is not defined in the Act. Section 9(1)(i) refers to ‘a lump sum, a pension or an
annuity’ payable by various funds. Where the services in respect of which such amounts are received
were rendered in South Africa, the amounts are regarded as received by or accrued to the person
from a source within South Africa. Article 17 of both the Mauritius DTA and the United Kingdom DTA
with South Africa also refer to both the words ‘pensions and annuities’. Only the word ‘annuity’ is
defined for the purpose of Article 17 of these DTAs. It therefore seems that the two words ‘pension’
and ‘annuity’ can be regarded as synonyms when used in respect of benefits payable by funds.
Pensions and annuities paid by a South African fund to a resident of Mauritius or the United Kingdom
respectively, in respect of services rendered in the Republic
l may be taxed in South Africa (Article 17(1) of the Mauritius DTA), and
l may only be taxed in the United Kingdom (Article 17(1) of the United Kingdom DTA).
Article 22 (in the case of the Mauritius DTA) and Article 21 (in the case of the United Kingdom DTA)
contain the rule regarding allowing deductions or credits to prevent double taxation on pensions and
annuities.
Please note that Article 17(1) of both the Mauritius DTA and the United Kingdom DTA is subject to
Article 18(2) applicable to Government service.
(i) Members of all five retirement funds
Selection of a single payment

Even though the right to annuities accrues to members, the definitions of all five retirement funds give
their members an option to commute a part of the retirement interest for a single payment (a lump
sum benefit) on retirement date. These definitions provide that ‘not more than one-third of the total
value of the retirement interest may be commuted for a single payment’.
255
The definition of ‘retirement interest’ refers to ‘on the date on which he or she elects to retire’, which in
turn means that the option to commute arises on the ‘retirement date’ (par (a) of the definition of
‘retirement date’). This limitation of a maximum of one-third of the retirement interest commuted for a
lump sum benefit does therefore not apply if a member dies before the retirement date. This is
confirmed in the list of exceptions to this rule in the definitions of all the retirement funds. This means
that the member’s dependants or nominees can elect that the full retirement interest is paid out as a
lump sum benefit after the death of the member.
A member of these five funds who has reached retirement date must therefore elect to commute a
part of the retirement interest payable by the fund for a single payment (lump sum benefit), before a
‘lump sum benefit’ as defined in par 1 arises. Until the member makes such election, no lump sum
benefit arises or is payable by the fund. The practical effect is that the choice to commute a part of
the retirement interest for a lump sum benefit could have an immediate tax effect for such a member
who reached retirement date. On the selection of a lump sum benefit, it is deemed to be received by
or accrued to the member in terms of par 4(1) and the taxable amount must be included in gross
income in terms of par (e) definition of ‘gross income’.
The fund must pay the remaining two-thirds of the retirement interest (after the deduction of the one-
third lump sum benefit) in the form of an annuity to such a member or can use it to purchase an
annuity (including a living annuity) from a registered insurer, subject to the de minimis rule. De
minimis is a legal principle which allows for matters that are small scale or of insufficient importance
to be exempted from a rule or requirement.
The de minimis rule applies if the value of the remaining two-thirds of the retirement interest of the
member does not exceed R165 000, where the employee is deceased or where the employee elects
to transfer the retirement interest to a pension preservation fund, a provident preservation fund or a
retirement annuity fund. In such a case, the total value of the retirement interest of a member may be
commuted for a single lump sum benefit on the retirement date. This is stated in proviso (ii)(dd) of par
(c) to the definition of pension fund, par (e) to the definition of pension preservation fund, par (b)(ii) to
the definition of retirement annuity fund, proviso (ii)(dd) of the definition of provident fund, and par (e)
to the definition of provident preservation fund.
The words ‘if two-thirds of the retirement interest does not exceed R165 000’ in effect means if the
total retirement interest does not exceed an amount of R247 500 (R165 000 × 3 ÷ 2). Commuting the
full retirement interest for a lump sum benefit in such a case means that all the future qualifying
annuities are commuted for a lump sum benefit. Such a commuted lump sum benefit due to the
application of the de minimis rule is taxed as a specific type of retirement fund lump sum benefit (in
terms of par 2(1)(a)(iii) – see 9.3.1).
The annuity can be provided by the retirement fund in one of three ways, namely it can be paid
directly by the retirement fund to the member, it can be purchased from a South African registered
insurer in the name of the fund, or in the name of the retiring member. With effect from 1 March 2022,
the full value of the retirement interest following commutation in respect of all five funds can also be
used to purchase a combination of annuities (including a combination of methods of paying the
annuity) or a combination of types of annuities. In the case where the remaining balance is used to
provide or purchase more than one annuity, the amount used to provide or purchase each annuity
must exceed R165 000 (provisos to the definitions of the five funds).
Exceptions to the one-third single payment limitation

For members of pension funds and provident funds, and, from 1 March 2022, also pension
preservation funds and provident preservation funds
The limitation that only one-third of the retirement interest can be commuted for a lump sum benefit
does not apply where a member of these funds elects to transfer his or her retirement interest to a
pension preservation fund, provident preservation fund or a retirement annuity fund after normal
retirement age but before retirement date. Such a transfer is taxed as a specific type of retirement fund
lump sum benefit in terms of par 2(1)(c) and could qualify for the specific deductions in terms of par 6A
– see 9.3.1.
For members of pension preservation funds, provident preservation funds and retirement annuity
funds
Members of pension preservation funds, provident preservation funds and retirement annuity funds
may withdraw the full retirement interest as a lump sum benefit prior to the retirement date in the
following two circumstances:
l when the member is or was a resident who emigrated from the Republic and the emigration is
recognised by the South African Reserve Bank for purposes of exchange control**, or
256
l when the member departs from the Republic upon the expiry of a visa obtained to work in or visit
the Republic and the member is not recognised as a resident by the South African Reserve Bank
for purposes of exchange control
(proviso (ii)(aa)** and (bb) to par (c) of the definition of ‘pension preservation fund’, proviso (ii)(aa)**
and (bb) to par (c) of the definition of ‘provident preservation fund’, and proviso (b)(x)(dd)(A)** and
(B) to the definition of ‘retirement annuity fund’).
These lump sum benefits will be taxed as a specific type of retirement fund lump sum withdrawal
benefit in terms of par 2(1)(b)(ii) due to being the general event listed in the table under point C
below (also see 9.3.2).
** Proviso (b)(x)(dd)(A) to the definition of ‘retirement annuity fund’ and provisos (ii)(aa) to par (c) to
the definitions of ‘pension preservation fund’ and ‘provident preservation fund’ have changed with
effect from 1 March 2021. Such members who emigrated will only be able to withdraw the full retire-
ment interest as a lump sum benefit prior to the retirement date
l in respect of applications received on or before 28 February 2021 and approved by the South
African Reserve Bank or an authorised dealer in foreign exchange for the delivery of currency on
or before 28 February 2022, or
l if the person is not a resident for an uninterrupted period of three years or longer on or after
1 March 2021.
The two-thirds balance of the retirement interest

If a member of any retirement fund has elected a one-third lump sum benefit on the retirement date,
the two-thirds balance of the retirement interest is payable in the form of annuities (including a living
annuity – see chapter 4.2). From 1 March 2022, a combination of annuities (including a combination
of methods of paying the annuity) or a combination of types of annuities can be elected. In the case
where the remaining balance is used to provide or purchase more than one annuity, the amount used
to provide or purchase each annuity must exceed R165 000. All such annuities will only be included
in gross income in terms of par (a) of the definition of ‘gross income’ as and when such qualifying
annuities are received by or accrue to such member.
The Second Schedule only applies to the lump sum benefit elected by the member. It does not apply
to the qualifying annuities payable out of the two-thirds balance of the retirement interest after the
member has reached retirement date. This will be the case irrespective of whether such balance is
left in the fund of which the person was a member to be taken as in-fund living annuities, or whether it
is transferred by the fund of which the person was a member to another fund (for example Alan Gray)
to buy annuities for the benefit of the member.
(ii) Protection of the retirement interests of members of provident funds and provident preservation
funds on 28 February 2021
Members of provident funds and provident preservation funds could still (until 28 February 2021) elect
to have the total value of their retirement interest paid out as or commuted for a lump sum benefit on
retirement date. The one-third limitation in respect of the commutation of annuities for a single
payment (lump sum benefit) on retirement date therefore did not apply to members of provident
funds and provident preservation funds who reach retirement date up and until 28 February 2021.
The date of 28 February 2021 has been amended various times. To eliminate the consequential
differences in the tax treatment of benefits from the various funds, the definitions of all retirement
funds have been amended with effect from that date. Members of provident funds and provident
preservation funds will, with effect from 1 March 2021, also
l not be able to commute more than one-third of their retirement interest for a lump sum benefit on
retirement date, and
l be forced to take qualifying annuities in respect of the remaining two-thirds of the retirement
interest.
The existing retirement interests of members of provident funds and provident preservation funds on
28 February 2021 are, however, protected. This is done through the provisos to the definitions of all
retirement funds. The effect of proviso (a), in respect of such members who have already reached the
age of 55 years on 1 March 2021, is that the one-third limitation is not applicable at all. This means
that such members can always take or commute their full retirement interest (consisting of all
contributions, transfers, amounts credited and any fund return) for a lump sum benefit irrespective of
when they reach retirement date.
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In any other case (meaning in the case of an existing member to such fund who has not reached the
age of 55 years on 1 March 2021) proviso (b) states that the following must not be taken into account
when calculating the value of the retirement interest (to which the one-third rule will apply):
l any contributions to a provident fund or any transfers to a provident preservation fund before
1 March 2021 (in the case of members of a provident fund who are 55 years or older on
1 March 2021, all contributions to a provident fund of which the person was a member on
1 March 2021 are excluded)
l any other amounts credited to the member’s individual account prior to 1 March 2021, and
l any fund return in respect of the aforementioned contributions and amounts credited
reduced by
l any amounts permitted in terms of the Pension Funds Act to be deducted from the member’s
individual account of the provident fund or provident preservation fund.
As a result of the aforementioned, all the retirement interests in respect of which such members
already obtained a vested right to on 28 February 2021, are protected and can still be taken as or
commuted for a lump sum benefit. The one-third limitation on retirement date is therefore not applic-
able thereto.
Members of provident funds may
l transfer the withdrawal interest* to a pension fund established by the same employer (subpar (ee)
of par (ii) of the proviso to the definition of ‘provident fund’).
* The term ‘withdrawal interest’ is defined in s 1(1) as the value of a member’s share of any fund, as
determined in terms of the rules of the fund, on the date on which the member elects to withdraw
due to an event other than the member attaining normal retirement age.
C: Types of lump sum benefits received from RSA retirement funds

The types of lump sum benefits received from RSA retirement funds are listed in par 2(1). The type of
event, and not the type of fund, in general, determines the type of lump sum benefit as well as the tax
implications thereof. Public Sector Pension Funds have a separate rule (see 9.3.3). The six specific
events and one general event are summarised in the table below. Because there are specific provisions
for the specific events, it must first be determined whether one of the six specific events is applicable
before the general event will apply.
Event Retirement fund lump sum Retirement fund lump sum
benefit in terms of withdrawal benefit in terms of
Specific events
Retirement or death Par 2(1)(a)(i)
Termination of employment due Par 2(1)(a)(ii)
to personnel reduction, etc.
Commutation of an annuity for a Par 2(1)(a)(iii)
lump sum benefit (for example
due to the de minimis rule)
Transfer on or after normal retire- Par 2(1)(c)
ment age but before retirement
date
Divorce order Par 2(1)(b)(iA)
Direct transfer between funds of Par 2(1)(b)(iB)
the same member
General event
All other events Par 2(1)(b)(ii)
Limitations to par 2(1)

The provisions in par 2(1) determine how the net amounts, to be included in gross income in terms of
par (e) in respect of lump sum benefits, are calculated. The provisions of par 2(1) are subject to the
source rule in s 9(2)(i) (see chapter 3), the special formula applicable to Public Sector Pension Funds
(par 2A) and the rule for surplus allocations (par 2C).
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The source rule in s 9(2)(i)

The source of any lump sum, pension, or annuity payable by a pension fund, pension preservation
fund, provident fund, or provident preservation fund (as defined, which means that it refers to funds
registered in the Republic) depends on where the services were rendered. The source rule states that
if the services were rendered by a non-resident in the Republic, such amounts payable are from a
source in the Republic (s 9(2)(i)). If the non-resident has rendered services partly within and partly
outside the Republic, only a portion of the amount is from a source within the Republic (see
chapter 3). The Republic portion is the ratio of the period during which services were rendered in the
Republic to the total period during which services were rendered (s 9(2)(i)). To calculate the final
amount to be included in gross income in terms of par (e), the net amounts must first be determined
in terms of par 2(1), and then be apportioned as aforesaid.
Section 9(2)(i) does not include a retirement annuity fund since membership to
such a fund is not linked to services rendered. The source of income received by a
Please note! non-resident from a retirement annuity fund registered in the Republic will always
be in the Republic.
Remember
The source provisions are relevant only to non-residents, because residents are taxed on a
worldwide basis, and source plays no part in the inclusion of an amount in a resident’s gross
income. Residents may, however, possibly qualify for an exemption in terms of s 10(1)(gC)(ii) in
respect of amounts received from a foreign fund, as explained in 9.1.
Example 9.1. Deemed source provision
Bongani celebrated his 60th birthday on 5 September 2021 and elected to retire from his
employment at the end of that month. He is a non-resident. During his 40 years of service, he
spent ten years (between 1 January 1998 and 31 December 2007) working in Switzerland and
the rest in the Republic. On his retirement, a lump sum benefit of R500 000 accrued to him from
the South African pension fund. The deductible portion of the lump sum in terms of par 5(1)(a)
the Second Schedule is R200 000.
Calculate the amount to be included in the gross income of Bongani for the year of assessment
ended 28 February 2022.
Also explain the tax effect if you assume that Bongani is a resident, both in the case where the
pension fund is an RSA fund, and where the pension fund is a foreign fund.
SOLUTION
Lump sum benefit accrued (par 2(1)(a)(i)) .................................................................. R500 000
Less: Second Schedule deduction (par 5(1)(a))......................................................... (200 000)
R300 000
Gross income = Amount from a source within the Republic (s 9(2)(i)):
R300 000 × 30/40 = ..................................................................................................... R225 000
If Bongani was a resident and the pension fund is an RSA fund, the gross income amount would
have been R300 000 since he will be taxable on his worldwide income. No s 10(1)(gC)(ii)
exemption is applicable since it is an RSA fund.
If Bongani was a resident and the pension fund was a foreign fund, he would have qualified for a
s 10(1)(gC)(ii) exemption of R125 000 (R500 000 (the lump sum benefit accrued) × 10/40).
Special formula applicable to Public Sector Pension Funds (par 2A)

The actual lump sum benefit received from a Public Sector Pension Fund is not taken into account
when calculating the taxable amount of such lump sum benefit. An amount calculated in accordance
with the formula in par 2A is deemed to be the lump sum benefit (see 9.3.3.2). The deemed amount is
further reduced by the par 5, 6 or 6A deductions (see Example 9.8).
Surplus distributions (par 2C)
Any actuarial surplus distributions by any registered, active fund to a member in consequence of an
event prescribed by notice in the Government Gazette, after the member’s death, retirement or
withdrawal, are excluded from gross income, effectively making the payment free of tax (par 2C).
Examples of these extraordinary events include undisclosed secret profits, actuarial surplus
calculations and unclaimed benefits. For example, a surplus may occur when a fund did not pay out
259
the member’s full minimum individual reserve when the member withdrew from a fund prior to retire-
ment, which caused an actuarial surplus to build up in the fund. To ensure consistent tax treatment in
respect of such extraordinary lump sum payments, a new par 2D ensures that such payments on
behalf of deregistered funds will also qualify for exempt treatment.
Lump sum benefits in the form of life policies

It may happen that the lump sum benefit is not a cash payment but represents a policy of insurance
ceded or made over to the taxpayer by the fund on retirement or cessation of membership. The
surrender value of the policy is deemed to be a lump sum benefit as if it were a cash payment accru-
ing to the member on the date of its cession or making over (par 4(2bis)). These policies must be
distinguished from the policies of insurance under par (d)(ii) and (iii) which are linked to an employer
that is not a fund.
If the policy of insurance is
l ceded or otherwise made over to the person by any retirement fund (fund A), and then
l ceded or otherwise made over by the person to any other such fund (fund B), or
l if the person pays an amount to the other fund in the place of or representative of the surrender
value or a part thereof
the surrender value is deemed to have been paid into the other fund (fund B) by the first fund
(fund A) for the benefit of the person (paras 5(3) and 6(3)). The effect of this deeming provision is that
such a second ceding to or payment into another fund is deemed a direct transfer from the first fund
to the second fund. It is consequently treated as a retirement fund lump sum withdrawal benefit in
terms of par 2(1)(b)(iB) being a direct transfer between funds of the same member (see 9.3.2).
Example 9.2. Lump sum benefits in the form of life policies
Alfons derives a retirement fund lump sum withdrawal benefit from a pension fund in the form of an
insurance policy with a surrender value of R400 000. R290 000 of his own contributions to the
fund was not deductible initially. Alfons has never received a lump sum benefit or severance
benefit before.
Discuss the nature and tax consequences of the retirement fund lump sum withdrawal benefit.
SOLUTION
The R400 000 falls under ‘other’ retirement fund lump sum withdrawal benefits in par 2(1)(b)(ii)
and the par 6(1)(b)(i) deduction for unclaimed contributions is available. The contributions of
R290 000 not previously allowed as deduction therefore reduces the R400 000 and R110 000
(R400 000 – R290 000) is included in gross income in terms of par (e). The normal tax payable in
terms of the retirement fund lump sum withdrawal benefit tax table and the cumulative principle is
R15 300 (R85 000 (R110 000 – R25 000) × 18%).
Date of accrual of lump sum benefits

The general timing rules determine that, notwithstanding the rules of any RSA retirement fund, and
subject to paras 3 and 3A dealing with the death of a member or former member or the death of
successors (see below), any lump sum benefit shall be deemed to have accrued to a person who is
a member of such fund on the earliest of the date
l on which an election is made in respect of which the lump sum benefit becomes recoverable
l on which any amount is deducted from the minimum individual reserve of a member for the
benefit of the member’s spouse in terms of a divorce order
l on which the benefit is transferred to another retirement fund, or
l of death of the member.
Lump sum benefits are taxed in the year of assessment during which such lump sum benefit is
deemed to accrue to the member of the fund (par 4(1)). These timing rules apply ‘notwithstanding’
the rules of the fund, but as noted above, subject to par 3 (which deals with death benefits) and
par 3A. This suggests that, notwithstanding the rules of the fund concerned, any lump sum benefit
arising out of a member’s withdrawal or resignation is subject to the special timing rule in par 3 and
deemed to have accrued to him/her on the date elected for payment, or on transfer to any other fund
or on the date of his/her death, whichever is the earlier. He/She will then be assessed to tax in the
year of assessment during which it is deemed to accrue as though it was a withdrawal benefit de-
rived by him/her upon his/her withdrawal or resignation from the fund or upon his/her retirement or
260
immediately prior to his/her death, depending upon the circumstances attaching to that date. Thus, if
the rules of a fund provide that a benefit becomes payable only upon withdrawal, the deduction
allowed will be that which applies in the case of the withdrawal from a fund.
A lump sum benefit paid after the death of a person is deemed to have accrued to that person imme-
diately prior to the death of that person (par 3). Such a lump sum benefit will therefore be included in
the gross income of the deceased’s last income tax return and assessment, and not in the return of
the deceased estate or the heirs of the deceased. Since such a lump sum benefit payable on the
death of a person will often be paid directly to the heirs, the tax payable on the lump sum benefit may
be recovered from the person to whom the lump sum benefit accrues (proviso (i) to par 3). In this
way, the ultimate tax burden is made to fall upon the heir of the benefit. In practice, the executor of
the deceased estate will do this recovery.
If a member of any of the five retirement funds who has already elected to retire and to receive a one-
third lump sum benefit and is currently receiving annuities dies during the year of assessment, the
person’s heir will inherit the right to annuities or living annuities after the death of the member. If the
heir commutes the annuities for a lump sum benefit after the death of the member, such a lump sum
benefit will also be deemed a lump sum benefit that has become recoverable in consequence of or
following the death of the member (proviso (ii) to par 3). Such lump sum benefit will therefore be
deemed to accrue to the member immediately before death and the deceased will be taxed thereon
as a retirement fund lump sum benefit in terms of par 2(1)(a)(i).
No lump sum benefit is deemed to accrue to the member on death if
l the dependants or nominees of such a deceased person elected to receive an annuity or living
annuity (proviso (iii) to par 3), or
l where the lump sum benefit is paid into a preservation fund as an unclaimed benefit (proviso (v)
to par 3).
The same rules as in par 3 will apply if the first heir dies and a lump sum benefit becomes recover-
able by a second heir. It is deemed to have accrued to the first heir immediately prior to his or her
death (par 3A).
Paragraph 3B makes provision for any lump sum benefit, recoverable in consequence of the termin-
ation of a trust, to be taxable in the trust immediately prior to the date of termination of the trust. This
will apply for all lump sum benefits from all retirement funds or insurers. This paragraph is a con-
sequential amendment to the proposed amendment to the definition of ‘living annuity’ in s 1(1) to
make provision for the termination of a trust because the word ‘death’ in the definition of ‘living annu-
ity’ is problematic. The reason is that trusts cannot die; they can only be terminated.
Example 9.3. Date of accrual of lump sum benefits

An employee resigns from both his employment and his pension fund. In terms of the rules of the
fund, it is stipulated that, on a member’s resignation, a lump sum benefit is only payable five years
after resignation.
Discuss when the withdrawal benefit will accrue to the employee.
SOLUTION
The withdrawal benefit will only accrue on that later date five years after resignation because that
is the date on which an election can be made that the amount must be paid (par 4(1)(a)). It will
be regarded as a retirement fund lump sum withdrawal benefit and the deductions allowable in
terms of par 6(1)(b)(i)–(v) will apply.
If the employee dies prior to the expiry of this five-year period, the retirement fund lump sum with-
drawal benefit will be deemed to have accrued immediately prior to his death (par 3), and the de-
ductions allowable in terms of par 5(1)(a)–(e) will apply. This would remain the outcome even if the
retirement fund lump sum withdrawal benefit were payable to his dependants at the end of the five-
year period only, irrespective of his earlier death.
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l The amount given to students in a question as a lump sum benefit received

from any retirement fund on retirement date is the amount that the taxpayer
has elected to commute for a single payment in terms of the rules of the
fund and will never exceed one-third of that member’s retirement interest.
l Even though pension funds and provident funds are linked to a specific
Please note! employer, the fund is a separate employer for employees’ tax purposes
when a lump sum benefit or annuity is paid out to a member by the fund
(see the definitions of ‘employer’ and ‘remuneration’ in the Fourth Schedule).
l An annuity received from an ‘annuity contract’ concluded with an insurer
(see s 10A for definition) differs from a compulsory annuity received from an
RSA retirement fund – see chapter 4.
9.3.1 Retirement fund lump sum benefits (paras 2(1)(a), 2(1)(c), 4(3), 5, 6 and 6A)
As shown in the table in 9.3, lump sum benefits received after the following four specific events will
qualify as retirement fund lump sum benefits.
Retirement or death
The definitions of ‘retire’, ‘retirement date’ and ‘normal retirement age’ are interlinked and must be
read together in the order below to understand when a person retires.
‘Retire’ means that a person becomes entitled to the annuity or lump sum benefits contemplated in
the definition of ‘retirement date’ (par 1).
‘Retirement date’ is the date on which a member elects to retire and becomes entitled to an annuity or
a lump sum benefit contemplated in par 2(1)(a)(i) on or after attaining the ‘normal retirement age’ in
terms of the rules of the fund (definition in s 1(1)). In the case of a nominee of a deceased member, it
is the member’s date of death.
The ‘normal retirement age’ (par (a) of the definition in s 1(1)) of members of a pension fund and a
provident fund is the date on which the member is entitled to retire (in terms of the rules of the fund)
for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body. The
‘normal retirement age’ in the case of members of a retirement annuity fund, pension preservation fund
or provident preservation fund is always the attainment of the age of 55 (par (b) of the definition of
‘normal retirement age’ in s 1(1)).
Reading the aforementioned three definitions together, it is clear that a member of a fund can only
elect to retire (and thereby reach retirement date) on or after attaining the specific age stated as
‘normal retirement age’ in the rules of that specific fund. The rules of funds can have different normal
retirement ages. Reaching normal retirement age merely means that you are entitled to retire. It does
not automatically mean that a person will elect to retire and, without such an election, retirement date
is not reached.
If a person has elected to retire, the consequential lump sum benefit will be taxed as a retirement
fund lump sum benefit in terms of par 2(1)(a)(i). However, if a member of a provident fund retires from
the fund before the age of 55 years on grounds other than ill-health, the lump sum benefit received as
a result thereof will be taxed as a retirement fund lump sum withdrawal benefit unless the Com-
missioner, on application by the fund, directs otherwise (par 4(3)).
‘Normal retirement age’ is also reached, irrespective of age, if a member becomes permanently in-
capable of carrying on his or her occupation due to sickness, accident, injury, or incapacity through
infirmity of mind or body (par (c) of the definition in s 1(1)). This means that any lump sum benefit
received by a person due to reaching normal retirement age in this way, will be taxed as a retirement
fund lump sum benefit in terms of par 2(1)(a)(i) irrespective of the person’s age at that stage.
Termination or loss of office or employment
Since the 2008 recession, withdrawal benefits received by members who lost their employment or
whose employment was terminated due to retrenchment are taxed as retirement fund lump sum
benefits (even though it is, in essence, a retirement fund lump sum withdrawal benefit). This was
done to ensure that the members enjoy the bigger benefit of the R500 000 taxed at 0% in terms of the
tax table for retirement fund lump sum benefits, instead of the R25 000 taxed at 0% in terms of the tax
table for retirement fund lump sum withdrawal benefits. This is also the reason why the par 6 deduc-
tions (and not the par 5 deductions) reduce the lump sum benefits received on the loss of office or
employment (in terms of par 2(1)(a)(ii)).
If a member receiving such a lump sum benefit on the termination or loss of employment, however, at
any time held more than 5% of the equity shares of the employer-company, the lump sum benefit will
262
be taxed as a retirement fund lump sum benefit. This means that the member will not receive this
‘bigger’ benefit of the R500 000 taxed at 0%, but the lump sum benefit will be taxed as a retirement
fund lump sum withdrawal benefit (which, in essence, it is) (proviso to par 2(1)(a)(ii)).
The reference to termination or loss of employment implies that this type of lump sum benefit can only
be paid out by pension funds and provident funds, being employer funds. The one-third limitation on
the amount that can be commuted for a lump sum benefit does not apply, since the member has not
reached retirement date.
Commutation of an annuity (due to the de minimis rule)

As explained in 9.3, the one-third limitation on lump sum benefits from all retirement funds, and the
consequential use of the two-thirds balance to buy annuities, or a combination thereof (from 1 March
2022), is subject to the de minimis rule. The de minimis rule applies if the remaining two-thirds of the
retirement interest in the fund does not exceed R165 000. If this rule applies and the balance of the
retirement interest is commuted for a single payment (a lump sum benefit), it will be taxed as a
retirement fund lump sum benefit in terms of par 2(1)(a)(iii).
Transfer on or after normal retirement age but before retirement date

The provision in par 2(1)(c) caters for a transfer of the retirement interest on or after attaining normal
retirement age but before retirement date (meaning before the member who has reached normal
retirement age elects to retire). Being entitled to retire on reaching ‘normal retirement age’ does not
mean that the member must automatically elect to retire. Individuals are allowed to elect their specific
retirement date. The date on which the lump sum benefit accrues to the individual depends on the
date on which the individual elects to retire and not on reaching the ‘normal retirement age’.
As a result, individuals who postponed the election of the retirement date, were allowed to keep their
benefits within their funds past ‘normal retirement age’. While such members retain their benefits
within such a fund, they may no longer contribute to those funds and therefore effectively became
inactive members. This left the employer with the burden of having to keep in touch with an inactive
member and having to deal with additional administration. The employee may also wish to sever ties
with the employer. To address these concerns, par 2(1)(c) allows persons to transfer any amount on
or after normal retirement age but before retirement date and allows specific transfers to other funds
as deductions in terms of par 6A in determining the net amount of such transfer.
The calculation of the taxable portions of retirement fund lump sum benefits, which must be included
in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum

benefits
Transfer on or
after normal
retirement age
but before
Retirement Termination or Commutation retirement date
or death loss of office or of an annuity* (par 2(1)(c))
(par 2(1)(a)(i)) employment (par 2(1)(a)(iii))
(par 2(1)(a)(ii))
less less less less
Par 5(1)(a)–(e) Par 6(1)(b)(i)–(v) Par 5(1)(a)–(e) Par 6A
* This is, for example, where two-thirds of the total value of the retirement interest does not exceed R165 000
and the qualifying annuities are therefore commuted for a single payment (a lump sum benefit) after an elec-
tion by the person entitled to the benefits.
The wordings of the five deductions in par 5(1)(a)–(e) and par 6(1)(b)(i)–(v) respectively are the
same. The deductions can be used in determining the taxable amount of any of the three types of
retirement fund lump sum benefits in terms of par 2(1)(a)(i)–(iii). Any such deduction can, however,
only be taken into account once
l as a deduction in terms of par 5 or 6 when determining the taxable amount in respect of a lump
sum benefit, or
l as an exemption in terms of s 10C in respect of qualifying annuities received.
263
It is submitted that it would be more cash-flow beneficial to use an available deduction against the
first applicable retirement fund lump sum benefit received during a year of assessment. The deduc-
tions in terms of par 5 or 6 may not exceed the lump sum benefit (paras 5(2) and 6(2)).
The following table summarises the provisions of retirement fund lump sum benefits:
Retirement fund lump sum benefits
Paragraph 2(1)(a)(i)–(iii):
Amount received by or accrued to the person as retirement fund lump sum benefit less par 5(1)(a)–(e) or
6(1)(i)–(v) deductions = gross income in terms of par (e)
Paragraph 2(1)(c):
Amount transferred for the benefit of a person on or after normal retirement age but before retirement date
less par 6A deduction = gross income in terms of par (e)
Amount received or accrued (par 2(1)(a)) Deductions – so much of the amounts below as was not previously
or transferred (par 2(1)(c)) allowed as a deduction in terms of the Second Schedule or as an
exemption in terms of s 10C:
Paragraph 5(1)(a)–(e) or 6(1)(i)–(v) deductions (the wordings of the
two paragraphs are the same and therefore only the wording of
par 5(1)(a)–(e) are listed here):
Paragraph 2(1)(a)(i): Retirement or Paragraph 5(1)(a): Contributions to any fund that did not previously
death rank for a deduction in terms of s 11F
Paragraph 2(1)(a)(ii): Termination of Paragraph 5(1)(b): Amounts transferred to a fund for the benefit of
employment the person because of an election made after a divorce order
l because employer ceases to carry allocation in terms of par 2(1)(b)(iA) (this means that the person
on trade, or previously elected that a transfer must be made from the minimum
individual reserve of the person’s former spouse to a fund of which
l person is redundant because of the person is a member, and the person was previously taxed on
personnel reductions such transfer due to the fact that a par 6(1)(a) deduction was not
Paragraph 2(1)(a)(iii): Commutation of allowed at that stage)
an annuity or portion of an annuity for a Paragraph 5(1)(c): Amounts deemed to have accrued because an
single payment (lump sum benefit) amount was transferred to a fund for the benefit of the person from
another fund of which that person is or was a member in terms of
par 2(1)(b)(iB) (this means that a transfer was previously made
between two funds of which the same person was a member, and
the member was previously taxed on such transfer due to the fact
that a par 6(1)(a) deduction was not allowed at that stage)
Paragraph 5(1)(d): Transfers by any fund to any preservation fund
of an already taxed unclaimed benefit**
Paragraph 5(1)(e): The exempt portion of a public sector pension
fund lump sum benefit in respect of service years before 1/3/1998
l paid into any other fund by a public sector pension fund for the
benefit of the person, or
l transferred into any other fund for the person’s benefit directly
from the fund into which the public sector pension fund paid
the amount into.
Paragraph 2(1)(c): Transfer on or after Paragraph 6A(a): An amount transferred for the benefit of that
normal retirement age but before retire- person from a pension fund into a pension preservation fund, a
ment date provident preservation fund or a retirement annuity fund, or
Paragraph 6A(b): An amount transferred for the benefit of the per-
son from a provident fund into a pension preservation fund, provi-
dent preservation fund or retirement annuity fund, or
Paragraph 6A(c): An amount transferred for the benefit of the per-
son from a pension preservation or provident preservation fund
into another pension preservation or provident preservation fund or
a retirement annuity fund (from 1 March 2022).
** An unclaimed benefit is a lump sum benefit that a member fails to claim within 24 months after resignation or
termination of services or retirement or death (Interpretation Note No. 99 (Issue 3)). If a fund transfers such
unclaimed benefit to any preservation fund, there is an accrual in terms of par 4(1)(c) and it is a par 2(1)(b)(iB)
retirement fund lump sum withdrawal benefit. The fund from which the transfer is made must obtain a tax
directive from SARS in respect of the employees’ tax to be withheld, making it an already taxed unclaimed
benefit.
If the member later elects to claim this already taxed unclaimed benefit from the preservation fund, there is
another accrual in terms of par 4(1)(a) and it is a par 2(1)(a) retirement fund lump sum benefit or a par 2(1)(b)(ii)
retirement fund lump sum withdrawal benefit. The second accrual will not be taxable due to this deduction in
terms of par 5(1)(d) or 6(1)(b)(iv).
264
Students are advised to keep retirement fund lump sum benefits in a separate
column (column 1 together with severance benefits) in the calculation of the tax-
able income of a natural person, because the same tax table is applicable to
Please note! these types of lump sums and lump sum benefits. Please remember that sep-
arate calculations of the normal tax payable on all the amounts in column 1 must
be made following the cumulative principle. See chapter 7 for complete details
regarding the subtotal method in the comprehensive framework.
Remember
Although the taxable portion of a retirement fund lump sum benefit must be included in gross
income in terms of par (e) of the gross income definition, it is included in column 1 and not in
column 3. The normal tax payable thereon is calculated separately from the normal tax payable
on the taxable income in column 3 and separately from the normal tax payable on any other
amount in column 1.
A retirement fund lump sum benefit is also not taken into account in the calculation of the allow-
able deductions in terms of s 11F and 18A (see chapter 7).
Application of the cumulative principle to the calculation of normal tax payable on a retirement fund
lump sum benefit
l the current retirement fund lump sum benefit, and
withdrawal benefits received by or accrued to the person on or after the specified dates in the retirement
fund lump sum tax table.
Use the tax table applicable to the current retirement fund lump sum benefit for both the calculations in step 1
and step 2.
l STEP 2 Calculate the ‘tax that would be leviable’ (the hypothetical tax) on the sum of all previous sever-
ance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits
(therefore excluding the current retirement fund lump sum benefit).
Normal tax payable on the current retirement fund lump sum benefit = tax in step 1 less tax in step 2.
The retirement fund lump sum benefit tax table is set out below:
Taxable income from lump sum benefits Rate of tax

Exceeding R500 000 but not exceeding R0 plus 18% of taxable income exceeding R500 000
R700 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of taxable income exceeding
R1 050 000 R700 000
Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding
R1 050 000
Example 9.4. Retirement from pension fund

Andile elects to retire from a pension fund on 28 February 2022 after reaching normal retirement
age in terms of the rules of the pension fund. A lump sum benefit of R600 000 accrues to him (he
has not received a lump sum benefit before). During his 20 years of service, contributions of
R18 600 did not previously rank for a deduction in terms of s 11F (up and until 28 February
2021). Calculate the amount that must be included in gross income as well as the normal tax
payable thereon.
265
SOLUTION
Lump sum benefit (par 2(1)(a)(i)) ............................................................................. R600 000
Less: Contributions which did not previously rank for deduction (par 5(1)(a)) ........ (18 600)
Gross income ............................................................................................................ R581 400
Normal tax payable per table above on (R581 400 – R500 000) @ 18% ..................... R14 652
The hypothetical tax is Rnil, as this is the first time that Andile has received a lump
sum benefit.
Example 9.5. Lump sum from an employer and lump sum benefit from a fund combined
Okkie is 60 years old, a resident of the RSA and has worked for Heights Properties Ltd in Cape
Town as a property manager for the past 25 years.
Okkie elected to retire on 31 December 2021 from Heights Properties Ltd after reaching normal
retirement age in terms of the rules of the pension fund. Okkie received the following amounts
because of his retirement:
l R120 000 as a lump sum from Heights Properties Ltd
l R800 000 as a lump sum benefit from H Pension Fund (Heights Properties Ltd requires that
all its employees must be members of H Pension Fund)
l R12 000 per month as an annuity from H Pension Fund with effect from 1 January 2022.
Since 1 March 2021, Okkie received a cash salary of R15 000 per month from Heights Properties Ltd.
Okkie owns an investment property since 2017 and he leased it out during the last two years of
assessment for R8 000 per month.
Except for the items listed above, Okkie did not have any other income or expenditure for the last
two years of assessment. All his contributions to the Pension Fund have been allowed as deduc-
tions in the past.
Calculate the total normal tax payable by Okkie for the 2022 year of assessment. You may assume
that Okkie has not received a severance benefit or lump sum benefit prior to 31 December 2021.
SOLUTION
(The format in chapter 7 is used)
Retirement
fund lump
sum benefit
Other
and
(column 3)
severance
benefit
(column 1)
Salary ....................................................................................................... R150 000
Lump sum from employer (severance benefit because older than
55 years) .................................................................................................. R120 000
Rental income .......................................................................................... 96 000
Retirement fund lump sum benefit (par 2(1)(a)(i)) ................................... 800 000
Annuities .................................................................................................. 24 000*
Taxable income ....................................................................................... R920 000 R270 000
* No s 10C exemption is available since there is no balance of
unclaimed contributions to use.
Normal tax determined in terms of the progressive tax table on other
taxable income (column 3) (calc 1) ......................................................... R52 904
Less: Primary rebate ................................................................................ (15 714)
Normal tax payable on other taxable income .......................................... R37 190
Normal tax payable on retirement fund lump sum benefit and severance
benefit (column 1) in terms of the applicable table (calc 2)........................... 95 400
Total normal tax payable for the 2022 year of assessment...................... R132 590
Calculation 1 Normal tax on other taxable income
Normal tax on R216 200 ............................................................................................. R38 916
Normal tax on R53 800 (R270 000 – R216 200) @ 26% .............................................. 13 988
Total normal tax .......................................................................................................... R52 904
continued
266
Calculation 2 Tax on retirement fund lump sum benefit and severance benefit
Since the two amounts are received on the same date and the same tax table
applies in respect of both, only one calculation is done. There is therefore also no
hypothetical amount of tax. The same answer will be obtained if one amount is
taken as being received ‘first’ and a hypothetical tax is claimed against the
‘second’ amount.
Normal tax determined per the retirement fund lump sum benefit/severance benefit
tax table in respect of the R920 000 taxable amount
On first R700 000 ........................................................................................................ R36 000
On R220 000 (R920 000 – R700 000) @ 27% ............................................................. 59 400
Total normal tax payable............................................................................................. R95 400
To prove that the normal tax payable will be the same amount of R95 400 irrespective of which of
the severance benefit or retirement fund lump sum benefit is deemed to be received first on
31 December 2021:
If the severance benefit is deemed to be received first, and the amounts are not added together
like in the suggested solution, the tax will be Rnil on the severance benefit because it is less than
R500 000 in the severance benefit table and taxed at 0%. The hypothetical tax is also Rnil, as
this is the first time that Okkie has received a severance benefit.
The tax on the retirement fund lump sum benefit will then be calculated in terms of the cumula-
tive principle using the retirement fund lump sum benefit table and will be: The tax on R920 000
(R120 000 + R800 000) = R95 400 less Hypothetical tax (in terms of the retirement fund lump
sum benefit table on the R120 000 severance benefit) which is Rnil = R95 400.
If the R800 000 retirement fund lump sum benefit is deemed to be received first, the tax in terms
of the retirement fund lump sum benefit table will be R36 000 + (27% × R100 000) = R63 000.
The hypothetical tax is Rnil, as this is the first time that Okkie has received a lump sum benefit.
The tax on the severance benefit will then be calculated in terms of the cumulative principle using
the severance benefit table and will be: The tax on R920 000 (R120 000 + R800 000) = R95 400
less Hypothetical tax (in terms of the severance benefit table on the R800 000) which is R63 000
= R32 400.
The total tax on both the severance benefit and the retirement fund lump sum benefit will there-
fore be R63 000 + R32 400 = R95 400.
9.3.2 Retirement fund lump sum withdrawal benefits (paras 2(1)(b), 4 and 6)
As shown in the table in 9.3, certain lump sum benefits received after the following two specific
events and one general event will qualify as retirement fund lump sum withdrawal benefits.
Awards in terms of a divorce order

The clean break principle entails that parties should (if circumstances permit) become economically
independent of each other as soon as possible after a divorce. To accommodate this principle, various
amendments to various Acts opened the possibility to issue a maintenance order or a divorce order
against the minimum individual reserve of a member. A retirement fund may now deduct any amount,
awarded to a non-member in terms of a divorce order or a maintenance order, from a member of that
fund’s minimum individual reserve. The deduction in terms of these orders can be made by the fund
from the date on which the divorce order or maintenance order is granted. The tax implications of
reducing a member’s minimum individual reserve in terms of a divorce order are not the same as
reducing a member’s minimum individual reserve in terms of a maintenance order. Paragraph
2(1)(b)(iA) only applies in the case of an award in terms of a divorce order. An award and the conse-
quential deduction from a member’s minimum individual reserve in terms of a maintenance order is
taxed in terms of s 7(11) and the Second Schedule does not apply to it.
The non-member spouse to whom any such awards accrue, has a choice between having the
amount awarded paid out to him or her, and having it transferred to a fund for his or her benefit. The
non-member spouse must submit the divorce order to the fund that must deduct the money from a
member’s minimum individual reserve. The fund must request the non-member spouse within
45 days from receiving the divorce order to choose between payment and transfer of the amount
awarded. The non-member spouse must choose within 120 days. The fund must effect the payment
or transfer within 60 days after the non-member spouse has notified the fund of his or her choice. If
the non-member spouse fails to choose or indicate the fund to which a transfer must be made within
the 120-day period, the fund must pay the amount directly to the non-member spouse 30 days after
the 120-day period has expired.
267
The following summary highlights the differences between reducing the minimum individual reserve
in terms of a maintenance order and reducing the minimum individual reserve in terms of a divorce
order:
Reduce minimum individual Reduce minimum individual
reserve in terms of a maintenance reserve in terms of a divorce order
order
Applicable sections Section 7(11), par (b) definition of Paragraph (e) definition of ‘gross
‘gross income’ and s 10(1)(u) income’, par 2(1)(b)(iA) and
par 6(1)(a) of the Second Sched-
ule
Taxable in whose hands The member spouse whose mini- The non-member spouse who
mum individual reserve is reduced receives the amount after the re-
(this means the spouse against duction of the minimum individual
whom the order was made) reserve of the member spouse
(this means the spouse in favour
of whom the amount was award-
ed)
What amount is included in in- The amount awarded to the non- The amount awarded to the non-
come and what amount is ‘remu- member spouse plus employees’ member spouse less the applic-
neration’? tax thereon (calculated considerable par 6 deductions
ing the tax-on-tax principle in
chapter 10)
In which column of the subtotal Column 3 Column 2 (as a retirement fund
method is it included? lump sum withdrawal benefit in
terms of par 2(1)(b)(iA))
Employees’ tax consequences The fund must apply the tax-on- The fund must obtain a directive
tax effect as contained in Inter- from the Commissioner in terms of
pretation Note No. 89 on Main- par 9(3) of the Fourth Schedule.
tenance Orders and the Tax-on- The tax table applicable to a
tax Principle. The normal pro- retirement fund lump sum with-
gressive tax table of natural per- drawal benefit will apply
sons will be applicable (see
chapter 10)
Direct transfer between funds of the same member

Paragraph 2(1)(b)(iB) refers to ‘any amount that is transferred for the benefit of a person to a fund
from a fund of which that person is or was a member’. Such transfers normally happen when the
member resigns and leaves the employ of an employer before the retirement date, and then elects
that his or her total minimum individual reserve, or a portion thereof, must not be paid to him or her
but must be transferred directly by the employer’s fund to another fund of which he is a member. It is
important to note that the same person must be the member of the two funds between which the
transfer is made and that the transfer must be made directly by the first fund to the second fund.
Please remember that ‘transfer between funds’ does not include any transfer of ‘the remainder of a
retirement interest’ as explained in 9.3 to another fund after a member has elected to retire and has
elected to receive a lump sum benefit. The election to retire and to commute a portion of the retire-
ment interest for a lump sum benefit is a retirement fund lump sum benefit in terms of par 2(1)(a)(i).
The transfer of the remainder of the retirement interest of such a retired person to purchase any
annuity (including a living annuity) from a registered insurer in effect represents annuities, and the
Second Schedule is not applicable to annuities.
If a person elects a lump sum benefit from fund A on retirement date, but requests that the lump sum
benefit, or a portion thereof, must be transferred directly by fund A to fund B of which that person is a
member instead of paying it out to the person, par 2(1)(a)(i) will not apply. Such a lump sum benefit
will be seen as a retirement fund lump sum withdrawal benefit in terms of par 2(1)(b)(iB) due to the
direct transfer between funds of the same member. The wording of par 2(1)(b)(iB) merely refers to
‘any amount that is transferred for the benefit of that person’ and it is therefore wide enough to
include any such direct transfer at any stage of membership.
268
Other cases
Any other amounts received by a person by way of lump sum benefits in consequence of member-
ship of a fund, except those explained in the six specific events listed in the table in 9.3 and already
discussed, fall under the general event in par 2(1)(b)(ii). This is typically when a member withdraws
from a fund or resigns from employment before the retirement date but does not elect to directly
transfer the minimum individual reserve from that fund to another fund of which he or she is or was a
member, as explained above. An example of this general event is if a member resigns from employ-
ment and elects that his or her minimum individual reserve be paid out to him or her.
The calculation of the taxable portions of retirement fund lump sum withdrawal benefits, which must
be included in gross income in terms of par (e), can be illustrated as follows:
Retirement fund lump sum withdrawal benefits
Award in terms of Direct transfer between Other cases (for

a divorce order funds of the same member example resignation)
(par 2(1)(b)(iA)) (par 2(1)(b)(iB)) (par 2(1)(b)(ii))
less less less
Par 6(1)(a) Par 6(1)(a) Par 6(1)(b)(i)–(v)
The following table summarises the provisions of retirement fund lump sum withdrawal benefits:
Retirement fund lump sum withdrawal benefits
Paragraph 2(1)(b)
Amount received or accrued as retirement fund lump sum withdrawal benefit less par 6(1)(a) or (b) deduc-
tions = gross income in terms of par (e)
Amount received or accrued Deduction
Paragraph 2(1)(b)(iA): Amounts Paragraph 6(1)(a)(i) and 6(1)(a)(ii) apply in respect of divorce orders (par
awarded in terms of a divorce 2(1)(b)(iA)) and transfers between funds (par 2(1)(b)(iB)):
order (to the non-member So much of the lump sum benefit that is paid or transferred to the funds
spouse) and deducted from listed in the table below can be deducted. The words ‘so much of the
the minimum individual re- benefit’ contemplated in par 2(1)(b)(iA) or 2(1)(b)(iB) means so much of
serve of the member spouse the specific lump sum benefit that the person elected to be directly trans-
(The date of accrual is the date ferred. This means that the person’s election regarding the application of
on which the amount became the funds can lead to a par 6(1)(a)(i) or (ii) deduction. The person does
due and payable by the fund not have to elect to transfer the total lump sum benefit to another fund
(par 2(2)(a).) and can elect to transfer only a portion.
Fund from which the lump sum Funds to which a deductible trans-
Paragraph 2(1)(b)(iB): direct benefit is received fer can be made
transfers to a fund for the ben-
Pension fund, pension preser- Pension fund, pension preservation
efit of the person from another
vation fund, provident fund or fund, provident fund, provident
fund of which the same person
provident preservation fund preservation fund or retirement
is or was a member
annuity fund
(The date of accrual is the
date of transfer (par 2(2)(b).) Retirement annuity fund Retirement annuity fund
continued
269
Amount received or accrued Deduction

Paragraph 2(1)(b)(ii): A lump Paragraph 6(1)(b) applies in respect of other retirement fund lump sum
sum benefit received by or withdrawal benefits (par 2(1)(b)(ii)).
accrued to a person from So much of the amounts below as was not previously allowed as a deduc-
membership of any fund ex- tion in terms of the Second Schedule or as an exemption in terms of
cept a retirement fund lump s 10C:
sum benefit (par 2(1)(a)) or a
retirement fund lump sum with- Paragraph 6(1)(b)(i): Contributions to any fund that did not previously
drawal benefit in terms of rank for a deduction in terms of s 11F
par 2(1)(b)(iA) or 2(1)(b)(iB) Paragraph 6(1)(b)(ii): Amounts transferred to a fund for the benefit of the
(this effectively means all other person because of an election made after a divorce order allocation in
cases when a lump sum bene- terms of par 2(1)(b)(iA) (this means that the person previously elected
fit is received or accrues, for that a transfer must be made from the minimum individual reserve of the
example when the member person’s former spouse to a fund of which the person is a member, and
withdraws or resigns from the the person was previously taxed on such transfer due to the fact that a
fund) par 6(1)(a) deduction was not allowed at that stage)
Paragraph 6(1)(b)(iii): Amounts deemed to have accrued because an
amount was transferred to a fund for the benefit of the person from an-
other fund of which that person is or was a member in terms of par
2(1)(b)(iB) (this means that a transfer was previously made between two
funds of which the same person was a member, and the member was
previously taxed on such transfer due to the fact that a par 6(1)(a) de-
duction was not allowed at that stage)
Paragraph 6(1)(b)(iv): Transfers from any fund to any preservation fund of
an already taxed unclaimed benefit**, and
Paragraph 6(1)(b)(v): The exempt portion of a public sector pension fund
lump sum in respect of service years before 1/3/1998
l paid into any other fund by a public sector pension fund for the bene-
fit of the person, or
l transferred into any other fund for the person’s benefit directly from
the fund into which the public sector pension fund paid the amount
into.
** An unclaimed benefit is a lump sum benefit that a member fails to claim within 24 months after resignation or
termination of services or retirement or death (Interpretation Note No. 99 (Issue 3)). If a fund transfers such
unclaimed benefit to any preservation fund, there is an accrual in terms of par 4(1)(c) and it is a par 2(1)(b)(iB)
retirement fund lump sum withdrawal benefit. The fund from which the transfer is made must obtain a tax
directive from SARS in respect of the employees’ tax to be withheld, making it an already taxed unclaimed
benefit.
If the member later elects to claim this already taxed unclaimed benefit from the preservation fund, there is
another accrual in terms of par 4(1)(a) and it is a par 2(1)(a) retirement fund lump sum benefit or a
par 2(1)(b)(ii) retirement fund lump sum withdrawal benefit. The second accrual will not be taxable due to the
deduction in terms of par 5(1)(d) or 6(1)(b)(iv).
Example 9.6. Paragraph 6(1)(a) and (b) deductions
Nomsa has resigned and her minimum individual reserve on withdrawal from the pension fund of
her employer amounts to R39 000. She elected that R12 000 must be transferred directly to a re-
tirement annuity fund of which she is a member, and that the rest must be paid to her in cash.
R20 000 of Nomsa’s own contributions to the fund has not previously ranked for deduction in terms
of s 11F (up and until 28 February 2021). Nomsa has not previously received any lump sum benefit
or severance benefit.
Discuss the tax consequences of the above in terms of the Second Schedule to the Act.
270
SOLUTION
There are two separate retirement fund lump sum withdrawal benefits.
One of R12 000, being the amount transferred directly to a retirement annuity fund. This is a ‘di-
rect transfer between funds’ in terms of par 2(1)(b)(iB) and a par 6(1)(a)(i) deduction of R12 000
(deductible transfer from a pension fund to a retirement annuity fund) can be claimed against it.
The taxable amount is therefore Rnil (R12 000 less R12 000) and no amount is included in col-
umn 2 of the subtotal method in terms of par (e) of the gross income definition.
The second one is the R27 000 paid out in cash and falls under ‘other’ retirement fund lump sum
withdrawal benefit in terms of par 2(1)(b)(ii). The par 6(1)(b)(i) deduction is available, namely the
R20 000 contribution that did not previously rank for a deduction. The taxable amount is therefore
R27 000 less R20 000 = R7 000.
The R7 000 is included in column 2 of the subtotal method in terms of par (e) of the gross income
definition.
No normal tax will be payable on these two retirement fund lump sum withdrawal benefits received
since the total of the taxable amounts (R7 000) is less than the R25 000 taxed at 0% in terms of the
retirement fund lump sum withdrawal benefit tax table.
Application of the cumulative principle to the calculation of the normal tax on retirement fund lump sum
withdrawal benefits
l the current retirement fund lump sum withdrawal benefit, and
withdrawal benefits received by or accrued to the person on or after the specified dates in the retirement
fund lump sum withdrawal tax table.
Use the tax table applicable to the current retirement fund lump sum withdrawal benefit for both the calcula-
tions in step 1 and step 2.
l STEP 2 Calculate the ‘tax that would be leviable’ (the hypothetical tax) on the sum of all previous sever-
ance benefits, retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits
(therefore excluding the current retirement fund lump sum withdrawal benefit).
Normal tax payable on the current retirement fund lump sum withdrawal benefit = tax in step 1 less tax in
step 2.
The retirement fund lump sum withdrawal benefit table is set out below:
Taxable income from lump sum benefits Rate of tax

Exceeding R25 000 but not exceeding R660 000 18% of taxable income exceeding R25 000
Exceeding R660 000 but not exceeding R990 000 R114 300 plus 27% of taxable income exceeding
R660 000
Exceeding R990 000 R203 400 plus 36% of taxable income exceeding
R990 000
Students are advised to keep retirement fund lump sum withdrawal benefits in a
separate column (column 2) in the calculation of the taxable income of a natural
Please note! person, because a different tax table applies to this type of lump sum benefit. See
chapter 7 for complete detail regarding the comprehensive framework and the sub-
total method.
271
Example 9.7. Retirement fund lumps sum benefit, retirement fund lump sum withdrawal
benefit and severance benefit
Morné (55 years, resident) was left paralysed after a car accident on his birthday on 6 July 2021.
On 28 February 2022, medical doctors were not yet willing to make a prognosis that Morné’s
paralysis would continue longer than a year. He was married out of community of property to
Marieke but was divorced on 17 August 2021 after a lengthy period of separation. Their 23-year-
old daughter, Melissa, is a full-time student at University of Stellenbosch. Morné is an employee
of Alfa Ltd.
The following information is relevant to the 2022 year of assessment:
Note
Cash salary .................................................................................................. R140 000
Gross lump sum from Alfa Ltd ..................................................................... 1 480 000
Award in terms of divorce order................................................................... 2 800 000
Gross lump sum benefit accruing from pension fund .................................. 3 550 000
Air ticket ....................................................................................................... 4 15 000
Pension fund contributions........................................................................... 5 11 200
Retirement annuity fund contributions ......................................................... 6 79 500
Contributions to a medical scheme and medical expenses ........................ 7 58 350
Donation to Public Benefit Organisation ...................................................... 8 60 000
Taxable capital gain……………………………………………………………… 70 000
Notes
(1) Morné elected to retire on 28 February 2022 after reaching the normal retirement age in
terms of the pension fund of Alfa Ltd. Alfa Ltd paid a gross lump sum of R480 000 to Morné
on 1 February 2022 in lieu of his retirement.
(2) In terms of the divorce order, Marieke’s pension fund was ordered to pay an amount of
R800 000 to Morné out of the minimum individual reserve of her pension fund. Morné elect-
ed that R100 000 must be transferred directly to his pension fund, R200 000 to his retire-
ment annuity fund and that the balance of R500 000 must be paid out to him. The minimum
individual reserve of Marieke was reduced by R800 000 on 1 September 2021, the
R300 000 was transferred directly to Morné’s chosen funds, and the R500 000 was paid out
to him on the same date.
(3) The pension fund of Alfa Ltd paid out the lump sum benefit on 28 February 2022. Contribu-
tions of R15 000 did not previously rank for a s 11F deduction up and until 28 February
2021.
(4) Alfa Ltd bought an air ticket at a cost of R15 000 for Morné’s best friend on 1 May 2021 so
that he could come to assist Morné. Alfa Ltd and Morné agreed that Morné would write a
detailed manual about the complicated processes of his work in exchange for this benefit.
(5) Morné made a monthly contribution of 8% of his cash salary to the pension fund of Alfa Ltd
(his employer made no contributions).
(6) Alfa Ltd monthly contributed R1 000 to a retirement annuity fund for the benefit of Morné.
Morné also contributed R67 500 (from the lump sum received from Alfa Ltd, refer note 1) to
the retirement annuity fund.
(7) Alfa Ltd monthly paid Morné’s contributions of R1 200 to the medical scheme up and until
28 February 2022. Morné is the main member; Marieke and Melissa are not registered as
dependants of Morné in terms of the medical scheme. Morné paid non-refundable hospital
expenses of R29 450 and paid all Melissa’s doctor’s expenses and prescribed medicine
amounting to R14 500 during the year.
(8) Alfa Ltd donated R60 000 to a Public Benefit Organisation on behalf of Morné in terms of a
payroll giving scheme and obtained the required s 18A certificate in respect of the donation.
Calculate Morné’s taxable income and the normal tax payable by him for the 2022 year of
assessment. Morné has never received a lump sum from an employer that is not a fund or lump
sum benefit from a fund before.
272
SOLUTION
(The format of chapter 7 is used) Column 1 Column 2 Column 3
Retirement Retirement
fund lump fund lump
Calc sum benefit sum with- Other
and sever- drawal
ance benefit benefit
Cash salary ....................................................... R140 000
Lump sum from Alfa Ltd (par (d)) ..................... 1 R480 000
Divorce order (par (e)) ...................................... 2 R500 000
Lump sum benefit from pension fund (par (e)) ... 3 535 000
Air ticket ............................................................ 4 15 000
Retirement annuity fund contributions by Alfa
Ltd (par 2(h) and par 13 of the Seventh
Schedule) .......................................................... 12 000
Contributions to medical scheme by Alfa Ltd
(par 2(i) and par 12A of the Seventh
Schedule) .......................................................... 14 400
Subtotal 1 (Gross income) ................................ R181 400
Add: Taxable capital gain ................................. 70 000
Subtotal 2 .......................................................... R251 400
Less: Contributions to retirement funds ........... 5 (69 135)
Subtotal 3 .......................................................... R182 265
Less: Section 18A donation. Actual amount
is R60 000. ....................................................... (18 227)
Limited to 10% × R182 265 = R18 227
(Therefore, R60 000 limited to R18 227.)
The excess of R41 773 (R60 000 – R18 227)
can be carried forward to the 2023 year of
assessment.
Taxable income................................................. R1 015 000 R500 000 R164 038
Morné’s taxable income is the sum of the three amounts, being R1 679 038.
Calculations
1 This is a severance benefit because Morné is 55 years old and the requirement of par (a) of
the definition of severance benefit is met.
2 Amount in terms of divorce order (retirement fund lump sum withdrawal benefit
par 2(1)(b)(iA)) ....................................................................................................... R800 000
Less: Par 6(1)(a): Deductible transfers from a pension fund to a pension
fund and a retirement annuity fund (R100 000 + R200 000) ........................ (300 000)
Gross income (par (e)) ............................................................................... R500 000
3 Lump sum benefit received (retirement fund lump sum benefit par 2(1)(a)(i)) ...... R550 000
Less: Par 5(1)(a): Contributions to retirement funds that did not previously
rank for deduction ....................................................................................... (15 000)
Gross income (par (e)) ........................................................................................... R535 000
4 The payment of the air ticket is in exchange for a service rendered by Morné and although the
ticket is for his friend, par 16 read together with par 2(e) of the Seventh Schedule includes it
as a fringe benefit in Morné’s hands. Alternatively, par (c) of the definition of gross income can
also be applied.
5 Contributions to retirement funds = R90 700 (R11 200 + R12 000 + R67 500)
In terms of s 11F the deduction limited to the lesser of
l R350 000; and
– remuneration of R181 400, and
– taxable income of R251 400 (including taxable capital gain)
therefore: 27,5% × R251 400 = R69 135, and
l the taxable income before this deduction and taxable capital gain = R181 400
The lesser amount is therefore R69 135.
The non-deductible contributions of R21 565 (R90 700 – R69 135) must be carried forward to
the 2023 year of assessment as ‘contributions not previously deducted’.
continued
273
6 Because the medical doctors were not willing to make a prognosis that Morné’s paralysis
would continue longer than a year, he does not meet all the requirements in the definition of
‘disability’.
Total contributions (R1 200 × 12) (s 6A(4)(b)) ....................................................... R14 400
Less: 4 × s 6A medical tax credit 4 × R3 984 (R332 × 12) .................................... (15 936)
Excess ((R1 536), limited to nil) ............................................................................. Rnil
Add: Hospital expenses ...................................................................................... 29 450
Melissa’s expenses (she meets the requirements in par (a)(iii) of the defi-
nition of ‘child’ in s 6B, and is therefore a dependant as described in
par (b) of the definition of ‘dependant’) ...................................................... 14 500
R43 950
Less: 7,5% of R164 038 ....................................................................................... (12 303)
R31 647
Section 6B medical tax credit 25% × R31 647 ...................................................... R7 912
The normal tax payable on the lump sums is calculated in date sequence. Therefore: firstly, the
retirement fund lump sum withdrawal benefit on 1 September 2021, then the severance benefit
on 1 February 2022 and lastly the retirement fund lump sum benefit on 28 February 2022.
Normal tax payable on divorce order (retirement fund lump sum withdrawal benefit)
of R500 000
Taxable amount = R500 000
Normal tax = (R500 000 – R25 000) × 18% .......................................... R85 500
(There is no hypothetical tax since this is the first time that the taxpayer
receives a lump sum benefit)
Normal tax payable on severance benefit of R480 000
Taxable income = R980 000 (R480 000 severance benefit +
R500 000 retirement fund lump sum withdrawal benefit)
Normal tax = R36 000 + (27% × R280 000 (R980 000 – R700 000)).... R111 600
Less: Hypothetical tax on R500 000 retirement fund lump sum withdrawal
benefit in terms of severance benefit table .................................... (nil)
R111 600
Normal tax payable on pension fund (retirement fund lump sum benefit) of R535 000
Taxable amount = R1 515 000 (R535 000 retirement fund lump sum benefit +
R500 000 retirement fund lump sum withdrawal benefit + R480 000 severance
benefit)
Normal tax = R130 500 + (36% × R465 000 (R1 515 000 – R1 050 000)).................. R297 900
Less:
Hypothetical tax on R980 000 (sum of retirement fund lump sum withdrawal
benefit and severance benefit) in terms of retirement fund lump sum benefit table
(Please note, the hypothetical tax is the same because actual tax was calculated
in terms of the severance benefit tax table, which is the same as the retirement
fund lump sum tax table) ........................................................................................ (111 600)
R186 300
Calculate total normal tax payable
Tax determined on taxable income in column 3 per table: R164 038 @ 18%............ R29 527
Less: Primary rebate .................................................................................................. (15 714)
Normal tax payable on taxable income in column 3 R13 813
Add: Normal tax payable on retirement fund lump sum withdrawal benefit ............ 85 500
Normal tax payable on severance benefit ...................................................... 111 600
Normal tax payable on retirement fund lump sum benefit .............................. 186 300
Less: Section 6A medical tax credit (R332 × 12) ..................................................... (3 984)
Section 6B medical tax credit ......................................................................... (7 912)
Total normal tax payable R385 317
9.3.3 Public sector pension funds (par (eA) definition of ‘gross income’, par 2A)
A public sector pension fund is a fund referred to in paras (a) or (b) of the definition of ‘pension fund’
in s 1 (for example the Government Employees Pension Fund or GEPF). The Act contains specific
provisions relating to the taxation of public sector pension fund benefits.
274
9.3.3.1 Transfers to provident fund (par (eA) definition of ‘gross income’)

Annuities paid by public sector pension funds are included in gross income (par (a) definition of ‘gross
income’ in s 1). By converting a fund of this nature to a provident fund, or by the member’s transferring
to a provident fund, tax could possibly be avoided on a portion of the benefits. This is because provi-
dent funds permit the full retirement interest to be taken as a lump sum. Paragraph (eA) will also apply
to public sector provident funds with effect from 1 March 2018.
A member who effectively remains in the employment of the same employer in the public sector, or
the dependants or nominees of a deceased member, must include an amount in gross income
(par (eA)). The amount included is equal to two-thirds of
l an amount transferred from a public sector pension fund to a public or private sector provident
fund, or
l an amount converted for the benefit or ultimate benefit of the member or the dependants or nom-
inees of a deceased member, where a public sector pension fund is wholly or partially converted,
by way of an amendment to its rules or otherwise, to a provident fund, or
l an amount payable to a member or utilised to redeem a debt of the member.
In the case of a conversion, the amount is deemed to have accrued to the member or the depend-
ants or nominees of a deceased member. If the former spouse of a member receives the amount in
terms of a divorce order, the amount still accrues to the member (par (eA)(iii)(bb)). The effect of
par (eA) is particularly severe, in that amounts included in gross income under this provision
l are not subject to the Second Schedule to the Act, and therefore do not qualify for any deduc-
tions in terms of the Second Schedule, and
l also do not qualify for the rating concession under s 5(10).
The amount included in gross income in terms of par (eA) is deemed to be remuneration for employ-
ees’ tax purposes even though no amount is actually paid to the employee when an amount is trans-
ferred from one fund to another or when a fund is converted. The employer is required to obtain a
directive from the Commissioner as to the amount of employees’ tax to be deducted or withheld from
the member’s salary (par 9(4) Fourth Schedule).
9.3.3.2 Lump sums benefits from a public sector pension fund (par 2A)
Public sector pension fund benefits in general have only become subject to tax since 1998. This can
be illustrated with the following timeline:
PSPF benefits tax-free PSPF benefits taxable
1 March 1998
With the above general principle in mind, the details and formulae that follow below become much
easier to understand.
Remember
The actual lump sum benefit received from a public sector pension fund as a retirement fund lump
sum benefit or retirement fund lump sum withdrawal benefit is not taken into account in calculating
the taxable amount. An amount determined in accordance with a formula in par 2A is deemed to be
the lump sum benefit. The par 5 or par 6 deductions must then be deducted.
The effect of the formula is to separate the actual lump sum benefit into two distinct portions and to
deem only part of it to be taxable:
l The amount attributable to pensionable service after 1 March 1998. This amount is the taxable
portion. It is reduced by the deductions available for private sector funds (par 5(1)(a)–(e)) (see
9.3.1) in the case of death or retirement. In the case of withdrawal or resignation, it is reduced by
the amount determined in terms of par 6(1)(b)(i)–(v) (see 9.3.2). The amount determined using
the formula will only be subject to tax under par (e) of the definition of ‘gross income’ in s 1 if
there is a balance remaining after the deduction of the aforementioned amounts.
l The amount attributable to pensionable service prior to 1 March 1998. This amount retains the
tax-free status it had before 1998.
The formula is expressed in par 2A as:
B
A= ×D
C
275
Very simply stated, the formula equates to the following:

Years’ service after 1 March 1998
Potential taxable amount (A) = × Lump sum
Total years’ service
In this formula
A is the deemed lump sum benefit
B is
– the number of completed years of employment of the taxpayer after 1 March 1998, or
– the number of completed years after 1 March 1998 during which the taxpayer had, until the
date of accrual of any benefit, been a member of any public sector fund
C is
– the total number of completed years of employment taken into account, or
– the number of completed years during which the taxpayer had, until the date of accrual of any
benefit, continuously been a member of any public sector fund
D is the actual lump sum benefit payable.
The amount represented by symbol A is deemed to be the lump sum and qualifies for deductions in
terms of par 5(1)(a)–(e) and par 6(1)(b)(i)–(v).
Example 9.8. Retirement from a PSPF

Amber (taxpayer) retires as member of a government pension fund on 28 February 2022. He
receives a lump sum of R1 500 000. He completed 43 years of service and the number of com-
pleted service years after 1 March 1998 is 24 years. Contributions of R10 800 did not previously
rank for a deduction in terms of s 11F. Calculate the amount that must be included in gross
income as well as the normal tax payable thereon.
SOLUTION
Apply the formula
B = 24 years
C = 43 years
D = R 1 500 000
A = B/C × D
= 24/43 × R1 500 000
= R837 209
Deemed lump sum benefit............................................................................................. R837 209
Less:
Contributions that did not previously rank for deduction (deductible in full – not
apportioned on the same basis as the lump sum that was received) ........................... (10 800)
Gross income ................................................................................................................. R826 409
Normal tax payable = R36 000 + tax on R126 409 (R826 409 – R700 000) @ 27%
(see 9.3.1 for table) ........................................................................................................ R70 130
9.4 Exemption of qualifying annuities (ss 10C, 11F and par 5(1)(a) and 6(1)(b)(i))
Section 10C provides for an exemption in respect of ‘qualifying annuities’. This is defined as the
amount of the retirement interest of a member of any of the five retirement funds payable in the form
of an annuity (including a living annuity) (s 10C(1)). This refers to the two-thirds portion of the retire-
ment interest of a member of any of the five retirement funds that cannot be commuted for a lump
sum on retirement date. It is important to remember that the one-third limitation only applies when a
person elects to retire from these funds.
The ‘balance of unclaimed contributions’ to retirement funds forms the basis of the s 10C exemption.
Please refer to the discussion in chapter 7.4.1 to confirm why, for the purposes of s 10C, the ‘balance
of unclaimed contributions’ will consist of the sum of all unclaimed contributions in respect of a pen-
sion fund or a retirement annuity fund and all unclaimed contributions to a provident fund whether
made before or after 1 March 2016.
276
Section 10C(2) allows an exemption equal to so much of any contributions to any pension fund,
provident fund and retirement annuity fund that did not rank for a deduction against the person’s
income in terms of s 11F or has not previously been
l allowed to the person as a deduction in terms of the Second Schedule (meaning in terms of
par 5(1)(a) or 6(1)(b)(i)), or
l allowed as an exemption in terms of s 10C(2)
in respect of any prior year of assessment.
Following the normal reduction order in the calculation of taxable income (gross income less exemp-
tions less deductions), the ‘balance of unclaimed contributions’ at the end of the 2021 year of assess-
ment, is applied or used in the following sequence during the 2022 year of assessment:
l firstly to claim a deduction in terms of par 5(1)(a) or 6(1)(b)(i) of the Second Schedule when the
par (e) gross income amount in respect of any applicable lump sum benefit received during the
2022 year of assessment is calculated, and
l secondly to claim an exemption in terms of s 10C against any ‘qualifying annuities’ received during
the 2022 year of assessment, and
l lastly to add any remaining balance of unclaimed contributions to the current contributions made
during the 2022 year of assessment before the allowable deduction in terms of s 11F is calcu-
lated.
The s 10C(2) exemption is limited to the total amount of qualifying annuities received in a specific
year of assessment. The exemption is only available in respect of a natural person’s own balance of
unclaimed contributions and any remaining balance on the date of death of a natural person will not
be available to subsequent holders of the annuity.
The ‘balance of unclaimed contributions’ can be applied in three different ways, as explained in
chapter 7.4.1, as a deduction (s 11F) or as an exemption, against any lump sum benefit or any quali-
fying annuities received from any retirement fund. It is submitted that a taxpayer will derive the great-
est benefit if the balance of unclaimed contributions is used as soon as possible, meaning at the first
allowable opportunity.
Example 9.9.
At the end of the 2021 year of assessment, retirement annuity fund contributions amounting to
R200 000 were not previously allowed as a deduction in the calculation of Jabu’s taxable income
(the balance of unclaimed contributions). Jabu retired from the retirement annuity fund on
28 February 2021.
Jabu contributed R5 000 per month to his employer’s pension fund until 30 September 2021.
Jabu elected to retire in October 2021 after reaching the normal retirement age and his total
retirement interest from his employer’s pension fund amounted to R300 000. Jabu received a
lump sum benefit of R100 000 (before any employees’ tax was deducted) on 31 October 2021
and an annuity of R5 000 per month from 31 October 2021.
Explain the tax consequences for Jabu in respect of the amounts he received from the pension
fund during the 2022 year of assessment.
SOLUTION
Jabu must include the taxable amount of the retirement fund lump sum benefit in his gross in-
come in terms of par (e) of the definition of ‘gross income’. Jabu can deduct R100 000 of the
balance of unclaimed contributions against the lump sum benefit in terms of par 5(1)(a). The
taxable lump sum benefit will therefore be R0 (R100 000 – R100 000).
Jabu must include the R25 000 (R5 000 × 5) qualifying annuities received in his gross income in
terms of par (a) of the definition of ‘gross income’. Jabu will be entitled to a s 10C exemption.
Jabu’s balance of unclaimed contributions now amounts to R100 000 (R200 000 – R100 000
(used in terms of par 5(1)(a)). Since this balance exceeds the amount of R25 000 in respect of
qualifying annuities, an exemption of R25 000 can be claimed in terms of s 10C.
The balance of unclaimed contributions now amounts to R75 000 (R200 000 – R100 000 –
R25 000). This balance of R75 000 is deemed to be current contributions made to the pension
fund during the 2022 year of assessment (s 11F(3)).
This R75 000 is therefore added to the R35 000 (R5 000 × 7) current contributions to the pension
fund made during the 2022 year of assessment (s 11F(3)). The deduction in terms of s 11F(2) is
then calculated as the lesser of the three normal limits of the s 11F deduction. The s 11F deduc-
tion is, as always, limited to the actual contributions of R110 000 (R35 000 + R75 000).
277
A natural person’s tax returns contain the information regarding the contributions made to retirement
funds, and the deductions granted in terms of s 11F. SARS keeps a record of the balance of un-
claimed contributions of a natural person. When a retirement fund (as employer) applies for a tax
directive (in terms of par 9(3) of the Fourth Schedule) regarding the employees’ tax to be withheld in
respect of a lump sum benefit, SARS can therefore take the balance of unclaimed contributions into
account to issue the directive.
The balance of unclaimed contributions is not taken into account when an employer who is not a fund
is calculating employees’ tax on a monthly basis. An employer can only take the information relating
to that specific month into account. Please see chapter 10 for a more detailed discussion about how
an employer will calculate the amount of the contributions to retirement funds to be taken into ac-
count in terms of par 2(4) of the Fourth Schedule.
1. From 30 October 2019, any contributions to any retirement fund that were
allowed as a deduction in terms of par 5 of the Second Schedule to
determine the taxable portion of the lump sum benefit that is deemed to
have accrued to the deceased immediately prior to his or her death must
be included in the property of the deceased estate for estate duty
purposes (s 3(3)(e) of the Estate Duty Act). This applies in respect of
(a) the estate of a person who dies on or after that date; and
Please note! (b) any contributions made on or after 1 March 2016.
2. The definition of ‘remuneration’ in the Fourth Schedule includes all
annuities and specify that amounts must be ‘income’. It is submitted that
the information regarding the s 10C exemption of a specific member will
not be available to the fund as employer when employees’ tax must be
calculated in respect of qualifying annuities paid by the fund. The fund will
therefore not be able to calculate the amount of ‘income’ (gross minus
exempt) in respect of the qualifying annuities. The fund must base the
calculation of employees’ tax on the gross amount of the qualifying annu-
ities paid.
9.5 Rating concession (average rating formula) (s 5(10))

The average rating formula was amended with effect from 1 March 2011 and the new average rating
formula applies to the following types of income (referred to as ‘irregular income’):
l ‘special remuneration’ paid to mineworkers as members of so-called proto teams (s 5(9); see 9.3.1)
l excess income derived by farmers on the disposal of plantations (par 15(3) of the First Schedule;
see chapter 22)
l excess income derived by farmers whose sugar cane fields have been damaged by fire (par 17
of the First Schedule; see chapter 22)
l excess of taxable farming income over the average farming income determined for that year in
terms of par 19(2) of the First Schedule when the provisions of par 19(1) of the First Schedule
apply (see chapter 22).
If a taxpayer’s taxable income in a particular year of assessment includes any of the above amounts,
the normal tax (excluding tax on any lump sum benefits or severance benefits) payable by the tax-
payer on B, before the deduction of any rebates, is calculated in accordance with the formula:
A
Y = × B
B+D–C
All the elements in this formula are defined in s 5(10) and should be studied in detail before attempt-
ing any practical examples. In short, the elements in the formula have the following meanings:
Y = amount of normal tax to be determined
A = normal tax (before rebates) on B + D – C (calculated in terms of the progressive tax table)
B = total taxable income for the year (excluding any lump sum benefit or severance benefit)
C = the sum of the irregular income above included in taxable income
D = so much of any current contribution to any pension fund, provident fund or retirement annuity
fund as is allowable as a deduction under s 11F solely by reason of the inclusion of the irregular
income above in the taxpayer’s income.
278
The proviso to s 5(10) states that the average rate may not be less than the lowest scale in the pro-
gressive table (namely 18%).
9.5.1 Member of a proto team (s 5(9))

Section 5(9) defines the term ‘special remuneration’ as
l an amount received by or accrued to a mineworker over and above his normal remuneration and
regular allowances, and
l any regular allowance for special services rendered by him (otherwise than in the course of his
normal duties) in combating any fire, flood, subsidence or other disaster in a mine, in rescuing
persons trapped in a mine or in performing any hazardous task during an emergency in a mine if
– such services are rendered by him as a member of a team recognised by the management of
the mine, and
– the members of the team have been appointed for the purpose of rendering such services.
Any special remuneration included in the taxpayer’s income is, together with any other receipts or
accruals that are subject to the rating concession, represented by item ‘C’ in the formula in s 5(10)
(s 5(10)(d)(i)).
Remember
The rating formula (s 5(10)) is still applicable to ‘special remuneration’ as defined for years of
assessment commencing on or after 1 March 2011.
Example 9.10. Retirement benefits, special remuneration and the average rating
formula
Lerato elected to retire from employment on 31 August 2021, the day after he celebrated his 60th
birthday and reached the normal retirement age. His income and deductions for the year of
assessment ended 28 February 2022 were as follows:
Salary (March to August 2021) ..................................................................................... R90 000
Lump sum gratuity received from his employer on his retirement
on 31 August 2021 (severance benefit) ....................................................................... 50 000
Retirement fund lump sum benefit on commutation of annuities from pension fund
on 31 August 2021 ........................................................................................................ 542 500
Special remuneration received as a member of a proto team ...................................... 25 000
Pension fund contributions (March to August 2021) ..................................................... 6 750
Capital gain (proceeds less base cost) ........................................................................ 60 000
Lerato had never previously received any lump sum benefits or severance benefits. He had been
a member of the pension fund for 35 years, and all his contributions to the fund had previously
been allowed as deductions for tax purposes. His taxable income for the previous year of assess-
ment was R124 000, including taxable capital gains of R4 000.
Calculate the normal tax payable by Lerato for the year of assessment ended 28 February 2022.
279
SOLUTION
(The format in chapter 7 is used)
Retirement Other
fund lump
sum benefit
and
severance
benefit
Calculate taxable income:
Salary .......................................................................................................... R90 000
Lump-sum gratuity (severance benefit) ...................................................... R50 000
Retirement fund lump sum benefit ............................................................. 542 500
Special remuneration received as a member of a proto team .................... 25 000
Gross income .............................................................................................. R115 000
Add: Taxable capital gain of R8 000 (40% × R20 000 (R60 000 –
R40 000 annual exclusion)) ........................................................................ 8 000
Subtotal 1 .................................................................................................... R123 000
Less: Deductions:
Actual contributions to retirement fund of R6 750 (deduction is lesser of
R350 000; 27,5% of the higher of remuneration (R90 000) and taxable
income (R123 000), therefore 27,5% × R123 000 = R33 825; and
R115 000. Therefore R33 825, limited to the actual contributions of
R6 750)........................................................................................................ (6 750)
Taxable income........................................................................................... R592 500 R116 250
The normal tax on the retirement fund lump sum benefit and severance benefit are calculated in
terms of a separate tax table. Since both the lump sums are received on the same day and the
same tax table applies to both, only one calculation is done. The tax on the taxable amount of
R592 500 is calculated at 18% in terms of that table and the normal tax payable thereon amounts
to R16 650 ((R592 500 – R500 000) × 18%).
The average rating formula is applied in respect of the special remuneration.
A
Y = × B
B+D–C
Where: A = normal tax on B + D – C (R91 250 (R116 250 – R25 000)) ..................... R16 425
B = total taxable income (excluding retirement fund lump sum benefit and
severance benefit) ................................................................................... 116 250
C = special remuneration as a member of a proto team ................................ 25 000
D = retirement annuity fund contribution on lump sum .................................. nil
Y = R16 425/(R116 250 – R25 000) × R116 250 = 20 925
Less: Primary rebate ...................................................................................................... (15 714)
Normal tax payable on taxable income excluding retirement fund lump sum
benefit and severance benefit .............................................................................. R5 211
Add: Normal tax payable on retirement fund lump sum benefit and severance
benefit ................................................................................................................... 16 650
Total normal tax payable....................................................................................... R21 861
280
10 Employees’ tax
Linda van Heerden, Maryke Wiesener and Angela Jacobs

l demonstrate knowledge of the Fourth Schedule by calculating the employees’ tax
liability of a taxpayer in a case study
l identify the tax implications of independent contractors, labour brokers and per-
sonal service providers, and to apply it in a practical case study or a theoretical
advice question.
Contents
Page
10.1 Overview .......................................................................................................................... 281
10.2 Remuneration (par 1, s 1(1) definition of ‘gross income’, ss 7(11), 8, 8B, 8C and 10) ... 284
10.2.1 Taxable (fringe) benefits (paras 4 and 16 of the Seventh Schedule) ............... 289
10.2.2 Directors’ fees (paras (a) and (g) of the definition of ‘employee’, s 7B) ........... 289
10.2.3 Right to acquire shares (par 11A, ss 8A, 8B and 8C) ....................................... 290
10.2.4 Annuities and royalties (definition of ‘remuneration’ (par (a), par (2B),
ss 10A and 10C) ................................................................................................ 291
10.2.5 Exemption from income tax: foreign employment income (s 10(1)(o)(ii)) ......... 291
10.3 Employee (paras 1 and 2(1), ss 9(2)(g), 9(2)(h) and 10(1)(c)(v)) .................................... 293
10.4 Employer (paras 1 and 2A of the Seventh Schedule) ...................................................... 293
10.5 Employees’ tax (paras 2, 9 and 11, ss 6(2), 6A, 6B, 7(2) and 7B) ................................... 294
10.6 Standard Income Tax on Employees (SITE) (par 11B(2)) ................................................ 305
10.7 Part-time, casual and temporary employees (paras 13(2)(b) and 13(3)) ........................ 305
10.8 Independent contractors, labour brokers and personal service providers (par 1) ............. 306
10.8.1 Independent contractors (definition of ‘remuneration’: exclusion in par (ii)) .... 306
10.8.2 Labour brokers (paras 1, 2(5), 21 and 23, and s 23(k)).................................... 309
10.8.3 Personal service providers (paras 1, 2(1A), 21 and 23, and s 23(k)) ............... 310
10.9 Directors of private companies (par 11C) ....................................................................... 313
10.10 Directors of public companies (par 1) ............................................................................. 313
10.11 Duties of an employer ...................................................................................................... 313
10.11.1 Registration (par 15) .......................................................................................... 313
10.11.2 Obligation to deduct and pay over tax (paras 2, 5, 6 and 7) ............................ 314
10.11.3 Irregular remuneration (par 9(3), paras (d) and (e) of the definition of ‘gross
income’, s 7A) .................................................................................................... 314
10.11.4 Directives to employer (paras 9 and 11) ........................................................... 315
10.11.5 Records (par 14(1)) ........................................................................................... 316
10.11.6 Annual returns (par 14(3), (6) and (7)) .............................................................. 316
10.11.7 Employees’ tax certificates (par 13) .................................................................. 316
10.12 The Employment Tax Incentive Act, 2013 ....................................................................... 317
10.13 Skills Development Levy and Unemployment Insurance Fund ....................................... 319
10.1 Overview
Except where otherwise stated, all references to paragraph numbers in this chapter are references to
the Fourth Schedule to the Income Tax Act.
281
Employees’ tax is not an additional tax but merely upfront payments of the normal tax payable on
remuneration earned. The normal tax payable on an employee’s taxable income is reduced by the
employees’ tax that has been deducted from his remuneration during the year of assessment.
Employees’ tax is withheld monthly if an ‘employer’ (who is a resident) or a representative employer (if
the employer is a non-resident) pays or becomes liable to pay ‘remuneration’ to an ‘employee’ unless
the Commissioner has granted authority to the contrary (par 2(1)). Employees’ tax must be deducted,
not only from remuneration that is actually paid to an employee, but also from remuneration that the
employer becomes liable to pay to him (except in the case of variable remuneration). Consequently,
remuneration credited to an employee’s or director’s account in the books of the employer or com-
pany, against which the employee or director is free to draw, constitutes an amount subject to the
deduction of employees’ tax. The employees’ tax on variable remuneration (as defined) must be
deducted on the date of payment (par 2(1B)).
The definitions of ‘remuneration’, ‘employer’ and ‘employee’ are interdependent. The definition of
‘remuneration’ is the central definition that drives the application and relevance of the other two
definitions. This is because both the definitions of ‘employee’ and ‘employer’ require that an amount
of ‘remuneration’ is either received or paid. If an amount of ‘remuneration’ is paid, the person paying
it becomes an ‘employer’ and if it is received, the person receiving it becomes an ‘employee’. The
definitions of the three terms are discussed in 10.2, 10.3 and 10.4 respectively. It is important to note
that, if a person receives remuneration from more than one employer, every employer will make a
separate calculation of the employees’ tax to be withheld on the specific remuneration paid by that
specific employer.
*
Remember
The Fourth Schedule requires the presence of the following three elements, before employees’
tax may be deducted: an employer paying remuneration to an employee.
The employer must pay the employees’ tax withheld to the Commissioner within seven days after the
end of the month during which it was withheld (par 2(1)). Should the seventh day fall on a Saturday,
Sunday or public holiday, the amount must be paid no later than the last business day before the
Saturday, Sunday or public holiday (s 244(1) of the Tax Administration Act). An employer who wilfully
uses or applies any amount withheld as employees’ tax for purposes other than the payment of such
amount to the Commissioner is guilty of an offence and is liable, upon conviction, to a fine or to impris-
onment for a period not exceeding two years (par 30(1)(a)). A monthly employer’s declaration
(EMP201) must accompany the payment to SARS. The office of SARS maintains an account for each
employer, to which the monthly payments are credited. Reconciliation declarations must be submitted
by the employer. The submission dates for the 2021 annual employer reconciliation are 13 September
to 31 October 2020 (interim period: 1 March 2021 to 31 August 2021) and 1 April to 31 May 2021
(annual period: 1 March 2021 to 28 February 2022).
At the end of the year of assessment, after the employees’ tax reconciliation (EMP501 reconciliation) of
the employer has been prepared, the total employees’ tax withheld from a specific employee’s remu-
neration can be identified and quantified. The employer must submit the employees’ tax certificates
(IRP5) annually by 31 May. An employer who wilfully or negligently fails to deliver the IRP5s is guilty of
an offence and is liable, upon conviction, to a fine or to imprisonment for a period not exceeding two
years (par 30(1)(1A)(a)). Annually, in respect of each year of assessment, SARS issues an external
guide (Guide for Employers in respect of Employees’ Tax) to assist employers in understanding their
obligations relating to employees’ tax, Skills Development Levy and Unemployment Insurance Fund
contributions (PAYE-GEN-01-G16 was issued in respect of the 2022 year of assessment).
In addition to the obligation to pay the employees’ tax withheld to the Commissioner, the employer must
also pay a compulsory Skills Development Levy (paid by the employer only) and both the employer and
the employee must make a compulsory contribution to the Unemployment Insurance Fund monthly. The
employer must remit the amounts on which these payments are based to SARS with the monthly
EMP201 (see 10.13).
Paragraph 14(6) provides that where an employer fails to submit ‘a complete return’ on time, that
employer will be subject to penalty for each month of non-compliance.
SARS states in Tax Practitioner Connect Issue 21 (21 May 2021) that non-compliance with an employ-
er’s PAYE tax obligations can be costly and is a criminal offence, which may result in a fine for the
employer or imprisonment for a period not exceeding two years. Non-compliance includes
l wilful or negligent failure to submit an EMP201 return, EMP501 return or IRP5/IT3(a)s to SARS
l wilful or negligent failure to deliver an IRP5 to an employee or former employee, or
282
10.1 Chapter 10: Employees’ tax
l deducting or withholding employees’ tax from employees, whilst wilfully using the money for pur-
poses other than paying it to SARS.
Non-compliance administrative penalties are imposed on employers who
l Fail to submit a complete EMP501 on or before 31 May 2021. They will be penalised for each
month that a complete return remains outstanding. The PAYE administrative penalty is calculated
in one-percent increments over a period of ten months from June 2021 in respect of the reconcili-
ation ending 28 February 2021 and for subsequent years (Tax Practitioner Connect Issue 23
(6 August 2021). Depending on the number of months outstanding, the penalty is up to 10% of
the total employees’ tax liability.
l Fail to pay the full amount of employees’ tax to SARS on or before the due date for payment (that
is, by the last working day before or on the 7th of the following month). They will be penalised by
an amount equal to 10% of the outstanding employees’ tax amount. In addition, interest will be
charged for the period that the amount remains unpaid.
The imposition, adjustment or cancellation of the PAYE administrative penalty should be communi-
cated to the employer through the Notice of Penalty Assessment (EMP301) and the statement of
account (EMPSA) via eFiling and/or the e@syFile communication centre (Tax Practitioner Connect
Issue 23 (6 August 2021).
Note that penalties and interest are imposed for late payment of skills development levy (SDL) and
unemployment insurance fund (UIF) as well.
See 10.11.3 for directives which must be obtained in terms of par 9(3), and 10.7 for the fixed rate for
temporary employees.
Extract from the comprehensive framework for natural persons for the 2022 year of assessment:
Normal tax payable by the natural person ....................................................................... Rxxx

Less: PAYE, provisional tax and s 35A withholding tax in respect of non-residents......... (Rxxx)
Calculation of employees’ tax per month
Normal tax due by or to the natural person on assessment ............................................. Rxxx
Remuneration (per month)

(Separate per employer for each employee)
(Def in par 1 – see 10.2)
Includes:
Various types of income
Specific inclusions
Specific exclusions
Annual payment separately
Less:
Par 2(4)(a)–(f) deductions
(See 10.5)
Balance of remuneration
(BoR)
Annual equivalent of BoR Annual equivalent of BoR plus annual

(excluding annual payment) payment (see 10.5)
Tax per table after rebates and Tax per table after rebates
the s 6A and 6B(3)(a)(i) medical and the s 6A and 6B(3)(a)(i) Total employees’
tax credits (par 9(6)) PLUS medical tax credits (par 9(6)) =
tax payable
=A =B
A × 1/12 = month’s employees’ less: A (see left)
tax = Tax on annual payment
283
Numerous COVID-19 tax relief measures regarding employees’ tax were

implemented:
l Resident employers and representative employers who are ‘qualifying
taxpayers’ were granted temporary relief regarding the settlement of its
COVID-19 Note employees’ tax liability for a limited period.
l Certain relief measures were granted to eligible employers under the
Employment Tax Incentive programme.
These measures are all discussed in chapter 34.
10.2 Remuneration (par 1, s 1(1) definition of ‘gross income’, ss 7(11), 8, 8B, 8C

and 10)
The definition of ‘remuneration’ does not per se require that the amount must be paid by an employer
to an employee but specifies types of amounts payable to any person and lists specific inclusions
and exclusions. An amount that is not ‘remuneration’ as defined is not subject to employees’ tax.
Consequently, the definition of ‘remuneration’ is fundamental to the determination of employees’ tax,
and it is therefore the starting point of this discussion. Non-residents will only be subject to employ-
ees’ tax on remuneration earned from a source within the Republic (see 10.3).
The preamble to the definition of ‘remuneration’ in par 1 states that it means an amount of income that
is paid or is payable to any person by way of any
l salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension,
superannuation allowance, retiring allowance or stipend (salary or study allowance of a minister)
l whether in cash or otherwise, and
l whether or not in respect of services rendered.
The requirement that an amount must be ‘income’ as defined in s 1(1) before it can constitute remu-
neration means that the amount must be income in nature, as opposed to capital, must be from a
source in the RSA (in the case of non-resident employees) and it must also not be exempt in terms of
any of the provisions of s 10. Section 10 provides for the following relevant exemptions (these
amounts are therefore not remuneration to the extent that it is fully or partially exempt):
l the capital element of an ‘annuity amount’ (s 10A)
l special uniforms (s 10(1)(nA))
l transfer costs (s 10(1)(nB))
l sections 8B and 8C share schemes (s 10(1)(nC),(nD) and (nE))
l remuneration in specific cases (s 10(1)(o) – see 10.2.5), and
l bursaries and scholarships (s 10(1)(q)).
The Guide for Employers in respect of Employees’ Tax for 2022 (PAYE-GEN-01-G16) and the Guide
for Codes applicable to Employees’ Tax Certificates 2022 (PAYE-AE-06-G06), make it clear that
exempt amounts, like the above, must still be reflected on the IRP5 certificates. If the allowance or
transfer costs are exempt from tax, the amount must be reflected under code 3713 (Other allowances
(Non-taxable)). If the allowance or transfer costs are taxable, employees’ tax must be deducted, and
the amount must be reflected under code 3714 (Other allowances (Subject to PAYE)).
The taxable benefit of a bursary is regarded as an annual payment for PAYE purposes. Only the
taxable portion of bursaries must reflect under code 3809 for grades R to 12 and NQF levels 1 to 4
and code 3820 for NQF levels 5 to 10. The non-taxable portion of bursaries must reflect under
code 3815 for grades R to 12 and code 3821 for NQF levels 5 to 10.
284
The following table summarises the specific inclusions and exclusions in the definition of ‘remuner-
ation’:
Normal tax Employees’ tax

Paragraph in the Amounts specifically excluded
Section in the Type of remuneration specifically
definition of from the definition of
Act included
‘remuneration’ ‘remuneration’ in par 1
Par (a) of ‘gross Par (a) Annuities, the taxable portion of Government pensions and grants
income’ in s 1(1) an ‘annuity amount’ in s 10A(1) under the Aged Persons Act, the
(see 10.2.4 below) and living Blind Persons Act, the Disability
annuities received Grants Act, or s 89 of the Chil-
dren’s Act (spesific exclusion in
par (iii))
An annuity under a divorce order
or decree of judicial separation or
under an agreement of separation
(specific exclusion in par (viii))
Par (c) of ‘gross Par (a) Amounts received for services An amount paid or payable to an
income’ in s 1(1) rendered or to be rendered independent contractor in respect
(including a voluntary award) of services rendered or to be
rendered (see 10.8.1) (specific
exclusion in par (ii))
Please note that even though
benefits that are fully exempt (for
example special uniform allow-
ances and certain transfer costs)
must be included in gross income
in terms of par (c) of ‘gross
income’, no employees’ tax needs
to be deducted from such bene-
fits. This is because these benefits
are not ‘income’. Such benefits are
also excluded from the definition of
‘taxable benefits’ in par 1 of the
Seventh Schedule
Par (cA) of Par (a) A restraint of trade payment
‘gross income’ received by a
in s 1(1) l labour broker for whom an
exemption certificate has not
been issued, or
l personal service provider
Par (cB) of Par (a) A restraint of trade payment
‘gross income’ in received by a natural person in
s 1(1) respect of or by virtue of
l employment or the holding of
any office, or
l any past or future employ-
ment, or the holding of an
office
Par (d ) of ‘gross Par (a) The gross lump sum received In terms of the Guide for Em-
income’ in s 1(1) from an employer who is not a ployers in respect of Employees’
retirement fund in respect of the Tax: 2022 Tax Year (PAYE-GEN-
termination, etc., of any office or 01-G16) any payment in respect
employment, including the proof leave pay is a payment in
ceeds of a policy of insurance or respect of services rendered and
risk policy ceded to a person, does not form part of a lump sum
dependant or nominee (irrespect- in terms of par (d). Such payment
ive whether it is a severance must be treated like a bonus for
benefit or not) employees’ tax purposes (and is
also seen as variable remu-
neration)
continued
285

Act included
Par (e) of ‘gross Par (a) The net taxable amount of a retire-
income’ in s 1(1) ment fund lump sum benefit and
retirement fund lump sum with-
drawal benefit received from retire-
ment funds (see chapter 9)
Par (eA) of Par (a) In the case of the conversion from
‘gross income’ a public sector pension fund to a
in s 1(1) private or public provident fund,
two thirds of an amount
l transferred from the Public
Sector Pension Fund to the pri-
vate or public provident fund,
or
l converted from a right to an
annuity to a right to a lump
sum, or
l paid to a member or used to
redeem a debt
Par (f ) of ‘gross Par (a) An amount received in commutation
income’ in s 1(1) of an amount due under a contract
of employment or service
Par (i ) of ‘gross Par (b) The cash equivalent of any taxable Right of use of a motor vehicle
income’ in s 1(1) (fringe) benefit as defined in the (par 7 of the Seventh Schedule –
Seventh Schedule and gains in see par (cB) of the definition of
terms of s 8A (also see 10.2.3) ‘remuneration’ for the special
rule in this regard)
Section 8 Par (bA) An allowance or advance included A travel allowance, subsistence
General in taxable income under s 8(1)(a)(i) allowance or an allowance
(for example computer allowances granted to a holder of public.
and entertainment allowances) (See par (cA), proviso to
par (bA)(ii) and par (c) of ‘remu-
neration’ for the special rules in
this regard.)
Qualifying reimbursive allow-
ances in terms of s 8(1)(a)(ii)
(specific exclusion in par (vi))
Section 8 Proviso to A subsistence allowance paid by Employees’ tax is not withheld
Subsistence par (bA)(ii) and the employer, but the employee from a subsistence allowance
allowance not par (a) does not paid and used as intended
used as such l spend a night away from his
usual place of residence in the
Republic before the last day of
the following month, or
l pay the allowance back to his
employer
Such an amount is then deemed to
be an amount paid for services
rendered in the following month
(meaning it is deemed to be an
inclusion in remuneration in terms
of par (a) of the definition of
remuneration and par (c) of gross
income. It is therefore no longer
seen as a subsistence allowance in
terms of s 8
Section 8 Public Par (c) 50% of an allowance given to the
officer holder of a public office to enable
him to defray expenditure incurred
in connection with his public office
continued
286

Act included
Section 8 Fixed Par (cA) 80% of the amount of any travel
travel allowance allowance other than a travel
allowance that is based on the
actual distance travelled (i.e., other
than a reimbursive travel allow-
ance); therefore 80% of any fixed
travel allowance received in terms
of s 8(1)(b)
The 80% becomes 20% if the
employer is satisfied that at least
80% of the use of the motor vehicle
will be for business purposes
(based on the logbook kept by the
employee)
Par 7 of the Par (cB) 80% of the taxable benefit cal-
Seventh culated in terms of par 7 of the
Schedule and Seventh Schedule (the ‘taxable
par (i) of ‘gross benefit’ means the cash equivalent
income’ in s 1(1) of the right of use of the motor
vehicle which is the value of the
private use as calculated in terms
of par 7(2) less the consideration
given by the employee). The ‘tax-
able benefit’ is therefore before the
par 7(7) and (8) adjustments made
by the Commissioner on assess-
ment
The 80% becomes 20% if the
employer is satisfied that at least
80% of the use of the motor vehicle
will be for business purposes
(based on the logbook kept by the
employee)
Section 8 Par (cC) 100% of the excess reimbursive
Reimbursive travel allowance is remuneration.
travel allowance The excess is the difference be-
tween the rate paid by the employ-
er and the rate of the simplified
method, currently R3,98 multiplied
by the business kilometres trav-
elled
Section 8B Par (d) Gain determined in terms of s 8B
(broad-based employee share
plan) (also see 10.2.3)
Section 8C Par (e) An amount as referred to in s 8C
(the market value on the date of
vesting of the equity instruments
less the consideration given by the
employee) and which must be
included in the income of the per-
son (also see 10.2.3)
Section 7(11) Par (f) Any amount deemed to be income
accrued to that person in terms of
s 7(11) (amounts received in terms
of a maintenance order) (see 7.6
and the ‘Please note!’ below)
Various provisos Par (g) Any amount received or accrued to
to s 10(1)(k)(i) a person by way of a dividend in
respect of a restricted equity
instrument as contemplated in
par (dd), (ii) and (jj) of the provisos
to s 10(1)(k)(i)
287
Maintenance orders and the tax-on-tax principle

A maintenance order is normally awarded by a court against a person, in this
case a member of the retirement fund, who has the obligation to provide finan-
cial support to his or her spouse and children. Should the member fail to meet
this obligation, the non-member may approach the court and obtain a mainten-
ance order against the fund directing that the maintenance be deducted directly
from the member’s benefit in a retirement fund.
A maintenance order amount is paid by the fund directly to the non-member or
dependant. Section 7(11) provides that although the amount is received by the
Please note! non-member, it will be deemed to be income in the hands of the member and
accrues on the date the amount is deducted from the member’s minimum indi-
vidual reserve in the retirement fund.
The administrator of the fund is an ‘employer’ for purposes of the Fourth Sched-
ule and therefore has a duty to deduct and pay employees’ tax to SARS on
amounts paid by the fund. The tax liability that arises on payment of the main-
tenance order to the non-member is not deducted from the maintenance order
paid. The fund must use a further portion of the member’s minimum individual
reserve to pay the tax payable on the maintenance order to SARS. The employ-
ees’ tax payable by the fund on the maintenance order is also deemed to be
income received by the member in terms of s 7(11)(b).
‘Remuneration’ includes the amount which is deemed to be income in terms of
s 7(11). This amount is the sum of the amount in terms of the maintenance order
and the employees’ tax on such an amount. This creates a tax-on-tax effect. The
following tax-on-tax formula and example in Interpretation Note No. 89 on
Maintenance Orders and the Tax-on-tax Principle can be used to simplify the
calculation of the tax-on-tax effect of each additional layer of tax:
X=A/C×B
Where
X = total tax payable as a result of the tax-on-tax effect
A = tax payable on maintenance order
B = 100
C = 100 minus the member’s marginal rate of tax
Example:
The amount payable to the non-member in terms of a maintenance order is
R242 534 for the 2022 year of assessment.
The maintenance to be paid is R 242 534 and the tax to be withheld is deter-
mined as follows:
(a) Tax on maintenance:**
Please note! Tax on R216 200 = R38 916,00
26% on R26 334 (R242 534 – R216 200) = 6 846,84
Total normal tax payable R45 762,84
** If the member receives a salary or pension, the rebate should not be taken
into account as the rebate is already taken into account when the employer
is deducting employees’ tax from his or her salary or pension.
(b) Grossed-up tax
R45 762,84 (a) × 100 / (100 – 26 marginal rate of taxpayer) = R 61 841,68
#
(c) Maintenance order after grossing up for the tax payable = R304 375,68
(R242 534 + R61 841,68)
Total income of the member = R304 375,68 (R 242 534 (amount in terms of
s 7(11)(a) + R61 841,68 (amount in terms of s 7(11)(b))
#
If the total grossed-up maintenance order fell into a higher tax bracket, an
additional gross-up calculation must be performed to account for the change in
tax bracket.
The IRP5 certificate of the member must be completed as follows:
Code 3601 (deemed income) = R 242 534
Code 3808 (deemed benefit) = R61 841,68
Code 4102 (Employees’ tax) = R61 841,68
288
Remember
1. If an amount is ‘remuneration’ as defined, any person paying such an amount to any other
person is defined as an employer, and employees’ tax therefore needs to be withheld by that
person (but see 10.4 regarding fringe benefits paid to partners).
2. If a taxpayer receives ‘remuneration’ amounts from various employers, each employer will
calculate the employees’ tax to be withheld separately. These calculations are therefore
based on the balance of remuneration in respect of the information available to each
specific employer. A retirement fund as employer will, for example, only take the information
regarding the lump sum benefit or the pension (annuity) into account, while an employer
who is not a retirement fund will take the salary and fringe benefits into account.
3. The net amount of a lump sum benefit from a retirement fund is included in gross income in
terms of par (e). The gross amounts of paras (d) and (f) severance benefits received from an
employer who is not a retirement fund is included in gross income. These net and gross
amounts are also the amounts of the ‘remuneration’ on which employees’ tax must be
withheld. This is because in par (a), the definition of ‘remuneration’ states ‘any amount
referred to in… par (d), par (e)... of the definition of gross income’ and the wording of those
paragraphs leads to the inclusion of the gross or net amount in the two cases. Please see
10.11.3 about the directives that must be obtained regarding the employees’ tax to be
withheld on these amounts.
4. The gross-up or tax-on-tax effect illustrated above should be used in all instances where the
employer pays a tax liability of an employee on his or her behalf (instead of withholding
employees’ tax) in relation to any ‘remuneration’ accrued or paid to the employee.
10.2.1 Taxable (fringe) benefits (paras 4 and 16 of the Seventh Schedule)

Taxable benefits given by associated institutions
Taxable benefits given to an employee by an associated institution in relation to an employer are
deemed taxable benefits granted by the employer (par 4 of the Seventh Schedule).
Consequently, it is the employer, rather than the associated institution, who is required to deduct
employees’ tax from the cash equivalent of such a taxable benefit.
Taxable benefits granted to relatives of employees and others
Taxable benefits granted by an employer to
l an employee’s relative by virtue of the employee’s employment, or
l any person other than the employee under any agreement, transaction or arrangement with the
employer
is deemed to be granted to the employee (par 16 of the Seventh Schedule).
The cash equivalent of these taxable benefits will be included in the employee’s remuneration and
the employer must withhold employees’ tax in respect thereof. The relative or other person who
receives the taxable benefit will therefore not be taxed thereon.
10.2.2 Directors’ fees (paras (a) and (g) of the definition of ‘employee’, s 7B)
Directors of public companies are included in the definition of ‘employee’ in terms of par (a) if they
receive ‘remuneration’ as defined. An employment contract generally determines the remuneration
payable to an executive director. If directors of public companies receive remuneration as defined,
employees’ tax must be withheld.
Directors of private companies are currently only included in the definition of ‘employee’ in terms of
par (a) if they receive ‘remuneration’ as defined. Until 28 February 2019 they were also included in
terms of par (g) ‘if they are not otherwise so included’. The inclusion in terms of par (g) was deleted
with effect from 1 March 2019. The Explanatory Memorandum on the 2018 TALAB explains that the
proposed amendment removes directors of private companies who do not receive remuneration from
the definition of ‘employee’ for purposes of the Fourth Schedule. It further states that these directors
are no longer subject to PAYE in terms of that Schedule in line with other amendments such as the
repeal of par 11C of the Schedule. It is the intention that directors who receive remuneration are
subject to employees’ tax in the same way as other employees.
The directors’ fees of resident non-executive directors are not regarded as remuneration and are not
subject to employees’ tax. This is because Binding General Ruling No. 40 accepts that resident non-
executive directors are not common law employees, and that no control or supervision is exercised
over the manner they perform their duties, or their hours of work. Binding General Ruling No. 41 clarifies
that non-executive directors carry on an ‘enterprise’ in respect of services rendered as a non-
executive director. Binding General Ruling No. 41 (Issue 2) was issued on 4 May 2017 to clarify certain
289
aspects relating to an NED’s liability date for VAT registration. Only those non-executive directors that
earn non-executive director fees and other income from taxable supplies that have, in total, exceed-
ed the compulsory VAT registration threshold of R1 million in any consecutive period of 12 months (or
will exceed that amount in terms of a written contractual arrangement) must register for VAT. Non-
executive directors that earn fees below the compulsory VAT registration threshold can choose to
register voluntarily if the minimum threshold of R50 000 has been exceeded and all the other re-
quirements for voluntary registration have been met.
The directors’ fees of non-resident non-executive directors are regarded as remuneration and are
subject to employees’ tax. This is because Binding General Ruling No. 40 does not apply to them as
it specifically excludes non-resident non-executive directors. Further, the rule excluding amounts
paid to independent contractors from remuneration (exclusion (ii) to the definition of ‘remuneration’)
does not apply to any amounts paid to non-residents for services rendered.
10.2.3 Right to acquire shares (par 11A, ss 8A, 8B and 8C)

Section 8B applies to qualifying equity shares acquired in terms of a broad-based employee share
plan approved on or after 26 October 2004 by the directors of the company. The employer must
withhold employees’ tax from the ordinary income generated on the disposal of qualifying equity
shares occurring within five years (see chapter 8).
Section 8C deals with the taxation on the vesting of equity instruments in directors and employees
and applies to any equity instrument acquired on or after 26 October 2004. The gain is included in
the definition of ‘remuneration’ on the date of vesting (also see Interpretation Note No. 55 (Issue 2))
(see chapter 8).
Gains made in terms of ss 8A, 8B and 8C are deemed to be paid to the employee by the person who
granted the right or from whom the equity instrument or qualifying equity share that gave rise to the
gain was acquired. Such gains are included in remuneration (paras (b), (d) and (e) of the definition of
‘remuneration’ and par 11A(1)). Similarly, any amount received or accrued to a person by way of a
dividend in respect of a restricted equity instrument as contemplated in paras (dd), (ii), (jj) and (kk) of
the provisos to s 10(1)(k)(i) is included in remuneration (par (g) of the definition of ‘remuneration’ and
par 11A(1)).
Unless the Commissioner has granted authority to the contrary, the person by whom the right was
granted or such dividends were distributed, is the employer and must deduct employees’ tax. It must
be deducted from the consideration paid or payable by that person (the employer) to the employee,
or from any cash remuneration payable to the employee (after that right has, to the knowledge of the
employer, been exercised, ceded or released or that equity instrument has vested or been disposed
of) or from the dividend that accrued to the employee (par 11A(2)). Before deducting the employees
tax, the employer or associated institution must ascertain the amount of employees’ tax from the
Commissioner and the Commissioner issues a directive in this regard (par 11A(4)). If the person who
granted the right or paid the dividend is an ‘associated institution’ in relation to the employer and
l that person is not a resident nor has a representative employer, or
l that person is unable to withhold the full amount of employees’ tax from that remuneration be-
cause the amount of employees’ tax which needs to be withheld exceeds the amount of remu-
neration, or
l the amount of the dividend consists of an equity instrument referred to in s 8C
the associated institution and the employer are jointly and severally liable to withhold the employees’
tax in respect of the gain or dividend from the total remuneration payable to that employee during
that year of assessment (proviso to par 11A(2)). The Commissioner must be notified if the employer is
unable to withhold the full amount of employees’ tax (par 11A(5)).
An employee who has made a gain under a transaction to which the person by whom the right was
granted and the employer are not parties, must immediately inform both such persons of the disposal
and also of the amount of the gain (par 11A(6)). An employee who, without just cause shown by him,
fails to comply with this requirement is guilty of an offence and is liable on conviction to a fine not
exceeding R2 000 (par 11A(7)).
290
10.2.4 Annuities and royalties (definition of ‘remuneration’ (par (a), par (2B), ss 10A and
10C)
Annuities
Annuities, including ‘annuity amounts’ contemplated in s 10A(1) and living annuities, are included in the
definition of ‘remuneration’ (par (a)). Only annuities payable under an order of divorce or decree of
judicial separation or under any agreement of separation are excluded from the definition of ‘remu-
neration’. The person paying any annuity to any other person is therefore an employer as defined in
par 1. It is immaterial how the annuity arises. Whether it is a purchased annuity, a testamentary annu-
ity, an annuity granted in return for the acquisition of an asset or right, or a living annuity, the payer
must deduct employees’ tax before making payments to the annuitant (the employee). The taxable
portion of an ‘annuity amount’ as defined in s 10A is remuneration. This is because an amount must
be ‘income’ as defined to be ‘remuneration’. The employer (being the insurer) must disclose the non-
taxable (capital) element of a purchased annuity amount under par 10A on the IRP5 under the codes
3602 (Income) and 3652 (Non-taxable).
The person paying an annuity is also liable to carry out all the duties and responsibilities of an em-
ployer. An employer can only base the monthly calculation of the employees’ tax on information
available to him. An employer will consequently not be able to take any possible exemptions in
respect of annuities, available at the end of the year of assessment (for example s 10C), into account.
Employees’ tax on annuities will therefore be based on the gross annuities paid, even in the case of
qualifying annuities as defined in s 10C.
With effect from 1 March 2022, a new subpar (2B) is inserted in par 2. This was inserted since many
surviving spouses who earn remuneration and receive annuities or pensions from retirement funds
after their spouse’s death, do not foresee the additional tax liability because of the aggregation of
income which pushes them into a higher tax bracket. This creates a cash flow burden and a tax debt
for the surviving spouse.
Paragraph (2B) authorises retirement funds or a person that is licenced as an insurer under the
Insurance Act to apply the fixed tax rate that the Commissioner directs in determining the amount of
employees’ tax to be withheld in respect of any year of assessment. This only applies where the
person to whom that annuity amount is paid (for example the surviving spouse) receives an amount
of remuneration from more than one employer. Any PAYE that is excessively withheld due to this, will
be refunded on assessment.
Royalties
It is submitted that royalties do not fall within the definition of ‘remuneration’ if they are received for
the use or grant of permission to use a patent, design, trademark or copyright. They do not fall within
any of the specific items referred to in the definition of the term ‘remuneration’; namely salary, leave
pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation
allowance, retiring allowance or stipend. These items clearly do not include amounts received for
permission to use an asset or right. Moreover, royalties are not referred to in paras (a), (c), (cA), (d),
(e), (eA), (f) or (i) of the definition of the term ‘gross income’ in s 1 (which are included in the definition
of ‘remuneration’). The payer of royalties therefore need not deduct employees’ tax from an amount
paid to RSA residents by way of royalties.
If royalties are paid to non-residents, the payer is liable to withhold the withholding tax on royalties in
terms of s 49A (see chapter 21).
The receipt of royalties may cause registration as a provisional taxpayer by the person (par (a) of the
definition of ‘provisional taxpayer’ in par 1), since the person derives income by way of amounts that
are not remuneration.
10.2.5 Exemption from income tax: Foreign employment income (s 10(1)(o)(ii))

Previously, the remuneration received by an employee for services rendered outside South Africa, for
or on behalf of any employer, was exempt from normal tax if the requirements under s 10(1)(o)(ii)
were met. With effect from 1 March 2020, the exemption only applies to the extent that the employ-
ee’s remuneration for services rendered outside South Africa does not exceed R1 250 000 in respect
of a year of assessment. The foreign employment income earned that exceeds R1 250 000, is subject
to normal tax in South Africa.
SARS issued Interpretation Note No. 16 (Issue 4) on 28 June 2021, which sets out SARS’ interpretation
and application of the foreign employment remuneration exemption in s 10(1)(o)(ii), including the
change in legislation which took effect from 1 March 2020. SARS also issued a third issue of the
291
Frequently Asked Questions (FAQ) document in respect of the foreign employment income exemp-
tion on 17 March 2020, based on the questions from employees, employers, and the public at large
about the implications of the amendment.
The FAQ document states that the potential for an exemption under s 10(1)(o)(ii) does not automati-
cally waive the employer’s obligation to deduct employees’ tax in terms of the Fourth Schedule. If the
employer is, however, satisfied that the s 10(1)(o)(ii) exemption will apply to an employee, the em-
ployer may elect to not deduct employees’ tax in respect of that employee. Where an amount quali-
fies for exemption under s 10(1)(o)(ii), the amount is not ‘remuneration’ as defined, as the definition of
remuneration requires that an amount must be ‘income’, as defined, before it can constitute remuner-
ation. This will also result in the amounts not being subject to the deduction of UIF or SDL unless, in
respect of SDL, the Minister of Higher Education and Training determines a different basis for the
calculation of the levy (see 10.13).
The FAQ document recommends that the R1 250 000 threshold should be accumulated monthly in
respect of all qualifying remuneration items. Once the R1 250 000 threshold is reached, the income
exceeding R1 250 000 is subject to normal tax. The R1 250 000 threshold may not be averaged over
the year of assessment. The calculation must be done from the beginning of the year of assessment,
or from the start date of an assignment, depending on the scenario, by adding up all the remunera-
tion items received until the R1 250 000 threshold is reached. In the FAQ document, SARS indicates
that it is accepted that during the month in which the R1 250 000 threshold is exceeded, the employ-
er (from a payroll perspective) can follow different options to determine which part of the remunera-
tion items falls within the R1 250 000 threshold, and which parts becomes subject to normal tax.
The following example in the FAQ document (based on the 2021 year of assessment) illustrates the
cumulative basis on which the R1 250 000 should be calculated:
An employee goes on secondment to a foreign country on 1 March 2020. The employer is satisfied
that the employee will qualify for the exemption under s 10(1)(o)(ii) and exercises the discretion to
apply the exemption through the payroll.
The employee receives the following monthly remuneration: Salary: R200 000 Travel allowance:
R50 000 Accommodation benefit: R30 000.
Items March April May June July
Salary R200 000 R200 000 R200 000 R200 000 R200 000
Travel allowance R50 000 R50 000 R50 000 R50 000 R50 000
Accommodation allowance R30 000 R30 000 R30 000 R30 000 R30 000
Accumulated total R280 000 R560 000 R840 000 R1 120 000 R1 400 000
Exempt R280 000 R280 000 R280 000 R280 000 R130 000
Subject to normal tax R0 R0 R0 R0 R150 000
It is accepted that in the month of July, in which the R1 250 000 limitation will be exceeded, the
employer, from a payroll perspective, can follow various options to make up the R1 250 000 exemp-
tion in that month, for example:
Option 1: R130 000 salary
Option 2: R50 000 travel allowance, R30 000 accommodation benefit and R50 000 salary
Option 3: R80 000 salary and R50 000 travel allowance.
For purposes of the employees’ tax certificate (IRP5), it is required that each remuneration item in
respect of foreign service income must be disclosed under the applicable foreign income source
code (for example 3651 and 3655 for foreign sourced salary income and bonus payments respect-
ively). Source code 3652 (Foreign income – non-taxable) may not be used in respect of any remu-
neration item that may qualify for the s 10(1)(o)(ii) exemption, as there are specific foreign income
source codes that provide for each item and should be used instead. If, however, source code 3652
is used by the employer to disclose foreign sourced income, the s 10(1)(o)(ii) exemption will not be
applied on assessment.
If an employer is satisfied that the employee qualifies or will qualify for the s 10(1)(o)(ii) exemption
and applies it in respect of a particular employee, the employer should disclose the exempt portion of
the remuneration under information source code 4587, limited to R1 250 000.
For example:
l Code 3601 – Gross salary earned in South Africa (if applicable), subject to normal tax
l Code 3651 – Gross salary earned outside of South Africa
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10.2–10.4 Chapter 10: Employees’ tax
l Code 4587 – The portion of the remuneration qualifying for the s 10(1)(o)(ii) exemption as deter-
mined by the employer for PAYE purposes (limited to R1 250 000).
The same principle applies to all the relevant remuneration items.
If the employer withholds employees’ tax in respect of remuneration and subsequently realises that
the remuneration qualifies for the s 10(1)(o)(ii) exemption, the employer may not refund the over-
deducted employees’ tax and the employee must claim the refund on assessment. SARS may re-
quest that the employee provides supporting documentation in the form of, for example, a travel
schedule, a passport and an employment contract, to substantiate the exemption that is claimed on
assessment. Paragraph 29 does not allow the refund of ‘over-deducted’ employees’ tax by an em-
ployer to an employee.
Where the employee is subject to tax in both South Africa and the foreign country, the employer may
apply for a directive in respect of the basis on which the monthly employees’ tax should be withheld
in South Africa. This does not result in the actual s 6quat credit being taken into account, but merely
considers the potential foreign tax credit for purposes of determining the employees’ tax that is
withheld for payroll purposes. The actual s 6quat credit will only be considered on assessment, if all
the requirements are met.
10.3 Employee (paras 1 and 2(1), ss 9(2)(g), 9(2)(h) and 10(1)(c)(v))

The term ‘employee’ is defined in par 1 as any one of the following:
l a person other than a company who receives any remuneration or to whom any remuneration
accrues
l a person who receives remuneration or to whom remuneration accrues by reason of services
rendered by that person to or on behalf of a ‘labour broker’
l a labour broker (see 10.8.2)
l a personal service provider (see 10.8.3)
l a person or a class or category of persons whom the Minister of Finance declares to be an
employee for the purposes of the definition by notice in the Government Gazette (referred to as a
‘declared employee’)
l a director of a private company (deleted with effect from 1 March 2019 – see 10.2.2 and 10.9).
Non-residents as employees
Non-residents are taxed on a source basis and the source of employment income is generally held to
be in the place where the services are rendered. Consequently, employees’ tax need not be deduct-
ed from the remuneration of non-residents who render services outside the Republic. Further, the
remuneration earned by non-residents for services rendered outside South Africa is not gross in-
come.
Employees’ tax must be deducted if the income is from a source within the Republic.
In terms of the deemed source rules, an amount is deemed to be from a source in the Republic if it is
received or accrued because of the holding of a public office if the person has been appointed in
terms of an Act of Parliament (s 9(2)(g)) or for services rendered in the public sector (s 9(2)(h)). The
reason for this is that it is not the place where the services are rendered that determines the source in
these two cases, but the entity to which it is rendered.
Employers may employ non-residents to render services for them in South Africa. The roles of these
employees may require them to work in other countries from time to time. In these situations, the
employee may be subject to tax in South Africa and the other countries and the potential for double
taxation arises. In the case of short-term employment in South Africa (less than 183 days), a double
taxation agreement between the Republic and the country of residence of the employee may relieve
an employee of liability to South African tax, in which case employees’ tax need not be deducted.
Section 10(1)(c)(v) provides an exemption for salaries paid to any subject of a foreign state who is
temporarily employed in the Republic, provided that the exemption is authorised by an agreement
entered into by the governments of the foreign state and the Republic (see chapter 5).
10.4 Employer (paras 1 and 2A of the Seventh Schedule)

The definition of ‘employer’ must not be interpreted through the lens of the common law or in terms of
Labour Law definitions of an employer. Although the concept ‘employer’ is a legal concept, the
Fourth Schedule extends this concept to any person who pays or is liable to pay ‘remuneration’. The
words ‘liable to pay’ indicates a contractual liability to incur the amount. The employee must therefore
have an enforceable right to the amount of remuneration.
293
The term ‘employer’ is defined in par 1 as

l a person (excluding a person not acting as a principal, for example, an agent) who pays or is
liable to pay to any person any amount by way of remuneration. A person acting in a fiduciary
capacity, or his capacity as a trustee of an insolvent estate, an executor or as an administrator of
any fund is also included, and
l a person who is responsible for the payment of remuneration to any person under the provisions
of any law or out of public funds or out of funds voted by Parliament or a provincial council.
Please remember that the word ‘person’ is defined in s 1.
Difficulties will arise when a non-resident who renders services in the Republic is paid his remune-
ration by a person resident in another country, because the Commissioner has no jurisdiction over
the non-resident employer and cannot enforce the deduction of employees’ tax. If remuneration is
paid or is liable to be paid by a resident representative employer, that is, by an agent of such foreign
employer having authority to pay remuneration, such representative employer of the foreign employer
must deduct or withhold employee’s tax, unless the Commissioner grants authority to the contrary
(par 2(1)). The term ‘representative employer’ is defined in par 1 and means
l the public officer of a company
l any manager or person responsible for paying remuneration on behalf of a municipality or body
corporate
l any guardian or curator having the management or control over the affairs of a person under
legal disability, or
l any agent of an employer who is not resident in the Republic having the authority to pay remu-
neration.
In terms of par 2A of the Seventh Schedule, a partner in a partnership is, for the
purposes of par 2 of the Seventh Schedule, deemed an employee of the partner-
ship. This deeming provision causes a taxable benefit to arise in the hands of the
partner since there is no employment relationship between a partner and a partner-
ship. This means that any par 2 of the Seventh Schedule taxable benefit (fringe
benefit) received by a partner from a partnership must be included in the partner’s
gross income in terms of par (i) of the definition of ‘gross income’.
It is important to note that, unlike the wording in ss 11F and (l) and par 12D of the
Seventh Schedule, the wording in par 2A of the Seventh Schedule does not also
Please note! deem a partnership to be an employer for the purposes of par 2 of the Seventh
Schedule. The Fourth Schedule has also not been amended to deem a partnership
to be the employer of a partner. The deeming provision in respect of a partner under
par 2 of the Seventh Schedule cannot be extended to the Fourth Schedule.
Although all fringe benefits will therefore be included in a partner’s gross income,
and although a fringe benefit is ‘remuneration’ as defined (because that definition
does not per se requires that the amount must be paid by an employer to an
employee), no employees’ tax must be withheld from fringe benefits granted to
partners.
Please refer to chapter 18 for a more detailed discussion and examples regarding
partnerships.
10.5 Employees’ tax (paras 2, 9 and 11, ss 6(2), 6A, 6B, 7(2) and 7B)
Any employer who is a resident, or a representative employer in the case of an employer who is a
non-resident, who pays or is liable to pay ‘remuneration’ to an employee must deduct employees’ tax
from the remuneration paid or payable and pay it over to the Commissioner monthly (par 2(1)). If a
person receives remuneration from more than one employer, the employees’ tax calculation of remu-
neration earned from each employer must be done separately.
With effect from 1 January 2014, the amount to be paid over to the Commissioner is subject to the
Employment Tax Incentive Act, 2013 (see 10.12).
Employees’ tax on any ‘variable remuneration’ must only be withheld on the date on which the
amount is paid to the employee (par 2(1B)). This is because variable remuneration is deemed to
accrue to the employee on the date on which the employer pays the amount to the employee.
‘Variable remuneration’ is defined in s 7B(1) and includes
l overtime pay, bonus or commission
l an allowance or advance paid in respect of transport expenses as contemplated in s 8(1)(b)(ii)
(i.e., a fixed travel allowance) or s s 8(1)(b)(ii) (i.e., a reimbursive travel allowance)
294
l any amount paid in respect of any period of leave not taken by the employee during that year
l any night shift allowance
l any standby allowance, or
l any amount paid in reimbursement of any expenditure contemplated in s 8(1)(b)(ii) (i.e., amounts
paid in reimbursement of proven expenditure incurred by an employee on the instruction of the
employer and in the furtherance of the employer’s trade).
Section 8(1)(a)(ii) provides that a reimbursement or advance for proven expenditure incurred by an
employee on the instruction of the employee’s principal in the furtherance of the trade of the prin-
cipal, must not be included in taxable income, as otherwise required by s 8(1)(a)(i). Including these
amounts in variable remuneration means that such amount accrues to the employee and is deduct-
ible by the employer on the date on which the employer pays the reimbursement or advance to the
employee. This might seem to indicate that such reimbursements and advances will be taxable, but
since s 8(1)(a)(ii) makes it clear that reimbursements and advances meeting the requirements of that
section are not included in taxable income, it is suggested that the inclusion of reimbursement of
expenditure in the variable remuneration definition of s 7B merely governs the timing of the employ-
er’s deduction of the reimbursement.
Employees’ tax must also be withheld in respect of
l retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits contem-
plated in par 2(1)(a) and (b) of the Second Schedule. This employees’ tax is determined in terms
of a directive issued by the Commissioner in terms of par 9(3) and is deducted from the
employee’s benefit or from the minimum individual reserve of the employee, and
l remuneration paid to an employee who is married but which is deemed to be income of the
employee’s spouse in terms of s 7(2). The liability for employees’ tax on such an amount is that of
the employee’s spouse. For example, if the excessive salary paid by Employer B to the wife of
Mr A must be included in Mr A’s income in terms of s 7(2), Employer B must deduct employees’
tax from both the salary paid to Mrs A in respect of the ‘fair salary’ (the employees’ tax on this
amount will be Mrs A’s liability) and in respect of the ‘excessive salary’ (the employees’ tax on this
amount will be Mr A’s liability).
How is the employees’ tax calculated?

The first step is to determine the amount on which the employees’ tax must be calculated.
Paragraph 2(4) explains that the amount of employees’ tax that is required to be withheld from remu-
neration monthly, is calculated on the balance of the remuneration, and explains how that is calculat-
ed. The balance of remuneration is the amount remaining after deducting the following from the
remuneration:
l any contribution made by the employee concerned to a pension fund or provident fund, limited to
the allowable deductions in terms of s 11F having regard to the remuneration and the period in
respect of which it is payable (par 2(4)(a))
l at the choice of the employer (and if proof of payment has been furnished to him), any contribu-
tions to a retirement annuity fund made by the employee, limited to the allowable deduction in
terms of s 11F having regard to the remuneration and the period in respect of which it is payable
(par 2(4)(b))
l any contribution made or amount paid by the employer to any retirement annuity fund on behalf
of or for the benefit of the employee, but limited to the deduction to which the employee is entitled
under s 11F having regard to the remuneration and the period in respect of which it is payable
(par 2(4)(bA)), and
l so much of any donation made by the employer on behalf of the employee
– as does not exceed 5% of that remuneration after deducting therefrom the amounts in
paras 2(4)(a), (b) and (bA), and
– for which the employer will be issued a receipt as contemplated in s 18A(2)(a) (par 2(4)(f)).
295
The wording of par 2(4)(f) in effect requires that a subtotal must be calculated
after the deduction of all the contributions to all retirement funds from ‘remuner-
ation’ in order to calculate the 5% on that subtotal.
No other amounts may be deducted in the determination of the ‘balance of the
remuneration’. Union dues, industrial council levies or similar payments cannot
be deducted in the determination of the balance of remuneration. Any other
deductions against income will be brought to account by the employee when
the employee is assessed for tax based on a return submitted by him after the
end of the year of assessment. To this extent, the employees’ tax paid by an
employee might exceed his normal tax liability for a year of assessment.
The words ‘having regard to the remuneration’ in par 2(4)(a), (b) and (bA) mean
that the specific employer may not take any other income apart from the
remuneration he or she paid into account.
Please note! The words ‘having regard to the period in respect of which it is payable’ in
par 2(4)(a), (b) and (bA) mean that the employer must take into account
whether it is current or arrear contributions (this distinction was only relevant
until 29 February 2016 because there is no distinction between current and
arrear contributions from 1 March 2016). It is clear from par 2(4)(a), (b) and (bA)
that the total current contributions by both the employee and the employer must
be taken into account.
Employees’ tax is calculated monthly but the specified limits in the s 11F
deduction apply annually. The amount of contribution to be deducted i.t.o
paras (a), (b) and (bA) must not, at any time during year of assessment, exceed
an amount that bears to amount stipulated in section 11F(2)(a) same ratio as
period during which remuneration was paid by employer to employee bears to a
whole year (Guide for Employers in respect of Employees’ Tax 2022 PAYE-GEN-
01-G16).
In order to calculate the allowable s 11F deduction that an employer can take
into account on a monthly basis, the employer must therefore
l divide the amount of R350 000 in the s 11F(2)(a) deduction by 12 (proviso
to par 2(4)). The annual cap of R350 000 is spread on a cumulative basis for
employees’ tax purposes. This cumulative cap is based on the portion of the
employees’ year of assessment during which the employee receives remu-
neration from an employer (Memorandum on the Objects of the Tax Adminis-
tration Laws Amendment Bill, 2017). For example, if an employee is
employed by an employer for a period of 7 months during the 2022 year of
assessment, the employer will apply a deduction limitation of R204 167
(R350 000 × 7/12) during this period. This cumulative cap only applies for
employees’ tax purposes, and any unused portion of the annual cap will be
taken into account on assessment.
Please note! l base the 27,5% in the s 11F deduction on the remuneration paid by the
employer in that specific month.
An employer can only base his calculation of the s 11F deduction to be taken
into account for employees’ tax purposes on information available to him. Due to
a lack of information, an employer will consequently not be able to do the calcu-
lation for the 27,5% of the ‘taxable income’ limit (s 11F(2)(b)(ii)) and will also not
be able to do the calculation where taxable capital gains must be taken into
account (in terms of s 11F(2)(c)). The employer can similarly never take any
balance of unclaimed contributions into account when the s 11F deduction is
calculated for employees’ tax purposes and will only take current contributions
into account.
The second step is to do the employees’ tax calculation.

Paragraph 9(1) determines that the Commissioner may prescribe deduction tables for employees,
taking into account the rebates in s 6, and may prescribe the manner in which the tables shall be
applied. Updated weekly, fortnightly, monthly, and annual tables based on the latest tax table for
natural persons are provided annually.
The Guide for Employers in respect of Employees’ Tax 2022 (PAYE-GEN-01-G16) states that the
weekly, fortnightly and monthly deduction tables, as published each year after the Budget Speech,
must be used to determine the amount of employees’ tax to be withheld from the balance of remu-
neration for each pay period. The annual deduction table must be used at the end of the tax period or
year of assessment to determine the final amount of employees’ tax payable for the full year or period
of assessment.
296
The Guide for Employers in respect of Tax Deduction Tables 2022 (PAYE-GEN-01-G01) states that
whilst employers must, in the absence of a tax directive to the contrary, as prescribed in paras 10
and 11 of the Fourth Schedule, make use of the deduction tables prescribed by the Commissioner,
the use of the statutory rates as an alternative is allowed.
In practice, the employees’ tax withheld monthly by most employers is calculated by using payroll
software which is based on the statutory rates. The deduction tables are generally used by employ-
ers who have a manual payroll system.
The Guide for Employers in respect of Tax Deduction Tables 2022 further explains that small differ-
ences may occur between the manual tables and other computer programs based on the statutory
rates of tax. These methods are acceptable in terms of the Income Tax Act provided that the results
are within the provisions of the Act. According to the Guide for Employers in respect of Tax Deduc-
tion Tables 2022, employers may use computer programs that render the same results as the results
that the employers receive when using the statutory rates of tax. Where an employer uses a comput-
erised payroll or his/her/its own created payroll program, the instructions and guidelines as pre-
scribed by SARS must still be followed.
The following example is given in the Guide for Employers in respect of Tax Deduction Tables 2022
to explain how the monthly deduction tables are used:
A monthly remunerated employee under the age of 65 receives a salary of R18 600 and contributes
R775 per month to a pension fund and R325 per month to a retirement annuity fund as well as R800
to a registered medical scheme in respect of himself/herself and one dependant.
Salary R18 600

Less: Allowable pension fund contributions (775)
Less: Allowable retirement annuity fund contributions (325)
Balance of remuneration R17 500
Employees’ tax on the balance of remuneration according to the monthly deduction tables R1 840
Less: Medical Scheme Fees Tax credit (R332 + R332 p/m) (664)
Amount of tax to be deducted R1 176
The monthly deduction tables contain the following columns, and if those tables are applied to the
detail in the example above, the following details are noted:
Remuneration Annual equivalent Tax Under 65 65–74 Over 75
R17 424–R17 474 R209 388 R1 831 R1 114 R874
R17 475–R17 525 R210 000 R1 840 R1 123 R883
R17 526–R17 576 R210 612 R1 850 R1 132 R893
Things to note:
l The remuneration is always given in brackets with a R50 difference between the lower and the
higher amount.
l Even though the word ‘remuneration’ is used as a heading in the table, the example provided
shows that the ‘balance of remuneration’ of R17 500 (and not the remuneration of R18 600) was
used to determine the R1 840 employees’ tax in the example.
l The annual equivalent in the table is calculated on the average monthly remuneration amount
within each bracket. For example, the average of the second line in the table above is R17 500
(R17 475 + R17 525)/2 and the annual equivalent of the average monthly remuneration is there-
fore R210 000 (R17 500 × 12). The reason why an annual equivalent is calculated is because the
statutory tax tables are based on annual amounts of taxable income.
l The amount of R1 840 is calculated as follows: Apply the statutory tables to calculate the normal
tax on the annual equivalent of R210 000. The normal tax per the table is R37 800 (R210 000 ×
18%)) and the normal tax payable after the s 6 rebate (the taxpayer is under 65) is R22 086
(R37 800 – R15 714). The monthly amount will therefore be R1 840,50 (R22 086/12).
l Since this average amount of the monthly remuneration of R17 500 equals the amount of the
balance of remuneration in the example, the total employees’ tax deducted on a monthly basis
will be almost 100% correct and the employer will have to make a minimum adjustment to the last
amount of employees’ tax deducted in the last month of the year of assessment.
297
l If the balance of remuneration was, however, lower or higher than the average amount of monthly
remuneration of R17 500, but still within that tax bracket, the monthly amount of employees’ tax
deducted will either be a bit too high or a bit too low. The employer will have to adjust the last
amount of employees’ tax deducted in the last month of the year of assessment to correct these
monthly over- or under-deductions. This is done by calculating the normal tax payable on the actual
balance of the remuneration for the year of assessment, and then deducting the total actual em-
ployees’ tax deducted in the first eleven months of the year of assessment.
If remuneration during a month includes an annual payment, the employees’ tax thereon must be cal-
culated separately. An annual payment is an amount of net remuneration which, in terms of the
employee’s service conditions or in accordance with the employer’s practice, is payable to the
employee as a lump sum or which is determined without reference to a period (Guide for Employers in
respect of Employees’ Tax 2022 PAYE-GEN-01-G16). An annual bonus, leave pay on resignation and
merit awards are examples of an annual payment. The annual payment need not be converted to an
annual equivalent like the balance of remuneration since it already is an annual amount. The employ-
ees’ tax on an annual payment is basically determined by calculating the annual equivalent of the
remuneration the employee earned during the tax period and adding the annual payment to the
result. The difference between the tax on the total result (annual equivalent plus annual payment) and
the tax on the annual equivalent will result in the employees’ tax deductible from the annual payment.
The tax on an annual payment can be deducted in the month that it is paid or can be spread over the
tax year.
It is important to note that a fringe benefit is not an annual payment even if it is only received once
during a year of assessment. This means that the fringe benefits must be included in remuneration in
the specific month(s) in which an employee is entitled thereto and in this way become part of the
balance of remuneration of which the annual equivalent must be calculated before the employees’
tax can be calculated.
In practise, the monthly PAYE calculation is in essence based on the earnings for the month (annual-
ised and then de-annualised). Year-to date annualisation is done in the following three scenarios:
l where the half-year filings are checked (mid-year and year-end), or
l where there is a significant difference in tax from one month to the next, or
l where an employee is discharged in the tax year, and the employer wishes to check the tax.
In all these cases, the year-to-date total of all taxable earnings and benefits, annualised for the year,
is used to calculate the tax payable using the statutory tax table and is then de-annualised for the
period worked. Payroll software can be set up to calculate tax on the same basis as explained if it is
done manually.
Examples 10.1A and 10.1B show the calculation of the employees’ tax for the same scenario, but
applying the two different methods, namely the monthly deduction tables and the statutory tax table.
In example 10.1B we applied the year-to date annualisation and statutory tax table.
Example 10.1A. Basic example of calculation of employees’ tax applying the monthly
deduction tables
Jan (45 years and unmarried) receives a monthly salary of R20 000 and a bonus of R20 000 each
year in February. Jan contributes R1 500 monthly to a pension fund based only on his cash sal-
ary. Jan received a monthly taxable fringe benefit of R3 000 from 1 August 2020. He is not a
member of a medical scheme. Jan contributes R500 a month to a retirement annuity fund and
supplied his employer with proof thereof.
Calculate the amount of the employees’ tax that his employer must withhold during the 2022 year
of assessment. Round off to the nearest rand.
298
SOLUTION
Months March to July 2021
The balance of remuneration, annual equivalent and employees’ tax payable for
each of these five months will be exactly the same.
Salary ........................................................................................................................ R20 000
Less: Contributions to retirement funds
Actual contributions = R2 000 (R1 500 + R500) limited to the lesser of
l R350 000/12 = R29 167, and
l 27,5% × R20 000 (remuneration) = R5 500 .............................................. (2 000)
Balance of remuneration ........................................................................................... R18 000
Annual equivalent in terms of the monthly deduction table ...................................... R216 120
According to the monthly deduction tables, the balance of remuneration of
R18 000 falls in the bracket of R17 985 – R18 035 and the monthly employees’
tax is an amount of R1 932 since Jan is younger than 65.
Total employees’ tax for the five months (R1 932 × 5) .............................................. R9 660
Months August 2021 to January 2022
The balance of remuneration, annual equivalent and employees’ tax payable for
each of these six months will be exactly the same.
Salary ........................................................................................................................ R20 000
Fringe benefit ............................................................................................................ 3 000
Actual contributions = R2 000 limited to the lesser of
l R350 000/12 = R29 167, and
l 27,5% × R23 000 (remuneration) = R6 325 .............................................. (2 000)
Balance of remuneration ........................................................................................... R21 000
Annual equivalent in terms of the monthly deduction table ...................................... R252 228
Total employees’ tax for the six months (R2 714 × 6) ............................................... R16 284
February 2022
Balance of remuneration EXCLUDING bonus:
Salary ......................................................................................................................... R20 000
Fringe benefit ............................................................................................................. 3 000
Actual contributions = R 2 000 limited to the lesser of
l R350 000/12 = R29 167 and
l 27,5% × R23 000 (remuneration excluding bonus) = R6 325 ................... (2 000)
Balance of remuneration excluding bonus ................................................................ R21 000

Balance of remuneration INCLUDING bonus:
Salary ......................................................................................................................... R20 000
Bonus ......................................................................................................................... 20 000
Fringe benefit ............................................................................................................. 3 000
l R350 000/12 = R29 167 and
l 27,5% × R43 000 (remuneration excluding bonus) = R11 825 ................. (2 000)
Balance of remuneration including bonus ................................................................. R41 000
continued
299

tax is an amount of R8 658 since Jan is younger than 65. The tax on the bonus is
therefore R5 944 (R8 658 – R2 714).
Employees’ tax for February 2022 (using the monthly deduction tables)
l on balance of remuneration .................................................................................. R2 714
l on bonus ............................................................................................................... 5 944
Total ........................................................................................................................... R8 658
However, since the employees’ tax deductions were based on the monthly deduc-
tion tables, the employer will have to adjust the employee’s tax in the last month of
the year of asssessment (February 2022) using the annual deduction table, to
ensure that the employees’ tax withheld for the year is as accurate as possible.
In February 2022, the actual year-to-date remuneration is R257 000 ((R18 000 × 5)
+ (R21 000 × 6) + R41 000).
Using the annual deduction tables, the normal tax payable on R257 000 by a
person who is younger than 65 is R33 756 (compared to R33 810 when using the
statutory tables, i.e., (R38 916 + R10 608 (R40 800 × 26%) – R15 714 (s 6(1)
rebate) yielding a R54 difference). This is because the remuneration in the monthly
and annual deduction tables is always given in brackets with a R50 difference be-
tween the lower and the higher amount, while the statutory tax table uses the exact
remuneration to date. The remaining R4 difference would be due to rounding.
The final answer for the employees’ tax deductible in February 2022, using the
annual deduction tables, is therefore not R8 658 but R7 812, which is the balancing
figure and is calculated as follows:
Total employees’ tax that the employer must withhold during the 2022 year of
assessment:
l For March 2021–July 2021 .................................................................................... R9 660
l For August 2021–January 2022 ............................................................................ 16 284
l For February 2022 ................................................................................................. 7 812
R33 756
Example 10.1B. Basic example of calculation of employees’ tax applying the statutory tax
table
Jan (45 years and unmarried) receives a monthly salary of R20 000 and a bonus of R20 000 each
year in February. Jan contributes R1 500 monthly to a pension fund based only on his cash sal-
ary. Jan received a monthly taxable fringe benefit of R3 000 from 1 August 2020. He is not a
member of a medical scheme. Jan contributes R500 a month to a retirement annuity fund and
supplied his employer with proof thereof.
Calculate the amount of the employees’ tax that his employer must withhold during the 2022 year
of assessment. Round off to the nearest rand.
300
SOLUTION
March 2021
Item Explanatory notes/ supporting calculations Amount (R)
Salary 20 000
Remuneration 20 000
Less: Section 11F (2 000)

PF R1 500
RAF R500
Total actual contributions R2 000
Limited to the lesser of:

1) 27,5% × R20 000 = R5 500
and
2) R350 000/12 = R29 167
Therefore: R5 500.
However, the deduction cannot exceed the
actual contributions. Therefore, the s 11F
deduction is R2 000.
Balance of remuneration 18 000
Annual equivalent of balance
of remuneration R18 000 × 12 months 216 000
Normal tax per progressive
tax table R216 000 x 18% 38 880
Section 6(2) rebate (15 714)
Employees tax for the year 23 166
Employees tax for March R23 166/ 12 months 1 931
Employees’ tax for period March to July (5 months):
R1 931 × 5 months = R9 655
continued
301
August 2021
Salary 20 000
Taxable fringe benefit 3 000
Remuneration 23 000

PF R1 500
RAF R500

1) 27,5% × R23 000 = R6 325
and
2) R350 000/12 = R29 167
Therefore: R6 325.

Annual equivalent of balance Actual year-to-date balance of remuneration
of remuneration – March to July: R18 000 × 5 months =
R90 000
Actual balance of remuneration – August:
R21 000
Forecast for the last six months – September
to February: R21 000 × 6 months =
R126 000
Annual equivalent: R90 000 + R21 000 +
R126 000 = R237 000 237 000
tax table R38 916 + 26% × (R237 000 – R216 200) 44 324
Less: Section 6(2) rebate (15 714)
Employees tax for March R28 610/12 months 2 384
Employees’ tax for the period August to January (6 months):
R2 384 × 6 months= R14 304
continued
302
February 2022:
(excluding the bonus)
Salary 20 000
Remuneration 23 000

PF R1 500
RAF R500

1) 27,5% × R23 000 = R6 325
and
2) R350 000/12 = R29 167
Therefore: R6 325.

R90 000
Actual year-to-date balance of remuneration
– August to January:
R21 000 × 6 months = R126 000
Balance of remuneration for February
(excluding the bonus): R21 000
R21 000 = R237 000 237 000
tax table R38 916 + 26% × (R237 000 – R216 200) 44 324
Section 6(2) rebate (15 714)
Employees tax for February R28 610/12 months 2 384
continued
303
February 2022:
(including the bonus)
Salary 20 000
Bonus 20 000
Remuneration 43 000

PF R1 500
RAF R500

1) 27,5% × R43 000 = R11 825
and
2) R350 000/12 = R29 167
Therefore: R11 825

R90 000
– August to January: R21 000 × 6 months =
R126 000
(including the bonus): R41 000
R41 000 = R257 000 257 000
tax table R38 916 + 26% × (R257 000 – R216 200) 49 524
Less: Section 6(2) rebate (15 714)
Normal tax on the bonus:

R33 810 – R28 610 = R5 200
Employees’ tax for February 2022:
On the bonus: R5 200 + on other remuneration: R2 384 = R7 584
Additional explanatory note:

In practice, the employer will have to adjust the total employees’ tax withheld during the previous 11 months
in the last month of the year of assessment (February 2022) to ensure that the employees’ tax withheld dur-
ing the entire year is as accurate as possible. The total remuneration is: R257 000.
Therefore, the employees’ tax for February 2022 should actually be:
Employees’ tax on total actual remuneration for the year: ........................................................... R33 810
[(R38 916 + 26% × (R257 000 – R216 200)] – R15 714 (s 6(1) rebate))
Less employees’ tax already withheld: R9 655 (R1 931 × 5) + R14 304 (R2 384 × 6) ................. (R23 959)
Adjusted employees’ tax to be withheld in February: .................................................................. R9 851
A comparison of Examples 10.1A and 10.1B shows that a near exact amount of employees’ tax is
withheld under the two methods with a R54 difference (R33 810 – R33 756) because, in the tax deduc-
tion tables, the remuneration is always given in brackets with a R50 difference between the lower and
the higher amount while the statutory tax table uses the exact remuneration to date. The remaining R4
difference would be due to rounding.
304
Paragraph 9(6) provides that the employer must deduct the s 6A medical tax credit from the amount
to be withheld or deducted by way of employees’ tax, both when the employer pays the medical
scheme fees or when proof of payment of those fees has been furnished to the employer.
The employer must also deduct the additional medical expenses tax credit (s 6B(3)(a)(i)) if the
employee is entitled to the secondary rebate (meaning he or she is 65 years or older). This means
that 33,3% × (the total contributions paid less (3 × the s 6A(2)(b) credit)) must be deducted by the
employer.
Example 10.2. Calculation of employees’ tax (with par 9(6))
Jabu (65 years and unmarried with no dependents or children) receives a monthly salary of
R20 000. Jabu contributes R1 500 a month to a pension fund and R1 000 to a medical scheme
(proof was furnished to employer). Jabu’s employer paid R500 a month in respect of a policy of
insurance against the loss of income for the benefit of Jabu.
Calculate the total employees’ tax that his employer must withhold in respect of the 2022 year of
assessment.
SOLUTION
Salary .......................................................................................................................... R20 000
Plus: Paragraph 2(k) of the Seventh Schedule fringe benefit ..................................... 500
R20 500
Less: Contributions to retirement fund
– R350 000/12 = R29 167 and
– 27,5% × R20 500 = R5 637,50 ................................................................... (1 500)
Balance of remuneration ............................................................................................ R19 000
Annual equivalent (R19 000 × 12) .............................................................................. R228 000
Normal tax determined per the tax table

On R216 200 ............................................................................................................... R38 916
On R11 800 @ 26% ..................................................................................................... 3 068
R41 984
Secondary rebate ........................................................................................... (8 613)
Paragraph 9(6)(a) deduction (R332 × 12 – s 6A tax credit) ........................... (3 984)
Paragraph 9(6)(b) deduction (33,3% × R48 (R12 000 – R11 952
(3 × R3 984)) ................................................................................................... (16)
Normal tax liability/Employees’ tax for the year .......................................................... R13 657
Please remember that employees’ tax is calculated and deducted monthly, even
though this question required you to calculate the total employees’ tax for the year.
The statutory rate was used in this example because the total employees’ tax for
the year of assessment was required to be calculated and that is the table that will
be used to assess the taxpayer and will therefore give the most accurate answer.
10.6 Standard Income Tax on Employees (SITE) (par 11B(2))

Paragraph 11B was repealed by the Tax Administration Act Amendment Act, 23 of 2015 with effect
from 1 March 2016.
10.7 Part-time, casual and temporary employees (paras 13(2)(b) and 13(3))
Part-time, casual and temporary employees are not in standard employment. The Act contains no
definition of ‘standard employment’, but the Guide for Employers in respect of Employees’ Tax 2022
issued by SARS states that the term refers to employment where the employee is required to render
services to one employer for at least 22 hours in every full week. An employee who works for less than
22 hours per week and declares in writing that he has no other employment or is required to work for at
least 5 hours per day and is paid remuneration of less than R349 per day, is in deemed ‘standard
employment’. Where the employer conducts business in such a manner that employees render ser-
vices on a regular or frequent basis for such periods as may be required by the employer, the
305
Commissioner may, after consultation with the employer or others, direct that the employment of such
employees shall be standard employment.
Non-standard employment is any employment that cannot be classified under standard or deemed
standard employment. The employees’ tax to be deducted from the remuneration payable to em-
ployees who are not in standard employment and receive part-time remuneration is not calculated in
terms of the normal rules. A flat rate of 25% is used instead of the normal tax tables and rebates. This
rate applies whether these employees are paid daily, weekly or monthly if they derive part-time remu-
neration. Where the employer is in possession of a tax directive in respect of an employee who is in
non-standard employment, employees’ tax must be deducted in accordance with the directive
(par 13.4 of the Guide for Employers in respect of Employees’ Tax 2022 issued by SARS).
An employer who ceased to be an employee’s employer must issue an IRP 5 to the employee within
14 days (par 13(2)(b)). The Commissioner may direct that an employer is deemed not to have
ceased to be an employer in relation to casual employees who are likely from time to time to be re-
employed by the employer (par 13(3)). This means that when regular use is made of the part-time
services of casual employees, such as waiters in a catering business, the employer, with the approv-
al of the Commissioner, needs to issue only one IRP 5 at the end of the year of assessment covering
all the deductions for the year. Note, however, the following:
Examples of part-time remuneration earned by individuals in non-standard employment are
l casual commissions paid, such as ‘spotter’s’ fees
l casual payments to casual workers for irregular or occasional services rendered
l fees paid to part-time lecturers
l honoraria paid to office-bearers of organisations and clubs.
A full-time student or scholar employed on a casual basis will therefore be subject to employees’ tax
at a flat rate of 25% unless he is in standard employment.
The following table is given in par 13.4 of the Guide for Employers in respect of Employees’ Tax 2022
issued by SARS:
Scenario Deduction method

Employee is required to work at least 22 hours a week (standard employment) and Use tax deduction
earns remuneration which exceeds the annual tax threshold (R87 300 if less than tables
65 years old / R135 150 if 65 years or older / R151 100 if 75 years or older)
Employee is required to work at least 22 hours a week (standard employment) and No employees’ tax
earns remuneration which does not exceed the annual tax threshold (R87 300 if less deducted
than 65 years old / R135 150 if 65 years or older / R151 100 if 75 years or older)
Employee is not in standard employment and works at least five hours per day at No employees’ tax
less than R349 for that day deducted
Employee is not in standard employment and works at least five hours per day at 25% deduction
more than R349 for that day
Employee is not in standard employment and works less than five hours per day at 25% deduction
less than R349 for that day
10.8 Independent contractors, labour brokers and personal service providers (par 1)
10.8.1 Independent contractors (definition of ‘remuneration’: exclusion in par (ii))
Interpretation Note No. 17 (Issue 5) highlights the point that the concept of ‘independent contractor’
is one of the more contentious areas of the Fourth Schedule. The classification as ‘independent con-
tractor’ or ‘employee’ will determine if an employer must deduct employees’ tax.
If a person renders services during a trade carried on independently of the person by whom the
amount is paid or payable, and independently of the person to whom the services are rendered, such
payment is not ‘remuneration’. Consequently, these amounts are not subject to employees’ tax and
the classification of a person as an independent contractor is therefore very important to ensure that
an employer meets all his duties in terms of the Act (see 10.11.2).
306
The wording of the exclusion in par (ii) makes it clear that the following persons can never be inde-
pendent contractors:
l a person who is not a resident
l a natural person who is a labour broker (par (c) of the definition of ‘employee’) (see 10.8.2) or
who works for a labour broker (par (b) of the definition of ‘employee’) or who is declared to be an
employee by the Minister of Finance by notice in the Government Gazette (par (d) of the definition
of ‘employee’)
l a personal service provider (par (e) of the definition of ‘employee’) (see 10.8.3).
The statutory tests and the common law tests are used as tools to determine whether a person is an
independent contractor for employees’ tax purposes. In practice, the statutory tests are applied first,
followed by the common law tests if the statutory tests are not applicable to a particular situation
(Interpretation Note No. 17 (Issue 5)).
The statutory tests

The exclusion contained in subpar (ii) of the definition of ‘remuneration’ provides a statutory test
which conclusively deems that a person is not carrying on a trade independently, with the result that
the person is earning ‘remuneration’. It also contains a statutory test which conclusively deems the
person to be carrying on a trade independently and consequently not earning ‘remuneration’ (SARS
Interpretation Note No. 17 (Issue 5)).
The first test (contained in the first proviso to subpar (ii))

Under the first test, both the elements of the test must be satisfied to conclude that the person is
deemed not to carry on a trade independently. However, if the second test applies, it will override the
first test.
l The first element
The first element requires that the services or duties are to be performed mainly (i.e., more than
50%) at the premises of the client. This refers to the premises of the person by whom the amount
is paid or payable, or to whom such services are rendered or will be rendered. Therefore, if the
services are rendered mainly at the premises of either of these persons (not necessarily the same
person), this element is met.
l The second element
The second element requires that the person rendering the service is subject to the
– control of any other person as to the manner that the person’s duties are or will be performed,
or as to the hours of his or her work, or
– supervision of any other person as to the manner that the person’s duties are or will be per-
formed, or as to the hours of his or her work.
Interpretation Note No. 17 (Issue 5) points out that this control-or-supervision part of the second
element refers to ‘any’ person, who could therefore include the payer of the amount, the recipient of
the service or any other person who has a contractual right to control or supervise the person in
respect of these specific services. This second element considers control or supervision, which
means that if either one applies, the second element of the first test is met.
If both elements of the first test are met, the person receiving the amount paid or payable in respect
of services rendered or to be rendered is deemed not to be carrying on a trade independently (sub-
ject to the second test not applying). Therefore, the amount received by the person is not excluded
from remuneration and is subject to employees’ tax.
The second test (contained in the second proviso to subpar (ii))

A person is deemed to carry on a trade independently if, throughout the year of assessment, he or
she employs three or more employees who are engaged on a full-time basis in the business of the
person rendering the service. These employees must not be connected persons (refer to par (a) of
the definition of connected person in s 1(1) to determine who is a connected person in relation to a
natural person) in relation to the person rendering the service. This second test is the overriding test
(second proviso to par (ii) of the definition of ‘remuneration’). This means that it takes precedence
over the first test (even if the requirements of the first test were met), and over the common law posi-
tion (Interpretation Note No. 17 (Issue 5)).
The common law dominant impression test

The second tool used to determine whether a person is an independent contractor or an employee is
the common law dominant impression test. This is essentially an analytical tool that is designed for
307
application in the employment environment to establish the dependence or independence of a per-

son. The common law dominant impression test makes use of several indicators, of differing signifi-
cance or weight, which must be applied in the relevant context. The indicators are interrelated and
point to whether there has been the ‘acquisition of productive capacity’ (that is, of labour power,
capacity to work, or simply effort). The ‘common law dominant impression grid’ is contained in An-
nexure C to Interpretation Note No. 17 (Issue 5) and guidance on how to apply the common law
dominant impression test is set out in point 7 of this interpretation note. This interpretation note also
contains a discussion of the common law dominant impression indicators in point 8 of the interpreta-
tion note.
Annexure B to Interpretation Note No. 17 (Issue 5) contains a flow diagram that should be followed
when a determination is to be made under either the exclusionary subpar (ii) of the definition of
‘remuneration’ or par 2(5) of the Fourth Schedule.
Herewith an extract from Annexure B to consider the flow in respect of the exclusionary subpar (ii) of
the remuneration definition:
The person is a natural person receiving remuneration [type (a) employee in the definition of ‘employee’]
Is the person a resident in RSA?
Yes No
Does the person employ three or

more unconnected employees
throughout the year of assessment?
Yes No
Are the services required to be

rendered mainly at the client’s
premises and is control or
supervision present as
envisaged by par (ii) of
‘remuneration’?
No Yes
Apply the grid
Dominant
impression that
an independent
contractor?
Yes No
Not subject to Subject to employees’ tax

employees’ tax
308
In general, professional fees payable to independent contractors or self-

employed persons such as medical practitioners, public accountants and audit-
ors, architects, quantity surveyors, attorneys and advocates are not subject to
the deduction of employees’ tax.
Please note! The responsibility of assessing an individual’s ‘independence’ rests on the
employer, as it is the employer who has an obligation to withhold employees’ tax
(where applicable) from payments made to the individual should he/she not
qualify as an independent contractor.
In practice it is recommended that employers maintain checklists/question-
naires to be completed by both the contractor and the employer, with relevant
supporting documents, to record the ‘independence’ assessment.
10.8.2 Labour brokers (paras 1, 2(5), 21 and 23, and s 23(k))

Paragraph (c) of the definition of ‘employee’ in par 1 includes a labour broker. A person (client) who
pays remuneration to a labour broker is therefore an employer as defined.
A labour broker is defined in par 1 as a natural person who conducts or carries on any business
whereby such person, for reward, provides a client with his own employees to perform work for the
client or procures workers for a client. The client pays the labour broker, and the labour broker pays
the workers. It is the provision or procurement of workers (that is, persons) and not the providing of a
service. In short, a labour broker differs from an independent contractor in the following respects:
Labour broker Independent contractor
Labour broker provides persons who get instructions Independent contractor and client agree on specific
from the client outcomes to be achieved
Client pays labour broker (and withholds employees’ Client pays independent contractor but does not
tax unless an exemption certificate was obtained in withhold any employees’ tax
terms of par 2(5))
Labour broker pays persons employed by him and Independent contractor pays his employees and
withholds employees’ tax withholds employees’ tax
The Commissioner may issue an exemption certificate (IRP 30) to a labour broker (par 2(5)). This will
absolve the client (employer) from having to deduct employees’ tax from any payments made to the
labour broker. The following requirements must be met by the labour broker before an exemption
certificate will be granted (par 2(5)(a)):
l He must carry on an independent trade (refer to Annexure B to Interpretation Note No. 17 (Issue 5))
and be registered as a provisional taxpayer.
l He must be registered as an employer.
l He must have submitted all returns required to be submitted in terms of the Act.
l He must not receive more than 80% of his gross income during the year of assessment from any
one client or an associated institution in relation to that client. The 80% test is not applicable if the
labour broker, throughout the year of assessment, employed three or more full-time employees
(other than shareholders, members or connected persons in relation to the labour broker) who
are engaged, on a full-time basis, in the business of the labour broker of rendering the relevant
service.
l He must not provide the services of another labour broker to any of his clients.
l He must not be contractually obliged to provide a specified employee to render any service to the
client. Interpretation Note No. 35 (Issue 4) explains that this relates to a scenario where the client
prescribes or requires that Employee A must render the service (i.e., the client is specifying the
employee). The interpretation note further explains that the requirement will be met where an em-
ployee of the labour broker was chosen by name because of a bona fide selection process,
based on the requirements of the client, and specified as such in the eventual contractual agree-
ment.
The IRP 30 is only applicable for the period indicated thereon by the Commissioner (par 2(5)(b)).
Clients (employers) making payments to a labour broker holding an exemption certificate must retain
a certified copy of the exemption certificate for inspection purposes. If no valid exemption certificate
can be produced, employees’ tax must be deducted according to the table applicable to natural
persons. In cases where the Commissioner has issued a tax directive, employees’ tax must be deduct-
ed in accordance with the directive. Interpretation Note No. 35 (Issue 4) recommends that all users
309
of services from potential labour brokers should have policies and systems in place to correctly identify
whether employees’ tax must be withheld from payments to these individuals.
Any employees’ tax withheld in respect of remuneration may be set off by the labour broker against
his or her provisional tax payments (paras 21 and 23).
Example 10.3.
Phumlani is a labour broker. Ntombi is in his service. Ntombi works as a typist for company A
whenever the company informs Phumlani that the company has suitable work for her. The com-
pany pays Phumlani directly.
Discuss all the employees’ tax consequences of the scenario.
SOLUTION
Any remuneration paid or payable by Phumlani to Ntombi is subject to employees’ tax. Should
Phumlani (the labour broker) have an exemption certificate, it will absolve company A from
deducting employees’ tax from the fees paid to Phumlani.
Example 10.4.
Dingani, a systems analyst, contracts his services to Themba, who in turn supplies workers to
perform specialised computer services to ABC (Pty) Ltd. Dingani supplies his services to
Themba via a close corporation known as P CC.
ABC (Pty) Ltd pays Themba for the services rendered by Dingani via the close corporation.
Themba invoices ABC (Pty) Ltd for the services supplied and in turn pays P CC.
Discuss all the employees’ tax consequences of the scenario.
SOLUTION
Themba is in effect a labour broker’s office that supplies a specific type of specialised labour to
one of its clients. ABC (Pty) Ltd will not be required to deduct employees’ tax if Themba has
obtained an exemption certificate.
Had Dingani supplied his service in his individual capacity, Themba would be required to deduct
employees’ tax from any remuneration paid to him. The fact that Dingani provides his services to
Themba via a close corporation does not detract from the fact that employees’ tax must be deduct-
ed by the labour broker (Themba) from the amount paid to the close corporation (P CC). It will be
calculated at 28%. The close corporation (P CC) cannot apply for an exemption certificate be-
cause it is not a natural person.
Section 23(k) limits the deduction of expenses incurred by labour brokers who do not have exemption
certificates. This provision prohibits the deduction of any expenses incurred by such labour brokers,
other than any salary paid to an employee and taxed in the employee’s hands (see chapter 6).
Interpretation Note No. 35 (Issue 4) explains the employees’ tax consequences of labour brokers and
personal service providers.
10.8.3 Personal service providers (paras 1, 2(1A), 21 and 23, and s 23(k))
Interpretation Note No. 35 (Issue 4) states that it was previously a popular tax-saving method for
employees to offer their services to their employers by using private companies, close corporations
or trusts as a medium. Legislation was therefore implemented to discourage the use of corporate
entities/trusts as intermediaries to provide personal services to clients that are in fact services that
are provided in terms of an employment contract. This resulted in remuneration that is payable by a
client to such a company, close corporation or trust, being subject to employees’ tax.
The definition of ‘employee’ in par 1 includes a personal service provider. Any company, close cor-
poration or trust that is a ‘personal service provider’ (as defined) and is in receipt of ‘remuneration’
(as defined) is subject to the withholding of employees’ tax.
310
A personal service provider is any company (as defined, therefore, it also includes a close corpor-
ation) or trust where any person, who is a connected person in relation to such company or trust,
personally renders services on behalf of the company or trust to a client. Apart from this, one of the
following requirements must also be met:
(a) such person would be regarded as an employee of the client if the service was rendered by
such person directly or indirectly to such client, other than on behalf of such company or trust. In
terms of Interpretation Note No. 35 (Issue 4) this would be met if the person receives ‘remuner-
ation’ as defined, or
(b) where the service or duties must be performed mainly at the premises of the client, such person
or such company or trust is subject to the control or supervision of the client as to the manner in
which the duties are to be performed or in rendering such service, or
(c) where more than 80% of the income of such company or trust from services rendered, consists
of amounts received from any one client or an associated institution. According to Interpretation
Note No. 35 (Issue 4) the reference to ‘income’ in the test is a reference to ‘income’ as defined in
s 1(1). It is therefore necessary to isolate the income received for the services rendered from the
income received for other activities of the company, close corporation or trust, to perform that
calculation.
A client of a company or trust which might be a personal service provider will know whether require-
ment (a) or (b) are met. This is not the case with requirement (c). The company or trust might there-
fore supply the client with an affidavit or solemn declaration stating that no more than 80% of the
income was received from one client (or associated institution) (par 2(1A)). The client may then bona
fide trust the affidavit and therefore not withhold any employees’ tax.
A company or trust is excluded from the definition of a personal service provider where, throughout
the year of assessment, three or more employees who are on a full-time basis engaged in the busi-
ness of such company or trust are employed. These employees may not be holders of shares in the
company, members of the company or close corporation, or a settlor or beneficiary of the trust or be
a connected person in relation to that person. Interpretation Note No. 35 (Issue 4) clarifies that the
employees, referred to in this requirement, must be directly involved in the service activities of the
personal service provider. It further explains that auxiliary staff, such as cleaning staff, do not enable
the service delivery business and do not qualify under the legislation. The facts and circumstances of
each case must be evaluated to determine who would qualify as being engaged in the business on a
full-time basis, for purposes of the exclusion.
311
Annexure C to Interpretation Note No. 35 (Issue 4) illustrates the following process flow to determine
whether an entity is a personal service provider:
No
Is the person a company or trust?
Yes
Is the service rendered personally No

by a connected person?
Yes
Are 3 or more full-time employees The person is

employed throughout the year Yes not a personal
(other than a connected person) service
engaged in rendering the provider
service?
No
Would the person rendering the

Yes
service be regarded as an
employee of the client if the
service was rendered directly?
No
Are the duties performed mainly

at the client’s premises and is the The person is a
Yes
person subject to the control or personal
supervision of the client as to the service
manner in which the duties are provider
performed?
No
Does more than 80% of the

income of the person consist of
amounts received from any one Yes
client or associated institution?
(This can be determined by
means of an affidavit or solemn
declaration.)
No
Where the definition is met and remuneration is paid to a personal service provider and is subject to
the deduction of employees’ tax, the employees’ tax withheld may be set off against the company or
trust’s provisional tax payments (paras 21 and 23). A personal service provider, however, does not
qualify as a ‘small business corporation’ (as defined in s 12E).
Section 23(k) limits the deduction of expenses incurred by a personal service provider. This provision
prohibits the deduction of any expenses incurred by these taxpayers, other than any salaries paid to
employees of the personal service provider and certain specific deductions. These are deductions
for legal costs (s 11(c)), bad debts (s 11(i)), employer contributions to funds (s 11(l)), repayment of
employee benefits (s 11(nA)) and repayment of restraint of trade payment (s 11(nB)). Expenses in
respect of premises, finance charges, insurances, repairs and fuel and maintenance in respect of
assets, if such premises or assets are used wholly and exclusively for purposes of trade, can also be
deducted (see chapter 6).
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The taxable income of a personal service provider that is a company will be taxed at the rate of 28%,
and if the personal service provider is a trust, at 45%. Employers making payments to personal
service providers must also use these rates to deduct employees’ tax. In addition, dividends tax will
be payable on any dividends declared by personal service providers who are companies. If the
personal service provider is a trust the normal principles of ss 7 and 25B will apply.
10.9 Directors of private companies (par 11C)

Paragraph 11C is repealed with effect from 1 March 2017. Please refer to the 2017 Silke for details in
this regard. See 10.2.2 for an explanation of the employees’ tax implications regarding directors’
fees.
10.10 Directors of public companies (par 1)

Directors of public companies are included in the definition of ‘employee’ in terms of subpar (a) being
a person receiving remuneration.
Employees’ tax is withheld from the monthly remuneration of executive directors according to the tax
tables.
SARS considers non-executive directors to be directors who are not involved in the daily manage-
ment or operations of a company, but simply attend, provide objective judgment, and vote at board
meetings (Binding General Ruling No. 40).
SARS considers both the ‘premises test’ and the ‘control or supervision test’ in respect of resident
non-executive directors. SARS accepts that no control or supervision is exercised over the manner in
which a non-executive director performs his duties and therefore such a director is not a common-law
employee. Directors’ fees paid to resident non-executive directors are therefore not ‘remuneration’,
not subject to employees’ tax and not subject to the limitations in s 23(m).
It follows that a resident non-executive director is an ‘independent contractor’ for VAT purposes in
respect of such activities (see proviso (iii)(bb) to the definition of ‘enterprise’). A resident non-
executive director who carries on an enterprise in the Republic must therefore register for VAT pur-
poses if the value of the directors’ fees exceeds R1 million in a 12-month period (Binding General
Ruling No. 41).
A non-resident non-executive director is always an employee for employees’ tax purposes. The fact
that such non-executive directors earn remuneration does not affect the independent nature of the
services (Binding General Ruling No. 41). Non-resident non-executive directors will therefore be
carrying on an enterprise if the services are physically rendered in the Republic and must register for
VAT in such a case.
10.11 Duties of an employer
10.11.1 Registration (par 15)

A person who is an employer (whether resident or non-resident) must in accordance with Chapter 3
of the Tax Administration Act (see chapter 35) apply for registration as an employer (par 15(1)). An
employer need not register as an employer, if he has no employees who are liable for normal tax
(proviso to par 15(1)).
An employer is also required to notify the Commissioner (within 14 days after ceasing to be an em-
ployer) if he has ceased to be an employer (par 15(3)).
From a technical perspective, anyone paying remuneration to an employee is an employer. This
therefore brings non-resident employers into the definition of employer with a requirement to register
as such in South Africa.
In practice, registration of non-resident employers is challenging and more so when there is no repre-
sentative employer. Without a representative employer, a non-resident employer does not have an
obligation to withhold employees’ tax (PAYE), even if the employees have a liability for normal tax.
However, the oligation to register as an employer is still legislated, even if no PAYE is required to be
withheld. In addition, Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) con-
tributions must be made by all employers (including non-resident employers).
Essentially, a non-resident employer may find itself in a position to have to register as an employer
only for the payment of SDL and UIF. UIF can of course be paid directly to the fund, however, SDL
requires a SARS employer registration to effect payment. This is one of the practical challenges we
are faced with in practice.
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10.11.2 Obligation to deduct and pay over tax (paras 2, 5, 6 and 7)

Paragraph 2 imposes upon an employer who is a resident, or a representative employer in the case
of an employer who is not a resident, the obligation to deduct and pay over employees’ tax.
Every person, whether or not he is registered as an employer, who pays or becomes liable to pay an
amount of remuneration must, unless the Commissioner has granted authority to the contrary, deduct
or withhold from that amount the appropriate amount of employees’ tax. The deduction of employees’
tax is made in respect of the employee’s liability for normal tax. If the remuneration is paid or payable
to a married person and the remuneration is deemed to be income of the employee’s spouse under
s 7(2), the deduction is to be made in respect of the normal tax liability of the employee’s spouse.
The amount of employees’ tax deducted or withheld must be paid to the Commissioner within seven
days after the end of the month during which it was deducted or withheld (par 2(1)). An employer
may deduct the amount of the employment tax incentive for which the employer is eligible from the
amount of employees’ tax to be paid to the Commissioner, unless s 8 of the Employment Tax Incen-
tive Act, 2013 applies (par 2(2A)).
An employer can be personally liable for the payment of employees’ tax under Chapter 10 of the Tax
Administration Act. Such employer must pay that amount to the Commissioner not later than the date
on which payment should have been made if the employees’ tax had in fact been deducted or with-
held in terms of par 2 (par 5(1) and Interpretation Note No. 27)). The par 2 liability to withhold em-
ployees’ tax is deemed to be discharged if the employer made payment of the outstanding
employees’ tax to the Commissioner (par 5(1A)).
An employer can, on application in the prescribed form and manner and if he or she is satisfied that
there is a reasonable prospect of ultimately recovering the tax from the employee, be absolved from
the employer’s personal liability. This will be the case if the failure was not due to an intent to post-
pone the payment of tax or to evade the obligations of the employer (par 5(2)). An employer has the
right to recover any tax paid by him in terms of par 5(1) from the employee in such manner as the
Commissioner, on application in the prescribed form and manner by the employer, decides
(par 5(3)). Any amount paid by the employer in terms of par 5(1) but not recovered from the employ-
ee, shall, for purposes of s 23(d) be deemed to be a penalty due and payable by the employer and
therefore not deductible for income tax purposes (par 5(5)).
Should the employer fail to pay the amount for which the employer is liable within the period allowed,
SARS must in terms of Chapter 15 of the Tax Administration Act (see chapter 33), impose a penalty of
10% of the amount due (par 6(1)).
An agreement between an employer and an employee under which the employer undertakes not to
deduct or withhold employees’ tax will be void (par 7). An employer may deduct more employees’ tax
if a written request was received from the employee (par 2(2)). The employer’s obligation to deduct
the tax is therefore absolute. Furthermore, the employee may not recover from an employer an
amount of employees’ tax deducted or withheld from his remuneration in terms of par 2.
10.11.3 Irregular remuneration (par 9(3), paras (d) and (e) of the definition of ‘gross
income’, s 7A)
SARS generally treats monthly overtime and production bonuses and quarterly commissions in the
same way as other remuneration, although it does allow for more complex calculations in specific
instances.
In the case of a 13th cheque or an annual bonus, the employees’ tax may, for example, be deducted
either at once or in 12 equal monthly instalments from such a bonus. If the employee was not in the
employer’s employment on 1 March, the employees’ tax must be deducted over the remaining
months in the year of assessment. The full amount of employees’ tax attributable to the bonus must
be deducted during the year of assessment in which it accrues to the employee. Whether the em-
ployees’ tax is deducted at once or in instalments, the amount to be deducted must be determined
using the annual tax deduction tables.
The amount of employees’ tax to be deducted or withheld from
l lump sums received from employers (par (d)) or retirement fund lump sum benefits and retire-
ment fund lump sum withdrawal benefits received from retirement funds (par (e)), or
l antedated salary or pension or lump sums from employers (s 7A)
must be ascertained by the employer from the Commissioner (i.e., a directive must be obtained),
whose determination of the amount is final (par 9(3)). In giving the directive, the Commissioner will
take the tax table that is applicable to the specific amount (the progressive table in respect of par (d)
gross income amounts that are not severance benefits, the specific table applicable to severance
314
benefits in respect of par (d) gross income amounts that are severance benefits and the specific tax
tables applicable to retirement fund lump sum benefits and retirement fund lump sum withdrawal
benefits in respect of par (e) gross income amounts) into account.
Where a fixed percentage directve is issued, the employer must multiply the percentage in the
directive with the amount of remuneration to calculate the employees’ tax. In most cases, a fixed
amount directive is issued by SARS which sets out the exact amount of employees’ tax to be withheld
based on the remuneration the employer disclosed on the directive application. The remuneration will
be the gross amount of a par (d) severance benefit and the net amount after the paras 5 and 6
deductions in respect of a par (e) retirement fund lump sum benefit or a retirement lump sum with-
drawal benefit.
10.11.4 Directives to employer (paras 9 and 11)

A tax directive (IRP3) is issued by SARS to instruct the employer/fund administrator on how to deduct
employees’ tax from certain payments where the prescribed tax tables do not cater for certain remu-
neration or other payments (SARS Guide for Employers in respect of Employees Tax for 2022 (PAYE-
GEN-01-G16)). The Commissioner, having regard to the circumstances, is empowered to issue a
directive in terms of par 11 to authorise the employer to
l refrain from deducting or withholding employees’ tax from remuneration due to employees, or
l deduct or withhold a specified amount of employees’ tax, or
l deduct or withhold an amount of employees’ tax calculated at a specified rate.
The directive may be issued
l to provide relief for an employee suffering hardship due to circumstances beyond his control, or
l where the employee’s remuneration is in the form of commission, or
l where the remuneration is received by a personal service provider, or
l to correct an error made by the employer in the calculation of employees’ tax (par 11(a)).
An application form must be completed by the employer/fund administrator to apply for a specific tax
directive. The following forms are available:
Application form Scenario Examples provided by SARS
IRP3(a) Severance benefit paid by employer Death/retirement/retrenchment. The form
must also be used for share options without
obligation or other lump sums
IRP3(b) Employees’ tax to be deducted at a fixed Commission/agents/personal service pro-
percentage vider
IRP3(c) Employees’ tax to be deducted at a fixed Par 11 of the Fourth Schedule (hardship) or
amount assessed loss carried forward
IRP3(s) Employees’ tax to be deducted on any
amount to be included under s 8A or 8C
Form A & D Lump sum benefits paid by pension and/or Death before retirement/retirement due to ill
provident fund health/retirement
Form B Lump sum benefits paid by pension or
provident fund on resignation/withdrawal/
winding up/transfer or payment as defined
in par (eA) of the definition of gross income/
future surplus apportionment/unclaimed
benefit/divorce payments
Form C Lump sum benefits paid by a RAF to a Death before retirement/retirement due to ill
member health/transfer from one RAF to another
before retirement
Form E Lump sum benefits payable after retire- Death member/former member after retire-
ment ment, par (c) living annuity commutation,
death – next generation annuitant, next gen-
eration annuitant commutation and transfer of
an annuity to another insurer
315
Where the scenario relates to retrenchment, retirement or death, the employer must obtain a tax
directive from SARS in respect of the employees’ tax. The applicable exemption will be determined
by SARS when the tax directive application is processed (SARS Guide for Employers in respect of
Employees Tax for 2022). A directive is valid for only the tax year or period stated thereon.
10.11.5 Records (par 14(1))

In addition to the records required in accordance with Part A of Chapter 4 of the Tax Administration
Act (see chapter 33), every employer must maintain a record showing the amounts of remuneration
paid by him to each employee and the amount of employees’ tax deducted from each amount of
remuneration. Record must also be kept of the income tax reference numbers of registered employ-
ees as well as such additional information as the Commissioner may prescribe. The record must be
retained by the employer for a period of five years from the date of the last entry and must be avail-
able for scrutiny by the Commissioner.
10.11.6 Annual returns (par 14(3), (6 and (7)))

By such date as prescribed in the Gazette, or within 14 days after the employer ceases to be an
employer in relation to an employee or ceases to be an employer in total, or whatever longer period
the Commissioner may approve, an employer must render a return (form EMP 501) to the Commis-
sioner.
An employer is also obliged to render an annual statement of taxable benefits (par 18(1) of the Sev-
enth Schedule). This provision requires an employer to declare on the annual return (form EMP 501)
that all taxable benefits enjoyed by his employees during the period for which the return is furnished
are declared on the employees’ tax certificates delivered to his employees.
If the employer fails to submit a complete return in terms of par 14(3), the Commissioner may impose
on that employer a penalty, which is deemed to be a percentage-based penalty under Chapter 15 of
the Tax Administration Act (see chapter 33). This penalty will be imposed for each month that the
employer fails to submit a complete return and in total may not exceed 10% of the total amount of
employees’ tax deducted or withheld or which should have been deducted or withheld by the em-
ployer from the remuneration of employees for the period (par 14(6)). This decision of the Commis-
sioner is subject to objection and appeal (s 3(4)(e)). If the total amount of employees’ tax deducted or
withheld, or which should have been deducted or withheld for the period in par 14(3) is unknown, the
Commissioner may estimate the total amount based on information readily available and impose the
penalty under par 14(6) on the amount so estimated (par 14(7)). When, upon determining the actual
employees’ tax of the person in respect of whom the penalty was imposed, it appears that the total
amount of employees’ tax was incorrectly estimated under subpar (7), the penalty must be adjusted
in accordance with the correct amount of employees’ tax with effect from the date of imposition of the
penalty (par 14(8)).
10.11.7 Employees’ tax certificates (par 13)

An employer who deducts or withholds an amount of employees’ tax is obliged to deliver an em-
ployee’s tax certificate (the IRP 5 form) to each employee or former employee to whom remuneration
has been paid or has become payable by him during any period of 12 months ending on the last day
of February (par 13(1) and 13(1A)). The employer can exercise the option in relation to all his em-
ployees or any class of employees that the period commences on the day following the last day of
the preceding period and ends on a date falling not more than 14 days before or after the last day of
February (par 13(1A)). The certificate must show the total remuneration of the employee or former
employee and the amount of employees’ tax deducted or withheld by the employer from remuner-
ation during the year of assessment (par 13(1)).
If the employer did not cease to be an employer in relation to the specific employee, the employees’
tax certificates must be delivered to employees within 60 days after the end of the period to which the
certificate relates. If the employer ceased to be an employer in relation to the specific employee or
ceased to be an employer in total, the IRP5s must be delivered within 14 days of the day when he so
ceased (par 13(2)).
Unless the Commissioner otherwise directs, no employer may deliver IRP5s to his employees until
such time that he has rendered his annual return (EMP 501) to the Commissioner. A percentage-
based penalty (a maximum rate of 10% of the employees’ tax withheld) becomes payable in terms of
Chapter 15 of the Tax Administration Act if the employer fails to render the EMP 501 within the pre-
scribed period.
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When no employees’ tax has been deducted from the remuneration paid to an employee, a form
IT 3(a) should be issued to the employee.
10.12 The Employment Tax Incentive Act, 2013

The Employment Tax Incentive Act, 2013 is contained in item 19A of Schedule 1 to the South African
Revenue Service Act, 1997. It aims to encourage employers to hire young and less experienced work
seekers to reduce unemployment in our country, as stated in the National Development Plan. Section
references in 10.12 are to ‘The Employment Tax Incentive Act’ unless otherwise indicated.
The employment tax incentive (ETI) commenced on 1 January 2014 and will cease on 28 February
2029. It brings relief to all ‘eligible employers’ in respect of ‘qualifying employees’ (an employee
contemplated in s 6 of the ETI Act). ‘Employees’ as defined means a natural person
l who works for another person and in any manner directly or indirectly assists in carrying on or
conducting the business of that other person
l who receives, or is entitled to receive, remuneration from that other person, and
l who is documented in the records of that other person as envisaged by the Basic Conditions of
Employment Act.
Eligible employers may reduce the monthly employees’ tax withheld from employees and payable to
SARS in terms of the Fourth Schedule with the amount of the ETI (s 2(2)). The employer must
therefore still withhold the correct employees’ tax, but has the benefit that he does not have to pay
the whole amount over to SARS. The idea is that he uses that saving to fund the salaries of qualifying
employees. Such amount is gross income for the employer but is also exempt in terms of s 10(1)(s) of
the Income Tax Act. The ETI is based on the monthly remuneration of ‘qualifying employees’ and is
explained below.
The following table summarises the meaning of ‘eligible employers’ and ‘qualifying employees’:
EMPLOYER EMPLOYEE
Eligible Non-eligible Qualifying Non-qualifying
Section 3(a) Section 3(b) and (c) Section 6(a), (b) and (e) Definition of ‘employee’
and s 6(c), (d) and (f)
and the proviso to s 6
Registered as an l The government in l 18 years and 29 years, l An independent con-
employer for em- any sphere or tractor
ployees’ tax pur- l Employed by an employer In terms of the proviso to
poses with a fixed place of busi- s 6, an employee who is,
ness in a special economic in fulfilling the conditions
zone, or of their employment con-
tract during any month,
l Employed by an employer
mainly involved in the
that is a qualifying com- activity of studying, is
pany as contemplated in not a qualifying employ-
s 12R of the Income Tax ee unless the employer
Act, and the employee ren- and employee have
ders services to that em- entered into a learning
ployer mainly within the programme as defined
special economic zone in in the Skills Develop-
which the qualifying comment Act, and, in deter-
pany that is the employer mining the time spent
carries on trade, and studying in proportion to
l Receives remuneration of the total time for which
less than R6 500 per month the employee is employ-
ed, the time must be
based on actual hours
spent studying and em-
ployed
continued
317
EMPLOYER EMPLOYEE
Eligible Non-eligible Qualifying Non-qualifying
l A public entity (except l In possession of either an l A connected person
if listed by Minister in identity card or an applica- in relation to the em-
the Gazette) tion for an asylum permit or ployer
an identity document issued
in terms of the Refugees Act
l A municipal entity l Employed on or after 1 Octo- l A domestic worker
ber 2013
l Disqualified from l An employee in re-
receiving the ETI due spect of which an
to the displacement of employer is ineligible
an employee or due to receive the ETI by
to not meeting certain virtue of s 4
conditions prescribed
by regulation
It is clear from s 4 that adherence by employers to the higher of amounts payable by virtue of any
wage regulation measure (as defined in s 4(3)) or the minimum wage of R2 000 per month (if there is
no wage regulation measure) is important. An employer is not eligible to receive the ETI if the wage
paid is less than the aforementioned.
An employer is deemed to have displaced an employee if the dismissal constitutes an automatically
unfair dismissal and the employer replaces the dismissed employee with an employee in respect of
which the employer is eligible to claim an ETI (s 5(2)). Such deemed displacements cause a penalty
of R30 000 and a possible disqualification of the employer from receiving the ETI (s 5(1)).
The relief that the ETI brings commenced on 1 January 2014 and is set out in s 7(2) and (3). The
effect of s 7(4) and (5) on the ETI must be borne in mind. An eligible employer must take any pre-
vious period of employment of a qualifying employee on or after 1 January 2014 by an associated
person (as defined) into account as if the eligible employer had been the employer for that previous
period. If a qualifying employee is only employed for a part of a month, the calculated ETI must be
apportioned in the ratio of remuneration for that month divided by the remuneration for a full month.
The ETI is based on the monthly remuneration of the qualifying employee and can be summarised as
follows:
Monthly remuneration First 12 months in respect of Second and third 12 months after
which an eligible employer the first 12 months in respect of
employs a qualifying employee which an eligible employer employs
a qualifying employee
Less than R2 000 50% × monthly remuneration 25% × monthly remuneration
R2 000 or more but < R4 500 R1 000 R500
R4 500 or more but < R6 500 Apply the formula in s 7(2)(c) Apply the formula in s 7(3)(c)
R6 500 or more Rnil Rnil
The number of hours for which a qualifying employee is employed is taken into account in the defini-
tion of ‘monthly remuneration’. If the qualifying employee is employed and paid remuneration for at
least 160 hours in a month (with effect from 1 March 2017), the monthly remuneration means the
amount paid or payable in respect of a month. If employed and paid remuneration for less than
160 hours in a month, the ETI as calculated above must be multiplied by the number of hours em-
ployed and divided by the number 160 (s 7(5)). The minimum monthly remuneration of R2 000 also
applies only if the employee is employed for more than 160 hours in a month (s 4(1)(b)). The same
apportionment as previously mentioned must be done if the person is employed for less than 160
hours in a month. In determining the remuneration paid or payable, an amount other than a cash
payment that is due and payable to the employee after having accounted for deductions in terms of
s 34(1)(b) of the Basic Conditions of Employment Act, must be disregarded (proviso to the definition
of ‘monthly remuneration’).
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Section 8 prohibits an eligible employer to claim an ETI in a specific month if the eligible employer, on
the last day of the month,
l has failed to submit any tax return, or
l has any outstanding tax debt except if the debt can be paid in instalments in terms of an agree-
ment with SARS, the debts is suspended due to an objection or appeal, or the debt does not ex-
ceed R100.
An employer cannot deduct more than the total employees’ tax that is due to SARS in a particular
month. Sections 9 and 10 provide for a rollover of the ETI to the next month in this case, as well as in
the case where the ETI is unavailable to the eligible employer in a specific month due to s 8. An
eligible employer can claim a reimbursement from SARS of the excess of the amount of the ETI at the
end of each employees’ tax reconciliation period on a date to be announced in the Government
Gazette.
Due to the impact of COVID-19, certain additional ETI relief measures were granted to eligible employ-
ers. These measures are discussed in chapter 34.
10.13 Skills Development Levy and Unemployment Insurance Fund

The Skills Development Levy (SDL)
The SDL is a compulsory levy scheme for the purposes of funding education and training. SDL is
payable by employers monthly at a rate of 1% of the leviable amount. Section 4 of the Skills Devel-
opment Levies Act 9 of 1999 (the SDL Act) lists the employers who are exempt from paying SDL. The
SARS Guide for Employers in respect of Skills Development Levy (SDL-GEN-01-G01) explains that,
although these employers are exempt from the payment of the SDL levy, these employers are not
absolved from PAYE registration if any one of its employees is liable for the payment of normal tax.
The leviable amount is the total amount of remuneration paid or payable by an employer to its em-
ployees during a month, as determined for the purposes of determining the employer’s liability for
employees’ tax. This means that the SDL is determined on the ‘balance of remuneration’ as explained
in 10.5 (also see par 2(4)).
Remuneration for SDL purposes does exclude certain amounts, and these should be excluded from
the ‘balance of remuneration’ for SDL purposes. The following amounts are excluded:
l any amounts paid to labour brokers and employees declared by the Minister to be employees to
whom a certificate of exemption has been issued in terms of par 2(5) of the Fourth Schedule
l any amounts paid as pension, superannuation allowances or retiring allowances
l any annuities, lump sums from employers (par (d) of the definition of ‘gross income’), lump sums
from retirement funds (par (e) or (eA) of the definition of ‘gross income’)
l any amount payable to a learner in terms of a contract of employment (s 18(3) of the SDL Act).
The employer must remit the SDL liable amount to SARS with his monthly EMP 201 form. The Com-
missioner may refuse to authorise a refund under subsection 190 of the Tax Administration Act, if the
employer has failed to furnish a return as required in terms of s 6(2) of the SDL Act, until the employer
furnishes such a return.
Due to the impact of COVID-19, employers were granted an exemption from the SDL for a limited
period. These measures are discussed in chapter 34.
The Unemployment Insurance Fund (UIF)

The monthly compulsory contributions to the UIF, made by employers and employees, are collected
by SARS, and are paid over to the UIF, which is managed by the Unemployment Insurance Commis-
sioner. The UIF provides short-term relief for workers when they become unemployed or are unable
to work because of illness, maternity or adoption leave and provides relief to the dependants of a
deceased contributor in terms of the Unemployment Insurance Act 63 of 2001 (SARS Guide for
Employers in respect of the Unemployment Insurance Fund (UIF-GEN-01-G01)). Both the employer
and the employee must each contribute 1% of the remuneration paid to a relevant employee during
any month to the UIF. The Unemployment Insurance Contributions Act 4 of 2002 (the UIC Act) ap-
plies to all employers and employees, other than those specifically excluded in terms of s 4 of the
UIC Act.
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’Remuneration’ for the purposes of UIF means remuneration as defined in par 1 of the Fourth Sched-
ule but does not include any amounts
l paid by way of pension, superannuation allowance or retiring allowance
l that constitutes an amount contemplated in par (a), (cA), (d), (e) or (eA) of the definition of ‘gross
income’ in s 1(1) of the Income Tax Act, or
l paid by way of commission.
The Minister of Finance determines the threshold for determining the UIF contributions, which is
R17 712 per month with effect from 1 June 2021. The UIF contributions are based on the total amount
of remuneration, therefore before the deductions allowed in the calculation of the ‘balance of remu-
neration’ (in terms of par 2(4)).
The employer must remit the UIF liable amount to SARS with his monthly EMP 201 form. The Com-
missioner my refuse to authorise a refund under subsection 190 of the Tax Administration Act, if the
employer has failed to furnish a return as required in terms of s 8(2) of the UIF Act, until the employer
furnishes such a return.
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11 Provisional tax

l determine if a taxpayer is a provisional taxpayer as defined
l determine the dates on which provisional taxpayers (companies and natural per-
sons) should submit provisional tax returns and make provisional tax payments
l calculate the provisional tax liability for provisional taxpayers (companies and nat-
ural persons)
l complete a provisional tax return for a company and a natural person
l identify the circumstances under which a provisional taxpayer will be liable for pen-
alties and interest on provisional tax payments
l calculate the amount of penalties that a provisional taxpayer is liable for in respect
of late payment and/or underpayment of provisional tax.
Contents
Page
11.1 Overview .......................................................................................................................... 321
11.2 Important definitions (par 1) ............................................................................................. 322
11.3 Registering for provisional tax ........................................................................................ 323
11.4 Provisional tax periods (paras 21, 23 and 23A) .............................................................. 323
11.5 Estimate of taxable income (paras 19, 24 and 25) .......................................................... 325
11.6 Normal tax rate used to calculate provisional tax payments (par 17) ............................. 327
11.7 Provisional tax payments for persons other than companies (par 21) ............................ 327
11.8 Provisional tax payments for companies (par 23) ........................................................... 329
11.9 Penalties in respect of provisional tax ............................................................................. 330
11.9.1 Late payment penalty (paras 25 and 27 and s 213 of the Tax
Administration Act) ........................................................................................... 330
11.9.2 Underpayment penalty (par 20) ....................................................................... 330
11.10 Interest in respect of provisional tax ................................................................................ 333
11.10.1 Interest in respect of the late payment of provisional tax (s 89bis(2)) ............. 333
11.10.2 Interest on the underpayment and overpayment of provisional tax
(s 89quat) .......................................................................................................... 334
11.10.3 Additional provisional tax payments (par 23A) ................................................ 335
11.11 Offences in respect of provisional tax (par 30(1A)(c)) .................................................... 336
11.12 Summary of provisional tax ............................................................................................. 336
11.1 Overview
Provisional tax is a method of paying normal tax on certain income in advance for a particular year of
assessment. Like employees’ tax (see chapter 10), provisional tax is not an additional tax. Employ-
ees’ tax and provisional tax are payment mechanisms in terms of which a person pays normal tax in
advance and in instalments during a year of assessment. Where employees’ tax is generally paid
monthly, provisional tax is paid twice a year on specific dates. By paying the amounts due in terms of
the provisional tax liability, the taxpayer will prevent potentially large amounts of tax due on assess-
ment, as the tax load is spread over the relevant year of assessment.
In contrast to employees’ tax, which is based on ‘remuneration’, provisional tax for persons other than
companies is based on forms of income other than ‘remuneration’ (unless the employer paying the
321
remuneration is not registered as an employer) or an allowance or advance contemplated in s 8(1).

This is reflected in the definition of ‘provisional taxpayer’. For example, a person earning remunera-
tion and rental income during the same year of assessment can therefore be liable for both employ-
ees’ tax and provisional tax. A company automatically falls into the provisional tax system due to
being specifically included in the definition of provisional taxpayer.
Provisional tax is based on estimates of the taxable income of the taxpayer in respect of a specific
year of assessment. In some cases, the estimate may not be less than the ‘basic amount’ as defined.
Late or incorrect payments of provisional tax and a failure to submit estimates or adequate estimates
may lead to additional tax, penalties and interest. An optional third provisional tax payment can be
made by a provisional taxpayer to avoid or reduce the taxpayer’s liability for interest payable on the
underpayment of provisional tax in terms of s 89quat (see 11.10.2 and 11.10.3).
Provisional tax payments may not be refunded otherwise than as provided for in par 28 or in circum-
stances determined by the Commissioner (par 29) and may not be reallocated to different periods or
to different taxpayers (SARS Interpretation Note No. 1 – Issue 3). The Act (par 28(1)(a), read with
Chapter 13 of the Tax Administration Act) permits a refund of provisional tax payments previously
made only if the taxpayer’s liability for normal tax has been assessed by the Commissioner and the
sum of employees’ tax deducted and provisional tax paid in respect of that period exceeds the total
liability for normal tax as assessed. Any excess may be refunded only after the taxpayer has been
assessed for the relevant year of assessment. The right to receive a refund is subject to SARS’s right
to verify, inspect or audit the refund prior to authorising the payment of the refund (s 190(2) of the Tax
Administration Act). Accordingly, requests to refund or reallocate provisional tax payments, for ex-
ample, between different periods or different taxpayers cannot be accommodated.
At the end of the relevant year of assessment, provisional tax and employees’ tax payments made
during the year of assessment are deducted from the normal tax payable by the taxpayer for that
year of assessment to determine the normal tax due by or to the natural person on assessment.
Extract from the comprehensive framework for natural persons for the 2022 year of assessment:
Normal tax payable by the natural person ....................................................................... Rxxx
Less: PAYE, provisional tax and the s 35A (non-final) withholding tax in respect of non-residents (xxx)
Normal tax due by or to the natural person on assessment.............................................. Rxxx
Extract from the assessment of a company in respect of the 2022 year of assessment:
Normal tax is calculated at 28% (It was announced in the 2021 Budget Speech that this rate
will change to 27% for years of assessment commencing on/after 1 April 2022.)............ Rxxx
Less: Provisional tax credits.............................................................................................. (xxx)
Net amount of normal tax payable by the company for the 2022 year of assessment ..... Rxxx
The rules relating to provisional tax are set out in Part III of the Fourth Schedule to the Act. All para-
graph references in this chapter refer to the Fourth Schedule to the Act and sections refer to the
Income Tax Act, unless otherwise indicated.
The effect of the limited COVID-19 tax relief measures granted to ‘qualifying
Covid-19 Note taxpayers’ in respect of the deferral of specific provisional tax payments for a
limited period are discussed in chapter 34.
11.2 Important definitions (par 1)

The term ‘provisional taxpayer’ is defined in par 1. Certain persons are included in the definition of
provisional taxpayer, while others are specifically excluded. Those included as provisional taxpayers
are:
l persons, other than a company, who receive income
– that does not constitute remuneration, or an allowance or advance contemplated in s 8(1) (this
relates to all allowances and advances – see chapter 8 for detail), or
– that qualifies as remuneration but is paid by an employer that is not registered as an employer
for employees’ tax purposes in terms of par 15 (This means that none of that employer’s employ-
ees is liable for normal tax. Multinational employers often do not have a legal entity in South
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11.2–11.4 Chapter 11: Provisional tax
Africa that can register, whilst embassies and other diplomatic missions are generally not sub-
ject to South African legislation under customary international law and also under the Diplo-
matic Immunities and Privileges Act (SARS Interpretation Note No. 1 – Issue 3))
l any company, and
l any person who is notified by the Commissioner that he or she is a provisional taxpayer.
Persons excluded from the definition of provisional taxpayer are
l approved public benefit organisations
l approved recreational clubs
l body corporates, share block companies and income tax exempt associations (see s 10(1)(e))
l non-resident owners or charterers of ships or aircraft
l a natural person who does not receive income from carrying on a business* and whose taxable
income for the year of assessment does not exceed the tax threshold as defined in par 1 of the
Fourth Schedule (for the 2022 tax year, these amounts are: for taxpayers below the age of
65: R87 300; for taxpayers aged 65 to below 75: R135 150 and for taxpayers aged 75 and older:
R151 100)
l a natural person who does not receive income from carrying on a business* and whose taxable
income for the relevant year of assessment is derived from interest, dividends, foreign dividends,
rentals from the letting of fixed property and remuneration from an employer that is not registered
as an employer in terms of par 15 does not exceed R30 000
l a small business funding entity
l a deceased estate, and
l any entity as defined in s 30B (for example trade unions and non-profit companies) and which is
approved by the Commissioner. These entities are therefore excluded despite perhaps being a
company.
* SARS Interpretation Note 1 (Issue 3) points out that the meaning of a ‘business’ is discussed in the SARS Guide on the Ring-
Fencing of Assessed Losses Arising from Certain Trades Conducted by Individuals (issued on 8 October 2010). The word
‘trade’ is defined in s 1(1) of the Act, but not the word ‘business’. This Guide explains that not every activity which is included
under the definition of a ‘trade’ can be regarded as a business in the ordinary sense of the word. It further explains that, to
determine whether a trade constitutes a business, one needs to consider the activities conducted as a whole. The general
impression should indicate whether the activities would normally be regarded as a ‘business’ in ordinary commercial life, and
the Guide also sets out the basic features of what may indicate that a business is being conducted (point 7.1 of this Guide).
The fees paid to resident non-executive directors of companies generally do not

qualify as remuneration and are not subject to employees’ tax (see Binding General
Please note! Ruling Note No. 40). Resident non-executive directors should consequently pay
provisional tax. Binding General Ruling Note No. 40 does not apply to non-resident
non-executive directors and their remuneration is subject to employees’ tax.
11.3 Registering for provisional tax

There is no longer a registration or deregistration process to be a provisional taxpayer. The onus is
on the taxpayer to determine if he or she is liable for provisional tax, and to request and submit an
IRP6 return via eFiling. Once the taxpayer is required to submit provisional tax returns, the change
can be made on the taxpayer’s eFiling profile by activating the tax type for ‘Provisional Tax (IRP6)’.
11.4 Provisional tax periods (paras 21, 23 and 23A)

All provisional taxpayers are required to make at least two provisional tax payments during a year of
assessment. The first provisional tax payment must be made within six months from the commence-
ment of the taxpayer’s year of assessment. The second provisional tax payment must be made on or
before the last day of the taxpayer’s year of assessment (paras 21 and 23). If the last day for pay-
ment falls on a public holiday or weekend (meaning a Saturday or a Sunday), the payment must be
made on the last business day prior to the public holiday or weekend (s 244(1) of the Tax Administra-
tion Act).
Provisional taxpayers may make a third voluntary provisional tax payment to avoid (or reduce) paying
interest in respect of its tax liability for a particular year of assessment (par 23A). For provisional
taxpayers with a February year-end, a third provisional tax payment could be made within seven
months after the end of the year of assessment (that is, on or before 30 September). For all other
provisional taxpayers, a third provisional tax payment could be made within six months after the end
of the relevant year of assessment. This is discussed in more detail in 11.10.3.
323
Example 11.1. Provisional tax periods for a natural person
During the 2022 year of assessment Julie received fixed property rental income of R100 000 for
the first time, in addition to the salary that she received from her employer.
Explain to Julie whether she will be regarded as a provisional taxpayer for the 2022 year of assess-
ment. Also indicate the provisional tax periods that will apply to her.
SOLUTION
Julie is a provisional taxpayer since she is a natural person who received income other than remu-
neration and the taxable income (rental) derived from the letting of fixed property exceeds
R30 000. Since Julie is a natural person, her year of assessment commences on 1 March and
ends on 28 or 29 February the next year. For the 2022 year of assessment, Julie’s first provisional
tax payment must be made by 31 August 2021. Her second provisional tax payment must be
made by 28 February 2022.
Example 11.2. Provisional tax periods for a company
Pro-Sound (Pty) Ltd is a South African company and for this reason, a provisional taxpayer. Its
financial year-end is 31 December.
On which dates must the company make its 2022 provisional tax payments?
SOLUTION
The company’s year of assessment commences on 1 January and ends on 31 December that
year. For the 2022 year of assessment, Pro-Sound’s first provisional tax payment must be made
by 30 June 2022. Its second provisional tax payment must be made by 31 December 2022.
The provisional tax regime for a provisional taxpayer with a February year-end can be illustrated as
follows:
2022 TAX YEAR
1/3/2021 31/8/2021 28/2/2022 30/9/2022
6 MONTHS 6 MONTHS 7 MONTHS
1st payment 2nd payment 3rd payment
Voluntary payment
Compulsory payments made by taxpayers to
calculated according to avoid or reduce
specific rules. interest.
If the last day of a period within which payment must be made falls on a
Please note! Saturday, Sunday or public holiday, the payment must be made not later than
the last business day before the Saturday, Sunday or public holiday (s 244(1)
of the Tax Administration Act).
324
11.5 Chapter 11: Provisional tax
11.5 Estimate of taxable income (paras 19, 24 and 25)

A provisional taxpayer is required to estimate its taxable income for the year of assessment for which
a provisional tax return must be submitted. A person who wilfully or negligently fails to submit an
estimate under par 19 is guilty of an offence and is liable, upon conviction, to a fine or to imprisonment
for a period not exceeding two years (par 30(1)(1A)(c)). This entails the completion of an IRP6 return
which is requested and submitted via eFiling.
In the case of a natural person, the estimate should exclude any retirement fund lump sum benefit,
retirement fund lump sum withdrawal benefit or any severance benefit received during the year of
assessment (proviso (i) to par 19(1)(a)).
Where a taxpayer (natural person) dies during a year of assessment, no estimate is required to be
made in respect of the period ending on the date of death of that person (proviso (ii) to par 19(1)(a)).
The date of death is the last day of the year of assessment of the natural person. Previously, there
was no exemption from the payment of provisional tax by a natural person in respect of the period
ending on the date of death. This could result in the imposition of an underestimation penalty
(par 20). The purpose of proviso (ii) to par 19(1)(a) is to exempt the executor from having to submit
an estimate of provisional tax on behalf of the deceased person in respect of the period up to the
date of death. The normal tax payable by the natural person will be payable on assessment. If, how-
ever, the deceased person was still alive on 31 August, there would have still been an obligation to
submit an estimate for the first provisional tax period.
For the first provisional tax payment, the estimate may not be less than the basic amount (see below),
unless the circumstances of the case justify a lower estimate (par 19(1)(c)). A second provisional tax
payment may be less than the taxpayer’s basic amount; however, the taxpayer may be subject to an
underpayment penalty in such case (see 11.9.2).
Due to the words ‘every provisional taxpayer shall . . . submit . . . ’ in par 19(1)(a) and (b), a provi-
sional tax return must be submitted even if the provisional tax payment is Rnil.
The basic amount is the person’s taxable income as assessed for the latest preceding year of assess-
ment, less the following amounts (par 19(1)(d)):
In the case of a person other than a company: In the case of a company:
The amount of any taxable capital gain included in The amount of any taxable capital gain included in
terms of s 26A terms of s 26A
The taxable portion of any retirement fund lump
sum benefit, retirement fund lump sum withdrawal
benefit or severance benefit. Lump sum benefits
due to a transfer from a public sector pension fund
to a public sector provident fund (par (eA) of the
definition of ‘gross income’) is not excluded
Any amount (other than a severance benefit) con-
templated in par (d) of the definition of ‘gross in-
come’. This paragraph includes certain once-off
benefits received from an employer in respect of
the termination, etc., of any office or employment in
a person’s gross income (see chapter 4)
*
Remember
The amount of a taxable capital gain is only excluded when determining the taxpayer’s basic
amount. A provisional taxpayer’s own estimate of its taxable income for a year of assessment
should include the estimated taxable capital gain for that specific year of assessment.
Where a provisional taxpayer must make an estimate to submit a provisional tax return more than
18 months after the end of the latest preceding year of assessment in relation to such estimate, the
basic amount must be increased by 8% per year. The basic amount must be increased for the num-
ber of years calculated from the end of the year of assessment to which the latest preceding year of
assessment in relation to such estimate relates, to the end of the year of assessment in respect of
which the estimate is made (proviso to par 19(1)(d)).
To determine the basic amount, the ‘latest preceding year of assessment in relation to such estimate’
is the latest year of assessment (preceding the current year of assessment for which the estimate is
made) for which the Commissioner issued a notice of assessment not less than 14 days before the
date on which the provisional taxpayer submits that provisional tax return (par 19(1)(e)). In this
325
instance, the SARS Interpretation Note No. 1 (Issue 3) refers to 14 calendar days, and where the last
day is a Sunday or public holiday, it is excluded from the counting of the days (s 4 of the Interpreta-
tion Act 33 of 1957).
Example 11.3. Determining a taxpayer’s basic amount
A provisional taxpayer (natural person) with a year of assessment ending on 28 February 2022 is
submitting his first provisional tax return for the year on 31 August 2021. The taxpayer received a
notice of assessment for his 2020 year of assessment on 31 July 2020 and a notice of assess-
ment for his 2021 year of assessment on 20 August 2021.
Explain how the basic amount will be determined.
SOLUTION
The latest preceding year of assessment (as defined) is the 2020 year of assessment. This is
since it is the latest preceding year of assessment for which a notice of assessment was issued
(on 31 July 2020), which is not less than 14 days before the provisional taxpayer has to submit its
first provisional tax return for its 2022 year of assessment (31 August 2021). The provisional tax-
payer’s basic amount for his first provisional tax payment will be based on his taxable income for
his 2020 year of assessment.
The period between 29 February 2020 (the end of the latest year of assessment in relation to
such estimate) and 31 August 2021 (the day on which it must submit its first provisional tax return
for its 2022 year of assessment) is 18 months. Since this period is not more than 18 months, it is
not required to increase its 2020 taxable income (the basic amount) by 8% per year.
Example 11.4. Determining a taxpayer’s basic amount

In Example 11.3, the provisional taxpayer’s latest preceding year of assessment was his 2020
year of assessment.
Explain how the basic amount will be determined if the provisional taxpayer did not submit his tax
return for the 2020 year of assessment and, at the time that he had to submit his first provisional
tax return for the 2022 year of assessment (on 31 August 2021), his latest preceding year of
assessment for which a notice of assessment was issued would have been his 2019 year of
assessment.
SOLUTION
Thirty (30) months would have passed between the last day of its latest preceding year of
assessment in relation to such estimate (28 February 2019) and the day he must submit the first
provisional tax return for his 2022 year of assessment (31 August 2021). To determine the basic
amount, the taxpayer must increase his taxable income for his 2019 year of assessment by 8%
per year for the number of years between 28 February 2019 (the end of his latest preceding year
of assessment in relation to such estimate) and 28 February 2022 (the end of the year of
assessment in respect of which he submits the provisional tax return). Because three years have
passed between 28 February 2019 and 28 February 2022, the taxpayer must increase his 2019
taxable income by 24% (3 × 8%). If his taxable income for his 2019 year of assessment was, for
example, R600 000, his ‘basic amount’ for the first provisional tax payment for his 2022 year of
assessment would be R744 000 ((R600 000 × 24%) + R600 000).
The Commissioner may estimate a provisional taxpayer’s taxable income if the taxpayer fails to sub-
mit an estimate (par 19(2)). The Commissioner may require the provisional taxpayer to provide further
detail relating to its provisional tax payment. If the Commissioner is dissatisfied with the provisional
taxpayer’s estimate, he or she may increase the amount. Such increased estimate is not subject to
objection and appeal (par 19(3)). Any estimate or increase by the Commissioner is deemed to take
effect in respect of the relevant period within which the provisional taxpayer is required to make a
provisional tax payment (par 19(5)). Where SARS has increased a taxpayer’s estimate of taxable
income, any additional provisional tax that becomes payable must be paid within a period deter-
mined by the Commissioner (par 25).
Where a provisional taxpayer has failed to submit an estimate of his taxable income by the last day of
a period of four months after the last day of the year of assessment, the provisional taxpayer is
deemed to have submitted an estimate of nil taxable income (par 19(6)). The Commissioner may still
estimate the provisional taxpayer’s taxable income in these circumstances. The provisional taxpayer
will be subject to penalties and interest in respect of any late and, or underpayment of provisional tax
(see 11.9 and 11.10).
326
The Commissioner may excuse a provisional taxpayer from making a first provisional tax payment if
satisfied that the taxpayer’s taxable income for the relevant year of assessment cannot be estimated
on the facts available at the time when the payment must be made (par 24). If SARS decides not to
absolve a provisional taxpayer from making a first provisional tax payment, the taxpayer may object
to SARS’ decision under Chapter 9 of the Tax Administration Act (see chapter 33).
11.6 Normal tax rate used to calculate provisional tax payments (par 17)
The normal tax rate to be used when calculating a provisional tax payment is the rate in force for the
year of assessment on the date of making the provisional tax payment. If the rate of tax has not been
promulgated for the year of assessment, the rate announced by the Minister of Finance in his budget
statement for the year must be used. If a rate has not yet been promulgated or announced in a
budget statement, the rate that applied for the latest preceding year of assessment must be used
(par 17(4)).
The Commissioner may prescribe tables that a provisional taxpayer may elect to use instead of the
above rates when calculating provisional tax payments. These tables take the relevant tax rates for
the year of assessment and s 6(2) rebates (where applicable) into account (par 17(5)).
The above rates apply in cases where the taxpayer makes an estimate of its taxable income, where
the Commissioner increases such estimate or where the Commissioner estimates the provisional
taxpayer’s taxable income (par 17(3)).
11.7 Provisional tax payments for persons other than companies (par 21)
First payment (within six months from the commencement of the year of assessment in question)
The first provisional tax payment for a provisional taxpayer other than a company is calculated as
follows (par 21(1)(a)):
Estimated taxable income for the year of assessment .............................................................. xxxx
Normal tax on estimated taxable income................................................................................... xxxx
Less: Primary, secondary, and tertiary rebates under s 6(2) .................................................... (xxxx)
Less: Medical scheme fees tax credit under s 6A ..................................................................... (xxxx)
Less: Additional medical expenses tax credit under s 6B ........................................................ (xxxx)
Total normal tax payable (A) ...................................................................................................... xxxx
Half of the normal tax payable on estimated taxable income (A / 2) ......................................... xx
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration during
the first period .................................................................................................................. (x)
Less: Foreign tax credits under s 6quat proved to be payable by the end of the first
period ............................................................................................................................... (x)
First provisional tax payment...................................................................................................... xxxx
Paragraph 21(1A) provides for situations where a taxpayer other than a company has a short year of
assessment, for example by reason of death or ceasing to be a tax resident. A first provisional tax
payment and return is not required when the duration of a year of assessment does not exceed six
months.
Second payment (not later than the last day of the year of assessment in question)
The second provisional tax payment for a provisional taxpayer other than a company is calculated as
follows (par 21(1)(b)):
Less: Primary, secondary, and tertiary rebates under s 6(2) .................................................... (xxxx)
Less: Medical scheme fees tax credit under s 6A .................................................................... (xxxx)
Less: Additional medical expenses tax credit under s 6B ........................................................ (xxxx)
Total normal tax payable ............................................................................................................ xxxx
the year of assessment .................................................................................................... (x)
Less: First provisional tax payment (if actually paid) ................................................................ (x)
Less: Foreign tax credits under s 6quat proved to be payable for the year of assessment .... (x)
Second provisional tax payment ................................................................................................ xxxx
327
Example 11.5. Provisional tax payment for a natural person not making contributions to a
medical scheme
Tsela, who turned 28 on 10 October 2021, submitted her first provisional tax return for her 2022
year of assessment on 31 August 2021 and paid an amount of R25 000. Her income consists of
her salary, income from a part-time business and certain investment income. Employees’ tax of
R49 350 was withheld from her salary during the period from 1 March 2021 to 28 February 2022.
Tsela is not a member of a medical scheme. Tsela received her assessment for the 2021 year of
assessment on 30 November 2021, which indicated her final assessed taxable income for the
2021 year as R450 000 and this included a taxable capital gain of R20 000. When Tsela calcu-
lated her second provisional tax payment on 28 February 2022, she wasn’t yet sure what her tax-
able income for the 2022 year of assessment would be and she decided to base her payment on
her basic amount.
Calculate Tsela’s second provisional tax payment for her 2022 year of assessment.
SOLUTION
Tsela’s basic amount on 28 February 2022 was R430 000 (R450 000 – R20 000). This was the
taxable income as per her latest preceding year of assessment at the time (excluding the taxa-
ble capital gain), being her 2021 assessment. Since this assessment did not end more than 18
months before 28 February 2022 when she had to make her second provisional tax payment for
her 2022 year of assessment, she is not required to increase this amount by 8% (see 11.5).
Tsela can therefore base her 2022 second provisional tax payment on her basic amount of
R430 000. The second provisional tax payment is calculated as:
Estimated taxable income for the year of assessment (basic amount)......................... R430 000
Normal tax on R430 000 ((R92 200 (R430 000 – R337 800) × 31%) + R70 532).......... R99 114
Less: Primary rebate (only the primary rebate applies since Tsela is not yet
65 years old) ...................................................................................................... (15 714)
Total normal tax payable............................................................................................... R83 400
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration
during the year of assessment .......................................................................... (49 350)
Less: First provisional tax payment ............................................................................. (25 000)
Second provisional tax payment ................................................................................... R9 050
Notes:
(1) If Tsela realises before 30 September 2022 that her taxable income for the 2022 year of
assessment was more than R430 000, she can make an additional provisional tax payment.
If she makes an additional provisional tax payment before 30 September 2022, she will not
incur interest on underpayment of provisional tax (see 11.10). If, for example, she realises
that her taxable income was R480 000 for the 2022 year of assessment, she should make
an additional provisional tax payment on or before 30 September 2022, calculated as fol-
lows in order to avoid paying interest on underpayment of provisional tax:
Normal tax on R480 000 ((R12 500 (R480 000 – R467 500) × 36%) +
R110 739)............................................................................................................ R115 239
65 years old) ............................................................................................ (15 714)
Total normal tax payable ..................................................................................... R99 525
Less: Employees’ tax deducted from the provisional taxpayer’s remuneration
during the year......................................................................................... (49 350)
Less: First provisional tax payment .................................................................. (25 000)
Less: Second provisional tax payment............................................................. (9 050)
Additional provisional tax payment ..................................................................... R16 125
(2) Since Tsela based her second provisional tax payment on her basic amount (and based on
the assumption that her final assessed taxable income for her 2022 year of assessment
does not exceed R1 million), Tsela will not be subject to an underpayment penalty
(see 11.9.2).
328
Example 11.6. Provisional tax payment for a natural person making contributions to a
medical scheme
Refer to example 11.5.
If Tsela contributed R4 200 per month to a medical scheme of which she is the sole member and
she is not a person with a disability, calculate the amount of her second provisional tax payment
(assume that she incurred no other qualifying medical expenses during the year):
Estimated taxable income for the year of assessment (basic amount)........................ R430 000
Normal tax on R430 000 (R92 200 (R430 000 – R337 800) × 31%) + R70 532) .......... R99 114
65 years old) .................................................................................................... (15 714)
Less: Medical scheme fees tax credit under s 6A (see chapter 7) (R332 × 12) ........ (3 984)
Subtotal ........................................................................................................................ R79 416
Less: Additional medical expenses tax credit under s 6B (see chapter 7)
Contributions to medical scheme (R4 200 × 12) .................................... R50 400
Less: 4 × medical tax credit under s 6A R3 984 (R332 × 12) ............... (15 936)
R34 464
Less: 7,5% of taxable income (R430 000 (note 1) × 7,5%) ................... (32 250)
R2 214
Section 6B medical tax credit (25% × R2 214) ............................................................ (554)
Total normal tax payable .............................................................................................. R78 862
Less: Employees’ tax deducted from the provisional taxpayer’s
remuneration during the year ........................................................................... (49 350)
Less: First provisional tax payment ............................................................................ (25 000)
Second provisional tax payment ................................................................................. R4 512
Notes:
(1) The normal rule in s 6B(3)(c) must be followed to do the calculation, but the ‘taxable income’
will be the estimated taxable income on which the provisional tax payment is based.
(2) If the amount calculated as Tsela’s second provisional tax payment was negative, then
Tsela will not receive a refund of provisional tax. She must submit a second provisional tax
return that will indicate a payment of Rnil.
11.8 Provisional tax payments for companies (par 23)

First payment (within six months from the commencement of the year of assessment in question)
The first provisional tax payment for a provisional taxpayer that is a company is calculated as follows
(par 23(a)):
Normal tax on estimated taxable income (A) ............................................................................. xxx
Half of the normal tax payable on estimated taxable income (A / 2) ......................................... xx
the first period .................................................................................................................. (x)
Less: Foreign tax credits under s 6quat proved to be payable by the end of the
first period ........................................................................................................................ (x)
First provisional tax payment...................................................................................................... xxxx
Paragraph 23(2) provides for situations where a company has a short year of assessment, for exam-
ple by reason of a company being incorporated during a year of assessment or a change of a com-
pany’s financial year. A first provisional tax payment and return is not required when the duration of a
year of assessment does not exceed six months.
Second payment (not later than the last day of the year of assessment in question)
The second provisional tax payment for a provisional taxpayer that is a company is calculated as
follows (par 23(b)):
the year ............................................................................................................................ (x)
Less: First provisional tax payment (if actually paid) ............................................................... (x)
Less: Foreign tax credits under s 6quat proved to be payable for the year ............................ (x)
Second provisional tax payment ................................................................................................ xxxx
329
Example 11.7. Provisional tax payment for a company
Lesego Construction (Pty) Ltd has a June year-end. At the time it had to submit its first provision-
al tax return for its 2022 year of assessment, the taxable income for its 2020 year of assessment,
which was its latest preceding year of assessment at the time, was R1 200 000. It received its
2020 assessment more than 14 days before its first provisional return for 2022 was due. The
taxable income for its 2020 year of assessment includes a R300 000 taxable capital gain. Calcu-
late the amount of Lesego Construction (Pty) Ltd’s first provisional tax payment if this payment
was based on its basic amount.
SOLUTION
First provisional tax payment (due on 31 December 2021)
Basic amount
Taxable income for the latest preceding year of assessment ..................................... R1 200 000
Less: Taxable capital gain included in the taxable income ......................................... (300 000)
Basic amount R900 000
Normal tax on basic amount (R900 000 × 28%) .......................................................... R252 000
First provisional tax payment (half of the normal tax payable on basic amount
(R252 000 × 1/2) .......................................................................................................... R126 000
On 30 June 2022 Lesego Construction (Pty) Ltd estimates that its taxable income for its 2022
year of assessment is R1 100 000. Calculate the amount of Lesego Construction (Pty) Ltd’s sec-
ond provisional tax payment if this payment was based on the estimate of R1 100 000.
Second provisional tax payment (due on 30 June 2022)
Estimated taxable income for the year of assessment.............................................. R1 100 000
Normal tax on estimated taxable income (R1 100 000 × 28%)................................. R308 000
Less: First provisional tax payment ........................................................................... (126 000)
Second provisional tax payment ............................................................................... R182 000
11.9 Penalties in respect of provisional tax

11.9.1 Late payment penalty (paras 25 and 27 and s 213 of the Tax Administration Act)
If a provisional taxpayer fails to make its first or second provisional tax payments on or before the
respective due dates, a 10% penalty is levied on the unpaid amounts (par 27). These due dates are
as follows:
Provisional tax period Due date

First provisional tax period End of six months after beginning of the year of assessment
Second provisional tax period Last day of the year of assessment
Where the Commissioner has increased a taxpayer’s estimate of taxable income, any additional
provisional tax that becomes payable must be paid within the period determined by SARS (par 25). If
the additional provisional tax is not paid within such period, the 10% penalty will be levied on the
unpaid amount.
11.9.2 Underpayment penalty (par 20)

An underpayment penalty is imposed when a provisional taxpayer underestimates its taxable income
for a particular year of assessment. The penalty is only imposed if the estimated taxable income used
for purposes of a taxpayer’s second provisional tax return is less than
l 80% of its final taxable income for that year of assessment in cases where the taxpayer’s taxable
income is more than R1 million, or
l 90% of its final taxable income for that year of assessment in cases where the taxpayer’s taxable
income is equal to or less than R1 million and is also less than the basic amount applicable to the
estimate.
330
l An underpayment penalty can only be imposed on a second provisional tax

payment. A first provisional tax payment cannot be subject to an underpay-
ment penalty.
l Where a taxpayer’s taxable income for a year of assessment exceeds
Please note! R1 million, the taxpayer could be subject to an underpayment penalty even if
its second provisional tax payment was based on its basic amount. The same
does not apply to a taxpayer whose taxable income is equal to or less than
R1 million. In such case, if the taxpayer based its second provisional tax
payment on its basic amount, the taxpayer will not be subject to an under-
payment penalty.
The underpayment penalty is calculated as follows:
Where a taxpayer’s taxable income for a year of Where a taxpayer’s taxable income for a year of
assessment exceeds R1 million assessment is less than or equals R1 million
20% of the difference between: 20% of the difference between:
l the normal tax on 80% of the taxpayer’s taxable l the lesser of:
income (after taking rebates into account), – the normal tax on 90% of the taxpayer’s
and taxable income (after taking rebates into
l the employees’ tax and provisional tax paid by account), and
the end of the year of assessment. – the normal tax on the taxpayer’s basic
amount (after taking rebates into account),
and
l the employees’ tax and provisional tax paid by
the end of the year of assessment.
When determining whether a taxpayer is subject to an underpayment penalty and when calculating
such penalty, the following amounts should be excluded from the taxpayer’s taxable income if
received or accrued to during the relevant year of assessment:
l retirement fund lump sum benefit
l retirement fund lump sum withdrawal benefit, and
l severance benefit
(proviso to par 20(1)).
The underpayment penalty should be reduced by the 10% late payment penalty imposed in respect
of a taxpayer’s second provisional tax payment for a particular year of assessment, if in addition to
being understated, the payment was also made late (par 20(2B)).
The Commissioner may remit the underpayment penalty in the following two circumstances:
l if the Commissioner is satisfied that the taxpayer’s estimate was seriously calculated with due
regard to all factors having a bearing thereon and was not deliberately or negligently under-
stated, the penalty may be remitted in whole or in part (par 20(2)), and
l if the taxpayer failed to submit a second provisional tax return within four months after the end of
its year of assessment and is consequently deemed to have submitted a nil return (see 11.5), the
Commissioner may remit the penalty in whole or in part if satisfied that the failure was not due to
an intent to evade or postpone the payment of provisional tax or normal tax (par 20(2C)).
Example 11.8. Underpayment penalty – natural person

Nwabisa submitted her second provisional tax return for her 2022 year of assessment on
28 February 2022 and paid an amount of R194 673. She was 38 years old at the time. She esti-
mated her taxable income for the 2022 year of assessment at R1 200 000 and used that for her
second provisional tax payment. Her basic amount was R1 150 000. Her first provisional tax
payment was made on 31 August 2021 for R190 000. She received her assessment for the 2022
year of assessment on 15 November 2022, which indicated her final assessed taxable income for
the year as R1 650 000.
Determine whether Nwabisa is liable for an underpayment penalty, and, if so, calculate the
amount of the penalty. Assume that Nwabisa did not qualify for any medical credits.
331
SOLUTION
Since Nwabisa’s taxable income for the year exceeded R1 million, she will be subject to an under-
payment penalty if the estimated taxable income used for her second provisional tax return was
less than 80% of her taxable income for the year. Her taxable income for the year was
R1 650 000 and 80% of this is R1 320 000. Since her estimated taxable income (R1 200 000) was
less than R1 320 000, she will be subject to an underpayment penalty calculated as:
80% of her taxable income ......................................................................................... R1 320 000
Normal tax on R1 320 000 (R537 800 (R1 320 000 – R782 200) × 41%) +
R229 089 – R15 714 (primary rebate))........................................................................ R433 873
Less: Employees’ tax and provisional tax paid by the end of the year of
assessment: R190 000 (first provisional tax payment) + R194 673
(second provisional tax payment) ................................................................... (384 673)
R49 200
Underpayment penalty (20% × R49 200) ................................................................... R9 840
Example 11.9. Underpayment penalty – natural person
Craig submitted his second provisional tax return for his 2022 year of assessment on 28 Febru-
ary 2022 and paid an amount of R34 100. He was 32 years old at the time. He estimated his
taxable income for the 2022 year of assessment at R400 000, which he used for purposes of
calculating his second provisional tax payment. His basic amount was R450 000. His first provi-
sional tax payment was made on 31 August 2021 for R40 000. He received his assessment for
the 2022 year of assessment on 15 November 2022, which indicated his final assessed taxable
income for the year as R480 000.
Determine whether Craig is liable for an underpayment penalty, and, if so, calculate the amount
of the penalty. Assume that Craig did not qualify for any medical credits.
SOLUTION
Since Craig’s taxable income for the year was less than R1 million, he will be subject to an under-
payment penalty if his estimated taxable income used for his second provisional tax return was
less than 90% of his taxable income for the year and less than his basic amount. His taxable
income for the year was R480 000 and 90% of this is R432 000. Since his estimated taxable
income (R400 000) used for purposes of the second provisional tax payment was less than
R432 000 and less than his basic amount of R450 000, he will be subject to an underpayment
penalty calculated as:
Normal tax (after rebates) on R432 000 (R94 200 (R432 000 – R337 800) × 31%) +
R70 532) – R15 714 (primary rebate) .......................................................................... R84 020
Normal tax (after rebates) on R450 000 (R112 200 (R450 000 – R337 800) × 31%) +
R70 532) – R15 714 (primary rebate) .......................................................................... R89 600
The lesser of the normal tax (after rebates) on 90% of his taxable income
(R432 000) and the normal tax (after rebates) on his basic amount (R450 000) must
be considered. The lesser amount is .......................................................................... R84 020
Less: Employees’ tax and provisional tax paid by the end of the year of
assessment: R40 000 (first provisional tax payment) + R34 100
(second provisional tax payment).................................................................... (74 100)
R9 920
Underpayment penalty (20% × R9 920) ..................................................................... R1 984
Example 11.10. Underpayment penalty – company

Perfect Plumbing (Pty) Ltd has a 30 June year-end. The company submitted its second provi-
sional tax return for its 2022 year of assessment on 30 June 2022 and paid an amount of
R120 800. Its estimate of its taxable income for the 2022 year of assessment was R860 000,
which was used for purposes of calculating the second provisional tax payment. Its basic
amount was R880 000. Its first provisional tax payment was made on 31 December 2021 for
R120 000. It received its assessment for the 2022 year of assessment on 15 February 2023,
which indicated its final assessed taxable income for the year of assessment as R900 000.
Determine whether Perfect Plumbing (Pty) Ltd is liable for an underpayment penalty, and, if so,
calculate the amount of the penalty.
332
SOLUTION
Since Perfect Plumbing (Pty) Ltd’s taxable income for the year of assessment was less than
R1 million, it will be subject to an underpayment penalty if its estimated taxable income used for
its second provisional tax return was less than 90% of its taxable income for the year of assess-
ment and less than its basic amount. Its taxable income for the year was R900 000 and 90% of
this is R810 000. Since its estimated taxable income (R860 000) was more than R810 000, it will
not be subject to an underpayment penalty, even though its estimated taxable income for the
year was less than its basic amount.
Although Perfect Plumbing (Pty) Ltd is not subject to an underpayment penalty on

its second provisional tax payment, it will be subject to interest on the underpay-
ment of provisional tax for the 2022 year of assessment. See 11.10.2.
Interest will be calculated on the difference between Perfect Plumbing (Pty) Ltd’s
normal tax liability for the year (R900 000 × 28% = R252 000) and its ‘credit
Please note! amount’ (R120 000 (first provisional tax payment) + R120 800 (second provisional
tax payment)). Interest will be calculated from the ‘effective date’ (31 December
2022, which is 6 months after the end of its 2022 year of assessment) until its date
of assessment (15 February 2023). If we assume that the prescribed rate of in-
terest is 7%, Perfect Plumbing (Pty) Ltd will be liable for R98,81 interest, calculat-
ed as R11 200 (R252 000 (normal tax liability) – R240 800 (credit amount)) × 7% ×
46/365 (31 (days in January) + 15 (days in February)).
11.10 Interest in respect of provisional tax

The provisions discussed in this paragraph relating to interest will be replaced by provisions of the
Tax Administration Act (TAA) once they become effective. When the TAA became effective on
1 October 2012, its provisions relating to interest did not become effective. This will only happen on a
date still to be announced.
11.10.1 Interest in respect of the late payment of provisional tax (s 89bis(2))

Provisional tax payments must be made in full on or before the end of a provisional tax period
(see 11.4). These due dates are as follows:
Provisional tax period Due date

First provisional tax period End of six months after beginning of the year of
assessment
Second provisional tax period Last day of the year of assessment
Additional provisional tax (voluntary third provision- The ‘effective date’, which in the case of a natural
al tax period) person and companies with a February year-end is
seven months after the end of the year of assess-
ment. In all other cases the ‘effective date’ is
six months after the end of the year of assessment.
If a provisional taxpayer fails to pay the amount in full within this period, interest is levied at the pre-
scribed rate on the unpaid amount for the period starting at the end of the relevant provisional tax
period and ending on the day that the amount is paid.
The prescribed rate is determined by the Minister of Finance (see definition of ‘prescribed rate’ in
s 1(1)). The current prescribed rate is 7% per annum (effective from 1 November 2020). Before that
date, the prescribed rate was as follows:
l for the period 1 November 2019 to 30 April 2020, 10%

l for the period 1 May 2020 to 30 June 2020, 9,75%
l for the period 1 July 2020 to 31 August 2020, 7,75%
l for the period 1 September 2020 to 31 October 2020, 7,25%.
If the prescribed rate changes during the period that a provisional taxpayer must pay interest, the
interest is calculated at the previous rate up to the day before the rate changes and thereafter at the
new rate (s 89quin).
333
The prescribed rate of interest is set in terms of the Public Finance Management
Act of 1999. Where the Minister of Finance sets a new rate for purposes of that
Please note! Act, it only applies to the Income Tax Act from the first day of the second month
following the date on which the new rate becomes effective.
Example 11.11. Interest on late payment of provisional tax
Gwyn is a provisional taxpayer. Her second provisional tax payment of R50 000 for the 2022 year
of assessment was due on 28 February 2022. She only paid the amount on 15 April 2022. Calcu-
late the interest payable by Gwyn due to the late payment of provisional tax.
SOLUTION
Because the amount was not paid in full on 28 February 2022 (the last day of her second provi-
sional tax period for her 2022 year of assessment), she must pay interest on the outstanding
amount. The prescribed rate of interest is 7%, and the amount of interest is R441,10 calculated as
R50 000 × 7% × (46 (the number of days the payment was outstanding)/365 (the number of days
in the year)).
11.10.2 Interest on the underpayment and overpayment of provisional tax (s 89quat)

Where a provisional taxpayer underestimates its taxable income for a particular year of assessment
and, because of that, underpays provisional tax, interest is levied on the underpayment in addition to
any underpayment penalties that may be levied (see 11.9.2). Interest is only levied on an underpay-
ment of provisional tax if the taxpayer’s taxable income finally determined for the year of assessment
exceeds R20 000 in the case of a company, or R50 000 in the case of a person other than a com-
pany. The underpayment is calculated as the difference between the normal tax payable in respect
of the taxpayer’s taxable income finally determined for the year of assessment and an amount refer-
red to as the ‘credit amount’.
The ‘credit amount’ is the sum of the following amounts:
l the taxpayer’s first and second provisional tax payments made for the year of assessment
l additional provisional tax payments made (see 11.10.3)
l employees’ tax withheld by the taxpayer’s employer during the year of assessment, and
l any foreign taxes that are deductible from the taxpayer’s tax payable for the year in terms of
s 6quat.
To determine the underpayment amount, any underpayment penalty levied (see

Please note! 11.9.2) should be added to normal tax. Effectively the provisional taxpayer will
also pay interest on the underpayment penalty.
Interest is levied at the prescribed rate from the ‘effective date’ in relation to the particular year until
the relevant date of assessment (s 89quat(2)). Despite the wording in s 89quat(2), the Guide for
Provisional Tax (GEN-PT-01-G01) states that the interest is calculated from the day following the
‘effective date’ to the day before the first due date on the relevant assessment notice. The prescribed
rate is currently 7% per annum (effective from 1 November 2020). The ‘effective date’ is 30 Septem-
ber of a particular year in the case of companies with February year-ends and all natural persons and
trusts. In any other case, the ‘effective date’ is six months after the last day of the taxpayer’s second
provisional tax period.
If the Commissioner is satisfied that the reason why the taxpayer paid its provisional tax late was due
to circumstances beyond the taxpayer’s control, the Commissioner may decide that the full or part of
the amount of interest is not payable (s 89quat(3)). The Commissioner may also decide that interest is
not payable for the first year of assessment that a natural person became a provisional taxpayer if the
circumstances warrant such decision (s 89quat(3A)). Any of these decisions by the Commissioner
are subject to objection and appeal (s 89quat(5)).
Where a provisional taxpayer overpaid provisional tax, interest, calculated at 3% (effective from
1 November 2020), which is four percentage points below the prescribed rate of 7%, is paid to the
taxpayer (definition of ‘prescribed rate’ in s 1(1)). Interest is only paid on an overpayment of provi-
sional tax if the excess amount exceeds R10 000, or if the taxpayer’s taxable income finally deter-
mined for the year of assessment exceeds R20 000 in the case of a company, or R50 000 in the case
334
of a person other than a company. The excess amount is calculated as the difference between the
credit amount and the normal tax payable on the taxpayer’s taxable income finally determined for the
year of assessment. Interest will be paid from the effective date until the excess amount is refunded
(s 89quat(4)).
*
Remember
The definition of ‘prescribed rate’ in s 1(1) provides that where interest is payable to a provisional
taxpayer on provisional tax overpaid, the rate of interest is determined at 4 percentage points
below the rate that would apply in the case where a provisional taxpayer underpaid provisional
tax.
Example 11.12. Interest in the case of underpayment of provisional tax

Jones Construction (Pty) Ltd made its second provisional tax payment of R180 000 for the 2021
year of assessment on 31 August 2021 (the last day of its financial year). Its first provisional tax
payment for the 2021 year of assessment of R150 000 was made on 28 February 2021. Its tax-
able income for its 2021 year of assessment, as finally assessed on 15 August 2022, was
R1 500 000 with a normal tax liability of R420 000.
Calculate any interest that Jones Construction (Pty) Ltd may be liable for. Disregard any under-
payment penalties that may be levied for purpose of this example. Assume that the prescribed
rate of interest was 7% at all relevant times.
SOLUTION
Jones Construction (Pty) Ltd’s first and second provisional tax payments were made on time. It is
therefore not subject to interest due to the late payment of provisional tax.
However, Jones Construction (Pty) Ltd underpaid its provisional tax for its 2021 year of assess-
ment by R90 000 and is liable for interest on this underpayment. The underpayment amount and
interest liability are calculated as:
Normal tax liability on amount assessed (R1 500 000 × 28%) .................................... R420 000
Less: Credit amount
First provisional tax payment ...................................................... R150 000
Second provisional tax payment ................................................ 180 000
R330 000 (330 000)
Underpayment ............................................................................................................. R90 000
Interest calculated from (6 months after 31 August 2021, the end of the
second provisional tax period) ................................................................ 28 February 2022
Interest calculated to (date of assessment) ............................................. 15 August 2022
Interest (R90 000 × 7% × 168/365 (31 (March) + 30 (April) + 31 (May)
+ 30 (June) + 31 (July) + 15 (August)) ................................................... R2 900
11.10.3 Additional provisional tax payments (par 23A)

A provisional taxpayer may make additional provisional tax payments in respect of a year of assess-
ment. These payments are referred to as third top-up payments and are in addition to the amounts
that must be paid at the end of the provisional taxpayer’s first and second provisional tax periods.
Additional provisional tax payments may be made to reduce any interest payable on underpayment
of provisional tax (see 11.10) (par 23A(1)). All additional provisional tax payments are included in the
‘credit amount’ when determining whether interest is due on the underpayment of provisional tax
(par (b) of the definition of ‘credit amount’ in s 89quat(1).
Where an additional provisional tax payment is made in respect of a year of assessment, but after the
‘effective date’ in respect of such year, the payment is deemed to be made before the ‘effective date’
for purposes of determining whether interest is due on the underpayment of provisional tax
(par 23A(2)).
335
Example 11.13. Interest in underpayment of provisional tax
Refer to example 11.12.

If Jones Construction (Pty) Ltd made an additional provisional tax payment of R90 000 on or
before 28 February 2022, the last day for making an additional provisional tax payment, it will
not be liable for interest on underpayment of provisional tax. This is because the credit amount
will then be R420 000 and therefore there will be no underpayment.
If Jones Construction (Pty) Ltd made an additional provisional tax payment of R80 000 on or
before 28 February 2022, the last day for making an additional provisional tax payment, it will be
liable for interest on the underpayment calculated as follows:
Normal tax liability on amount assessed (R1 500 000 × 28%)..................................... R420 000
Less: Credit amount
First provisional tax payment ....................................................... R150 000
Second provisional tax payment.................................................. 180 000
Additional provisional tax payment .............................................. 80 000
R410 000 (410 000)
Underpayment ............................................................................................................. R10 000
Interest calculated from (6 months after 31 August 2021, the end of the
second provisional tax period)................................................................. 28 Febru-
ary 2022
Interest calculated to (date of assessment) ............................................. 15 August 2022
Interest (R10 000 × 7% × 168/365 (31 (March) + 30 (April) + 31 (May)
+ 30 (June) + 31 (July) + 15 (August)) .................................................... R322
If Jones Construction (Pty) Ltd made an additional provisional tax payment of R90 000 on
31 March 2021, it will not be liable for interest on underpayment of provisional tax (because for
purpose of s 89quat, the payment is deemed to be made before the effective date), but it will be
liable for interest on the late payment of the additional provisional tax (that is s 89bis interest –
see 11.10) of R535 (calculated as R90 000 × 7% × 31 (the days between last day for making an
additional provisional tax payment and the day on which the payment was made)/365).
11.11 Offences in respect of provisional tax (par 30(1A)(c))

A person who wilfully or negligently fails to submit an estimate of his taxable income for provisional
tax purposes (as required under par 19), is guilty of an offence and may, upon conviction, be fined or
imprisoned for a period of up to two years (par 30(1A)(c)).
11.12 Summary of provisional tax
Provisional tax First payment Second payment Third payment

(Fourth Schedule) (Compulsory) (Compulsory) (Voluntary)
Payment date On or before the last day of On or before the last day of On or before the effective
(paras 21(1), 23 the sixth month of the year the year of assessment. date, thus:
and 23A(1)) of assessment. Year-end not February:
not later than 6 months after
year-end
February year-end:
not later than 7 months after
year-end
Calculation of Normal tax liability (after Normal tax liability (after Normal tax liability (after
the provisional deducting the primary, sec- deducting the primary, sec- deducting the primary, sec-
tax payment ondary and tertiary rebates ondary and tertiary rebates ondary and tertiary rebates
(paras 19, 21(1), and the ss 6A and 6B med- and the ss 6A and 6B med- and the ss 6A and 6B med-
23 and 23A) ical tax credits) on the esti- ical tax credits) on the esti- ical tax credits) on the
mated (note 1) taxable in- mated (note 1) taxable in- actual taxable income for
come for the year of assess- come for the year of assess- the year of assessment
ment (equal to or more than ment
the ‘basic amount’)
continued
336

(Fourth Sched- (Compulsory) (Compulsory) (Voluntary)
ule)
Divided by 2 Less: Less:
Less: The first provisional tax pay- The first and second pro-
Employees’ tax withheld ment visional tax payment
from remuneration for the Less: Less:
first 6 months (note 2) Employees’ tax withheld Employees’ tax withheld
Less: from remuneration for the from remuneration for the
Foreign tax allowable as a year of assessment (note 2) year of assessment (note 2)
s 6quat rebate Less: Less:
Foreign tax allowable as a Foreign tax allowable as a
s 6quat rebate s 6quat rebate
Penalties and Penalties Penalties Interest
interest l Late payment l Inadequate year-end l Late payment
(paras 20, 27, Penalty of 10% of the estimation (note 3) If the amount pre-
ss 89quat and amount not paid (par 27) If taxable income ex- scribed is not timeously
89bis(2)) Interest ceeds R1 million and paid in full, interest (at
l Late payment the estimate is less than the prescribed rate) is
80% of the taxable in- payable on the portion
If the amount prescribed of the amount not paid
is not timeously paid in come for the year (as
assessed), an auto- in full, for the period that
full, interest (at the pre- the amount remains un-
scribed rate) is payable matic penalty of 20% of
the difference between paid (s 89bis(2))
on the portion of the
amount not paid in full, – the normal tax (after l Underpayment by the
for the period that the rebates) on 80% of taxpayer
amount remains unpaid taxable income for the Interest payable by the
(s 89bis(2)) year, and taxpayer at the pre-
– the employees’ tax scribed rate, on the
and provisional tax amount by which the
already paid for the normal tax payable ex-
year (par 20(1)(a)) ceeds the actual tax
paid (credit amount),
If taxable income is from the effective date
R1 million or less and to the date of assess-
the estimate is less than ment (applicable to all
the basic amount and is provisional taxpayers
also less than 90% of (also taxpayers that
the taxable income for qualify as provisional
the year (as assessed), taxpayers but are not
an automatic penalty of registered as such))
20% of the difference (s 89quat(2))
between l Overpayment by the
– the lesser of normal taxpayer
tax (after rebates) on
90% of taxable in- Interest payable by the
come for the year or Commissioner at the
normal tax on the prescribed rate, on the
basic amount, and amount by which the
– the employees’ tax actual tax paid (credit
and provisional tax al- amount) exceeds the
ready paid for the normal tax payable,
year (par 20(1)(b)) from the effective date
to the date refunded
(applicable to all tax-
payers, not only pro-
visional taxpayers)
(s 89quat(4))
l Late payment
Penalty of 10% of the
amount not paid
(par 27) (note 3)
continued
337

(Fourth Schedule) (Compulsory) (Compulsory) (Voluntary)
Interest
l Late payment
If the amount pre-
scribed is not timeously
paid in full, interest (at
the prescribed rate) is
payable on the portion
of the amount not paid
in full, for the period that
the amount remains
unpaid (s 89bis(2))
Note 1: Taxable capital gains are excluded when the ‘basic amount’ is used as an estimate
(par 19(1)(d)). If, however, estimated taxable income is used, taxable capital gains should
be included, as estimated amounts are used. The final taxable income for a specific tax
year would also include taxable capital gains.
The taxable portion of any lump sum award from any pension fund, pension preservation
fund, provident fund, provident preservation fund, retirement annuity fund and severance
benefit, is excluded in determining the basic amount, as well as any amounts included in
gross income under par (d) of the gross income definition.
Note 2: A company will have no employees’ tax deduction (unless it is a personal service provider).
Note 3: If both a par 20 penalty for an inadequate year-end estimate and a par 27 penalty for late
payment have been issued, the par 20 penalty will be reduced by the amount of the par 27
penalty (par 20(2B)).
338
12 Special deductions and assessed losses
Jolani Wilcocks
Assisted by Herman Viviers

After studying this chapter, you should:
l be able to establish which expenses are deductible for tax purposes
l be able to follow the rules for the deduction of restraint of trade payments
l be able to calculate the amounts an employer may deduct in respect of his contri-
butions to funds
l know when a deduction is available for medical lump sum payments
l be able to calculate the deduction allowed to an employer in respect of shares
issued to employees in terms of s 8B
l understand how annuities to former employees, life insurance policies and variable
remuneration are dealt with
l apply the provisions pertaining to learnership agreements
l be able to determine which legal expenses are deductible
l understand what expenditure on repairs may be deducted
l be able to calculate the deductions allowed for bad debt and debt due to the tax-
payer considered to be doubtful
l be able to identify and calculate the deduction for the repayment of employee
benefits
l understand and be able to apply the provisions relating to deductions available on
the issue of venture capital company shares
l be able to identify which donations are deductible and to calculate the allowable
deduction in this regard
l calculate the special allowance for suspensive sales
l know when a deduction is available for future expenditure
l know how to deal with assessed losses.
Contents
Page
12.1 Overview (ss 11(a), 11(x) and 23) .......................................................................................... 340
12.2 Employee-related expenses.................................................................................................... 341
12.2.1 Restraint of trade payments (s 11(cA)) .............................................................. 341
12.2.2 Fund contributions by employers (s 11(l)) ......................................................... 342
12.2.3 Deduction of medical lump sum payments (s 12M) .......................................... 342
12.2.4 Shares issued by employers in terms of s 8B (s 11(lA)) .................................... 343
12.2.5 Annuities to former employees or partners and their dependants (s 11(m))..... 344
12.2.6 Life insurance premiums (s 11(w)) ..................................................................... 345
12.2.7 Variable remuneration (s 7B).............................................................................. 346
12.2.8 Learnership agreements (s 12H) ....................................................................... 347
12.3 Legal expenses (s 11(c)) ................................................................................................... 353
12.4 Repairs: Introduction (s 11(d)) ........................................................................................... 355
12.4.1 Repairs: Meaning ............................................................................................... 355
12.4.2 Repairs: Occupied for the purpose of trade or in respect of which
income is receivable .......................................................................................... 357
12.5 Bad debt (s 11(i)) ............................................................................................................... 359
12.6 Doubtful debt (s 11(j)) ........................................................................................................ 361
12.7 Repayment of employee benefits (s 11(nA) and 11(nB)) .................................................. 363
339
Page
12.8 Deductions in respect of the issue of Venture Capital Company shares (s 12J) ........... 364
12.8.1 Defining a Venture Capital Company and a qualifying company........................ 364
12.8.2 Deduction available on investment in a Venture Capital Company ................ 366
12.9 Donations to public benefit organisations and other qualifying beneficiaries (s 18A) ... 368
12.10 Allowance for outstanding debt: Credit agreements and debtors’ allowance (s 24) ..... 370
12.11 Future expenditure on contracts (s 24C) ........................................................................ 373
12.12 Assessed losses (s 20).................................................................................................... 376
12.12.1 Assessed losses: Balance set off by companies ............................................ 377
12.12.2 Assessed losses: From trade carried on outside South Africa........................ 380
12.13 Comprehensive example................................................................................................. 381
12.1 Overview (ss 11(a), 11(x) and 23)

Apart from the deductions allowed under the general deduction formula in s 11(a), the Act sets out
certain special deductions in s 11(c) to (w). These special deductions will be the main focus of this
chapter. The purpose of the special deductions is to permit deductions that would not ordinarily be
available under the general deduction formula, either because they are of a capital nature or be-
cause they cannot satisfy the restrictive test that the expenditure should be incurred in the production
of income. Section 11(x) also brings within the scope of s 11 all other amounts allowed to be deduct-
ed from the income of the taxpayer in terms of any other provision in Part I of the Act, which deals
with normal tax. Section 23, in turn, prohibits the deduction of certain expenditure and losses.
Section 23B contains a prohibition against double deductions under more than one provision of the Act
and therefore expenditure incurred may only be allowed as a deduction under either a special deduc-
tion or the general deduction formula.
*
Remember
As a rule, when an amount qualifies for deduction under both the general deduction formula and
a special deduction, it must be deducted only under the special deduction, even if this deduc-
tion is more limited than the deduction that would have been allowed under the general deduc-
tion formula.
Section 23H limits the amount that may be deducted in any year of assessment for certain expend-
iture that will produce a benefit only in later years of assessment (see chapter 6).
*
Remember
If a small, medium or micro-sized enterprise (SMME) receives an amount from a small business
funding entity to fund an expense (in part or in total)
l any deduction for such funded expense under s 11
l should first be reduced with the amount of the funding received from the small business fund-
ing entity before deducting the remaining amount.
If the amount received or accrued from the small business funding entity exceeds the allowable
deduction in the current year of assessment, any excess should be carried forward to the follow-
ing year of assessment and should be used to reduce the deductions for such funded expenses
(including s 11(a)) in the following year (s 23O(6) – see chapter 19).
This chapter will first cover employee-related expenses and their deductibility by the employer, after
which a range of special deductions and allowances, amongst others deductions relating to donations
(s 18A) and the allowance for future expenditure on contracts (s 24C), will be covered. The chapter will
conclude with a discussion on the tax treatment of assessed losses (under s 20) (for ring-fencing of
assessed losses (s 20A) – see chapter 7).
340
12.2 Chapter 12: Special deductions and assessed losses
12.2 Employee-related expenses
12.2.1 Restraint of trade payments (s 11(cA))

Section 11(cA) deals with the deduction of restraint of trade payments. It provides an allowance in
respect of an amount actually incurred by a person
l in the course of the carrying on of his trade
l as compensation in respect of a restraint of trade
l imposed on any person who
– is a natural person
– is or was a ‘labour broker’ as defined in the Fourth Schedule to the Act (other than a labour
broker who has been issued an employees’ tax exemption certificate), or
– is or was a ‘personal service provider’ as defined in the Fourth Schedule (previously a personal
service company or trust, which will also still qualify).
*
Remember
The deduction is, however, allowable only to the extent that the restraint of trade payment
incurred constitutes or will constitute income of the person to whom it is paid under par (cA) (for
labour brokers or personal service providers) or under par (cB) (for natural persons who
received it as a result of their current, past, or future employment or the holding of any office) of
s 1 of the gross income definition. Restraint of trade payments made to a company (that is not a
‘personal service provider’) will therefore not be deductible because the amount will not be includ-
ed in the gross income of that company (see chapter 4). This could, however, result in a capital
gain for the company under the Eighth Schedule (see chapter 17).
The amount to be deducted for a year of assessment may not be more than the lesser of
l the amount of the restraint of trade divided by the number of years, or part thereof, during which
the restraint of trade applies, or
l one-third of the amount incurred.
It will follow then that a restraint of trade payment will be deductible over the period for which the
restraint is applicable (no apportionment), but never over a period of less than three years.
To prevent taxpayers from trying to claim restraint of trade payments under any other provision, for
example s 11(a) (which would allow a once-off deduction of the total amount), s 23(l) prohibits the
deduction of restraint of trade payments under any section other than s 11(cA).
If a restraint of trade payment is paid back to an employer, the amount repaid

would be regarded as a taxable recoupment in the hands of the employer (under
s 8(4)(a)) to the extent that a deduction was previously allowed. The employee
Please note! would be entitled to a deduction (under s 11(nB)) for the amount repaid, to the
extent that the amount was previously included in the employee’s gross income
(under par (cA) or (cB) of the gross income definition in s 1) (see 12.7).
Example 12.1. Restraint of trade payment
Xenidy Ltd made a restraint of trade payment of R120 000 to a retiring executive, Mr Yeng, on
1 September 2021. Mr Yeng was restrained from competing with the company for four years from
the date of the payment.
Calculate how and when the payment will be deductible. The financial year of Xenidy Ltd ends
on the last day of February.
341
SOLUTION
Amount paid ................................................................................................................... R120 000
Deductions to be allowed:
Year ended 28 February 2022 ........................................................................................ (R30 000)
The payment is deductible in equal instalments over the period to which it relates, that is, four
years (no apportionment). If the period of the restraint had been less than three years, the payment
would have been deductible in equal instalments of R40 000 each over three years.
12.2.2 Fund contributions by employers (s 11(l))

Employer contributions made to all approved (South African) retirement funds will be deductible
against income under s 11(l).
In the determination of taxable income, this section permits an employer
l to deduct any amount contributed by him during the year of assessment
l for the benefit of or on behalf of his employees or former employees or for any dependant or
nominee of a deceased employee or former employee
l to any pension, provident or retirement annuity fund (in terms of the rules of the fund).
The deduction will effectively be unlimited. The expressions ‘pension fund’, ‘provident fund’ and
‘retirement annuity fund’ are defined in s 1.
* Remember
Contributions to benefit funds (including medical schemes) are no longer allowed under s 11(l)
and need to meet the requirements of s 11(a) to qualify for a deduction.
Example 12.2. Employer’s contributions to funds

Swartzel Ltd (with a February year-end) contributed R1 290 000 on behalf of its employees to a
pension fund during the 2022 year of assessment.
Determine the amount which Swartzel Ltd can claim as a deduction in terms of s 11(l) in the 2022
year of assessment.
SOLUTION
Swartzel Ltd can deduct the full R1 290 000 in terms of s 11(l) since it is paid on behalf of the
employees to an approved pension fund.
If an employer’s contributions to a pension, provident or retirement annuity fund are returned to him,
the amount returned would be regarded as a taxable recoupment in terms of s 8(4)(a).
For purposes of s 11(l), a partner in a partnership will be deemed to be an

employee of the partnership and the partnership will be deemed to be the
employer of the partner. A deduction of contributions by the partnership to a
qualifying fund for the benefit of or on behalf of a partner will therefore qualify for
Please note! possible deduction in terms of s 11(l). However, no s 11(a) will be available to a
partnership making medical scheme (benefit fund) contributions on behalf of
any partner, as s 11(a) is not adjusted to provide for the deemed employer-
employee relationship between a partner and a partnership (see chapter 18).
12.2.3 Deduction of medical lump sum payments (s 12M)

Some employers, in order to attract and retain a high standard of employees, cover (either fully or
partially) medical scheme contributions of former employees after retirement. Previously the tax
treatment of these payments were uncertain, being viewed as either capital in nature (providing an
enduring benefit) and not deductible, or revenue in nature, requiring the taxpayer to spread the tax
342
deduction over the expected remaining life of the retired employee. Section 12M seeks to prescribe
the tax treatment of these lump sum payments by employers.
The provisions of section 12M will be applicable if an employer makes a lump sum payment
l during the year of assessment
l to any former employee who retired (due to old age, ill health or infirmity) or their spouses or
dependants (as defined in s 1 of the Medical Schemes Act) (s 12M(2)(a)), or
l under a policy of insurance taken out with an insurer in respect of one or more former employees
or dependants (as described above) (the employer therefore purchase an annuity from an insurer
(any long-term insurer as defined in s 1 of the Long-term Insurance Act paying a once-off lump
sum payment, covering future medical scheme contributions) (s 12M(2)(b))
l so that the retired employee or dependant can use the lump sum for purposes of making a con-
tribution to
– any medical scheme or fund registered under the Medical Schemes Act, or
– any foreign fund which is registered under any similar law in any other country where the
medical scheme is registered (refer s 6A(2)(a)(i) and (ii)).
In determining the taxable income of the taxpayer (the employer), from carrying on any trade, a
deduction of the full lump sum will be allowed from the income of the taxpayer (s 12M(2)).
No deduction will however be allowed if the employer making the payment (or a connected person of
the employer) retains any further obligation (actual or contingent) in respect of the mortality risk of
any former employee (or dependant). This will be the case where the employer is expected, under
the rules of the insurance policy, to make future top-up payments to the insurer to cover shortfalls due
to medical inflation. (The insurer therefore have to take responsibility for the mortality risk, that is the
risk concerning the longevity of the employee – thus if the policy was taken out on the premise that
the employee would live to be 80 and he/she then dies only at 90, the risk of covering the unforeseen
10 years should fall on the insurer.)
Example 12.3. Deduction of medical lump sum payments
Nice (Pty) Ltd covers, as part of their retirement benefit plan for employees, post-retirement med-
ical scheme contributions. This is done by paying a lump sum amount directly to the retired em-
ployee out of which the employee then funds his post-retirement medical scheme contributions.
Calculate the tax deduction available under s 12M to Nice (Pty) Ltd if the company paid a lump
sum (to fund post-retirement medical scheme contributions) of R200 000 on 31 March 2022 to
Tired Joe who retired at the age of 65. Nice (Pty) Ltd has a June year-end.
SOLUTION
Nice (Pty) Ltd can deduct from their income for the 2022 year of assessment the full lump sum of
R200 000 paid to cover post-retirement medical scheme contributions (s 12M(2)).
12.2.4 Shares issued by employers in terms of s 8B (s 11(lA))

The tax consequences of shares received by an employee in terms of a ‘broad-based employee
share plan’ are dealt with in s 8B (see chapter 8). Section 11(lA), on the other hand, allows for the
deduction by the employer of
l the market value of any qualifying equity shares granted to an employee as contemplated in s 8B
(on the date that the shares are granted to the employee)
l less any consideration paid by that employee for the shares
l limited to a maximum deduction of R10 000 per year per employee.
*
Remember
l Section 8B stipulates that the maximum value of shares issued to an employee in any five-
year period may not exceed R50 000. The employer may only deduct R10 000 per year per
employee, and any excess may be carried forward to the following year (the R10 000 limit will
also apply in that following year).
l Only the employer can claim a deduction under s 11(lA) even if the shares have been grant-
ed by an associated institution (Interpretation Note No. 62 (issued 30 March 2011)).
343
Example 12.4. Deduction for shares issued by employers in terms of s 8B
During the current year of assessment Shares Ltd issued four equity shares to each of its 74
employees, in terms of a ‘broad-based employee share plan’ (as defined in s 8B(3)). The
employees each paid R1 per share (being the nominal value of the share).
(i) Calculate the amount that Shares Ltd can deduct if the market value of each issued share
was R2 000.
(ii) Calculate the amount that Shares Ltd can deduct if the market value of each issued share
was R4 000.
SOLUTION
Amounts deductible in terms of s 11(lA):
(i) Market value of R2 000 per share:
(R2 000 × 4) – (R1 × 4) = R7 996, because the market value of the shares,
reduced by the consideration paid by the employee, does not exceed R10 000
the full amount can be deducted.
R7 996 × 74 employees ............................................................................................. R591 704
(ii) Market value of R4 000 per share:
(R4 000 × 4) – (R1 × 4) = R15 996, because the market value of the shares,
reduced by the consideration paid by the employees, exceeds R10 000, only
R10 000 of the costs incurred per employee can be deducted in the current year
of assessment. The excess amount has to be carried forward to the next year of
assessment. R10 000 × 74 employees ...................................................................... R740 000
An amount of R443 704 (R5 996 × 74) has to be carried forward to the next year
of assessment.
12.2.5 Annuities to former employees or partners and their dependants (s 11(m))

Section 11(m) provides a deduction for annuities paid by a taxpayer during a year of assessment
l to a former employee of the taxpayer who has retired from his employment as a result of old age,
ill health or infirmity (a physical or mental weakness) (s 11(m)(i)), or
l to a former partner of the taxpayer
– who retired from the partnership as a result of old age, ill health or infirmity, and
– who was a partner for at least five years in the undertaking, and
– the amount paid is reasonable when compared to the services rendered by the person con-
cerned as a partner in the partnership prior to his retirement and to the profits made in the
partnership, and
– it does not represent a consideration payable to him for his interest in the partnership (such as
goodwill) (s 11(m)(ii)), or
l paid to a person who is dependent for his maintenance upon a former employee or partner. If the
former employee or partner is deceased, then the person must be someone who was dependent
upon the former employee or partner immediately prior to his death, for example the widow of a
former employee or partner (s 11(m)(iii)).
Example 12.5. Annuities to former employees or partners and their dependants

During the 2022 year of assessment an employer made the following special payments:
l to A, who retired as a result of old age, an annual pension of R28 500 payable for life
l to B, who inherited a large fortune and ceased work, an annuity of R6 000 payable for a term
of ten years
l to C, who retired as a result of ill health, a gratuity of R40 000
l to Mrs D, widow of deceased employee D, a pension of R30 000 a year for life
l to Mrs E, widow of deceased employee E, a lump sum gratuity of R100 000
l to Mrs H, mother of employee E, a pension of R50 500 a year, and to Mr I, an aged uncle of
E, a pension of R10 500 a year; both pensions are payable for life. Mrs H and Mr I depended
on E for their maintenance prior to his death.
What will be the deductible amounts in terms of s 11(m)?
344
SOLUTION
Amounts deductible in terms of s 11(m):
A. Annuity to former employee who retired as a result of old age, deductible in
full .......................................................................................................................... R28 500
B. Annuity to former employee who did not retire as a result of ill health, infirmity
or old age, not deductible ..................................................................................... nil
C. Lump sum payment to retired employee, not deductible under s 11(m)............... nil
D. Annuity to widow of deceased employee, deductible in full.................................. R30 000
E. Lump sum payment to widow of deceased employee, not deductible under
s 11(m)................................................................................................................... nil
H & I. Annuities to dependants of deceased employee, deductible in full ...................... R61 000
R119 500
12.2.6 Life insurance premiums (s 11(w))

Section 11(w) addresses the deduction of life insurance premiums paid by the employer
l on behalf of employees, or
l on life insurance policies taken out to protect themselves against the loss of profits that may arise
due to the loss of certain key personnel,
if the employer is the policyholder. This deduction allows the taxpayer to deduct the full amount of the
premiums paid during the year of assessment.
The tax deduction will be allowed in the following two circumstances:
(1) if the policy meets the following two requirements:
l it relates to the death, disablement (disability) or illness of an employee or director, and
l the amount of expenditure incurred by the taxpayer in respect of premiums payable under
the policy is deemed to be a taxable benefit granted to an employee or director of the tax-
payer under par 2(k) of the Seventh Schedule (where the employer has made any payment
to any insurer under an insurance policy directly or indirectly for the benefit of the employee
or his or her spouse, child, dependant or nominee – see chapter 8), or
(2) if the policy (so-called key-person policy plans) meets all of the following requirements:
l it insures the employer against any loss of an employee or director (a key person) by
reason of the death, disablement (disability) or illness of an employee or director
l it is a risk policy (this excludes any policy with an investment element, for example whole
life policies) with no cash or surrender value
l it is the property of the employer (he is the sole owner and beneficiary) at the time of the
payment of the premium, and
l in respect of any policy entered into
– on or after 1 March 2012, the policy agreement states that s 11(w) applies in respect of
premiums payable under that policy, or
– before 1 March 2012, it is stated in an addendum to the policy agreement by no later than
31 August 2012 that s 11(w) applies in respect of premiums payable under that policy.
Premiums paid on this type of insurance policy, arising solely out of and in the course of employment
of an employee or director, will not be deductible under this section (for example, travel insurance
and general work-related accident plans (Explanatory Memorandum on the Taxation Laws Amend-
ment Bill, 2012)). Premiums on these policies (referred to as employment-event policies) will be
deductible in terms of s 11(a).
345
l Section 23(r) (see chapter 6) prohibits a deduction of any premiums paid by a

natural person in terms of an insurance policy covering that natural person
against illness, injury, disability, unemployment or death. Thus, no deduction
will be available to the natural person on these policies, but there is the possi-
bility of a deduction (under s 11(w)) by the employer of the natural person
Please note! covered by the policy, if the premiums on this type of policy were paid by the
employer.
l The receipt or accruals of the insurance proceeds will be included in the
gross income of the employer. If the proceeds are received by a person
other than the employer, the special inclusion provisions under par (m) of the
gross income definition will apply (see chapter 4).
l The provisions of s 23H are applicable to s 11(w) premiums (see chapter 6).
Example 12.6. Tax implications of life insurance premiums
Speedco paid monthly premiums during the 2022 year of assessment (ending on 30 September)
on two insurance policies (Speedco is the policy holder of both policies), namely:
l R3 200 per month on a policy where Risk (an employee) is the beneficiary, which covers Risk
against an event arising solely out of and in the course of his employment with Speedco, and
l R2 300 per month on a risk policy (with no cash or surrender value) that insures Speedco
against the loss of Risk’s services by reason of death, disablement or illness (a so-called key-
man policy).
Indicate, supported with reference to legislation, the income tax implications for Speedco for the
2022 year of assessment of the monthly insurance premiums paid on the two insurance policies.
SOLUTION
The R3 200 monthly premium will not result in a fringe benefit in the hands of Risk as the policy is
work-related (par 2(k) of the Seventh Schedule – thus not a policy as referred to in s 11(w)(i)) and the
deduction of this type of policy is specifically excluded under s 11(w). Speedco will however be able
to claim the total deduction of R38 400 (R3 200 for 12 months) for the premiums paid in terms of
s 11(a).
The R2 300 paid monthly on a risk policy will fall into the provisions of s 11(w)(ii) (being a risk
policy with no cash or surrender value and Speedco being the beneficiary and policy holder) and
therefore the amount of R27 600 (R2 300 over 12 months) will be deductible in full in terms of
s 11(w).
12.2.7 Variable remuneration (s 7B)

Variable remuneration is defined in s 7B(1) and includes
l overtime pay, bonus or commission (as contemplated in the definition of ‘remuneration’ in par 1 of
the Fourth Schedule (see chapter 10))
l a travel allowance or advance paid in terms of s 8(1)(b)(ii) (see chapter 8), or
l leave pay (an amount which an employer is liable to pay to an employee due to any leave period
which the employee has not taken during the year).
From 1 March 2020 variable remuneration also includes
l a travel allowance or advance paid (under s 8(1)(b)(iii) – see chapter 8)
l a night shift allowance
l a standby allowance, or
l an amount paid or granted as reimbursement for any expenditure incurred (under s 8(1)(a)(ii) –
see chapter 8).
If a taxpayer is determining his taxable income during a year of assessment, any amount to which an
employee becomes entitled from an employer in respect of variable remuneration, is deemed to have
l accrued to the employee, and
l constitute expenditure incurred by the employer,
on the date of payment of the amount by the employer to the employee (s 7B(2)).
The timing of the accrual and incurral of variable remuneration will therefore be on the payments
basis and will only be included in the income of the employee (and be taken into account for employ-
ees’ tax purposes (under par 2(1B) of the Fourth Schedule – see chapter 10)) and be expenditure
346
incurred (and be allowed as a deduction) by the employer on the date of actual payment. The accru-
al on the payments basis could, however, lead to a mismatch when deducting expenditure against
variable remuneration by an employee, for example if a reimbursive travel allowance is received, it
will be taxed when paid, whilst the business kilometres travelled should, however, be deducted in the
year of assessment when it is travelled, which might not fall in the same year of assessment. To
alleviate this problem, the employee will be deemed to have travelled the business kilometres relating
to the allowance, during the year of assessment when the allowance is paid (and taxed under s 7B)
(provisos to s 8(1)(b)(ii) and (iii)).
‘Employee’ and ‘employer’ is defined in par 1 of the Fourth Schedule (refer to

Please note! chapter 10 for a detail discussion of these definitions).
Example 12.7. Tax implications of variable remuneration
Variance (Pty) Ltd (with a June year-end) has a company policy to pay performance bonuses to
employees in divisions that increased their turnover from year to year by more than 10%. The
calculation of these performance bonuses are only finalised once the financial statements have
been approved by the auditors.
Performance bonuses for the company’s 2022 year of assessment was finalised on 15 August
2022 and paid to all applicable employees (with the August pay run) on 26 August 2022.
Indicate when the performance bonuses will be taxed in the hands of the employees and also
when Variance (Pty) Ltd will be able to claim the payment as a deduction from taxable income.
SOLUTION
Variance (Pty) Ltd can only deduct the performance bonuses relating to the 2022 year of assess-
ment (ending 30 June 2022) in their tax calculation for the 2023 year of assessment, since it was
only paid on 26 August 2022 (s 7B(2)).
Employees will be taxed on the performance bonuses during their year of assessment ending
28 February 2023, since it was paid during August 2022. Employees’ tax will be withheld from the
performance bonuses in August 2022, since this is the payment date of the bonuses (s 7B(2)).
12.2.8 Learnership agreements (s 12H)

Section 12H provides an additional deduction for employers (over and above other normal remunera-
tion deductions), from the employer’s income from his trade. This deduction is intended to encourage
employers to train employees in a regulated environment in order to encourage skills development
and job creation (Interpretation Note No. 20 (Issue 8) (28 July 2021)). If a learner is a party to a regis-
tered learnership agreement with an employer during the year of assessment, the provisions listed
below will apply.
When will s 12H be applicable?
Section 12H will apply if, during any year of assessment, a learner
l entered into a registered learnership agreement with an employer (s 12H(2) and (2A)), or
l was a party to a registered learnership agreement with an employer and the learner successfully
completed the learnership during the year (s 12H(3), (3A), (4) and (4A)).
The learnership agreement should always be entered into pursuant to (meaning ‘in accordance with’)
the employer’s trade (which will include any lawful trade as defined in s 1(1)) from which income is
derived. Where more than one employer is party to a registered learnership agreement, only the
“lead employer” (usually the employer responsible for paying the learner’s remuneration) will be
allowed to claim this allowance. An employment contract must be in place between the learner and
the “lead employer” and the contract must specify who the “lead employer” is (Interpretation Note
No. 20 (Issue 8)).
347
l A registered learnership agreement is defined in s 12H(1) as an agreement

entered into before 1 April 2024 between a learner and an employer that is reg-
istered in accordance with the Skills Development Act 1998 (Act 97 of 1998)
(thus registered with a sector education and training authority (SETA)). An ap-
Please note! prenticeship contract will also qualify for the s 12H allowances since a ‘learner’
is defined in s 1 of the Skills Development Act as including an apprentice (Inter-
pretation Note No. 20 (Issue 8)).
l A learner is defined in s 12H(1) as a learner defined in s 1 of the Skills Devel-
opment Act, 1998.
The provisions of s 12H will not apply if a learner who previously failed to complete a registered lear-
nership agreement registered for another learnership agreement with the same employer (or associ-
ated institution as defined in s 12H(1)) with the same training and educational content (s 12H(6)).
What will the implications be if s 12H is applicable?

The discussion below relates to allowances for learnership agreements entered into on or after
1 October 2016 but before 1 April 2024.
If an employer qualifies under s 12H, he may deduct an allowance (which can be an annual or a com-
pletion allowance), in addition to any deductible expenditure incurred in terms of s 11(a), notwith-
standing s 23B that prohibits double deductions (ss 12H(2), (2A), (3), (3A) (4) and (4A)).
The amount of the allowance differs, depending on whether the learnership agreement is entered into with
l a person (a learner) in possession of a qualification on a NQF level 1 to 6 (under Chapter 2 of the
National Qualifications Framework Act) when entering into the learnership agreement, or
l a person (a learner) in possession of a qualification on a NQF level 7 to 10 (under Chapter 2 of
the National Qualifications Framework Act) when entering into the learnership agreement
AND
whether the person
l has no disability, or
l has a disability.
A disability is defined in s 6B(1) as

a moderate to severe limitation of a person’s ability to function or perform daily
activities as a result of
l a physical
l sensory
l communication
l intellectual, or
l mental impairment
if the limitation
l has lasted or has a prognosis of lasting more than a year, and
l is diagnosed by a duly registered medical practitioner (in accordance with
criteria prescribed by the Commissioner).
The National Qualifications Framework (NQF) Act (Act 67 of 2008) sets out a ten-
level framework for education and training in South Africa. The ten levels repre-
Please note! sent the following:
l level 1 – General Certificate
l level 2 – Elementary Certificate
l level 3 – Intermediate Certificate
l level 4 – National Certificate (Grade 12)
l level 5 – Higher Certificate
l level 6 – Diploma or Advanced Certificate
l level 7 – Bachelor’s Degree or Advanced Diploma
l level 8 – Bachelor Honours Degree, Postgraduate Diploma or Bachelor’s
Degree
l level 9 – Master’s Degree or Master’s Degree (Professional)
l level 10 – Doctoral Degree or Doctoral Degree (Professional)
Section 12H has different allowances for levels 1 to 6 and levels 7 to 10.
348
The allowances (annual or completion) for the categories set out above can be summarised as fol-
lows (s 12H(2) to (5A)):
Type of learner Type of allowance Not disabled Disabled

A learner in possession of a An annual allowance R40 000 R60 000
qualification on a NQF level 1 to (R40 000 plus R20 000)
6 (under Chapter 2 of the
National Qualifications A completion allowance R40 000 R60 000
Framework Act) when entering (R40 000 plus R20 000)
into the learnership agreement
A learner in possession of a An annual allowance R20 000 R50 000
qualification on a NQF level 7 to (R20 000 plus R30 000)
10 (under Chapter 2 of the
National Qualifications A completion allowance R20 000 R50 000
Framework Act) when entering (R20 000 plus R30 000)
into the learnership agreement
The allowance will therefore be:

l R40 000 for a learner with no disability (s 12H(2), (3) and (4)), or R40 000 plus R20 000 (thus
R60 000) if classified as a person with a disability (as defined in s 6B(1)) when entering into the
learnership agreement (s 12H(5)) and the learner was in possession of a qualification on a NQF
level 1 to 6 when entering into the learnership agreement, or
l R20 000 for a learner with no disability (s 12H(2A), (3A) and (4A)), or R20 000 plus R30 000 (thus
R50 000) if classified as a person with a disability (as defined in s 6B(1)) when entering into the
learnership agreement (s 12H(5A)) and the learner was in possession of a qualification on a NQF
level 7 to 10 when entering into the learnership agreement.
The following summary will utilise a learner with no disability to illustrate the application of the section,
but the example below will highlight the application for disabled persons:
When a registered learnership agree- l R40 000 allowance per full year of the learnership (s 12H(2)(a)).
ment is entered into (with a learner Take note that if the learnership agreement falls over the year-
with no disability who is in posses- end, the R40 000 allowance per full year will be apportioned
sion of a qualification on the NQF over the two years based on the number of full months.
level 1 to 6) and every year that a l If the learnership agreement is for a period of less than
learner is a party to a registered 12 months, a pro rata allowance of R40 000 is allowed, calcu-
learnership agreement (s 12H(2)): lated based on the ratio that the number of full months of the
An annual allowance Î R40 000 (or contract bears to 12 months (s 12H(2)(b)).
R60 000 if disabled) for every full
l If the learnership agreement is for a period of more than
12-month period of the learnership
12 months, a R40 000 allowance will be allowed for every full
agreement
period of 12 months of the contract.
When a registered learnership agree- l R20 000 allowance per full year of the learnership (s 12H(2A)(a)).
ment is entered into (with a learner Take note that if the learnership agreement falls over the year-
with no disability who is in posses- end, the R20 000 allowance per full year will be apportioned
sion of a qualification on the NQF over the two years based on the number of full months.
level 7 to 10) and every year that a l If the learnership agreement is for a period of less than
learner is a party to a registered 12 months, a pro rata allowance of R20 000 is allowed, calcu-
learnership agreement (s 12H(2A)): lated based on the ratio that the number of full months of the
An annual allowance Î R20 000 (or contract bears to 12 months (s 12H(2A)(b)).
R50 000 if disabled) for every full l If the learnership agreement is for a period of more than
12-month period of the learnership 12 months, a R20 000 allowance will be allowed for every full
agreement period of 12 months of the contract.
General rules applicable to all lear- l Due to delayed registrations with the SETA, learnership agree-
nership agreements entered into ments registered on or after 1 January 2013 will be deemed
and for every year that a learner is a registered throughout the period of the learnership agreement
party to a registered agreement (thus from the date entered into between the employer and the
learner), if registered at the SETA within 12 months after the
last day of the year of assessment in which the learnership
agreement was entered into (s 12H(2)(c) and s 12H(2A)(c)).
continued
349
l If the learnership agreement is transferred to a new employer,

the first employer will be eligible for a pro rata portion of the
annual allowance(s) (based on the portion of the contract
period that the learner was employed by him) and the second
employer will be able to deduct the remainder of the annual
allowance(s) and the full completion allowance (Explanatory
Memorandum to the Taxation Laws Amendment Act, 2009).
l Only full calendar months in a particular year of assessment
would qualify for the annual allowance. (If a learnership agree-
ment begins on the ninth of a month, it would end on the eighth
of the next month.) For example, if an employer has a December
year-end and an employee commences a nine-month learner-
ship on 10 February, the learnership would be completed on
9 November and there would be a full period of nine months for
purposes of the calculation of the annual allowance. However,
if the same nine-month learnership commenced on 15 October
of Year 1, it would be completed on 14 July in Year 2 and there
would be a full two months in Year 1 and a full six months in
Year 2 for purposes of the annual allowance. There would
therefore be a full period of only eight months that will qualify
for the annual allowance over the two-year period. (Example
adapted from the Interpretation Note No. 20 (Issue 8).)
A registered learnership agreement is successfully completed:
When a registered learnership agree- l If the period of the learnership agreement is less than 24 months,
ment is successfully completed (with an allowance of R40 000 on successful completion (s 12H(3)).
a learner with no disability and who is l If the learnership agreement is for a period of 24 months or
in possession of a qualification on the longer, R40 000 allowance on successful completion of the
NQF level 1 to 6) (s 12H(3) and (4)): learnership for every consecutive period of 12 months of the
A completion allowance Î R40 000 learnership (thus the number of full years) (s 12H(4)).
(or R60 000 if disabled)
When a registered learnership agree- l If the period of the learnership agreement is less than 24 months,
ment is successfully completed (with an allowance of R20 000 on successful completion (s 12H(3A)).
a learner with no disability who is in l If the learnership agreement is for a period of 24 months or
possession of a qualification on the longer, R20 000 allowance on successful completion of the
NQF level 7 to 10) (s 12H(3A) and learnership for every consecutive period of 12 months of the
(4A)): learnership (thus the number of full years) (s 12H(4A)).
A completion allowance Î R20 000
(or R50 000 if disabled)
General rules applicable to all lear- l If the learnership is transferred to a new employer, the second
nership agreements successfully employer will be able to deduct the full completion allowance.
completed l The completion allowance is only allowed once-off (in addition
to the annual allowance) during the year of assessment in
which the learnership is successfully completed.
l Should the employer fail to claim the completion allowance in
the year of assessment in which the learnership is completed,
the subsequent claim of such completion allowance will not be
allowed.
l SARS requires adequate proof that the learnership agreement
is successfully completed before allowing the deduction for the
completion allowance. The learnership is considered to be
completed when confirmation is provided by the SETA that the
learnership has been successfully completed. For example, if it
is a two-year learnership agreement ending on 31 December
Year 1, but the SETA only confirms successful completion on
31 January Year 2, the company (if it has a December year-
end) can only claim the completion allowance on 31 January of
Year 2. If a confirmation is not obtained from the SETA, objec-
tive evidence should be collected by the employer to prove
completion. Thus, if the employer was in possession of ade-
quate documentary proof of successful completion from the
training provider on 31 December Year 1, the completion allow-
ance could have been claimed at the end of December Year 1
350
l If a learner obtains a higher qualification whilst a party to a learnership

agreement, resulting in the NQF level moving from NQF level 6 to 7 (thus
affecting the allowances), the employer will be able to adjust his allow-
ances claimed. The annual allowance will be calculated on a pro rata
Please note!
basis based on the period the learner was in possession of an NQF level
6 and NQF level 7. The completion allowance will, however, be based on
the NQF level of the learner on the date of completion (Interpretation
Note No. 20 (Issue 8) – see Example 12.8 (e) below).
l If the learnership agreement is terminated and not completed, no
further annual or completion allowance can be claimed by the employer.
Reporting
For every year that an employer was eligible for a deduction in terms of s 12H, the employer must
submit the information required by the SETA of the learnership agreement timeously and in the form
and manner and at the place indicated, to the SETA with which the learnership is registered
(s 12H(8)). The SETA then needs to report in the same manner to the Minister of Finance (s 12H(7)).
The reporting requirements are aimed at enabling the monitoring of the overall progress of the addi-
tional deduction for learnerships. The National Treasury will use this aggregate information to deter-
mine the viability of the s 12H deduction over the long term.
Example 12.8(a). Learnership agreements

Learner Segone (in possession of a NQF level 3 qualification) enters into a 12-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd, on 1 January 2022.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Segone successfully com-
pletes the learnership agreement. You can assume that Easy Employ (Pty) Ltd has a December
year-end.
SOLUTION
Section 12H(2)(a) annual allowance ........................................................................... (R40 000)
(R60 000 allowance if disabled (s 12H(5)))
Section 12H(3) completion allowance ......................................................................... (R40 000)
Example 12.8(b). Learnership agreements
Assume the same information as in (a) above, but the period of the learnership agreement is only
8 months.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if learner Segone success-
fully completes the learnership agreement.
SOLUTION
Section 12H(2)(b) annual allowance (R40 000 × 8/12) ............................................... (R26 667)
(R60 000 × 8/12 = R40 000 allowance if disabled (s 12H(2)(b) and (5)))
Section 12H(3) completion allowance ......................................................................... (R40 000)
Example 12.8(c). Learnership agreements
Assume the same information as in (a) above, but the learnership agreement is entered into on
1 July 2022 and is successfully completed on 30 June 2023.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd.
351
SOLUTION
2022: Section 12H(2)(a) annual allowance (R40 000 × 6/12) ................................... (R20 000)
R60 000 × 6/12 = R30 000 allowance if disabled (s 12H(5)))
2023: Section 12H(2)(a) annual allowance (R40 000 × 6/12) ................................... (R20 000)
(R60 000 × 6/12 = R30 000 allowance if disabled (s 12H(5)))
Section 12H(3) completion allowance ............................................................. (R40 000)
Example 12.8(d). Learnership agreements

Assume the same information as in (a) above, but the learnership agreement is entered into on
1 January 2022 and is successfully completed on 30 June 2023.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd.
SOLUTION
2022: Section 12H(2)(a) annual allowance ............................................................... (R40 000)
2023: Section 12H(2)(b) annual allowance (R40 000 × 6/12) ................................... (R20 000)
Section 12H(3) completion allowance for every full 12-month period, thus .... (R40 000)
Example 12.8(e). Learnership agreements
Learner Mapitsha (in possession of a NQF level 6 qualification) enters into a 12-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd, on 1 January 2022. On 1 July
2022, she obtained a NQF level 7 qualification.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Mapitsha successfully
completes the learnership agreement on 31 December 2022. You can assume that Easy Employ
(Pty) Ltd has a December year-end.
SOLUTION
Section 12H(2)(a) annual allowance apportioned (R40 000 × 6/12) ........................... (R20 000)
Section 12H(2A)(a) annual allowance apportioned (R20 000 × 6/12) ......................... (R10 000)
Section 12H(4A) completion allowance (since level 7 at date of completion) ............. (R20 000)
(R50 000 allowance if disabled (s 12H(5A)))
Example 12.8(f). Learnership agreements

Learner Shezi (in possession of a NQF level 8 qualification) enters into a 24-month registered
learnership agreement with his employer, Easy Employ (Pty) Ltd on 1 January 2022.
Calculate the s 12H allowance(s) available to Easy Employ (Pty) Ltd if Shezi successfully com-
pletes the learnership agreement on 31 December 2023. You can assume that Easy Employ
(Pty) Ltd has a December year-end.
SOLUTION
2022: Section 12H(2A)(a) annual allowance ............................................................. (R20 000)
2023: Section 12H(2A)(a) annual allowance ............................................................. (R20 000)
Section 12H(4A) completion allowance of R20 000 for every full 12-month
period thus R20 000 × 2 .................................................................................. (R40 000)
(R50 000 × 2 full 12-month periods = R100 000 if disabled (s 12H(5A)))
352
12.2–12.3 Chapter 12: Special deductions and assessed losses
Example 12.8(g). Learnership agreements
Assume the same information as in (f) above, but the learnership agreement is entered into on
1 January 2022 and is successfully completed on 30 June 2024. Assume further that learner
Shezi’s learnership agreement is taken over by Gentle (Pty) Ltd on 1 April 2023.
Calculate the s 12H allowance(s) available to both Easy Employ (Pty) Ltd and Gentle (Pty) Ltd in
connection with the learnership agreement entered into with Shezi. (You can assume both com-
panies have a December year-end.)
SOLUTION
Easy Employ (Pty) Ltd
2022: Section 12H(2A)(a) annual allowance ............................................................... (R20 000)
2023: Section 12H(2A)(b) annual allowance (R20 000 × 3/12) ................................... (R5 000)
(R50 000 × 3/12 = R12 500 allowance if disabled (s 12H(5A)))
No s 12H(4A) completion allowance as not yet successfully completed .......... –
Gentle (Pty) Ltd
2022: No s 12H allowance as not yet a party to learnership agreement
Section 12H(4A) completion allowance of R20 000 for every full 12-month
period of the learnership, thus 2 full years (2 × R20 000) ................................. (R40 000)
(R50 000 × 2 full years = R100 000 allowance if disabled (s 12H(5A)))
12.3 Legal expenses (s 11(c))

If legal expenses are not incurred in the production of income, it will not be deductible under s 11(a).
For circumstances like these, a special deduction is allowed under s 11(c) for qualifying legal ex-
penses that would otherwise not be deductible under s 11(a). A deduction will be allowed during the
year of assessment on:
legal expenses actually incurred on any claim, dispute or action at law occurring as a result of or due to the
ordinary operations of the taxpayer in the carrying on of his trade,
SUCH AS
fees for the services of legal practitioners, expenses incurred in procuring evidence or expert advice, court
fees, witness fees and expenses, taxing fees, the fees and expenses of sheriffs or messengers of court and
other expenses of litigation that are of an essentially similar nature to any of these fees or expenses,
BUT
no deduction will be allowed for legal expenses that are capital in nature (it is not a requirement that the legal
expenses must be ‘in the production of income’),
AS LONG AS
the legal expenses were incurred to prevent a claim for compensation and that compensation or damages
are deductible under s 11(a) OR if the legal expenses are for a claim made by a taxpayer for the payment to
him of any amount and that amount will be ‘income’.
In practice, SARS accepts that disputes before rates courts, liquor licensing courts or valuation
courts are disputes or actions at law and will be deductible. Important is the requirement that there
must be a dispute or action at law, although the dispute need not be one that has reached the courts.
353
Example 12.9. Deduction of legal expenses relating to damages and compensation
A newspaper company incurred legal expenses to resist a claim for damages for libel (slander or
defamation). Would the legal expenses be deductible?
SOLUTION
Yes, the legal expenses would be deductible under s 11(c). Legal expenses incurred by a news-
paper company to resist a claim for damages for libel would be deductible under s 11(c) be-
cause any damages paid would be deductible under s 11(a), the risk of libel actions being an
inevitable concomitant of the trade of a newspaper company.
Some legal expenses, although disallowed under s 11(a), are deductible under s 11(c), for example
legal expenses
l incurred in the protection of income
l to prevent a reduction of income
l to prevent an increase in deductible expenditure, or
l to avoid a loss or resist a claim for compensation.
Section 11(c) does not cover the payment of the damages or compensation itself. The deduction of
these payments will be allowed only under s 11(a), if the requirements of s 11(a) read with s 23(g)
(see chapter 6) are fulfilled.
Listed below are some practical examples taken from case law:
l An accountant incurred damages and legal expenses in connection with arbitration proceedings
that arose because, in order to earn income, he deliberately risked violating a restraint clause in
the agreement governing a partnership of which he had previously been a member. The court,
finding that the damages were allowable and that the legal expenses arose out of the ordinary
operations of the taxpayer as an accountant, permitted the deduction of the legal expenses
under s 11(c) (ITC 1310 (1979)).
l A company that sold its products through both agents and associated companies incurred legal
expenses in connection with the termination of an agency agreement. These costs were held to be
deductible as expenditure not of a capital nature, but were expenditure incurred on a dispute or
action at law arising in the course of the ordinary operations undertaken by the taxpayer in carrying on
its trade (ITC 1154 (1970)).
l A company that was a scrap-metal merchant erected a crushing machine on hired land zoned by
the local municipality for general residential purposes. The municipality then gave notice calling
for the removal of the machine, but the company took no action. The municipality consequently
instituted proceedings in the Supreme Court for an order directing the company to remove the
machine. In order to gain time and continue the profitable use of the machine for as long as pos-
sible, the company decided to use all legitimate means of resisting the granting of this order. At
the same time, it made every effort to find a suitable alternative site for the machine. The court,
having regard to the fact that the purpose and effect of the expenditure was to delay the granting
of an order compelling the removal of the machine for as long as possible, held (at 306):
that the legal expenses incurred did not create or enhance any asset, nor did they bring about any
advantage for the enduring benefit of trade. In fact, they were more closely related to the appellant’s
income-earning operations than to its income-earning structure.
The court accordingly concluded that the legal expenses incurred were not of a capital nature
and were deductible under s 11(c) (ITC 1241 (1975)).
l Legal expenses incurred by a farmer in the acquisition or protection of a right to use water on a
continuous basis were spent to protect a capital asset and are consequently not deductible in
terms of s 11(c) (ITC 1598 (1994)).
Interpretation Note No. 80 (5 November 2014) discusses the income tax treat-
Please note! ment of stolen money. Reference is also made to the deductibility of the expend-
iture incurred on legal and forensic services in terms of s 11(c).
354
12.4 Repairs: Introduction (s 11(d))

Section 11(d) allows as a deduction from income, expenditure actually incurred during the year of
assessment, on
l repair or beetle treatment of property occupied for trade purposes or in respect of which income
is receivable (rental property) (immovable property). The beetle treatment will include initial pro-
tective treatment or treatment in the course of replacing infested woodwork (Interpretation Note
No. 74 (Issue 2) (issued 14 December 2015))), and
l repair of machinery, implements, utensils and other articles used for trade purposes (movable
property).
No deduction will, however, be allowed for expenditure incurred for repairs to the
Please note!
extent that the expenditure is recoverable (s 23(c)) (see chapter 6).
Expenditure incurred and deducted (under s 11(d)) to affect repairs, could, if subsequently recouped
(for example if the asset is sold), give rise to a recoupment under s 8(4)(a). The following are some
examples of the possible recoupment of expenditure incurred on repairs (provided by the courts in
C:SARS v Pinestone Properties CC (2002)):
l repairs on defective work on a building, which are recovered through a claim for damages
against the builder
l repairs effected on an insured asset and then the cost is reduced through a claim against the
insurer, and
l selling an income-producing property for a higher selling price based on an agreement that the
seller will effect specific repairs before the date of sale.
SARS will however have to prove, based on the facts, that there had been a recoupment.
The cost of repairs will therefore only be recoverable or could be recouped under s 8(4)(a) if there is
a causal link between the cost of the repairs and the amount received or accrued (Interpretation Note
No. 74 (Issue 2)).
12.4.1 Repairs: Meaning

The Act does not contain a definition of the word ‘repairs’ used in s 11(d). Consequently, it should be
understood in its ordinary sense and according to its ordinary grammatical meaning. The meaning
given in the New Shorter Oxford English Dictionary is:
Restore (a structure, machine, etc.) to unimpaired condition by replacing or fixing worn or damaged parts;
mend.
Merriam Webster Dictionary gives the following meaning:
To restore by replacing a part or putting together what is torn or broken or to restore to a sound or healthy
state, etc.
The court held that, in the ordinary sense of the word, ‘repairs’ means replacement or renewal of some-
thing that has become defaced or worn out or worn down by use or possibly by wear and tear (ITC 491
(1941)).
Maintenance could fall under repairs, but will only be deductible under s 11(d) if
the maintenance is required to keep the asset in good working order and condi-
Please note!
tion, which implies that the asset has become worn out by use or wear and tear
(Interpretation Note No. 74 and ITC 491 (1941)).
Although these tests are not exhaustive, but merely of assistance to the general inquiry, the Special
Court for Hearing Income Tax Appeals has in several cases accepted the following useful principles:
(1) Repair is restoration by renewal or replacement of subsidiary parts of the whole. Renewal as distin-
guished from repair is reconstruction of the entirety, meaning by the entirety not necessarily the whole
but substantially the whole subject-matter under discussion.
(2) In the case of repairs effected by renewal it is not necessary that the materials used should be identical
with the materials replaced (CIR v African Products Manufacturing Co Ltd 1944 TDP 248, 13 SATC 164).
355
(3) Repairs are to be distinguished from improvements. The test for this purpose is whether a new asset has
been created resulting in an increase in the income-earning capacity or whether the work undertaken
merely represents the cost of restoring the asset to a state in which it will continue to earn income as before.
*
Remember
The words ‘restoration by renewal or replacement’ indicate that it is necessary for the original
structure to have become impaired and that the work done must be to restore it by repair. Conse-
quently, unless part of the original structure has deteriorated or is damaged or weakened, a renewal
or replacement cannot be regarded as a repair.
Example 12.10. Work that does not constitute repairs
If the owner of a rent-producing property, in order to improve the appearance of his asset, replaces
a shingle roof that is unimpaired with a new one that is differently coloured, will it qualify as a repair?
SOLUTION
It is submitted that the replacement of the roof will not constitute a repair.
The position would be different if the shingle roof was so dilapidated that the owner was com-
pelled to replace it. A replacement in these circumstances would constitute a repair. It has been
held that as long as the work performed is necessitated by decay and deterioration, it does not
matter that the taxpayer thought that the part was still serviceable or had some other reason for
replacing it (even if it was replaced by a product of better quality).
It is important to consider the deduction of repairs caused by some fortuitous act such as storm or
fire and not due to the wearing out, damage or deterioration of a property by use. In practice, SARS
permits the deduction of expenditure to repair storm damage to business premises or rent-producing
properties. (The same approach will probably be adopted for fire damage.) When, however, the
damage is so significant that the asset concerned has been partially destroyed, it may be considered
to be a reconstruction of the entirety. If it is, it will not be a repair but an improvement, and the expend-
iture will be of a capital nature.
The deductibility of expenses under s 11(d) has been the topic of many court cases over the years.
Important principles have been established in the following court cases:
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland (1933 PC)

The distinction between repairs and renewals was clarified in this case. The company owned a rail-
way line running between Vryburg and Bulawayo, part of which passed through the Bechuanaland
Protectorate. Since the track generally had become worn and was in a dangerous state, despite the
incurring of ordinary current expenditure on maintenance, a large programme of renewal was adopt-
ed by the company. During the year in question, it expended a large amount in laying new sleepers,
rails and fastenings over part of the track. The result of the renewal was to bring the track back to its
normal condition, but the line, as renewed, was not capable of giving more service than the original
line. The Privy Council noted that the expenditure was incurred in consequence of the rails having
been worn out and represented the cost of restoring them to a state in which they could continue to
earn income. It did not result in the creation of any new asset. It was held that the expenditure consti-
tuted a repair and was properly deductible.
The fact that it is necessary, in order to effect a repair, to dismantle and re-erect
Please note! an asset completely cannot make a repair a renewal (ITC 1264 (1977) and
Rhodesia Railways Ltd v Collector of Income Tax, Bechuanaland (1933 PC)).
It is not always easy to determine whether a particular asset that has been renewed or reconstructed
forms a subsidiary part of a larger structure. If it is a subsidiary part of a larger structure, the work
done would constitute a repair. If it is not a subsidiary part of a larger structure, it will qualify as a
separate entity and as the entirety, and the work done would therefore not constitute repairs. There
may be difficulty in dealing with borderline cases, and, as has been emphasised in many decisions,
the question is one of degree.
356
Flemming v KBI (1994)

In this case the taxpayer drilled a new borehole, erected a windmill for the borehole and installed
piping to feed water from the borehole to a newly constructed dam, due to the fact that the existing
borehole did not pump adequate water for farming purposes. The taxpayer claimed a s 11(d) deduc-
tion, arguing that all these expenses were repairs of property occupied for the purpose of trade. He
argued further that the borehole and windmill were subordinate parts of the farm and that repairs of
property as used in the section also included the replacement of a subordinate portion of property.
It was held that since no evidence could be found that anything went wrong with the borehole itself
requiring its replacement, expenditure was not incurred on the repair of the borehole as a subordin-
ate and inseparable part of the farm. The expenditure was incurred to improve the water supply
which could therefore not be classified as repairs. A repair involves the renewing, renovating or
restoring of decaying or damaged parts. A deduction under s 11(d) will only be available if the origi-
nal structure was in need of repair (Interpretation Note No. 74 (Issue 2)).
Reconstruction in lieu of repairs

It is submitted that if, in lieu of repairs, there is a reconstruction of the entire subject matter, it cannot
be said that any amount was actually incurred on repairs. Section 11(d) clearly provides that the
deduction is available for ‘expenditure actually incurred on the repairs of property and sums expend-
ed for the repair’.
The position is not so clear when there is no reconstruction of the entirety, but a portion of the subject
matter has deteriorated and, instead of it being restored to its original condition, a repair is brought
about in the process of creating an improvement. If repairs are done as part of a larger reconstruction
project (an all-inclusive project), the cost of the repairs would not be deductible. It is submitted that if there
are two separate contracts, one for the reconstruction and one for the repair work, then the cost of the
repairs would be deductible under s 11(d) (ITC 238 (1932) and ITC 915 (1960)).
Summarised distinction between ‘repairs’ and ‘improvements’

Repairs Improvements
An asset or part of its original structure has de- Any construction on the asset in addition to its original
teriorated or was damaged and was restored to structure where the asset was improved from its origi-
its original condition (restoration). nal condition (for example, increased income-earning
capacity was achieved in the process).
l The structure or article should have been damaged or deteriorated and

needed replacement for it to be classified as a repair.
l Materials need not be identical to the original materials replaced, but should
only restore the asset to the original condition.
l Repairs done at the same time as improvements may qualify for deduction
under s 11(d) if it can be clearly and separately identified from the improve-
ments (the burden of proof will be on the taxpayer under s 102 of the Tax
Please note! Administration Act (see chapter 33)).
l If something new is added to an asset, it will usually be considered to be an
improvement (e.g. the underpinning of foundations to remedy cracks in a
building).
l Spare parts to be used in repairs will be deemed to be trading stock (defini-
tion of ‘trading stock’ in s 1 (see chapter 14) and a deduction will be deferred
until the spare parts are used and no longer included in closing stock
(s 22(1)).
(Interpretation Note No. 74 (Issue 2))
12.4.2 Repairs: Occupied for the purpose of trade or in respect of which income is
receivable
Section 11(d) does not exclude the deduction of expenditure on repairs that are of a capital nature
but requires that
l the repairs be effected to property
– ‘occupied for the purpose of trade, or
– in respect of which income is receivable’, or
l to machinery, implements, utensils and other articles ‘employed by the taxpayer for the purposes
of his trade’.
357
The reference to the word ‘receivable’ indicates that repairs will be deductible regardless of whether
income was actually received during the current year of assessment. It should just be capable of
generating income for that year of assessment (Interpretation Note No. 74 (Issue 2) and ITC 243
(1932)).
A number of court cases dealt with the question whether the property to which the repairs were
effected was used for trade purposes:
A taxpayer, who had personally occupied a house, decided to let it out to a third party for several
years. It was a term of the lease, included at the request of the lessee, that the taxpayer should effect
repairs up to a cost amounting to a substantial sum prior to the occupation of the house by the les-
see. The court took the view that these were deductible repairs ‘in respect of which income is receiv-
able’ (even though the repairs were done before the lessee occupied the property). As soon as the
lease was signed, income was receivable on the property from the date on which occupation was to
be given to the lessee (ITC 163 (1930)).
In a later case (ITC 243 (1932)), the court held that, because the word ‘receivable’ meant ‘capable of
being received’, it was not necessary that an agreement for the receipt of income should be in exist-
ence before the expenditure could be deducted. The expression ‘in respect of which income is
receivable’ merely means that the property must be in such a state or of such a kind that income is
‘capable of being received’ or it must be a ‘lettable proposition’ (ITC 561 (1944)) before the deduc-
tion of the repairs will be allowed.
When, however, initial repairs are effected because a bond-holder stipulated that they should be
effected before it would advance funds to finance the acquisition of the property, the repairs, incur-
red on the stipulation of the bond-holder, are regarded as capital in nature (ITC 162 (1930)).
In s 23(b) the legislature reaffirms the requirement of s 11(d) by not permitting any deduction for the
cost of repairs of
l any premises not occupied for the purposes of trade, or
l of any dwelling, house or domestic premises, except that part that is occupied for the purposes
of trade.
The part of the residence occupied for purposes of trade ‘shall not be deemed to have been occu-
pied for the purposes of trade’ unless it is
l specifically equipped for purposes of the taxpayer’s trade, and
l is regularly and exclusively used for those purposes.
The following expenses will not qualify as deductible repairs:

l Repairs to vacant premises hired by a taxpayer who wishes to prevent occu-
pation by a competitor would not be to property occupied for the purposes of
trade and thus would not be deductible under s 11(d) (Strong and Co of Rom-
sey Ltd v Woodifield (Surveyor of Taxes) (1906 AC)).
Please note! l Expenditure on repairs (necessary mainly due to the manner in which the
tenant treated the property) effected subsequent to reoccupation of the prem-
ises by the owner. No deduction will be allowed (in terms of the equivalent of
s 23(g)), since the deduction of any moneys not wholly or exclusively laid out
or expended for purposes of trade will be prohibited. The fact that the expendi-
ture on repairs arose because of the use of the premises when income was
received will be irrelevant (ITC 643 (1947)).
The deduction requires that machinery, implements, utensils and other articles be employed by the
taxpayer for the purposes of his trade before expenditure on repairs effected to them may be deduct-
ed. It is submitted that when initial repairs are effected to a second-hand asset immediately after its
purchase, but prior to its use in the business, the deduction under s 11(d) will not be allowed. This is
because the asset was not yet ‘employed by the taxpayer for the purposes of his trade’.
By contrast, once the asset is used in the business of the taxpayer, all repairs are deductible. The
repairs will be deductible even if the bad state of repair is due wholly to the condition of the asset at
the time it was acquired.
* Remember
The provisions of s 23H (see chapter 6) could limit the deduction allowable for repairs paid in
advance.
358
12.5 Bad debt (s 11(i ))

Section 11(i) permits a deduction from a taxpayer’s income of the amount of any debt due to such
taxpayer. The deduction is allowed
l to the extent to which the debt has become bad during that year of assessment
l the amount of the debt must have been included in the taxpayer’s income in either the current or a
previous year of assessment, and
l the debt must be due to the taxpayer.
As a result, if a taxpayer sells his business, including his debt, during the year of assessment, he will
be unable to claim an allowance for bad debt (should that debt become bad), as the debt is not due
to that taxpayer anymore. Similarly, when a taxpayer compromises with a debtor during the year and
waives his right to claim any portion of the debt owing by him, the portion for which he has waived his
recovery right cannot rank as a bad debt. This is due to the fact that it does not belong to him at the
end of the year of assessment. In practice, however, the Commissioner permits a taxpayer to write off
any loss sustained in the event of a compromise as a bad debt.
If a bad debt is claimed as a deduction, the taxpayer must keep record of the following information:
l the name of the debtor
l the date the debt was incurred
l the amount written off
l his reasons for writing off the debt
l the circumstances in which the debt became due, for example, for goods supplied, services or
work performed, money lent or as a result of the purchase of the assets of a business, including
the debt due to it.
When considering this deduction, remember:
l The debt must have become bad during the year of assessment for it to be claimed in that year
(ITC 181 (1930)). Bad debt can therefore not be accumulated and written off in a later year.
If a debtor becomes insolvent in a particular year of assessment, the taxpayer

(seller) cannot claim a deduction under s 11(i) for that debt in a later year of
assessment.
Please note! If the seller has neglected to claim the deduction in the year in which the debtor
became insolvent (or an earlier year if the debt went bad before insolvency), his
only remedy is to seek a revision of the assessment or a refund of tax overpaid
for the year in which the debt became bad.
l Debt written off must have been included in the taxpayer’s income. A bad debt arising from the
sale of goods is deductible, since the amount of the debt would have been included in the sell-
er’s income when the debt initially arose.
* Remember
A bad debt arising out of money lent to an employee, for example, is not deductible in terms of
s 11(i), since the amount of the debt would never have been included in the lender’s income.
l The bad debt must be owing to the taxpayer on the last day of the year of assessment.
If an amount allowed as bad debt is subsequently recovered, it forms part of

gross income in the year of receipt, and previous assessments cannot be
Please note!
reopened. Section 8(4)(a) is also the authority for the inclusion of this amount
in the income of the taxpayer in the year in which it is recovered.
359
Purchase of a business
Debt taken over on the purchase of a business and subsequently found to be bad is not allowable,
since the amount of the debt would never have been included in the income of the buyer of the
business. The loss is clearly one of a capital nature. The same principle applies to an inherited busi-
ness. The heir is not entitled to deduct bad debt outstanding at the date of death of the deceased, as
the amount concerned was never included in the income of the heir.
The seller of a business, including debt due, may guarantee payment of the debt to the buyer in the
event of their becoming irrecoverable but
l any subsequent amount payable under the guarantee is a capital loss
l and this amount may also not be claimed as a deduction for bad debt, since the debt no longer
belongs to the seller.
This problem can be overcome. The agreement should provide that if the seller is compelled to make
any payment to the buyer under his guarantee for irrecoverable debt, he is entitled to re-cession of
that debt. If it is re-ceded to him, it is submitted that the bad debt is deductible, since the debt now
belongs to him, was previously included in his income and therefore comply with the requirements of
s 11(i). This was confirmed by the courts in SIR v Kempton Furnishers (Pty) Ltd (1974 A).
Moneylenders
Section 11(i) does not prevent a finance company or a moneylender from writing off moneys lent that
prove to be bad. Such losses are, however, deductible in terms of s 11(a) as losses incurred in the
production of income and not of a capital nature. This will also be the case if it is the custom of a
business or profession to make advances to customers or clients as an integral part of the business
carried on for the purpose of securing or retaining business.
Previous business
Section 11(i) does not require the continued existence of the taxpayer’s business out of which the
debt arose for the deduction to be available. A taxpayer can deduct bad debt incurred in a previous
business from his income from trade in a particular year. This will be allowed if all the other require-
ments of s 11(i) are satisfied. In practice, SARS also permits a taxpayer to deduct the cost of collect-
ing such debt.
Timing of bad debt deduction

The question of whether a debt is bad or not must be decided at the time when the bad debt is
claimed and according to the then existing circumstances of the debtor. Subsequent events cannot
influence the determination made for that year of assessment. In practice, the taxpayer is permitted
to make his determination at the time when his financial statements are prepared and is not obliged
to do so on the last day of his year of assessment. No deduction will be allowed for bad debts to the
extent that the debt is recoverable from some other person under a guarantee or suretyship agree-
ment (s 23(c)).
Value-Added Tax
If a debt was included in debtors of a VAT vendor, the debtor amount will include VAT. Since the VAT
portion would not have been included in the income of a taxpayer and could also never be a bad
debt (as it can be claimed back from SARS by way of an input tax adjustment – see chapter 31), VAT
should be excluded when calculating a bad debt for the purposes of s 11(i).
Example 12.11. Bad debt (s 11( i))
Bad debt of R60 000 was written off as irrecoverable by Goodheart during their 2022 year of
assessment. The amount written off related to trading debtors and the following loan made to an
employee:
During the 2019 year of assessment Goodheart lent R50 000 interest-free to one of its employ-
ees, Spender (Spender was never a holder of shares in the company). Spender has since left the
employment of Goodheart and by year-end 30 September 2022, after the company has recov-
ered R35 000 of the outstanding loan amount from Spender, the balance was written off as irre-
coverable.
Calculate the s 11(i) deduction available to Goodheart in respect of these irrecoverable debts.
360
SOLUTION
Section 11(i) deduction (R60 000 – R15 000 (R50 000 (loan) – R35 000
(recovered)) ................................................................................................................. (R45 000)
Note: The loan to Spender will be capital in nature and since it was never included in the income
of Goodheart, s 11(i) will not be applicable to the amount written off. There will however be a
capital loss under the Eighth Schedule of R15 000 (R0 (proceeds) – R15 000 (base cost)).
Any exchange gain or exchange loss that was recognised in the current or any
previous year of assessment relating to a debt owing to a person, has to be
Please note! deducted (in the case of an exchange gain previously recognised) or added
back (in the case of an exchange loss previously recognised) from the taxable
income of the person to the extent that, upon final realisation, the debt has
become bad (s 24I(4) – see chapter 15).
12.6 Doubtful debt (s 11(j))

Section 11(j) allows two different allowance options based on whether a taxpayer applied IFRS 9
(Financial Instruments) to the debt in question for financial reporting purposes, or not. Irrespective of
which option is applicable, an annual allowance can only be claimed if
l the debt is due to the taxpayer, and
l it would have been allowed as a deduction under another provision of the Act (implying that it
must have previously been included in the taxpayer’s income – a doubtful debt provision relating
to an employee debt would therefore not be allowed as a deduction).
*
Remember
Section 11(j) provides for an allowance of the amount of debt owed to the taxpayer that is consid-
ered to be doubtful. Section 11(i) (see 12.5) allows for the deduction of an amount owed to the tax-
payer that has already become bad.
Doubtful debt allowance if the taxpayer applies IFRS 9 to the debt (s 11(j)(i)):
If the taxpayer applies IFRS 9 (for debt other than in respect of lease receivables (as defined in
IFRS 9) that have not been included in income), the doubtful debt allowance would be the sum of
l 40% of the sum of
– the loss allowance relating to impairment measured at an amount equal to the lifetime expect-
ed credit loss (as intended in IFRS 9) for debt
plus
– bad debt written off for financial reporting purposes
• that was not allowed as a deduction under s 11(a) or s 11(i) (see 12.5) in the current or any
previous year of assessment, and
• that was included in the income of the taxpayer in the current or any previous year of assess-
ment
plus
l 25% of the loss allowance relating to impairment for debt other than debt already included as
part of the 40% inclusion above.
361
Doubtful debt allowance if the taxpayer does not apply IFRS 9 to the debt (s 11(j)(ii)):
If the taxpayer does not apply IFRS 9, the doubtful debt allowance would be the sum of
l 40% of debt due to the taxpayer that is in arrears (past their due date) for 120 days or more
(excluding any debt to which IFRS 9 was applied)
plus
l 25% of debt due to the taxpayer that is in arrears (past their due date) for 60 days or more but
excluding any debt
– to which IFRS 9 was applied (under s 11(j)(i)), or
– that was already taken into account under the 40% inclusion above.
Taxpayers not applying IFRS 9 must adjust the value of the debt due to them by reducing it with the
value of any security in respect of such debt that is in arrears for either 120 days or 60 days (as the
case may be) before multiplying it with 40% or 25% respectively. This adjustment ensures alignment
in the value used to determine the doubtful debt allowance between taxpayers who apply IFRS 9
(where the loss allowance on which the doubtful debt allowance is based takes into account any
expected cash flows that would possibly realise from security in respect of the debt) and taxpayers
who do not apply IFRS 9 (Draft Explanatory Memorandum on the Taxation Laws Amendment Bill,
2020).
The amount of the doubtful debt allowance granted, under both options above, must be included in
the taxpayer’s income in the following year of assessment (proviso to s 11(j)).
Due to the adding back of the allowance claimed in the previous year, the differ-
ence between the allowance of the previous year and the current year will deter-
Please note! mine the net effect on the taxable income. Any increase in the allowance will be
allowed as a deduction, while a decrease in the allowance will increase the taxable
income of a taxpayer.
The taxpayer (under either of the options above) can make an application to the Commissioner to
issue a directive to increase the 40% inclusion to a maximum of 85%. The following factors will be
considered:
l the history of the debt owed to the taxpayer (including the number of repayments not met and
the period of the debt)
l the steps taken to enforce repayment of the debt
l the likelihood of the debt being recovered
l any security available in respect of that debt
l the criteria applied by the taxpayer in classifying debt as bad, and
l any other factors that the Commissioner may deem relevant (proviso to the proviso of s 11(j)).
Example 12.12. Doubtful debt allowance (s 11(j))
During the 2021 year of assessment, SARS allowed Chronicle Ltd to claim a doubtful debt allow-
ance of R65 000.
During the 2022 year of assessment a total impairment loss allowance (IFRS 9 loss allowance) of
R200 000 was determined by Chronicle Ltd in terms of IFRS 9. It consisted of R75 000 measured
at an amount equal to the lifetime expected credit loss and R125 000 measured at an amount
equal to the 12-month expected credit loss. Chronicle Ltd has never received any income from
lease contracts.
Calculate the effect on taxable income in respect of the doubtful debt allowance for Chronicle
Ltd for the 2022 year of assessment.
SOLUTION
Year ended 31 December 2022
Add back: 2021 doubtful debt allowance ...................................................................... R65 000
(40% × R75 000 (measured at an amount equal to the lifetime expected credit loss))
+ (25% × R125 000 (measured at an amount equal to the 12 month expected credit
loss)) – 2022 doubtful debt allowance (s 11(j)(i)) ........................................................... ( 61 250)
362
12.7 Repayment of employee benefits (s 11(nA) and 11(nB))

If an employee
l received any amount (including a voluntary award) in respect of services rendered or to be
rendered, or in respect of any employment (or the holding of any office), which was included in
his taxable income, and
l such an amount (or a portion thereof) is refunded by the employee, the repayment will be allowed
as a deduction against his income (s 11(nA)).
The amount received or accrued that is later refunded to the employer will be limited to an amount of
money and not an asset that is returned (Interpretation Note No. 88 (issued 19 February 2016)). An
example of this provision is maternity leave payments that are refunded, due to the employee not
returning to work as agreed after the maternity leave period, or a retention bonus refunded in a fol-
lowing year. The deduction that will be allowed will however be limited to the amount previously
included in taxable income and will only be allowed in the year of assessment when the refund is
actually made.
Interpretation Note No. 88 provides some examples of the treatment of the

s 11(nA) deduction and also states that:
l satisfactory proof must be provided by a taxpayer when claiming the
s 11(nA) deduction to show that the amount was previously taxed, and sub-
sequently refunded. Such proof must be provided when SARS conducts a
Please note!
compliance verification or audit (as referred to in s 31, read with s 40 of the
Tax Administration Act (see chapter 33)), and
l no change should be made to the leviable amount for Skills Development
levies or to the remuneration for Unemployment Insurance purposes for any
amounts recovered from employees.
Example 12.13. Repayment of employee benefits (s 11(nA))
Mpho, an employee of Swimgo, received a sign-on bonus of R80 000 in 2021. Swimgo deducted
employees’ tax of R32 000 from the amount and Mpho received a payment of R48 000.
During January 2022, Mpho resigns from his employment at Swimgo. As a result of his resigna-
tion, he is required, in terms of his employment contract, to repay the full sign-on bonus and
R6 500 interest charged by Swimgo, before the end of February 2022.
What amount will Mpho be allowed to deduct in terms of s 11(nA) from his taxable income for the
2022 year of assessment?
SOLUTION
Mpho will be entitled to a deduction of the refunded amount of R80 000 under s 11(nA).
(Although Mpho only received a payment of R48 000 after tax, he will have to repay the full
amount of the sign-on bonus and can therefore also deduct the full R80 000 which was included
in his taxable income in 2021.)
The interest that was raised by Swimgo will not be deductible by Mpho under s 11(nA), since it
was not previously included in Mpho’s taxable income as is required by s 11(nA).
The same principle will also apply to a restraint of trade payment on which the employee was taxed in
terms of par (cA) or (cB) of the gross income definition in s 1 (see chapter 4), which is refunded by
the employee (s 11(nB)).
Previously the initial payment to the employee was fully taxable, but the employee could not obtain a
tax deduction for amounts repaid, although no net enrichment arose, as it was denied due to the
limitations existing in s 23(m). Section 23(m) has, however, been amended to allow the deductions in
terms of s 11(nA) and s 11(nB) to employees who earn remuneration.
Please note! These amounts will also be deductible if incurred by a personal service provider
(s 23(k)) (see chapter 10).
363
12.8 Deductions in respect of the issue of Venture Capital Company shares (s 12J)
Section 12J contains a tax incentive to assist small and medium-sized businesses and junior mining
exploration companies in terms of equity finance. It provides for the possible deduction of the amount
invested in such enterprises through Venture Capital Companies (VCCs). VCCs bring together small
investors and concentrate investment in the small business sector.
12.8.1 Defining a Venture Capital Company and a qualifying company

A VCC is a company approved as such by the Commissioner (under s 12J(5)) and in respect of
which such approval has not been withdrawn (in terms of s 12J(3A), (3B), (6) or (6A)). The VCC acts
as a financier to various independent small businesses (referred to as qualifying companies or inves-
tee companies). The VCC is aimed at bringing together small investors (who will qualify for the
s 12J(2) deduction). By acquiring shares issued by the VCC, they will acquire a share in the small
businesses in which the VCC invests. The VCC therefore acts as a financier to the small businesses
by using the funds of small investors. Schematically the proposed structure can be illustrated as
follows (the arrows indicate the flow of funds/investment):
Qualifying Qualifying Qualifying

Company A Company B Company C
VCC
Investor A Investor B Investor C

(natural person (listed company (unlisted company
– a taxpayer) – a taxpayer) – a taxpayer)
Please note! The VCC is a fully taxable entity and no special tax rules apply.
The VCC must meet all of the following requirements on the date of approval:
The VCC
l must be a resident company
l has the sole objective to manage the investments in qualifying companies (this is to ensure that a
deductible investment in the VCC is not misdirected)
l must be a taxpayer in good standing, and
l is licenced in terms of s 8(5) of the Financial Advisory and Intermediary Services Act, 2002
(Act 37 of 2002) (s 12J(5)).
364
A qualifying company (or an investee company) is defined in s 12J(1) as

l a resident company
l that is not a controlled group company in relation to a group of companies of
which a VCC to which that company has issued any share forms part from the
date of issue of any such share and thereafter
l that is a taxpayer in good standing
l that is an unlisted company (as defined in s 41) or a junior mining company
(defined in s 12J(1) as any company solely carrying on a trade of mining explo-
ration or production which is either an unlisted company or listed on the alter-
native exchange division of the JSE)
l that does not carry on an impermissible trade, which includes:
– dealing or renting of immovable property, except trade as a hotel keeper
(including bed and breakfast establishments)
– financial service activities, such as banking, insurance, money-lending or
hire-purchase financing
– provision of professional services, such as legal, tax advisory, broking, man-
agement consulting, auditing, accounting and other related activities
– operating casinos or other gambling-related activities, including any other
games of chance
– manufacturing, buying or selling liquor, tobacco products or arms or ammu-
nition, and
Please note! – conducting business mainly outside South Africa (definition of ‘impermissible
trade’ in s 12J(1))
l that during any year of assessment of that company ending after the expiry of
36 months after the first date on which the company issued any share to a VCC
– the sum of the company’s investment income (as defined in s 12E(4)(c) –
see chapter 19) does not exceed 20% of that company’s gross income dur-
ing that year (effectively preventing VCCs from investing in passive com-
panies), and
– not more than 50% of the aggregate amount received by or accruing to that
company from the carrying on of any trade was derived (either directly or in-
directly) from a person who holds a share in that VCC, or who is a connected
person in relation to such a person
l that does not constitute a person who holds a share in a VCC to which that com-
pany has issued any share and who holds (either directly or indirectly or alone
or together with any connected person in relation to that person) more than 50%
of the participation rights (as defined in s 9D(1) – see chapter 21) or of the vot-
ing rights in that company, and
l that does not carry on any trade in relation to a venture, business or undertaking
(or part thereof) that was acquired by that company (either directly or indirectly)
from a person holding a shares in a VCC to which that company has issued any
share, or who is a connected person in relation to such person.
The Commissioner can withdraw a company’s VCC status in the following two circumstances:
l If a VCC fails to meet the requirements listed above (thus listed in s 12J(5)) during a year of
assessment, the Commissioner can, after appropriate notice, withdraw VCC approval. The approval
will be withdrawn from the beginning of that year unless corrective steps are taken by the company
within the period stated in the notice (s 12J(6)), or
l If, at the end of the year of assessment, after the expiry of 48 months (was 36 months before
21 July 2019) from the first date of the issue of the venture capital shares, the VCC
– has spent less than 80% of expenditure to acquire assets, to obtain qualifying shares in qualify-
ing companies, that, immediately after issue of the shares, held assets with a maximum book
value of R50 million (R500 million if investing in any junior mining company), or
– has spent more than 20% of the amounts received for the issue of its shares (thus more than
20% of the total subscription monies received) to acquire qualifying shares in any one qualify-
ing company
the Commissioner can, after appropriate notice, withdraw the VCC approval. The approval will be
withdrawn effective from the commencement of the year of assessment during which the end of
the period available to take acceptable corrective steps according to the notice, falls. The approval
will, however, not be withdrawn if the company takes corrective steps acceptable to the Commis-
sioner within the period stated in that notice (s 12J(6A)).
365
A qualifying share is defined in s 12J(1) as an equity share held by a VCC which

is issued to it by a qualifying company but excluding
l a hybrid equity instrument as defined in s 8E(1) (see chapter 16), but without
the exclusion of
– a share that the issuer is obliged to redeem or a share where the issuer is
obliged to distribute an amount constituting a return of the issue price of
that share (in whole or in part) within three years from the date of issue
– a share where the holder of that share may exercise an option under
Please note!
which the issuer must redeem the share or distribute an amount constitut-
ing a return of the issue price of that share (in whole or in part) within
three years from the date of issue, or
– at any time on the date of issue of that shares, the existence of the com-
pany issuing that shares is either terminated or likely (with reasonable
consideration of all the facts at that time) to be terminated within three
years, or
l a third-party-backed share as defined in s 8EA(1) (see chapter 16).
A company may reapply for approval in the year of assessment that follows after the year of assess-
ment in which the VCC status was withdrawn, if the non-compliance has been rectified to the Com-
missioner’s satisfaction (s 12J(7)). The following decisions of the Commissioner are subject to objec-
tion and appeal under Chapter 9 of the Tax Administration Act (see chapter 33):
l the decision to withdraw a company’s VCC status (under s 12J(6) and (6A)), and
l the decision on whether to accept a company’s reapplication for approval after the VCC status
was withdrawn (under s 12J(7)), (s 3(4)(b)).
If the Commissioner withdraws the VCC status an amount equal to 125% of the
expenditure incurred by investors to acquire VCC shares must be included in
Please note! the income of the VCC in the year the approval is withdrawn (this will almost
equalise the deduction of individuals (with an approximate tax rate of 41%)
previously claimed to the VCC with a 28% tax rate) (s 12J(8)).
12.8.2 Deduction available on investment in a Venture Capital Company

If a taxpayer actually incurred expenditure during a year of assessment to acquire any venture cap-
ital share issued to that taxpayer by a venture capital company on or before 30 June 2021
(s 12J(11)), a deduction of the full amount will be allowed from income for that year of assessment
(s 12J(2)). For expenditure incurred from 21 July 2019, this deduction will be limited to
l R5 million per year if the taxpayer is a company, and
l R2,5 million per year if the taxpayer is a person other than a company. (s 12J(3C)).
A venture capital share is defined in s 12J(1) as any equity share held by a tax-
payer in a VCC which was issued to that taxpayer by a VCC, and does not
include any share which
l is a hybrid equity instrument as defined in s 8E(1) (see chapter 16), but with-
out the exclusion of
– a share that the issuer is obliged to redeem or a share where the issuer
is obliged to distribute an amount constituting a return of the issue price
of that share (in whole or in part) within three years from the date of issue
– a share where the holder of that share may exercise an option under
which the issuer must redeem the share or distribute an amount consti-
Please note! tuting a return of the issue price of that share (in whole or in part) within
three years from the date of issue, or
– at any time on the date of issue of that shares, the existence of the com-
pany issuing those shares is either terminated or likely (with reasonable
consideration of all the facts at that time) to be terminated within three
years
l constitutes a third-party-backed share as defined in s 8EA(1) (see chap-
ter 16), or
l was only issued to that taxpayer due to services rendered or to be rendered
by him regarding the incorporation, marketing, management or administra-
tion of that VCC or of any qualifying company in which that VCC holds or
acquires any share.
366
The deduction will only be allowed if supported by a certificate (a VCC investor certificate) issued by
the VCC. The certificate must state the amounts invested and that the Commissioner has approved
the company as a VCC (s 12J(4)), but subject to the following (provided for in s 12J(3), (3A) and
(3B)):
l where during any year of assessment
– the taxpayer funded the payment or financing of any of the expenditure incurred to acquire any
VCC shares with a loan or credit, and
– any portion of that loan or credit is still outstanding on the last day of the year of assessment,
the amount which will qualify for a deduction will be limited to the amount for which the taxpayer
is deemed to be at risk on the last day of the year of assessment.
A taxpayer will be deemed to be at risk to the extent that:
– the incurral of the expenditure to acquire any VCC shares, or
– the repayment of any loan or credit used by the taxpayer for the payment or financing of any
expenditure to acquire VCC shares (under s 12J(2))
would (having regard to any transaction, agreement, arrangement, understanding or scheme
entered into before or after such expenditure is incurred) result in an economic loss to the tax-
payer. The economic loss should be the result of no income received by or accrued to the tax-
payer in future years from the disposal of the VCC shares issued to the taxpayer as a result of the
incurral of the expenditure.
The taxpayer will not be deemed to be at risk to the extent that
– the loan or credit is not repayable within a period of five years, and
– it was granted to the taxpayer by the VCC in which the shares were acquired (s 12J(3)).
l if (before 1 January 2017), during any year of assessment,
– a taxpayer incurred expenditure to acquire any VCC share, and
– as a result of, or immediately after the acquisition of a VCC share in a VCC, that taxpayer is a
connected person (see chapter 13) in relation to that VCC
– no deduction will be allowed for the expenditure incurred to acquire any VCC share.
l if, at the end of any year of assessment but at least 36 months after the first time that the venture
capital shares were issued,
– a taxpayer incurred expenditure to acquire any VCC share, and
– that taxpayer is a connected person (see chapter 13) in relation to that VCC
• no deduction will be allowed for the expenditure incurred to acquire any VCC share
• the Commissioner must, after due notice to the VCC, withdraw the VCC approval (under
s 12J(5)) effective from the date of the original approval, and
• the VCC must include 125% of the expenditure incurred by any person to buy shares issued
by the VCC in the income of the VCC in the year in which the approval of the VCC is with-
drawn.
The VCC can prevent the above from happening if the VCC takes corrective steps, acceptable to
the Commissioner within the prescribed period in the notice issued to the VCC (s 12J(3A)). By
allowing 36 months after the issue of the VCC shares before performing the first connected
persons’ test, the VCC should have enough time to find additional investors, and, as such, a more
enabling environment will be created for the VCC (Explanatory Memorandum on the Taxation
Laws Amendment Bill, 2016).
l if, at the end of any year of assessment, but at least 36 months after the first time that the venture
capital shares of any class were issued, a taxpayer holds more than 20% of the venture capital
shares of that class
– no deduction will be allowed for the expenditure incurred to acquire any VCC share of that
class
– the Commissioner must, after due notice to the VCC, withdraw the VCC approval (under s 12J(5))
effective from the commencement of that year of assessment, and
– the VCC must include 125% of the expenditure incurred by any person to buy shares issued
by the VCC in the income of the VCC in the year in which the approval of the VCC is withdrawn.
367
These measures will not apply during a year of assessment ending from 31 July 2021, if
– the taxpayer holds more than 20% of the VCC shares of a class and the VCC gives written
notice to the Commissioner that the VCC will cancel all the issued shares in that class of
shares, and
– the VCC cancels all the issued shares in that class of shares within six months after the date of
the written notice (s 12J(3B)).
Example 12.14. Acquisition of issued shares in a VCC
Moses (Pty) Ltd (an approved VCC) issued shares at a cost of R50 000 to Johannah (which she
bought using her own funds) on 1 September 2020. Johannah held these shares for a year before
selling them on 1 September 2021 for R60 000. She immediately took the R60 000 and after adding
another R10 000 (once again from her own funds), bought newly issued shares in Buck (Pty) Ltd
(another approved VCC). Assume that the necessary VCC investor certificates were obtained.
Calculate the tax implications of the share transactions for Johannah for the 2021 and 2022 years
of assessment.
SOLUTION
Shares in Moses (Pty) Ltd deductible (s 12J(2)), thus full investment deductible .......... (R50 000)
Shares sold in Moses (Pty) Ltd – full amount previously deducted under s 12J will be
recouped under s 8(4)(a), thus R50 000. ....................................................................... R50 000
The rest of the selling price obtained of R10 000 will be either treated as a capital
gain under the Eighth Schedule, or as income (if Johannah is a sharedealer or held
the shares for speculative purposes).
Shares in Buck (Pty) Ltd – deductible (s 12J(2)) ............................................................ (R70 000)
The portion of the cost of VCC shares that a taxpayer could deduct from his
income under the provisions of s 12J(2), will not qualify on disposal of the shares
for the provisions of s 9C (unless it relates to an equity share held for longer than
5 years). The cost will be recouped and be taxable under s 8(4)(a) upon dispos-
Please note! al. If the shares were held for at least 3 years but not longer than 5 years, s 9C
will apply to the extent that the amount received or accrued on disposal of the
shares exceeds its cost (s 9C(2A)) (see chapter 14). If, however, a VCC share is
disposed of or if there was a return of capital and that share has been held by
the taxpayer for longer than five years, no amount shall be recovered or re-
couped notwithstanding the provisions in s 8(4)(a) (s 12J(9)).
12.9 Donations to public benefit organisations and other qualifying beneficiaries

(s 18A)
The s 18A deduction has been discussed in detail in chapter 7. The detail provisions of the section
will therefore not be repeated here. Only a brief overview of s 18A and its application to companies,
followed by a discussion of the qualifying deductions available to a portfolio of a collective investment
scheme, are provided here.
Overview of s 18A
Section 18A(1) permits the deduction of
l bona fide donations to qualifying beneficiaries (see chapter 7)
l in cash or property in kind (see chapter 7)
l made by a taxpayer, and
l actually paid or transferred during the year of assessment.
368
A donation is made, not when the subject matter is delivered to the donee, but when the legal formal-
ities for a valid donation have been completed. The deduction of all qualifying donations made by the
taxpayer during the year of assessment is limited to 10% of the taxable income of the taxpayer as
calculated before allowing any deduction under s 18A or s 6quat(1C) (see chapter 21).
*
Remember
This deduction is a deduction in the determination of ‘taxable income’. Consequently a taxpayer
with no taxable income or an assessed loss will not be allowed to claim the s 18A deduction.
Any amount of a donation not allowed in the current year of assessment (due to the donation exceed-
ing the limits for deduction) can be carried forward and will be allowed as a deductible donation in
the following year (subject to the limits). The latter will include the total amount of any donation(s)
made that were not allowed due to the fact that an assessed loss was realised before the s 18A
deduction was taken into account. The excess can be carried forward from year to year until it is fully
deductible (proviso to s 18A(1)). This will also apply to donations made by a portfolio of a collective
investment scheme (see below).
Example 12.15. Deductible donations
Lesego (Pty) Ltd donated R250 000 to an approved public benefit organisation (PBO) during the
2022 year of assessment and made no donations during the 2023 year of assessment. Lesego
(Pty) Ltd had taxable income of R1 850 000 for the 2022 year of assessment and R2 950 000 for
the 2023 year of assessment before any deduction under s 18A or s 6quat(1C) was taken into
account.
Calculate the s 18A deduction available to Lesego (Pty) Ltd for the 2022 and 2023 years of assess-
ment. You can assume that the company was in possession of the relevant s 18A tax receipt.
SOLUTION
Donation of R250 000, but maximum s 18A deduction limited to 10% × R1 850 000
= R185 000 (excess deductible donation of R65 000 carried forward to the 2023
year of assessment (proviso to s 18A(1))) ...................................................................... (R185 000)
Total deductible donation of R65 000 (excess deductible donation carried forward
from 2022). The maximum deduction will be limited to 10% of taxable income of
R2 950 000 = R295 000, but limited to total deductible donations of R65 000 .............. (R65 000)
*
Remember
If an employer needs to determine the employees’ tax liability of its employees, a deduction under
s 18A can be made against an employee’s ‘remuneration’ (as defined in par 1 of the Fourth
Schedule) in order to determine the ‘balance of remuneration’ on which employees’ tax needs to
be levied (par 2(4)(f) of the Fourth Schedule). This deduction will only be allowed where the em-
ployer makes a donation on behalf of an employee and a valid s 18A tax receipt has been ob-
tained and will be limited to 5% of the ‘remuneration’ that will remain after the s 11F deduction for
contributions to retirement funds have already been taken into account (see chapter 10).
The s 18A deduction available to a portfolio of a collective investment scheme is calculated using a
special formula. All other taxpayers will continue to calculate the s 18A deduction by using the
10% limitation discussed above.
Deduction for all qualifying donations made by a portfolio of a collective investment scheme
A collective investment scheme is treated as an investment vehicle for portfolio investors and, as
such, is treated as a flow-through entity in relation to revenue amounts (such as interest and divi-
dends for income tax purposes). The 10% deduction would therefore not really benefit a portfolio of a
collective investment scheme, due to the limited amounts of taxable income. It requires special
provisions for the deduction of donations since the only taxable income that a portfolio of a collective
investment scheme usually retains is management fees.
369
The deduction of all qualifying donations made by a portfolio of a collective investment scheme (see
chapter 5) is limited to
A = B × 0,005
Where
l A is the amount to which the deduction of qualifying donations will be limited
l B represents the average value of the aggregate of all of the participatory interests held by invest-
ors in the portfolio for the year of assessment, calculated by using the aggregate value of all the
participatory interests in the portfolio at the end of each day during that year (s 18A(1)(A)).
This means that the deductible donations will be limited to
l 0,5% of the weighted average annual value of net collective investment scheme assets
l during the year of assessment in which the donation is made.
12.10 Allowance for outstanding debt: Credit agreements and debtors’ allowance
(s 24)
Section 24 contains special provisions governing the taxation of income derived under qualifying sus-
pensive sale or credit agreements. The type of agreement that qualifies is one that has the effect that
l ownership of movable property will pass from the taxpayer to another person, or
l transfer of immovable property will be passed from the taxpayer to the other person
only upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable
to him under the agreement (s 24(1)).
The provisions of s 24 also apply to qualifying suspensive sales of immovable

property. A taxpayer who disposes of immovable property, such as a township,
under suspensive sales must therefore include the proceeds in income in terms
of s 24. If this sale of trading stock meets the requirements of s 24, the taxpayer
Please note! will be entitled to claim the allowances provided by that section. The allowance
made must be included in the taxpayer’s income in the following year of as-
sessment (s 24(2)). For a detailed discussion of the tax implications of township
developments, see the 2017 edition of Silke.
Section 24 applies to an agreement that has the effect that ownership will pass from one person to
another upon or after the receipt by the taxpayer of the whole or a certain portion of the amount pay-
able under the agreement. Therefore, it applies when a taxpayer sells his goods on the basis that
ownership will pass only after the payment of a deposit or after the payment of the sum of the capital
instalments (excluding finance charges and VAT) (Interpretation Note No. 48 (Issue 3) (issued
5 March 2018)). In terms of ITC 1900 (2017) entitlement to payment will vest in a taxpayer as soon as
the agreement becomes enforceable at the request of either of the parties involved.
If this section is applicable, it implies that
l the whole amount payable under the agreement is deemed to have accrued to the taxpayer,
even if it is payable in instalments over a number of years (s 24(1)), and
l the taxpayer is entitled to claim an allowance (also referred to as the s 24 allowance or the debt-
ors’ allowance). The allowance can only be claimed if at least 25% of the amount payable under
the agreement becomes due and payable at least 12 months after the date of the agreement
(s 24(2)).
The purpose of the section is to prevent the undue deferral of income earned under credit agree-
ments. At the same time, it matches (on a limited basis) the recognition of the income with the receipt
of cash.
If a taxpayer enters into a qualifying suspensive sale or credit agreement, the tax implications will be
as follows:
l The total amount payable under the agreement, excluding interest or similar finance charges and
VAT, is deemed to have accrued to the taxpayer on the day on which the agreement was entered
into.
– The finance charges element must be dealt with under the provisions of s 24J (see chap-
ter 16). This means that the finance charges are taxed in the hands of the taxpayer as if they
accrue on a yield-to-maturity basis over the period of the credit agreement (s 24(1)).
– The VAT is excluded since it is not received by the taxpayer on his own behalf or for his own
benefit and can therefore not be gross income.
370
l The s 24 debtors’ allowance can be claimed. The allowance must relate to amounts that are
deemed to have accrued under qualifying agreements, but have not been received at the close
of the taxpayer’s accounting period. Taking into account any allowance for doubtful debts made
under s 11( j) (see 12.6), a further allowance can be made if it seems reasonable under the spe-
cial circumstances of the taxpayer’s trade as set out in a public notice issued by the Commis-
sioner. However, no such notice has been issued to date and therefore taxpayers need to con-
tinue applying the methods prescribed in Interpretation Note No. 48 (Issue 3).
*
Remember
An agreement will only qualify for the allowance if at least 25% of the amount payable under it
becomes due and payable at least 12 months after the date of the agreement.
The allowance is available only in certain circumstances and is subject to objection and appeal
under Chapter 9 of the Tax Administration Act (s 3(4)(b)). The s 24 allowance is not available for
l leases under which the lessee has an option to purchase the leased item
l sales on extended credit in the absence of a condition suspending the passing of ownership, and
l sales subject to a specific (resolutive) condition (for example the sale will be cancelled if the
purchase price is not paid by a certain date) (Interpretation Note No. 48 (Issue 3)).
The s 24 allowance is calculated as a percentage of the amount owing to the taxpayer under qualifying
credit agreements at the end of the year of assessment.
l The amount owing (the adjusted qualifying outstanding debtors) is determined after the deduc-
tion from qualifying outstanding debtors at year-end (excluding finance charges and VAT) of
– the deduction for bad debts under s 11(i), and
– the doubtful debt allowance under s 11(j).
l The percentage used is the gross-profit percentage on eligible credit agreements.
Finance charges and VAT are also excluded from sales and cost of sales in determining the
gross-profit percentage. The gross-profit element is therefore the gross-profit percentage multi-
plied by the adjusted qualifying outstanding debtors, excluding finance charges and VAT. The
gross-profit percentage in a particular year of assessment is:
Gross profit (excluding finance charges and VAT)
× 100
Sales (excluding finance charges and VAT)
The s 24 allowance is calculated as follows:
Section 24 allowance = Gross profit % × Adjusted qualifying outstanding debtors
Gross profit
(excluding finance
charges and VAT) Qualifying outstanding debtors less
× 100 deduction for bad debts (s 11(i)) less
Sales doubtful debt allowance (s 11(j))
(excluding finance
charges and VAT)
It is important to remember that the allowance made must be added back to (or included in) the
taxpayer’s income in the following year of assessment (s 24(2)).
Please note! The s 24 allowance granted in any year can be used to create an assessed loss
or to increase an assessed loss (Interpretation Note No. 48 (Issue 3)).
371
Example 12.16. Suspensive sales

H Ltd sold a machine, held as trading stock, under a suspensive sale agreement on 1 July 2021.
The agreement provided for three repayments of R75 551 each, the first to be made on the last
day of June 2022 and the remaining two to be made on the last days of June 2023 and
June 2024 respectively. In terms of the agreement, ownership of the machine will transfer to the
purchaser on receipt of the first payment. The cash price of the machine sold was R150 000,
plus VAT of R22 500. The original cost for H Ltd of the machine was R100 000, excluding VAT.
The interest rate charged is 15% per year. H Ltd has a year of assessment which ends on the
last day of June.
The amounts due in terms of the agreement can be analysed as follows:
Finance VAT Capital Capital
charges (output) repaid balance
R R R R
1 July 2021 ..................................................... 150 000
30 June 2022 interest..................................... 25 875 6 479 43 197 106 803
30 June 2023 repayment ............................... 18 423 7 451 49 677 57 126
30 June 2024 repayment ............................... 9 854 8 570 57 126 nil
54 153 22 500 150 000 –
Calculate the effect on taxable income of H Ltd for the three years of assessment ended 30 June
2022, 2023 and 2024.
SOLUTION
Year of assessment ended 30 June 2022
Gross-profit percentage:
(R150 000 – R100 000) ÷ R150 000 × 100 = 33,3%
Outstanding debtor, excluding VAT and finance charges = R106 803
Section 24 debtor’s allowance: 33,3% × R106 803 = R35 601
Taxable income calculation:
Capital portion due in terms of contract (s 24) ........................................................... R150 000
Interest accrued (s 24J(3) – see chapter 16) .............................................................. 25 875
175 875
Less: Cost of machine sold (s 11(a)) ....................................................... (100 000)
Section 24 debtor’s allowance (see above – deductible under s 11(x)) (35 601)
Net effect on taxable income .......................................................................... R40 274
Please note:
The output tax of R22 500 will be accounted for (paid to SARS) in full in the 2022
year of assessment (s 9(3)(c) of the VAT Act – see chapter 31). The separate
amounts of VAT indicated under the column ‘VAT (output)’ will not be accounted
for separately during each year of assessment. The amount indicated in the VAT
column was determined as follows:
R75 551 (instalment^) – R25 875 (interest) = R49 676 × 15/115 = R6 479.
^Financial calculator input:
PV = (R172 500); FV = Rnil; n = 3; i = 15; Comp PMT = R75 551

Outstanding debt, excluding VAT and finance charges = R57 126
Section 24 debtor’s allowance: 33,3% × R57 126 = R19 042
Interest accrued (s 24J(3) – see chapter 16) .............................................................. R18 423
Add back: Previous year’s s 24 debtor’s allowance ................................................ 35 601
Less: Section 24 debtor’s allowance (see above) ..................................................... (19 042)
Net effect on taxable income......................................................................... R34 982
continued
372
Please note:
No output tax will be accounted for in the 2023 year of assessment as it was
already accounted for in full during the 2022 year of assessment in terms of
s 9(3)(c) of the VAT Act (see Chapter 31). The amount in the VAT column was cal-
culated as follows: R75 551 – R18 423 = R57 128 × 15/115 = R7 451.
Interest accrued (s 24J(3) – see chapter 16) .............................................................. R9 854
Add back: Previous year’s s 24 debtor’s allowance ................................................ 19 042
Less: Section 24 debtor’s allowance (debtor balance = 0) ....................................... –
Taxable income ............................................................................................. R28 896
Please note:
No output tax will be accounted for in the 2024 year of assessment as it was
already accounted for in full during the 2022 year of assessment in terms of
s 9(3)(c) of the VAT Act (see Chapter 31). The amount in the VAT column was
calculated as follows: R75 551 – R9 854 = R65 697 × 15/115 = R8 570.
Interpretation Note No. 48 (Issue 3) allows for and explains four methods for the
calculation of the debtors’ allowance, namely
l individual debtor-by-debtor basis (see example above)
Please note! l aged-debtors’ basis
l moving-weighted-average method, and
l use of the current year’s gross profit percentage.
12.11 Future expenditure on contracts (s 24C)

Section 24C provides a deduction for certain future expenditure that will be incurred by a taxpayer in
the performance of his obligations under a contract from which he has derived income. Sometimes
taxpayers receive an advance payment before the commencement of the work under a contract.
Such an advance payment enables them to finance the acquisition of materials, equipment (assets)
and other expenditure relating to the contract. The advance payment received is included in ‘gross
income’ in terms of s 1 (amount received or accrued). This will occur when taxpayers engaged in, for
example, the construction industry or manufacturing (but can also include industries such as the
motor industry, financial services industry, publishing and share block schemes (Interpretation Note
No. 78 (issued 29 July 2014))).
Section 24C grants these taxpayers and others in similar circumstances an allowance for their future
expenditure against the advance payment received. The taxpayer’s calculation should be substan-
tiated by supporting evidence.
A deduction is allowed in the determination of the taxpayer’s taxable income for a year of assessment
if
l his income in that year of assessment includes or consists of an amount received by or accrued
to him in terms of a contract, and
l the amount will be used in whole or in part to finance or pay future expenditure (excluding any
losses) that will be incurred by him in the performance of his obligations under the same contract
in a following year of assessment.
The allowance is calculated as follows:
Estimated contract cost Income received/ Actual expenditure
Section 24C allowance = × less
accrued in advance incurred to date
Contract price (income)
The allowance may not exceed the amount received or accrued.

Estimated cost as a percentage of the total contract price is calculated by taking into account the
amount of the future expenditure that relates to the contract (s 24C(2)).
373
‘Future expenditure’ excludes any losses and is expenditure that will be incurred in a subsequent
year of assessment
l that will be allowed as a deduction from income in a subsequent year of assessment (s 11(a) or
other expenditure, but not an allowance on a capital asset previously acquired (Interpretation
Note No. 78)), and
l in respect of the acquisition of any asset on which a capital allowance will be allowed under the
provisions of the Act (s 24C(1)).
*
Remember
Last year’s s 24C allowance must be added back before the taxpayer claims the current year’s
s 24C allowance (s 24C(3)). Effectively, only the change is allowed in the current year. Note
however that the reversal of the s 24C allowance in the subsequent year will be deemed income
received under the contract and a further s 24C allowance may therefore be allowed against it in
that year (Interpretation Note No. 78).
It is important for the taxpayer to show that he will have an obligation to incur the future expenditure
and also, as far as it is practical, to establish the amount of the obligation. There must be a clear
measure of certainty as to whether the expenditure is quantified or quantifiable. The onus is on the
taxpayer to satisfy the Commissioner that the contracts relied upon as the basis for the allowance will
result in an unconditional contractual (legal) obligation. The taxpayer must therefore have a legal obli-
gation to use a portion of the proceeds received or accrued to fulfil (pay) his obligations (expenses)
under the contract. The Commissioner will not be satisfied that future expenditure will be incurred
when there is only a contingent liability (ITC 1601 (1995)). In other words, the purpose of s 24C is not
to provide a deductible reserve fund for possible comebacks, unforeseen contingencies or latent
defects, since this would be in contradiction with the provisions of s 23(e) of the Act.
The taxpayer should do the analysis for purposes of s 24C on a contract-by-contract basis, unless
the contracts are similar and have the same obligations to perform under those contracts. In such a
situation the contracts may be grouped together, for example a transport business selling bus or air
tickets in advance (Interpretation Note No. 78).
In Clicks Retailers (Pty) Ltd v CSARS (2021 (4) SA 390 (CC)) the taxpayer challenged the disallow-
ance of a s 24C allowance by the Supreme Court of Appeal. During the 2009 year of assessment,
Clicks claimed a s 24C allowance in its tax calculation, based on the operation of its loyalty pro-
gramme. Under the ClubCard programme, customers conclude a contract with Clicks making them
eligible to earn cash-back vouchers on sales concluded with Clicks and its loyalty partners. The
Commissioner disallowed the allowance on the basis that the income and obligation to incur future
expenditure arose from different contracts, namely the sale contract and the ClubCard contract
respectively, and not the same contract (as required under s 24C(2)). Clicks argued that as it uses
the income from sales to loyalty programme members to finance its future obligation to redeem cash-
back vouchers, both the income and the obligation to incur the future expenditure arose from the
same contract. They based this on a previous court case (the Big G case) where the Constitutional
Court found that the requirement of contractual sameness (under s 24C(2)) can be achieved on
l a same-contract basis (where the income-producing and obligation-imposing contracts are the
same contract), or
l on a sameness basis (where the income and obligation to finance expenditure are not in the
same contract but the contracts it relates to are so ‘inextricably’ linked that they meet the re-
quirement of sameness).
Clicks indicated that they meet both
l the same-contract requirement – entering into this contract of sale earns Clicks income and trig-
gers its obligation to redeem loyalty programme vouchers. The contract of sale was therefore
both income-producing and obligation imposing, and
l the sameness requirement – the two contracts operate together – both in producing income for
Clicks and in generating its obligation to finance future expenditure.
In a unanimous judgment, the Constitutional Court dismissed the appeal as Clicks could not establish
the contractual sameness requirement. It could not claim the allowance based on a same-contract
basis as income is generated from contracts of sale with loyalty programme members, whilst the
obligation to incur future expenditure arises from the ClubCard contract with loyalty programme
members. Although the court accepted that there was an inextricable link between the sale contract
and the ClubCard contract, the concept of sameness in the context of the s 24C allowance requires
374
at a minimum that both the earning of income and the obligation to finance future expenditure must
depend on the existence of both contracts. If either contract can be entered into and exist without the
other, they cannot achieve sameness. The accrual of income under the sale contract activated and
quantified the obligation to finance future expenditure but the actual obligation was embedded in the
ClubCard contract.
Interpretation Note No. 78 includes a detailed explanation of the Commissioner’s

Please note! viewpoint on the application of s 24C to ceded contracts, warranty claims and
maintenance contracts.
Example 12.17. Section 24C allowance
Built-it Ltd, a builder, entered into a contract on 20 February 2022 for a contract price of
R1 000 000. It estimated that it would incur deductible costs of R800 000 in carrying out its obli-
gations under the contract. The contract determines that a deposit of R400 000 is receivable on
25 February 2022. It commenced work on the contract on 3 March 2022 and completed the work
in December 2022. In terms of the contract, the balance of the contract price only becomes pay-
able by the client once the work has been completed. Built-It Ltd received the balance of
R600 000 on 1 December 2022 and incurred the anticipated expenditure of R800 000. Its year of
assessment ends on the last day of February.
Calculate the taxable income of Built-it Ltd for the years of assessment ending on 28 February 2022
and 28 February 2023.
SOLUTION
Gross profit calculation:
Contract price .............................................................................................................. R1 000 000
Less: Estimated costs............................................................................................... (800 000)
Gross profit ............................................................................................................... R200 000
Cost as percentage of price (800 000/1 000 000 × 100) ............................................. 80%
Taxable income for year ended 28 February 2022
Gross income (not R1 000 000 as R600 000 is not unconditional at this stage as
the work has not yet been completed (Mooi v SIR)) .................................................... R400 000
Less: Section 24C allowance for the estimated portion of the R400 000 to be
incurred in the next year (80% of R400 000) .................................................... (320 000)
Taxable income .............................................................................................. R80 000
Taxable income for year ended 28 February 2023

Gross income ............................................................................................................... R600 000
Add: Section 24C allowance for previous year added back ..................................... 320 000
R920 000
Less: Expenditure actually incurred ........................................................................... (800 000)
Taxable income .............................................................................................. R120 000
The total taxable income in respect of the contract over the two years therefore
amounted to R200 000 (R80 000 plus R120 000).
If the corporate rules in ss 41 to 47 (see chapter 20) apply to a transaction, the

Please note! reversal of the s 24C allowance claimed in the previous year may take place in
another taxpayer’s hands (Interpretation Note No. 78).
375
12.12 Assessed losses (s 20)

Section 20 of the Act contains the provisions relating to assessed losses and balance of assessed
losses. An ‘assessed loss’ is defined for the purposes of s 20 as
l an amount
l by which the deductions allowed under s 11
l exceeds the income from which they are deducted (s 20(2)).
A taxpayer will have an assessed loss when his allowable deductions are more than his income,
leaving him with a negative taxable income.
A ‘balance of assessed loss’ has not been defined, but means the excess of
l any assessed losses incurred in the carrying on of a trade
l over the taxable income derived from the carrying on of a trade plus any other taxable income.
Example 12.18. Balance of assessed loss
In 2021 the Makuyana Trust has an assessed loss from a trade of R550 000, in 2022 a taxable
income of R380 000 and in 2023 an assessed loss of R70 000.
Calculate the balance of assessed loss for each year of assessment.
SOLUTION
In 2021, the balance of assessed loss is R550 000, and in 2022, R170 000 (R550 000 less
R380 000).
In 2023, the balance of assessed loss is R240 000 (R170 000 + R70 000).
For the purposes of determining the taxable income of any person (including a company liable for
normal tax at a corporate tax rate of 28%), the following amounts will be allowed to be set off against
the income derived by him from carrying on any trade:
l a balance of assessed loss
– incurred by him in any previous year
– that has been carried forward from the preceding year of assessment (s 20(1)(a))
l an assessed loss
– incurred by him during the same year of assessment
– in carrying on any other trade, either alone or in partnership with others, otherwise than as a
member of a company whose capital is divided into shares (s 20(1)(b)).
New limitation rules will apply for companies for any balance of assessed loss to be carried forward
to a year of assessment of a company that commences on/or after the date on which the South Afri-
can corporate tax rate is reduced below the current tax rate of 28%. The balance of assessed loss
allowed to be set off against the income derived by a company from carrying on a trade during such
year will be limited to
l a balance of assessed loss
– incurred by such company in any previous year
– that has been carried forward from the preceding year of assessment
– to the extent that the amount of such set-off does not exceed the higher of
• R1 million, and
• 80% of taxable income before taking into account any previous balance of assessed loss
(s 20(1)(a)(i)).
376
Example 12.19. Balance of assessed loss: Limitations applicable to companies
Tahlehelo (Pty) Ltd (with a 31 March financial year-end) suffered an assessed loss of R1 200 000
during its 2022 year of assessment. During the 2023 year of assessment, the company realised a
taxable income of R1,1 million from its trading operations. Assume that during the annual South
African National Budget Speech held in February 2022 the South African corporate tax rate was
reduced from 28% to 27% for years of assessment commencing on or after 1 April 2022.
Calculate the taxable income/(assessed loss) position for Tahlehelo (Pty) Ltd for its 2023 year of
assessment.
SOLUTION
2023 Year of assessment
Taxable income (before the set off of any balance of assessed loss) ...................... R1 100 000
Less: Balance of assessed loss of R1,2 million brought forward from 2022 limited
to the higher of (s 20(1)(a)(i)):
l R1 million, and
l 80% × R1,1 million (the 2023 taxable income before taking the balance of
assessed loss from the previous year into account) = R880 000
Therefore, the balance of assessed loss (R1,2 million) is limited to R1 million ......... (1 000 000)
Taxable income......................................................................................................... R100 000
The unused portion of the balance of assessed loss of R200 000 (i.e., R1.2 million less R1 million)
will be allowed to be carried forward to the 2024 year of assessment and will again be subject to
the limitations in terms of s 20(1)(a)(i).
12.12.1 Assessed losses: Balance set off by companies

In SA Bazaars (Pty) Ltd v CIR (1952 AD), the court held that s 20(1)(a) prevents a person who does
not carry on a trade in Year 2 from carrying forward to Year 2 a balance of assessed loss established
in Year 1.
While this decision has been overturned in relation to persons other than companies by s 20(2A) (see
chapter 7), it remains valid for companies. Therefore, a company that fails to carry on a trade for an
entire year of assessment cannot carry forward a balance of assessed loss established in the preced-
ing year to that year of assessment. The result is that the company loses that balance of assessed
loss, even if it subsequently recommences its trade.
In Robin Consolidated Industries Ltd v CIR ([1997] 2 All SA 195 (A), 59 SATC 199), two issues had to
be considered by the court. The first issue was whether the taxpayer had ‘carried on a trade’ during a
particular year of assessment.
The taxpayer was a manufacturer, wholesaler and retailer of stationery and associated products,
operating throughout the country via subsidiary companies. The taxpayer became insolvent and was
placed in provisional liquidation by 1986. On 3 October 1986, the liquidators sold the taxpayer’s
business ‘lock, stock and barrel’, except for the exclusion of certain assets. Goods and stock in bond
were excluded from the sale. Whilst in liquidation, two sale transactions, i.e., the sale of goods in
bond and stock in bond respectively, were undertaken by the liquidators.
The court held that while it may have been in the normal course of trading for a liquidator to sell off
assets in bulk, trading and realisation are distinct and opposing concepts. It was held that the dis-
posal of the stock in bond was designed to allow others to trade in that stock and release the tax-
payer from risks entailed in doing so itself. Accordingly, it was held that the two transactions did not
constitute the carrying on of a trade.
The second issue before the court was whether the taxpayer would be entitled to carry forward its
assessed loss to later years even though it neither traded nor earned any income from trade in the
particular year of assessment.
The court held that s 20(1) implies that, if there is no income or loss from trading in a specific year,
the assessed loss disappears. It was held that the rule in SA Bazaars (Pty) Ltd v CIR should not be
deviated from, i.e., that the set-off of an assessed loss is admissible only
l against income derived from trade, and
l where the balance of assessed loss has been carried forward from the previous year,
are correct.
The taxpayer’s appeal accordingly failed.
377
Example 12.20. Set-off of assessed loss against income from another trade
In Year 1, Abigail Ltd had an assessed loss of R200 000 and did not carry on trade in Year 2, but
recommenced trading in Year 3, when it derived a taxable income of R400 000.
Calculate the assessed loss or taxable income for each year.
SOLUTION
Year 1: Assessed loss R200 000.
Year 2: Nil assessment, that is, no taxable income or assessed loss (the assessed loss of
R200 000 established in Year 1 cannot be carried forward because no trade was
carried on in Year 2).
Year 3: Taxable income R400 000.
It is not essential that a company must have carried on a trade during the whole of the year; any
period of trading during the year will suffice. In Interpretation Note No. 33 (Issue 5) (issued 5 May
2017) SARS expresses the view that, in order for a company to set-off an assessed loss, the com-
pany must carry on a trade and income must have accrued to the company. Both these requirements
must be satisfied before an assessed loss may be carried forward.
SARS will, however, accept that these requirements are met if the company can prove that a trade
has been carried on during the current year of assessment, even if no income accrued. This will only
apply in cases where it is clear that a trade has been carried on and the fact that no income was
earned must be incidental or as a result of the nature of the trade carried on by the company. The
company will, however, have to discharge the onus that it did trade in the year of assessment if no
income was derived from the trade.
Unless a company is doing business as a moneylender, the receipt of interest

on money lent would not ordinarily be regarded as income derived from the
carrying on of a trade. Therefore, if a company has a balance of assessed loss
carried forward from a previous year and during the current year of assessment
Please note! its income is derived solely from interest on a loan, the balance of assessed
loss may not be set off against the interest, since the company cannot be
regarded as carrying on the trade of a moneylender. A company could, how-
ever, derive interest from investments on such a scale that its operations do
constitute a trade, in which event an assessed loss brought forward may be set
off against its interest income.
In the special circumstances set out in s 103(2), a company may be prevented from setting off an
assessed loss against other income derived by it (see chapter 32).
Whatever the correct legal position may be, SARS permits an assessed loss from trade to be set off
against non-trade income; otherwise an anomalous position might arise. For example, a company
that has a taxable income from interest of R200 000 and an assessed loss from trade of R200 000 in
the same year of assessment would be liable to tax on the interest (the assessed loss being carried
forward to the next year), although in truth its net income is nil.
378
Example 12.21. Assessed loss carried forward

Below are the income and expenditure accounts of Mloto Ltd, which derives income from letting
fixed property. Mloto Ltd has a 31 December financial year-end. Assume that during the annual
South African National Budget held in February 2022, the South African corporate tax rate was
reduced from 28% to 27% for years of assessment commencing on or after 1 April 2022.
Income 2022 2023 2024
Rent receivable ............................................................. R150 000 R240 000 R480 000
Expenditure
Rates and taxes ............................................................ R30 000 R30 000 R35 000
Repairs and maintenance ............................................. 22 500 75 000 28 000
Insurance ...................................................................... 7 500 7 500 7 500
Commission on rent collected ...................................... 14 400 18 000 36 000
Alterations to property................................................... 160 000 115 000 130 000
Interest on bond ............................................................ 120 000 120 000 120 000
Audit fees ...................................................................... 9 000 9 000 9 000
Water charges .............................................................. 4 500 5 100 5 400
R367 900 R379 600 R370 900
Net surplus/(loss) .......................................................... (R217 900) (R139 600) R109 100
Calculate the normal tax liability (if any) of Mloto Ltd for the company’s 2022 to 2024 years of
assessment.
SOLUTION
Net loss according to account .................................................................................. R217 900
Less: Alterations to property (capital) (see note 1) ................................................... (160 000)
Assessed loss (s 20(2)) ............................................................................................ R57 900
Balance of assessed loss to be carried forward to 2023 (s 20(1)(a)(i)) .................... R57 900
Normal tax liability ..................................................................................................... Rnil
Net loss according to account .................................................................................. R139 600
Less: Alterations to property (capital) (see note 1) ................................................... (115 000)
Assessed loss (s 20(2)) ............................................................................................ R24 600
Add: Balance of assessed loss brought forward from 2022 (s 20(1)(a)(i)) ............... 57 900
Balance of assessed loss to be carried forward to 2024 (s 20(1)(a)(i)) .................... R82 500
Normal tax liability ..................................................................................................... Rnil
Net surplus according to account............................................................................. R109 100
Add: Alterations to property (capital) (see note 1) .................................................... 130 000
R239 100
Less: Balance of assessed loss of R82 500 brought forward from 2023 limited to
the higher of (s 20(1)(a)(i)):
l R1 million, and
l 80% × R239 100 = R191 280
Thus, the entire balance of assessed loss brought forward from 2023 will be
allowed to be set off against the 2024 taxable income ............................................. (82 500)
Taxable income......................................................................................................... R156 600
Normal tax liability (R156 600 x 27%) ....................................................................... R42 282
Note 1: The expenditure on alterations to property may be taken into account in the determination
of the base cost of the property for capital gains tax purposes.
379
Example 12.22. Assessed loss: More than one trade

The following information relates to Bernice (Pty) Ltd:
Year of assessment
Income 2022 2023 2024
Hardware business ....................................................... R400 000 R460 000 R480 000
Farming ......................................................................... 200 000 150 000 150 000
Grocery business .......................................................... 300 000 400 000 450 000
Admissible expenditure
Hardware business ....................................................... R350 000 R480 000 R400 000
Farming ......................................................................... 350 000 350 000 250 000
Grocery business .......................................................... 250 000 410 000 310 000
What is the taxable income or assessed loss of Bernice (Pty) Ltd for each year of assessment?
SOLUTION
Assessed loss from farming (s 20(2)) ......................................................................... R150 000
Less: Taxable income from the hardware business (s 20(1)(b)) ........... (R50 000)
Taxable income from the grocery business (s 20(1)(b)).............. (50 000)
(100 000)
Balance of assessed loss to be carried forward to 2023 (s 20(1)(a)(i)) ........ R50 000
Assessed loss from farming (s 20(2)) ......................................................................... R200 000
Assessed loss from the hardware business (s 20(2)) ................................................. 20 000
Assessed loss from the grocery business (s 20(2)) .................................................... 10 000
R230 000
Add: Balance of assessed loss brought forward from 2022 (s 20(1)(a)(i)) ............. 50 000
Balance of assessed loss to be carried forward to 2024 (s 20(1)(a)(i)).......... R280 000
Assessed loss from farming (s 20(2)) ..................................................... R100 000
Less: Taxable income from the hardware business (s 20(1)(b)) ........... (R80 000)
Taxable income from the grocery business (s 20(1)(b)).............. (140 000)
(220 000)
R120 000
Less: Balance of assessed loss brought forward from 2023
(s 20(1)(a)(i))............................................................................... (R280 000)
Balance of assessed loss to be carried forward to 2025
(s 20(1)(a)(i)) .............................................................................. R160 000
12.12.2 Assessed losses: From trade carried on outside South Africa

Proviso (b) to s 20(1) provides that
l foreign losses are fully ring-fenced, and
l taxpayers will only be allowed to use foreign losses to reduce foreign income
l and not to reduce any South African income (whether from trade or passive income (for example
rentals)).
380
12.13 Comprehensive example
Example 12.23. Special deductions

The following is the Statement of Profit or Loss and other Comprehensive Income of Mr Deduct’s
steel manufacturing business (as sole proprietor) for the 2022 year of assessment:
Statement of Profit or Loss and other Comprehensive Income
Selling and administration expenses ...R1 124 000 Gross profit ............................... R2 873 000
Stock lost in fire .............................. 90 000 Interest on local business
bank account ............................ 16 000
Bad debt ........................................ 4 500
Provision for doubtful debt ............. 3 000
Rent................................................ 120 000
Foreign travelling expenses ........... 20 000
General expenses .......................... 329 500
Net surplus ..................................... 1 198 000
R2 889 000 R2 889 000
l Mr Deduct owns 25% of the capital of a private company which for the year has an assessed
loss of R4 000.
l Mr Deduct is aged under 65 years.
l In the previous year of assessment Mr Deduct had an assessed loss of R8 000.
l General expenses include:
Repairs to private residence ...................................................................................... R25 000
Repairs to plant and machinery ................................................................................. 66 600
Stock taken for personal use ...................................................................................... 4 000
Income tax paid .......................................................................................................... 211 400
Other deductible expenses ........................................................................................ 22 500
l The provision for doubtful debt consists of a debt that is due to Mr Deduct and that has been in
arrears for more than 120 days. No provision was allowed as a deduction for normal tax
purposes in the previous year of assessment. Mr Deduct does not apply IFRS 9 for financial
reporting purposes and does not hold any security in respect of the debt included in the
R3 000 provision.
l Mr Deduct filed a claim on account of the stock lost in the fire and received R50 000 from his
insurance company. This amount was credited to a reserve account in his ledger. A stock-
taking immediately after the fire disclosed that goods costing R90 000 had been destroyed.
This amount was reflected in the books by a credit to ‘Purchases Account’ and a debit to
‘Fire loss – Stock Account’.
l The foreign travelling expenses were incurred on a buying trip for the purchase of raw
materials and plant and machinery; 50% of this amount was spent in the purchase of raw
materials, and 50% in connection with the purchase of machinery.
Calculate Mr Deduct’s taxable income from his sole proprietor business for the 2022 year of
assessment.
SOLUTION
Net surplus: Statement of Profit or Loss and other Comprehensive Income.................. R1 198 000
Add: Repairs to residence (note 3) .......................................................... R25 000
Foreign travelling expenses (in respect of plant and
machinery) (note 9) ......................................................................... 10 000
Stock for personal use (note 4) ....................................................... 4 000
Income tax paid (note 5) ................................................................. 211 400
Excess provision for doubtful debt (note 7)..................................... 1 800
Fire loss recoverable by insurance (note 8) .................................... 50 000
302 200
R1 500 200
Less: Local interest exemption (s 10(1)(i)) ............................................................... (16 000)
R1 484 200
Less: Assessed loss from previous year (note 2) .................................................... (8 000)
Taxable income ................................................................................................ R1 476 200
continued
381
Notes
(1) Mr Deduct cannot deduct any amount as a result of his being a holder of shares in a private
company having an assessed loss (s 20(1)(b)).
(2) The assessed loss of R8 000 incurred in the previous year of assessment must be carried
forward to the current year of assessment.
(3) The expenditure on repairs to the private residence is a private expense and not deductible
for income tax purposes (s 23(b)).
(4) Expenditure incurred for the maintenance of Mr Deduct is not allowed. Therefore, stock taken
for personal use is not deductible (s 23(a)). Section 22(8) applies and a recoupment at cost
price will be included.
(5) Income tax paid is prohibited as a deduction (s 23(d)).
(6) Bad debt is an allowable deduction, provided the debt was at some time included in the
taxpayer’s income, is due to the taxpayer and has during the year of assessment become
bad (s 11(i)).
(7) Section 11(j) allows for a deduction of 40% of debt due to the taxpayer that has been in
arrears for more than 120 days if the taxpayer does not apply IFRS 9. A deduction of R1 200
(R3 000 × 40%) will be allowed The additional provision created, that is, R1 800, must be
regarded as income carried to reserve and, in terms of s 23(e), may not be deducted. Note
that the s 11(j) deduction of R1 200 allowed in the 2022 year of assessment, will be included
in Mr Deduct’s income in the 2023 year of assessment.
(8) Loss of stock due to fire is ordinarily deductible but not when it is recoverable under an in-
surance contract. Therefore no deduction may be made for the R50 000 recovered (s 23(c)).
(9) Section 11(a) prohibits the deduction of expenditure or losses that are of a capital nature.
Hence the overseas travelling expenses of R10 000 (R20 000 × 50%) expended in connec-
tion with the purchase of machinery is not deductible under s 11(a).
382
13 Capital allowances and recoupments
Jolani Wilcocks
Assisted by Herman Viviers

l identify when a person is a connected person for normal tax purposes, and apply
the connected person’s rules pertaining to depreciable assets and capital allow-
ances
l distinguish between the different types of assets and the capital allowance applic-
able to each
l calculate and discuss the tax consequences of leased assets
l calculate and discuss the capital allowances available on intellectual property and
research and development
l determine and calculate the recoupment or s 11(o) allowance when a capital asset
is disposed of, as well as the deferral available on a recoupment, if applicable.
Contents
Page
13.1 Overview .......................................................................................................................... 384
13.2 Core concepts ................................................................................................................. 386
13.2.1 Connected persons (s 1).................................................................................. 386
13.2.2 Machinery, plant, implement, utensil or article ................................................ 387
13.2.3 Process of manufacture ................................................................................... 388
13.2.4 Depreciable asset (s 1) .................................................................................... 389
13.2.5 Recoupments and the s 11(o) allowance ........................................................ 389
13.3 Allowances on movable assets ....................................................................................... 389
13.3.1 Wear-and-tear allowance (s 11(e))................................................................... 389
13.3.2 Movable assets used in farming or production of renewable energy s 12B) ..... 393
13.3.3 Movable assets used by manufacturers, for research and development or
by hotelkeepers, and ships, aircraft and assets used for the storage and
packing of agricultural products (s 12C) ......................................................... 395
13.3.4 Small business corporations (s 12E) ................................................................ 399
13.3.5 Rolling stock (s 12DA) ...................................................................................... 401
13.4 Allowances on immovable assets.................................................................................... 403
13.4.1 Buildings and improvements: Annual allowance (s 13) ................................... 403
13.4.2 Urban development zones (s 13quat).............................................................. 408
13.4.3 Residential units (s 13sex) ............................................................................... 410
13.4.4 Low-cost residential units on loan account (s 13sept)..................................... 413
13.4.5 Commercial buildings (s 13quin) ..................................................................... 414
13.4.6 Buildings in special economic zones (s 12S) .................................................. 416
13.4.7 Pipelines, transmission lines and railway lines (s 12D).................................... 417
13.4.8 Deductions in respect of improvements on property in respect of which
Government holds a right of use or occupation (s 12NA) ............................... 419
13.5 Hotels ............................................................................................................................... 420
13.5.1 Immovable assets of hotels: Annual allowance on buildings (s 13bis) ........... 420
13.5.2 Hotels: Movable assets (s 12C) ....................................................................... 423
13.6 Owners and charterers of aircraft or ships (s 33) ............................................................ 423
13.6.1 Movable assets: Aircraft and ships (ss 12C, 8(4)(a), 8(4)(e), 11(o), 12E
and 24P) ........................................................................................................... 424
13.6.2 Immovable assets: Airport and port assets (s 12F) ......................................... 424
383
Page
13.7 Leases .............................................................................................................................. 426
13.7.1 Lease premiums (s 11(f)) ................................................................................. 426
13.7.2 Leasehold improvements (s 11(g)) .................................................................. 430
13.7.3 Relief for the lessor (lessor’s special allowance) (s 11(h))............................... 434
13.7.4 Deductions in respect of improvements not owned by the taxpayer (s 12N) .... 435
13.7.5 Limitation of allowances for lessors of certain assets (s 23A) ......................... 437
13.7.6 Sale and leaseback arrangements (ss 23D and 23G)..................................... 440
13.8 Intellectual property and research and development ..................................................... 443
13.8.1 Legislation for expenditure incurred on or after 1 January 2014 but before
1 October 2022 (ss 11(gB), 11(gC), 11D, 12C, 13(1) and 23I) ..................... 443
13.9 Allowances on other types of expenses .......................................................................... 452
13.9.1 Government business licences (s 11(gD))....................................................... 452
13.9.2 Industrial policy project allowance (s 12I) ....................................................... 453
13.9.3 Energy efficiency savings deduction (s 12L) ................................................... 453
13.9.4 Additional deduction for roads and fences used in respect of the
production of renewable energy (s 12U) ......................................................... 454
13.9.5 Environmental expenditure (s 37B) .................................................................. 455
13.9.6 Environmental conservation and maintenance (s 37C) ................................... 456
13.9.7 Land conservation in respect of nature reserves and national parks s 37D)..... 457
13.10 Recoupments ................................................................................................................... 459
13.10.1 Recoupments: General recoupment provision (ss 8(4)(a), 8(4)(b) and 24M) .... 460
13.10.2 Recoupments: Donations, asset in specie distributions, the disposal of
assets to connected persons and change of use to trading stock
(s 8(4)(k)) .......................................................................................................... 464
13.10.3 Recoupments: Deferred recoupment of allowances (s 8(4)(e)–(eE)) .............. 465
13.10.4 Recoupments: Interest or related finance charges (s 8(4)(l)) .......................... 468
13.10.5 Recoupments: Industrial policy project allowance (s 8(4)(n)) ......................... 469
13.10.6 Recoupments: Acquisition of hired assets (s 8(5)) .......................................... 469
13.10.7 Recoupments: Concession or compromise regarding a debt (s 19) .............. 473
13.11 Alienation, loss or destruction allowance (s 11(o)).......................................................... 482
13.11.1 Limitation of losses from disposal of certain assets (s 20B) ............................ 485
13.12 Summary .......................................................................................................................... 486
13.12.1 Comparison between ss 11(e), 12C and 13 .................................................... 486
13.13 Comprehensive examples ............................................................................................... 488
13.1 Overview
As discussed in chapter 6, payments of a capital nature will not be deductible for normal tax pur-
poses in terms of the general deduction formula (s 11(a)). However, certain capital assets, if they fulfil
the requirements listed in the Act, will qualify for capital allowances (in this chapter referred to as
‘allowances’) and can be written off for normal tax purposes over different periods. Chapter 13 will
focus on these different allowances available (including those on leased assets, intellectual property,
and research and development). It will also cover the calculation of a recoupment or s 11(o) allow-
ance when a capital asset is disposed of or where a change in use of an asset occurs.
After discussing certain core concepts, this chapter will focus on the following allowances and
recoupments available to taxpayers:
384
13.1 Chapter 13: Capital allowances and recoupments
Allowances and recoupments on capital assets
Movable assets: Immovable assets: Intellectual property Other types of

l Section 11(e): l Section 13: and research and expenses:
Wear-and- Buildings and development: l Section 11(gD):
tear allow- improvements l Section 11(gB): Government
ance (13.3.1) (13.4.1) Registration business
l Section 12B: l Section 13bis: expenses of licences (13.9.1)
Farming or Hotel buildings intellectual l Section 12I:
production of and improvements property Industrial policy
renewable (13.5.1) (13.8.1) project allow-
energy l Section 13quat: l Section 11(gC): ance (13.9.2)
(13.3.2) Urban develop- Acquisition of l Section 12L:
l Section 12C: ment zones intellectual Energy
Manufac- (13.4.2) property efficiency
turing, l Section 13sex: (13.8.1) savings deduc-
research and Residential units l Section 11D: tion (13.9.3)
development, (13.4.3) Deductions for l Section 12U:
hotels, ships, l Section 13sept: scientific and Additional
aircraft and Low-cost residen- technological deduction for
assets used tial units (13.4.4) research and roads and
for storage l Section 13quin: development fences used in
and package Commercial (13.8.1) respect of the
of agricultural buildings (13.4.5) production of
products l Section 12S: renewable
(13.3.3) Buildings in energy (13.9.4)
l Section 12E: special economic l Section 37B:
Small zones (13.4.6) Environmental
business l Section 12D: expenditure
corporations Pipelines, trans- (13.9.5)
(13.3.4) mission lines and l Section 37C:
l Section 12DA: railway lines Environmental
Rolling stock (13.4.7) conservation
(13.3.5) l Section 12F: and
Airport and port maintenance
assets (13.6.2) (13.9.6)
l Section 12NA: l Section 37D:
Deductions in Land conserva-
respect of im- tion in respect of
provements on nature reserves
property where or national parks
government holds (13.9.7)
a right of use or
occupation
(13.4.8)
Disposals of assets and other recoupments:
Disposals:
l Section 8(4)(a): General recoupments (13.10.1)
l Section 8(4)(e), (eA)–(eE): Deferred
recoupments (13.10.3)
Leases: l Section 8(4)(k): Donations, asset in specie
l Section 11(f): Lease premium (13.7.1) distributions, disposals to connected
l Section 11(g): Leasehold improvements persons and change in use of trading stock
(13.7.2) (13.10.2)
l Section 11(h): Relief for lessor (lessor’s l Section 11(o): Alienation, loss or destruction
special allowance) (13.7.3) allowance (13.11)
l Section 12N: Deductions in respect of Other recoupments:
improvements not owned (13.7.4) l Section 8(4)(b): Actuarial surplus paid to
l Section 23A: Limitation of allowances employer from a pension fund (13.10.1)
granted to lessors of certain assets (13.7.5) l Section 8(4)(l): Interest or related finances
l Section 23D: Leasebacks and licenses (13.10.4)
(13.7.6) l Section 8(4)(n): Industrial policy project
l Section 23G: Leasebacks that involve allowance (under s 12I) (13.10.5)
tax-exempt bodies (13.7.6) l Section 8(5): On acquisition of hired assets
(13.10.6)
l Section 19: Concession or compromise
regarding a debt (13.10.7)
385
13.2 Core concepts

There are certain core concepts and/or definitions of which a basic understanding is required before
allowances and recoupments could be discussed in detail. These are:
l connected persons (as defined in s 1)
l machinery, plant, implement, utensil or article (referred to, for example, in ss 11(e) and 12C)
l process of manufacture (referred to, for example, in ss 12C and 13)
l depreciable asset (as defined in s 1 – referred to, for example, in ss 11(o) and 8(4)(e))
l recoupments (contained mainly in ss 8(4) and 8(5) and the s 11(o) allowance).
13.2.1 Connected persons (s 1)

Many sections in the Act refer specifically to ‘connected persons’. It is important to understand this
concept since it can affect the normal tax treatment of a specific transaction. For example, if an asset
is sold to a ‘connected person’, no s 11(o) allowance will be allowed as a deduction (see 13.11). The
term ‘connected person’ is defined in s 1 as follows in relation to various other persons:
Connected persons in relation
Type of taxpayer Example
to the taxpayer
Natural person l any relative (within the third degree A father and his children will be
(par (a) of definition) of kinship (consanguinity) of the connected persons
natural person and including
adopted children/adoptive par-
ents)
l a trust (other than a portfolio of a Where a grandparent is the bene-
collective investment scheme) of ficiary of a trust, his grandchildren will
which the natural person or the be connected persons in relation to
relative is a beneficiary the trust
Trust (other than a l any beneficiary of the trust Where a grandmother is the bene-
portfolio of a collective l any connected person in relation ficiary of a trust, she will be a con-
investment scheme) to a beneficiary nected person in relation to the trust,
(par (b) of definition) and her relatives will also be con-
nected persons in relation to the trust
(even if they are not beneficiaries)
Connected person l any other person who is a con- Agnus and Josina, who are not rela-
in relation to a trust nected person in relation to the tives, are both beneficiaries of the
(other than a portfolio trust same trust. Agnus’ relatives will be
of a collective connected persons in relation to the
investment scheme) trust, and Josina’s relatives will be
(par (bA) of definition) connected persons in relation to the
trust. This rule causes Agnus’ rela-
tives and Josina’s relatives to be con-
nected persons
Members of a l any other member The members of a partnership are
partnership or foreign l any connected person in relation connected persons, and they are
partnership to any member of the partnership connected persons in relation to the
(par (c) of definition) or foreign partnership other partners’ or members’ connect-
ed persons
Company, including a l any other company in the same Fellow subsidiaries of the same
portfolio of a collective group of companies (controlling holding company are connected per-
investment scheme and controlled group com- sons
(par (d)(i)–(vA) of panies), where a group of com- A company and a holder of shares
definition) panies consists of a controlling (not a company) who is a ‘20%
group company that holder’ are connected persons, and a
– directly holds more than 50% company and a group of connected
of the equity shares or voting persons who jointly constitute a ‘20%
rights in at least one controlled holder’ are connected persons
group company, and
continued
386
Connected persons in relation

Type of taxpayer Example
to the taxpayer
Company, including a – directly or indirectly holds If company Alfa holds at least 20% of
portfolio of a collective more than 50% of the equity the equity share capital of company
investment scheme shares in or voting rights Colonial and no holder of shares holds
(par (d)(i)–(vA) of in each controlled group com- the majority voting rights in Colonial,
definition) (continued) pany Alfa is a connected person in relation
l any person (but excluding com- to Colonial. However, if Alfa and
panies) that alone or together Albatross each holds 50% of the
with that person’s connected equity share capital of Colonial, both
persons holds 20% or more of a Alfa and Albatross are connected
company’s equity shares or persons in relation to Colonial.
voting rights (the equity shares or If Notsung is a connected person of
voting rights can be held directly company Iglo and he or it also man-
or indirectly) ages or controls company Manganye,
l any company that holds 20% or then Iglo and Manganye are con-
more of a company’s equity nected persons in relation to each
shares or voting rights (but only if other. In addition, all the connected
no holder of shares holds the persons of Notsung will also be
majority of voting rights in the connected persons in relation to com-
company) pany Iglo.
l any other company, if the com-
pany is managed or controlled
by a connected person (or his
connected person)
l any other company that would be
part of the same group of com-
panies according to the definition
of ‘group of companies’
Close corporation l any member Kelly CC and Jordan CC will be
(par (d)(vi) of definition) l any relative of the member or trust connected persons if Jordan CC is a
(other than a portfolio of a col- connected person in relation to a
lective investment scheme) that is member of Kelly CC
a connected person in relation to a Morgan CC and Neville CC will be
member connected persons if Neville CC is a
l any other close corporation connected person in relation to a
which is a connected person to trust that is the connected person in
one of the members, or relative relation to Morgan CC
or connected trust
Interpretation Note No. 67 (Issue 4) (issued on 28 January 2020) contains detailed

Please note! explanations and examples that explain the definition of ‘connected person’.
13.2.2 Machinery, plant, implement, utensil or article
What does ‘machinery or plant’ mean?

Several of the provisions dealing with capital allowances use the term ‘machinery or plant’. However,
this term is not defined in the Act.
The Shorter Oxford English Dictionary defines ‘machinery’ as ‘machines, or their parts, taken collectively;
the mechanism or works of a machine or machines. . . [a] system or kind of machinery’, and ‘plant’ as
the ‘fixtures, implements, machinery, and apparatus used in carrying on any industrial process’.
The courts have found that a plant includes whatever device is used permanently by a businessman
to carry on his business, has a degree of durability and will not be classified as trading stock. An item
that is part of the manufacturing process (for example a railway line that connects a quarry with the
factory) will also be classified as plant.
387
What does ‘machinery, plant, implement, utensil or article’ mean?

l Machinery, plant, implement, utensil or article
The words ‘machinery, plant, implement, utensil or article’ (used in various sections, including
ss 11(e), 11(o), 12C and 12E) have a wider meaning than the words ‘machinery or plant’. They
refer to tangible (touchable) assets and do not include intangible assets such as patent rights,
trade marks and goodwill. Animals that do not qualify as trading stock, for example racehorses or
circus animals, will also be regarded as ‘machinery, plant, implement, utensil or article’.
l Article
The meaning of the word ‘article’ in the expression ‘machinery, plant, implement, utensil and
article’ refers to items that can be detached, removed, stored and remounted easily and inexpen-
sively. Examples (from court cases) of items that will qualify as articles are carports that are
designed and intended to be removable and movable partitions used as the inner walls of a
building.
13.2.3 Process of manufacture

The ss 12C and 12E(1) allowances are available for machinery or plant used directly in a process of
manufacture or in a process that in the Commissioner’s opinion is similar to a process of manufacture
(see 13.3.3 and 13.3.4). Section 13, in turn, makes an annual allowance available for buildings used
in a process of manufacture or in a process that in the Commissioner’s opinion is similar to a process
of manufacture.
What is a process of manufacture?
This term has been the subject of many court cases. In SIR v Safranmark (Pty) Ltd, 1982 (1) SA 113
(A) the important issues relating to a process of manufacture are summarised as:
(1) The term ‘process of manufacture’. . . means an action or series of actions directed towards the
production of an object or thing which is essentially different from the materials or components
which went into its making (this confirms the principles laid down in ITC 1006 (1962)).
(2) The requirement of ‘essential difference’ necessarily imports an element of degree; and there are
no fixed criteria – nor is there any precise universal test – whereby this can be determined. It is
never easy to determine whether or not a change in the materials or components wrought by the
process, be it as to the nature, form, shape or utility of the materials or components, has brought
about an essential difference. This must be decided on the individual facts of each case. In COT v
Processing Enterprises (Pvt) Ltd 1975 (2) SA 213 (RAD) it was stressed that there need not be a
change in the actual substance of the raw material before the process of dealing with it is
regarded as a manufacturing process. It is however important for skill to be applied in some way
to raw material to such an extent that its actual character is changed. Its physical substance may
remain the same, but the process of handling may none the less be regarded as a manufacturing
process if the raw material has been cleaned and broken up into its components.
(3) When deciding whether or not a particular activity falls within the ambit of a ‘process of manu-
facture’ the ordinary, natural meaning of that phrase in the English language must not be ignored.
Since no two activities are the same, each activity should be evaluated separately, based on the
facts.
What is a process similar to a process of manufacture?

The lists of processes that SARS accepts as ‘direct’ processes of manufacture, similar processes and
those processes excluded from being a process of manufacture are detailed in the Annexures to
Practice Note No. 42:
l Annexure A: This annexure lists the processes regarded by SARS as processes similar to a
process of manufacture and includes, for example, curing of biltong, dry-cleaning, construction
of roads and buildings, photography, preparation of computer software and bulk processing of
meat.
l Annexure B: This annexure lists direct processes of manufacture and includes examples of
qualifying processes in addition to more conventional manufacturing operations, such as:
crushing of stone, baking of bread, blending and mixing of tea, printing, re-treading of tyres and
manufacture of bricks. The processes on this list do not require any specific approval before
being classified as a process of manufacture. However, Practice Note No. 42 states that the list is
not exhaustive.
l Annexure C: This annexure lists processes regarded by SARS as neither processes of manufac-
ture nor similar processes, for example a garage keeper, dental surgery, processing of accounts data
and the delivery of final statements. However, Practice Note No. 42 states that the list is not
exhaustive.
388
13.2–13.3 Chapter 13: Capital allowances and recoupments
What does the phrase ‘used directly in a process of manufacture’ mean?

The phrase ‘used . . . directly in a process of manufacture . . . or any other process . . . which is of a
similar nature’ is used in ss 12C and 12E(1). In SIR v Cape Lime Ltd (1967 A) it was agreed that
generally speaking once the process of manufacture has commenced or started, the movement of
material from one part of the plant to the next is an integral part of the process of manufacture. As a
result, any plant or machinery used to effect such movement during the manufacturing process, is
used ‘directly in a process of manufacture’.
13.2.4 Depreciable asset (s 1)

A ‘depreciable asset’ is
l an asset as defined in the Eighth Schedule, which includes:
– any property, movable or immovable, corporeal or incorporeal, excluding any currency, but
including any coin that is made mainly from gold or platinum, and
– any right or interest to or in the above-mentioned property
l that qualifies for a deduction or allowance that is wholly or partly based on its cost or value
l but excluding trading stock or any debt (s 1).
Remember
If a small, medium or micro-sized enterprise (SMME) uses an amount received from a small
business funding entity to fund (or to reimburse) expenditure incurred for the acquisition,
creation or improvement of an asset (including an allowance asset), the base cost of the asset
should be reduced by the amount of the funding received. The remaining amount should then
be used to base the calculation of the deductible allowances on (s 23O(3)–(5) – see chapter 19).
13.2.5 Recoupments and the s 11(o) allowance

When a taxpayer disposes of an asset on which allowances were granted for normal tax purposes,
there might be certain normal tax consequences:
The proceeds of Tax value of the Recoupment

the disposal EXCEED asset (see 13.10)
The proceeds of Tax value of the A possible s 11(o)

the disposal ARE LESS THAN asset allowance
(see 13.11)
Therefore, if:
l proceeds (limited to original cost price) – tax value = positive: add recoupment to income (s 1,
gross income, par (n) – see chapter 4)
l proceeds (limited to original cost price) – tax value = negative: claim s 11(o) allowance if circum-
stances qualify.
13.3 Allowances on movable assets
13.3.1 Wear-and-tear allowance s 11((e))

When will s 11(e) be applicable?
The s 11(e) allowance (commonly referred to as the wear-and-tear allowance) will be available to a
taxpayer if:
l the value of any machinery, plant, implements, utensils and articles
l owned by the taxpayer or acquired by him as purchaser in terms of an instalment sale agree-
ment, and
l used by him for the purpose of his trade (this will exclude assets held in reserve or as replacement
assets in the event of a breakdown (Interpretation Note No. 47 (Issue 5) issued 9 February 2021))
l has been diminished by reason of wear and tear or depreciation during the year of assessment.
389
Section 11(e) does not apply to the following:

l farmers for development expenditure already allowed in full under the provisions of par 12 of the
First Schedule (specifically disallowed as set out in par 12(2) of the First Schedule (see chap-
ter 22))
l machinery, plant, implements, utensils and articles that qualify for deductions under ss 12B (mov-
able assets used in farming or production of renewable energy – see 13.3.2), 12C (see 13.3.3),
12DA (rolling stock – see 13.3.5), 12E(1) (see 13.3.4), 12U (additional deduction for roads and
fences used in respect of the production of renewable energy – see 13.9.4) or 37B (environ-
mental expenditure – see 13.9.5) (since the section only excludes s 12E(1) assets (manufacturing
assets of a small business corporation), taxpayers will still have the option to elect between
applying the provisions of s 11(e) or s 12E(1A) to the non-manufacturing assets of a small
business corporation)
l any machinery, plant, implement, utensil or article if the ownership is retained by the taxpayer as
a seller in terms of an instalment sale agreement (proviso (iA))
l buildings or other structures or works of a permanent nature (proviso (ii))
l any machinery, implement, utensil or article the cost of which has been allowed as a deduction
under s 24D (expenditure incurred on a National Key Point (proviso (iiiA)).
What will the implications be if s 11(e) is applicable?
General rule Allowance = Value » Expected useful life × number of months used in year
Section 11(e) allows taxpayers a deduction against income for the amount by which the value of
qualifying assets used by him for the purpose of his trade has been diminished by reason of wear
and tear or depreciation during the year of assessment.
The wear-and-tear allowance should be calculated using the diminishing value of the asset (the
allowance should be calculated on the value remaining after deduction of previous years’ allow-
ances). However, in terms of Binding General Ruling (Income Tax) No. 7, a taxpayer may elect to use
the straight-line method (under this method the allowance is claimed in equal instalments over the
expected useful life of the asset) or the diminishing-value method for calculating the wear-and-tear
allowance. The taxpayer does not need to notify the Commissioner when changing the method but
should keep the necessary records supporting the write-off of all assets readily available.
A taxpayer using the diminishing-value method that wishes to adopt the straight-line method must
write off the income tax value of existing assets in equal instalments over the remaining estimated
useful life.
The following information and documents must be kept for any asset in respect
of which an allowance was claimed:
l The date of acquisition, date on which the asset was brought into use and if
disposed of, the date on which it was disposed of.
l The value of the asset.
l The write-off period of assets and any information or documentation used to
determine its write-off period.
Please note! l The income tax value of the asset at the end of the previous year of
assessment. Any assets written-off in full must be brought into account for
record purposes at a residual value of R1.
l If the asset is disposed of, the price realised on disposal or scrapping of the
asset and the income tax value at the end of the previous year of assess-
ment.
(Interpretation Note No. 47 (Issue 5), p 20)
The allowance amount should be determined on the basis of the periods of use listed in a public
notice issued by the Commissioner. Write-off periods acceptable to SARS for assets that are written
off on the straight-line method are listed in Binding General Ruling (Income Tax) No. 7 (reissued on
9 February 2021) (see Appendix E – this also includes leased assets). For example, personal com-
puters are written off over three years, whilst computer tablets and similar devices are written off over
two years (applicable to tablets brought into use during a year of assessment commencing from
1 March 2009), delivery vehicles over four years and passenger cars are written off over five years. (It
is submitted that the list in the Binding General Ruling (Income Tax) No. 7 will meet the requirements
of a public notice as required.)
390
Taxpayers who believe that a shorter write-off period should be used are required to apply, in the
prescribed form and manner, to be approved by the Commissioner.
For an asset not mentioned in the list, a taxpayer must determine the period of write-off by its expected
life, taking into account the following factors:
l how long the taxpayer expects the asset to last
l how the taxpayer expects to use the asset, for example the environment in which the asset is used
and the intensity with which the asset is used, will affect this factor
l whether the asset is likely to become obsolete
l whether the effective life of the asset is limited to the life of a particular project.
(Binding General Ruling (Income Tax) No. 7, p.8)
Used (or second-hand) assets may be written off over their expected lifetimes, which may be deter-
mined in the light of their condition.
Binding General Ruling (Income Tax) No. 7 states that ‘small items’ may be written off in full in the year
of assessment in which they are acquired and brought into use. The Commissioner regards a small
item as an item acquired at a cost of less than R7 000 that ‘normally functions in its own right and is not
part of a set’. An example of a set would be a table and six chairs forming part of a set. If the set costs
R7 000 or more, it fails to qualify, as do its component parts. The small item write-off does, however, not
apply to assets acquired by a lessor for the purposes of letting. Lessors that let small items must
depreciate these assets over their useful life (examples of small items let are DVDs and gas cylinders).
Value of an asset for s 11(e) purposes is

l the direct cost of the asset
l as if acquired under a cash transaction concluded at arm’s length on the
date on which the purchase transaction was concluded (market value)
(s 11(e)(vii)),
including
– the direct cost of installation or erection of the asset
(also shipping and delivery charges) (see note 1)
Please note!
– cost of foundation/supporting structure (see note 2)
– moving cost (see note 3)
but excluding
interest and finance charges (but s 24J is available) (see note 4).
(In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth
Schedule should apply in order for s 8(4)(e) to provide for a delayed taxation of
the recoupment (see 13.10.3).)
Note 1: Foreign travelling expenses incurred by the taxpayer in order to buy the asset cannot be
included in the installation and erection costs and would thus not be added to the value of
the asset.
Note 2: If an asset in the form of any machinery, implement, utensil or article qualifies for the wear-
and-tear allowance and is also mounted on or fixed to any concrete or other foundation or
supporting structure, and:
l that structure is designed for the asset and is constructed in such a manner that it could
be regarded as being integrated with the asset, and
l its useful life will be limited to the useful life of the asset mounted on it,
the foundation or supporting structure will not be deemed to be a structure or work of a
permanent nature, but will be deemed to be part of the asset that is mounted on or affixed to
it (s 11(e)(iiA)). For example, if an industrial washing machine is mounted in concrete to
prevent the machine from excessive vibration and movement, the concrete will be deemed
to be part of the washing machine for the purposes of the s 11(e) allowance.
Note 3: Any expenditure incurred in moving an asset (on which a s 11(e) allowance can be claimed)
from one location to another shall be included in the value of that asset if:
l used for purposes of trade, and
l if not deductible under s 11(a) (thus preventing a double deduction) (s 11(e)(v)).
These expenses can then also be claimed over the remaining write-off period of the asset.
Note 4: The following should be considered when determining the value of an asset qualifying for
the s 11(e) allowance:
l If a taxpayer acquires an asset without paying for it (e.g. if a vehicle is acquired by
donation, inheritance or as a distribution in specie), the taxpayer will have to base the
allowance on the market value of the asset.
391
l The allowance under s 11(e) is calculated based on the value of the asset, in contrast to,
for example the s 12C allowance (see 13.3.3) that is claimed on the cost of the asset.
The implication of this is that the s 11(e) allowance can be claimed on an asset obtained
for no consideration, but s 12C can only be claimed on assets that were obtained at an
actual consideration, since there should be a cost before s 12C can be claimed. Under
s 11(e) the taxpayer can claim the allowance on the value of the asset (regardless of
whether or not any amount was paid for the asset).
l When an asset qualifying for the wear-and-tear allowance is acquired in a foreign
currency, the price should be converted to Rand by applying the provisions of s 25D. It
is the practice of SARS to convert the cost price of the asset to Rand for the purposes of
the wear-and-tear allowance on the date on which the transaction for its acquisition was
incurred. When the delivery of the asset takes place over an extended period or a long
time after the order for the machinery or plant was placed, it is prepared to permit the
conversion to take place on the date of delivery. All subsequent foreign exchange gains
and losses are then dealt with in terms of s 24I (see chapter 15) and par 43 of the Eighth
Schedule (see chapter 17).
l A manufacturer who constructs plant and machinery for the purposes of his business
may not claim the wear-and-tear allowance on the value of his own skill and labour.
Remember
The s 11(e) allowance (some additional notes to clarify the application):
l The allowance is only available for ordinary wear and tear. When damage to an article is
caused through an accident or a removal or through some external or violent means, the
damage cannot be said to be ordinary wear and tear as envisaged by the allowance.
Depreciation arising from other causes (for example a change in fashion or the obso-
lescence of the asset) is not deductible.
l The allowance can be claimed up to the date of sale of an asset or up to the time the asset is
scrapped and no longer used for the purposes of trade. (If the asset is sold for more than its
tax value, the amount exceeding the tax value will be included in income to the extent to
which it represents a recoupment of any wear-and-tear allowances previously made (in terms
of s 8(4)(a)). On the other hand, if a taxpayer disposes of an asset on which allowances were
previously claimed, there might be the possibility of claiming a s 11(o) allowance, if the
proceeds (limited to original cost price) less the tax value is a negative amount.
l The allowance may be granted only for wear and tear relating to the current year of assess-
ment.
l The requirement merely states that an asset be used by the taxpayer for the purposes of his
trade and not that he be obliged to use it (for example by the terms of his employment).
l The allowance is only granted on qualifying assets belonging to the taxpayer. Therefore, a
taxpayer is not entitled to the allowance on machinery and plant that he has hired or that is
subject to a usufruct in his favour.
l If fixed assets are used partly for trading purposes and partly for private purposes, a wear-
and-tear allowance based on the proportion of use for trading purposes will be allowed.
l The s 11(e) allowance will be apportioned if the asset was not used for purposes of trade for
the full year (for example asset acquired or disposed of in the year or a natural person using
the asset in his trade dies or becomes insolvent).
l A special ‘deemed allowance’ rule provides that:
– when an asset was previously brought into use by the taxpayer in a trade carried on by
him
– in the production of income that was excluded from income (for example under the
turnover tax regime)
– the period of use of the asset in the previous year or years of assessment shall be taken
into account in determining the amount by which the value of the asset has been
diminished (s 11(e)(ix)).
The deemed allowance will not be recouped if the asset is consequently disposed of
(s 8(4A)).
l The allowance granted to a lessor must be based on the cost of the asset less any residual
value (as specified in the lease agreement). Section 23A may also set a limit on the amount
of certain allowances, including the wear-and-tear allowance that may be claimed in any
year of assessment by a lessor letting ‘affected assets’ as defined (see 13.7.5).
l Section 23D imposes a restriction on the deduction or allowance available under s 11(e) on
machinery, plant, implements, utensils or articles let or licensed to a person (or his con-
nected person) who held the asset during the two years before the start of the lease or
licence (see 13.7.6).
392
See 13.12 for a comparison between the provisions of ss 11(e), 12C (movable assets used by manu-
facturers, for research and development or by hotelkeepers, and ships, aircraft and assets used for
the storage and packing of agricultural products) and 13 (allowance on buildings and improve-
ments).
Example 13.1. Wear-and-tear allowance

Moatshe (Pty) Ltd acquired a motorcycle at a cost of R40 000 (excluding VAT) on 1 March 2022
and immediately brought it into use in its business, for the purpose of making deliveries. It used
the motorcycle for the rest of its year of assessment ending 31 August 2022 and throughout its
year of assessment ending 31 August 2023.
Calculate the wear-and-tear allowance to be claimed in the 2022 and 2023 years of assessment.
The taxpayer elects the straight-line method. Binding General Ruling (Income Tax) No. 7 and
Interpretation Note No. 47 (which is in line with the Commissioner’s public notice) allow a four-
year write-off period on a motorcycle.
SOLUTION
31 August 2022
Wear-and-tear allowance (R40 000/4 × 6/12 (s 11(e)) ................................................ (R5 000)
31 August 2023
Wear-and-tear allowance (R40 000/4) ......................................................................... (R10 000)
Remember
The s 11(e) allowance
l can be claimed only on assets that do not qualify for other allowances
l can never be claimed on buildings
l has to be apportioned for the period it was used in the taxpayer’s trade. As the Act does not
prescribe the method of apportionment, either the number of days or the number of months
used in the taxpayer’s trade during the year of assessment could be applied.
13.3.2 Movable assets used in farming or production of renewable energy (s 12B)

The provisions of s 12B can be summarised as follows:
Assets that will Machinery, implements, utensils or articles
qualify for the l owned by the taxpayer or acquired by him as purchaser under an instalment
allowance: sale agreement, and
l used by him in the carrying on of his farming operations (but not livestock),
but excluding
– any motor vehicle whose sole or primary function is the conveyance of persons
– caravans
– aircraft (other than an aircraft used solely or mainly for the purpose of crop-
spraying), or
– office furniture or equipment (s 12B(1)(f))
l used in the taxpayer’s trade for the production of bio-fuels (s 12B(1)(g)), or
l used in the taxpayer’s trade to generate electricity from
– wind power
– solar energy (sunlight) (see note 1)
– hydropower (gravitational water forces) to produce electricity of not more
than 30 megawatts, or
– biomass comprising organic wastes, landfill gas or plant material (s 12B(1)(h)),
or
l improvements (not repairs) to any of the above assets (s 12B(1)(i)(a))
(If a lessee undertakes improvements on leased property in terms of a Public
Private Partnership,
– owned by the government in the national, provincial or local sphere or
certain government-owned exempt entities,
– or for obligations incurred on or after 1 January 2013, the Independent
Power Producer Procurement Programme administered by the Department
of Energy,
continued
393
s 12N (deduction for improvements not owned by the taxpayer – see 13.7.4)
will be applicable. It allows for the depreciation allowance on the improvements
to be calculated as if the lessee owned the property, if the lessee uses the
property for earning income. The expenditure incurred by the lessee to
complete the improvements shall be deemed to be the cost to the lessee of the
movable asset used for farming or the production of renewable energy), and
l foundations or supporting structures that are deemed to be part (see note 2) of
the above assets (s 12B(1)(i)(b)).
Capital allowance The year of assessment during which a qualifying asset, or any improvements
available from: thereto, is brought into use for the first time by a taxpayer (new or used assets).
Allowance (general) = Cost × 50%/30%/20% per year

General rule and
Allowance (machinery to generate electricity from photovoltaic solar energy
not exceeding one megawatt) = Cost × 100%
Calculation of the A 100% allowance will be allowed for machinery used in the taxpayer’s trade to
capital allowance: generate electricity from photovoltaic solar energy not exceeding one megawatt
(see note 1) (s 12B(2)(b)).
The deduction for all other qualifying assets will be calculated on the cost as
follows:
l 50% in the first year
l 30% in the second year, and
l 20% in the third year (s 12B(2)(a)).
The full allowance can be claimed, even if an asset is used for only part of the year
of assessment (s 12B(2)).
Note 1: For years of assessment commencing on or after 1 January 2016, the generation of electricity
from solar energy will only be allowed for the following three categories:
l photovoltaic solar energy (solar PV) of more than one megawatt,
l photovoltaic solar energy (solar PV) not exceeding one megawatt, or
l concentrated solar energy (solar CSP).
The useful life of the foundation or supporting structure will be limited to the useful life of the
asset or improvement (proviso to s 12B(1)). For years of assessment commencing on or
after 1 April 2016, a deduction will be allowed for expenditure actually incurred for roads
and fences (including foundations or supporting structures designed for such fences (under
s 12U – see 13.9.4) constructed for purposes of trade of a person generating electricity.
Note 2: The foundations or supporting structures is deemed to be part of the asset if:
l the asset is mounted or fixed to any concrete or other supporting structure or foun-
dation, and
l the supporting structure or foundation is designed for the asset in such a way that it is
an integral part of the asset, and
l the foundation or supporting structure is brought into use on or after 1 January 2013.
The useful life of the foundation or supporting structure will be limited to the useful life of the
asset or improvement (proviso to s 12B(1)).
The allowance is available only if the asset is brought into use for the first time by
Please note! the taxpayer. This requirement does not limit the deduction to new or unused
assets, but prevents a taxpayer from claiming the s 12B allowance twice on the
same asset.
Example 13.2. Movable assets used in production of renewable energy

On 30 June 2022, Solastic (Pty) Ltd completed the installation of solar panels at a total cost of
R350 000, and immediately brought it into use. The solar panels will generate electricity from
photovoltaic solar energy not exceeding one megawatt.
Calculate the allowances on the solar panels for the year of assessment ending 30 September
2022.
394
SOLUTION
2022: R350 000 × 100% (s 12B(2)(b)) ........................................................................ (350 000)
Remember
The s 12B allowance
l cannot be claimed on buildings
l is claimed when the asset is brought into use for the first time by the taxpayer
l can be claimed in full (thus no apportionment) in a year of assessment, even if the asset was
used for only a few days in the production of income.
Section 12B is discussed in more detail (with additional examples) in chapter 22.
13.3.3 Movable assets used by manufacturers, for research and development or by

hotelkeepers, and ships, aircraft and assets used for the storage and packing
of agricultural products (s 12C)
When will s 12C be applicable?
Section 12C provides an allowance on the following assets, owned by the taxpayer or acquired by
him in terms of an instalment sale agreement and brought into use for the first time:
Industrial machinery or Machinery or plant
plant l of the taxpayer or the lessor, where the asset is let
(after 15 December 1989) l that is used for the purposes of the taxpayer’s or lessee’s trade (but not
mining and farming)
l directly in a process of manufacture or similar process (see 13.2.3)
l carried on by the taxpayer or lessee (s 12C(1)(a) and (b)).
If, however, the taxpayer is a small business corporation as defined in
s 12E(4), the machinery or plant may qualify for the 100% allowance under
s 12E(1) (see 13.3.4) and not s 12C (s 12C(1)(a), (b) and (c)).
Industrial machinery or Machinery or plant
plant used under a supply l of the taxpayer
agreement in the l made available in terms of a contract to another person (the components
Automotive industry supplier) for no consideration
(years of assessment l that is brought into use by the supplier for the first time
ending on or after
1 January 2016) l for purposes of the supplier’s trade (but not mining and farming)
l and is used by the supplier solely for the benefit of the taxpayer for the
purposes of the performance of his obligations under that contract
l in a process of manufacture (see 13.2.3)
l under the Automotive Production and Development Programme or Auto-
motive Investment Scheme administered by the Department of Trade and
Industry (referred to in the 11th Schedule to the Act) (s 12C(1)(bA)).
If, however, the taxpayer is a small business corporation as defined in
s 12E(4), the machinery or plant may qualify for the 100% allowance under
s 12E(1) (see 13.3.4) and not s 12C (s 12C(1)(bA)).
Agricultural Machinery or plant
co-operatives l of an agricultural co-operative, and
(after 15 December 1989) l used by it directly for storing or packing pastoral, agricultural or other
farm products of its members, or
l for subjecting such products to a ‘primary process’ as defined in s 27(9)
(s 12C(1)(c)).
Hotelkeepers Machinery, implement, utensil or article
(after 15 December 1989) l of the taxpayer or the lessee (where the asset is let)
l used for the purposes of the taxpayer or lessee’s trade as hotelkeeper
(see 13.5), and
l that is used by the taxpayer or lessee in a hotel
l excluding any vehicle or equipment for offices or managers’ or servants’
rooms (s 12C(1)(d) and (e)).
continued
395
Aircraft An aircraft
(on or after 1 April 1995) l of the taxpayer
l that is used for the purposes of his or her trade
l excluding an aircraft in respect of which an allowance has been granted to
the taxpayer under s 12B (see 13.3.2 and chapter 22) (s 12C(1)(f)).
Ships A ship
(on or after 1 April 1995) l of the taxpayer
l that is used for the purposes of his or her trade
l excluding a South African ship contemplated in s 12Q(1) (s 12C(1)(g)).
Machinery or plant used New or unused machinery or plant
for research and l of the taxpayer
development purposes l that is first brought into use
(on or after 1 October
l for purposes of research and development as defined in s 11D (see 13.8.1)
2012 but before
(s 12C(1)(gA))
1 October 2022)
Improvements Improvements (other than repairs) to any of the above assets, except to an air-
craft (s 12C(1)(f)) and a ship (s 12C(1)(g)) (s 12C(1)(h)).
Section 12C is not available for an asset that is let, unless:

l the asset is let under an ‘operating lease’ as defined in s 23A(1) (see
Please note! 13.7.5), or
l the asset is let under any other lease and the lessee under the lease derives
income (as defined in s 1) in the carrying on of his trade (s 12C(3)(a)).
Remember
If a taxpayer qualifies as a small business corporation, allowances on manufacturing plant and
machinery can be claimed under the provisions of s 12E(1).
What will the implications be if s 12C is applicable?
Allowance (new and unused manufacturing assets) = Cost ×

General rule 40%/20%/20%/20%
and
Allowance (all other assets) = Cost × 20% per year
The s 12C allowance will normally be:
20% of the cost of the asset or improvement to the taxpayer in

each year for five years
EXCEPT IF
it is new or unused machinery or plant or improvement
l acquired by the taxpayer under an agreement formally and finally signed by every party to it on
or after 1 March 2002, and
– brought into use for the first time by the taxpayer for the purposes of his trade (other than
mining, farming, banking, financial services, insurance or rental business), and
– used directly in a process of manufacture or similar process,
where it will be:
40% of the cost in the year brought into use, and then
20% in each of the three subsequent years of assessment.
396
l acquired by the taxpayer under an agreement formally and finally signed by every party to it on
or after 1 January 2012, and
– brought into use on or after that date by the taxpayer for the purpose of research and develop-
ment as defined in s 11D (see 13.8.1 – the allowance will be available on plant and machinery
used for research and development purposes where the expenditure to acquire the assets was
incurred on or after 1 October 2012 but before 1 October 2022), where it will be:
50% of the cost in the year first brought into use, and then
30% in the second year and 20% in the third year of assessment.
If a lessee undertakes improvements to a leased asset in terms of a Public Private Partnership,

l owned by the government in the national, provincial or local sphere or certain government-owned
exempt entities
l or for obligations incurred on or after 1 January 2013, the Independent Power Producer Procure-
ment Programme administered by the Department of Energy,
s 12N (deduction for improvements not owned by the taxpayer – see 13.7.4) will be applicable. It
allows for the depreciation allowance on the improvements to be calculated as if the lessee owned
the asset (plant and machinery), if the lessee uses the asset to earn income. The expenditure
incurred by the lessee to complete the improvements shall be deemed to be the cost for purposes of
the allowance (s 12N(1)).
Remember
l The accelerated allowance (40:20:20:20) is not available where the asset is let.
l The accelerated allowance applies only to new or unused machinery or plant (and is there-
fore not available to an aircraft and a ship).
l The 20% rate applies to both new and used assets (including aircrafts and ships).
l The s 12C allowance is not apportioned, but can be claimed in full, if the asset was used for
any period of time in the required manner during a particular year of assessment.
l The total deductions allowed under ss 12C and 11(o) (the alienation, loss or destruction
allowance) can never exceed 100% of the cost (s 12C(5)).
l The s 12C allowance is only available if the asset is brought into use for the first time by the
taxpayer (or his lessee, where applicable). This requirement prevents a taxpayer from
claiming the s 12C allowance twice on the same asset.
If a taxpayer brings the same asset into use in a process of manufacture for the second time,
the taxpayer may not claim s 12C again, but may apply the s 11(e) wear-and-tear allowance
(see 13.3.1).
l Any improvement to a s 12C asset is treated as a ‘new asset’ in that it is written off from the
time that the improvements are first brought into use.
The cost of an asset for the purposes of s 12C is

the lesser of
l the actual cost to the taxpayer to acquire that asset, or
l the direct cost under a cash transaction concluded at arm’s length on the date
on which the purchase transaction was concluded (market value),
Please note! including
– the direct cost of installation or erection of the asset
(also shipping and delivery charges)
– cost of foundation/supporting structure (note 1)
– moving cost (note 2)
but excluding
interest and finance charges (note 3).
397
Note 1: When any machinery, plant, implement, utensil, article or improvement qualifying for the
s 12C allowance is mounted on or fixed to any concrete or other foundation or supporting
structure, and:
l the foundation or supporting structure is designed for the asset and is constructed in
such a manner that it could be regarded as being integrated with the machinery, plant,
implement, utensil, article or improvement, and
l its useful life will be limited to the useful life of the asset mounted on it,
the foundation or supporting structure will be deemed to be part of the asset that is mounted
on or affixed to it (proviso to s 12C(1)).
Note 2: Any expenditure (not deductible under s 11(a)) incurred by a taxpayer to move an asset
from one location to another is deductible in equal instalments over the remaining write-off
period (under s 12C) of the asset. If the asset has been written off in full by the time that it is
moved, the moving cost is deductible in full in the year in which it is incurred (s 12C(6)).
Note 3: Interest need to be dealt with under s 24J(2) (see chapter 16).
A special ‘deemed allowance’ rule provides:

l when an asset was previously brought into use by the taxpayer in a trade
carried on by him
l in the production of income that was excluded from income (for example
under the turnover tax regime)
l any deduction that could have been allowed under s 12C during the
previous year in which the asset was brought into use and any following
Please note! year is deemed to have been allowed during those years of assessment, as
if the receipts and accruals were included in the taxpayer’s income
(s 12C(4A)).
Therefore, the tax value of the asset is reduced by the deemed allowance,
although no actual deduction will be granted under this section (s 12C) in
respect of the period of use of the asset (which was excluded from income) in
the previous years. The deemed allowance will not be recouped if the asset is
consequently disposed of (s 8(4A)).
Remember
Section 12C(3)(c) prohibits the s 12C allowance on an asset that has been disposed of by the
taxpayer during any previous year of assessment.
See 13.12 for a comparison of the provisions of ss 11(e) (wear-and-tear allowance), 12C and 13
(allowance on buildings and improvements).
Example 13.3. Section 12C 20% and 40% allowances, moving and installation cost
Kanyetu CC acquired Machine A (a second-hand machine) for R1 500 000 and brought it into
use in its manufacturing process on 10 January 2017.
Kanyetu CC acquired a new manufacturing Machine B for R3 000 000 and brought it into use in
its manufacturing process on 15 December 2019. Kanyetu CC spent an additional R50 000 on
installation expenditure for Machine B.
Kanyetu CC decided to move to another site and both machines were moved on 15 July 2020 at
a cost of R10 000 for Machine A and R60 000 for Machine B (both amounts not claimable under
s 11(a)).
Calculate the allowances that Kanyetu CC may claim under s 12C in its years of assessment
ending at the end of June 2020, 2021, 2022 and 2023 (ignore VAT).
398
SOLUTION
Year ended 30 June 2020
Machine A:
Section 12C allowance (20% of R1 500 000 – 20% as a second-hand machine) .... (R300 000)
Machine B:
Section 12C allowance (40% of (R3 000 000 + R50 000 (installation cost
included)) (new and unused) – the allowance is granted in full even though the
machine was used for only part of the year) ............................................................. (R1 220 000)
Machine A:
Section 12C allowance (20% of R1 500 000, plus R10 000 (moving cost – as
Machine A is written off in full in the 2021 year, the full amount will be claimed)) .... (R310 000)
Machine B:
Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000
(ϛ of R60 000 – the moving cost is deductible in equal instalments over the
remaining years over which the s 12C allowance is to be claimed, thus
three years)) .............................................................................................................. (R630 000)
Year ended 30 June 2022, 2023
Machine B:
Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000
(ϛ of R60 000) ........................................................................................................... (R630 000)
Remember
The s 12C allowance for a year of assessment can be claimed in full (thus no apportionment),
even if the asset was used for only a few days in the taxpayer’s trade.
13.3.4 Small business corporations (s 12E)

Section 12E allows certain deductions on movable assets for small business corporations. The
requirements for a taxpayer to be classified as a small business corporation are discussed in detail in
chapter 19.
Allowance (manufacturing assets) = Cost × 100%

General rule and
Allowance (non-manufacturing assets) = Cost × {s 11(e) write-off period
% (see 13.3.1) OR 50%/30%/20% per year}
399
The three types of deductions that are provided for in s 12E can be summarised schematically as
follows:
Allowances available
in terms of s 12E
Manufacturing assets: Non-manufacturing assets: Moving expenses:

Applicable to Applicable to Any expenditure incurred by
l plant and machinery l Any machinery, plant, the taxpayer in moving a
l owned or acquired implement, utensil, qualifying s 12E asset from
(under an instalment sale article, aircraft or ship one location to another,
agreement) by the l that does not qualify for which is not deductible
taxpayer, and s 12E(1) (thus not manu- under s 11(a), will be allowed
l used directly in a facturing assets), and l in equal instalments over
process of manufacture l is acquired (under an the remaining years of
or similar process agreement formally and that capital deduction (in
terms of s 12E(1), or
l for the first time on or finally signed) on or after
12E(1A)) will be allowed
after 1 April 2001 1 April 2005, and
on the asset, or
l by a small business cor- l would also qualify for
deduction under s 11(e). l in any other case, in full
poration for the purposes in the year incurred.
of the taxpayer’s trade The allowance is at the
(other than mining and election of the small business (s 12E(3)).
farming). corporation (note 1), either
A 100% allowance of cost is l the wear-and-tear
permitted in the year that the allowance in terms of
asset is brought into use, s 11(e) (see 13.3.1)
even if the asset is not used (s 12E(1A)(a)), or
for the full year (s 12E(1)). l 50% of the cost of the
asset in the year during
which that asset was
bought into use for the
first time,
30% of the cost in the
second year and
20% of the cost in the
third year (note 2 and 3)
(s 12E(1A)(b)).
Notes:
1. The taxpayer would elect to use s 11(e) if it results in a more favourable allowance than under s 12E(1A)(b).
2. The s 12E allowance is not apportioned if the asset is used for less than 12 months during a year of assess-
ment (s 12E(1A)).
3. It is important to realise that in order for an asset to qualify for the allowance available for non-manufacturing
assets under s 12E(1A), the asset should meet and is subject to the requirements of s 11(e).
Remember
The above allowances will only be available if the taxpayer
l qualifies as a small business corporation for purposes of s 12E(4)(a) (see chapter 19)
l is the owner or purchaser (under an instalment sale agreement), but not the lessor of the
asset, and
l is available for new, as well as second-hand moveable assets.
400
The cost of an asset for s 12E is

the lesser of
including
Please note! the direct cost of installation or erection of the asset
(also shipping and delivery charges)
but excluding
interest and finance charges (s 12E(2)).
In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth
the recoupment (see 13.10.3).
Example 13.4. Assets and moving expenses of small business corporations

Naidoo CC, a small business corporation as defined, commenced trading on 1 September 2020.
Its year of assessment ends on the last day of February each year. Naidoo CC acquired non-
manufacturing machinery on 15 September 2020 for R1 000 000, which was immediately brought
into use for trade purposes. A new plant costing R1 250 000 was purchased on 1 December
2020 and Naidoo CC immediately brought the plant into use in its manufacturing operations. On
29 May 2021, Naidoo CC moved to bigger premises and incurred moving costs amounting to
R50 000 in respect of the manufacturing machinery and R30 000 in respect of the non-manu-
facturing machinery.
Calculate the allowances that Naidoo CC can claim during the 2021, 2022 and 2023 years of
assessment.
SOLUTION
28 February 2021
Allowance in respect of non-manufacturing machinery (Year 1 = 50%) (s 12E(1A)) ... R(500 000)
Cost of manufacturing plant (100% deduction allowed in the first year) (s 12E(1)) ..... (R1 250 000)
28 February 2022
Allowance in respect of non-manufacturing machinery acquired during 2021
(Year 2 = 30%) (s 12E(1A)) .......................................................................................... (R300 000)
Deduction for moving costs:
Manufacturing machinery (deduct in full as asset written-off in full) (s 12E(3)(b)) ....... (R50 000)
Non-manufacturing machinery (two years remaining that capital deductions will be
allowed) (R30 000/2) (s 12E(3)(a)) ............................................................................... (R15 000)
28 February 2023
Allowance in respect of non-manufacturing machinery acquired during 2021
(Year 3 = 20%) (s 12E(1A)) .......................................................................................... (R200 000)
Deduction for remaining moving costs incurred during 2022 on non-manufacturing
machinery (remaining moving costs written off in full as final allowance is claimed
on asset in 2023) (R30 000 – R15 000 (2022)) (s 12E(3)(a))........................................ (R15 000)
Interpretation Note No. 9 (Issue 7) (issued on 25 June 2018) contains detailed

Please note! explanations and examples that further clarify the taxation of small business
corporations.
13.3.5 Rolling stock (s 12DA)

When will s 12DA be applicable?
In support of government’s objective to reduce the cost of doing business in South Africa, investment
in the rail transportation industry had to be encouraged. This objective led to the introduction of the
rolling stock allowance (s 12DA) and the allowance on railway lines (s 12D – see 13.4.7), which is
aimed at the infrastructural development of rail transportation.
The s 12DA allowance is applicable to any rolling stock (for example trains and carriages) brought
into use from 1 January 2008 until 28 February 2022.
401
Section 12DA is applicable to

l any acquisition or improvements of any rolling stock
l brought into use on or before 28 February 2022 in the carrying on of the taxpayer’s trade
l owned by the taxpayer, or acquired by him in terms of an instalment sale agreement
l that is wholly or mainly used by the taxpayer for the transportation of persons, goods or things
l in the production of his income (s 12DA(1)).
* Remember
The allowance will not be available to a lessor of rolling stock, as the section requires that the
taxpayer himself should use the rolling stock to transport passengers, goods or things.
What will the implications be if s 12DA is applicable?
General rule Allowance = Cost × 20% per year
An allowance of 20% per year (thus a five-year straight-line write-off period) on the cost of the rolling
stock will be allowed as a deduction from the income of the taxpayer (s 12DA(2)). The full allowance
will be available for a year of assessment, even though the rolling stock was brought into use for only
a part of the year of assessment. The total deduction allowed or deemed to be allowed under this
section and any other provisions of the Act can never exceed 100% of the cost (s 12DA(6)).
The cost of rolling stock for s 12DA is

the lesser of
l the actual cost, incurred by the taxpayer, or
l the direct cost under a cash transaction concluded at arm’s length on the
date on which the transaction for the acquisition or improvements were
Please note! concluded (market value),
including
the direct cost of acquisition or improvement of the rolling stock
(In the case of a disposal, the taxpayer can elect that par 65 or 66 of the Eighth
the recoupment (see 13.10.3).)

l when any rolling stock was, in a previous year of assessment, brought into use for the first time by
the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or for example
part of the turnover tax (see chapter 23))
l any deduction that could have been allowed under this section during the previous year in which
the asset was brought into use and any subsequent year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 12DA(4)).
Therefore, the tax value of the rolling stock is reduced by the deemed allowance, although no actual
deduction will be granted under this section (s 12DA) regarding the period of use of the asset (which
was excluded from income) in the previous years. The deemed allowance will not be recouped if the
asset is consequently disposed of (s 8(4A)).
No deduction shall be allowed on rolling stock in the year after it has been disposed of (thus the year
after the taxpayer ceased to be the owner) (s 12DA(5)).
Example 13.5. Allowance on rolling stock
On 15 February 2022, Roll-a-Long Ltd acquired a train and immediately brought it into use for the
transport of passengers. The train was purchased for a total cost of R600 000.
Calculate the allowances for Roll-a-Long Ltd on the train for the years of assessment ending on
30 June 2022 and 30 June 2023.
402
SOLUTION
2022: R600 000 × 20% (s 12DA(2)) (the full allowance allowed, although only
used for a part of the year of assessment) .................................................................. (R120 000)
2023: R600 000 × 20% (s 12DA(2)) ............................................................................ (R120 000)
13.4 Allowances on immovable assets

Legislation relating to allowances on immovable assets was amended, effective from 21 October
2008, to ensure a simple and comprehensive regime for easier compliance and enforcement. The
main objective of these amendments was a unified structure for capital allowances on buildings,
which comprises the bulk of what will be covered in this section.
13.4.1 Buildings and improvements: Annual allowance (s 13)

When will s 13 be applicable?
Section 13 allows a taxpayer to deduct an annual allowance on the cost of a building that was
l erected by the taxpayer, or
l purchased by the taxpayer from another person who was entitled to the s 13(1) annual allowance,
or
l purchased by the taxpayer from another person, where the building was never used before
and is
l wholly or mainly used by the taxpayer (or tenant or subtenant if the building was let)
l for trade purposes (other than mining or farming) for a process of manufacture, research and
development (as defined in s 11D (see 13.8.1)) or similar process (see 13.2.3).
Buildings in which research and development are carried on, on or after 1 Octo-
Please note! ber 2012, but before 1 October 2022, will also qualify for the s 13 allowance
(s 13(1)).
Important terminology for the purposes of s 13:

Date of erection:
The date of the commencement of erection of a building is important in the determination of the rate
of the annual allowance. The erection of a building commences on the date when the laying of its
foundations commences. (Excavation is performed in preparation of, preparatory but not part of, the
process of erection.)
‘Wholly or mainly’ used:
The buildings should be ‘wholly or mainly’ (more than 50%) used for a qualifying purpose. In practice,
SARS requires more than 50% of a building, measured either by floor space or by volume, to be used
for qualifying purposes. The allowance is also granted on the cost of erection of subsidiary buildings,
provided that they are erected on the same site and at the same time as the taxpayer’s qualifying
industrial buildings. An example would be buildings comprising offices, changing rooms and
cafeterias for employees. The ‘same site’ is not taken to mean merely the same subdivision of land
but will include any land next to the land on which the industrial buildings are erected. SARS will not
extend the allowance to improvements to the subsidiary buildings, since they will not be effected for
the purpose of increasing or improving the industrial capacity of these buildings. A building that is
used wholly or mainly for a qualifying purpose but includes, for example, offices, would qualify for the
allowance, but future improvements to these offices will not qualify for the reason already given.
What will the implications be if s 13 is applicable?
A taxpayer can deduct an annual allowance on the cost of a qualifying building (s 13(1)(b)). The rate
of the allowance varies, depending on when the erection of the building or qualifying improvements
commenced.
403
Erection of the building or qualifying improvements commenced – Rate of allowance

From 15 March 1961 but before 1 July 1985 2%
Between 1 July 1985 and 31 December 1988 2% (17,5% initial allowance)
Between 1 January 1989 and 30 June 1996 5%
Between 1 July 1996 and 30 September 1999 (provided that the buildings
or improvements were brought into use by 31 March 2000) 10% (provision deleted)
From 1 October 1999 onwards 5%
In each instance, the allowance is based on (and in total may not exceed):
The cost to the taxpayer of the qualifying buildings or

improvements, excluding repairs
LESS
Any recovery or recoupment of allowances of a replaced asset (s 13(3))
LESS
The initial allowance (which was 17,5% of the cost of qualifying buildings and improvements, the
erection of which commenced between 1 July 1985 and 31 December 1988, if completed and
brought into use by 31 December 1989) that was available (under the now-repealed s 13(7)).
A person who acquires buildings by purchase from a person who was entitled
to the allowance will also qualify for the allowance, provided that he or his
Please note! tenant or subtenant continues to use the building for the prescribed purposes
(s 13(1)(d)). If the previous owner was not entitled to the allowance, the pur-
chaser will also not be able to claim the allowance, although the building may
be used for a qualifying purpose by the new owner.
Example 13.6. Initial and annual allowance
Nomatema (Pty) Ltd erected a factory building at a total cost of R1 800 000. The erection of the
building commenced on 1 March 1988, and it was brought into use on 1 October 1988.
Calculate the allowances on the building for the year ended 28 February 2022.
SOLUTION
Cost of building ....................................................................................................... R1 800 000
Less: Initial allowance (17,5% of R1 800 000) ........................................................ (315 000)
R1 485 000
The annual allowance each year must be based on the cost less the initial allowance; that is,
R1 485 000. Therefore the annual allowance in the year ended 28 February 2022 will be an
amount of R29 700 (2% of R1 485 000).
This allowance is calculated on the cost to the taxpayer of a building or improvements. Take note of
the following in calculating the cost:
l If a taxpayer acquires a building without giving any consideration (for example by donation or
inheritance), he is not entitled to the allowance, since he incurred no cost.
l The portion of interest and other expenditure relating to any part of a building that has been
brought into use or is available for letting is deductible under s 24J(2) (see chapter 16).
l In practice, SARS considers that the cost of a building for purposes of s 13 excludes
– the cost of clearing and levelling the site preparatory to construction
– the cost of excavations, and
– the cost of external paving and fencing.
l Only the cost of a building qualifies for the allowance; a lump sum consideration paid for both a
building and the land on which it stands, will have to be apportioned.
l Improvements to any building will qualify for the allowance (s 13(1)(f )). ‘Improvements’ is defined
and means
– any extension
– addition, or
404
– improvements, other than repairs

– to a building that is or are effected for the purpose of increasing or improving the industrial
capacity of the building (s 13(9)).
The annual allowance is granted on the cost of improvements to any building if
– the building was wholly or mainly used by the taxpayer in the course of his trade (other than
mining or farming) for any process of manufacture or similar process (see 13.2.3), or
– the building was let by the taxpayer and used as described by the tenant or subtenant
(s 13(1)(f )).
The annual allowance applicable when the erection of the improvements commenced will be
used to calculate the s 13 allowance on the improvements. It is therefore possible that the
allowance claimed on the building may differ from the allowance claimed on the improvements.
A special ‘deemed-allowance’ rule provides

l when the buildings or improvements were previously brought into use by the
taxpayer in a trade carried on by him
l in the production of income that was excluded from income (for example
under the old source-based system of taxation)
l any deduction that could have been allowed under s 13(1) during the
Please note! previous year in which the asset was brought into use and any following
year is deemed to have been allowed during those years, as if the receipts
and accruals were included in the taxpayer’s income (s 13(1A)).
Therefore, the tax value of asset is reduced by the deemed allowance, although
no actual deduction will be granted under this section (s 13(1)) regarding the
period of use of the asset (which was excluded from income) in the previous
years. The deemed allowance will not be recouped if the asset is consequently
disposed of (s 8(4A)).
This allowance will not be available if a company is an REIT (see chapter 19) or its controlled com-
pany on the last day of the year of assessment (s 25BB(4)).
Remember
l The allowance is calculated with reference to the year when the erection of the building or
improvements commenced, not the date of purchase.
l The allowance is only claimed from the year of assessment that the building is brought into use.
l The allowance can be claimed only on buildings used wholly or mainly for manufacturing
and, from 1 October 2012 but before 1 October 2022, also for buildings used wholly or
mainly for research and development. If the building was used for administration only, no
allowance can be claimed.
l The allowance is not apportioned if the building is not used for the full year of assessment.
Example 13.7. Buildings and improvements: Annual allowance

Only the annual allowance will be considered in this example:
Facts Allowance to be granted
Scenario 1: Scenario 1:
Building erected by Allen at a cost of Allen enjoys an allowance of R4 000 a year
R200 000 on land costing R120 000 and (2% of R200 000). Since the building was
completed on 1 February 1978. erected after 14 March 1961, Allen, who erect-
Building let to Barry from that date and used ed the building, may claim the allowance, pro-
by Barry in a process similar to a process of vided the building is used mainly in a process
manufacture. of manufacture or a similar process, either by
Allen’s year of assessment ends on the last himself or his lessee. The allowance is granted
day of February. in full, even though the building is used for
only one month during the year of assessment.
The rate of the allowance is 2% because the
erection of the building commenced before
1 January 1989.
No capital allowance is available on the land.
Improvements effected to above building Allen enjoys an allowance of R500 a year
during January 1980 by Allen at a cost of (2% of R25 000). The rate of the allowance is 2%
R25 000. because the erection of the improvements to the
building commenced before 1 January 1989.
continued
405
Facts Allowance to be granted

Above building together with the land on Chris enjoys an allowance of R5 000 a year
which it stands is purchased from Allen by (2% of R250 000). A purchaser is entitled to
Chris on 1 May 2000 at a total cost of the allowance if the seller was entitled to the
R350 000, of which R100 000 was stipulated allowance. The allowance is calculated on
as being for the land and R250 000 as being cost for the purchaser.
for the building. The building is then mainly The rate of the allowance is 2% because the
used by Chris in a process of manufacture. erection of the building commenced before
1 January 1989.
Allen will be liable for tax on so much of the
R250 000 as represents a recoupment of
annual allowances that he has claimed, that is,
2% of R200 000 for 24 tax years (R96 000) plus
2% of R25 000 for 22 tax years (R11 000); that
is, R107 000.
The balance of the profit on the sale; that is,
R5 000 (R25 000 capital gain on building and
improvements (R250 000 – R225 000) less
capital loss of R20 000 (R100 000 – R120 000)
on the land), will be of a capital nature and not
taxable since it was before capital gains tax
was introduced, thus before 1 October 2001.
Chris effected improvements to above No allowance. The improvements must be
building during September 2010 at a cost of effected for the purpose of increasing or
R400 000. The improvements were effected improving the industrial capacity of the building.
in order to improve the facilities for staff, by
the provision of restrooms and a canteen.
Donovan commenced the erection of a Donovan enjoys an allowance of R40 000 a
building on 1 February 1996. The building year (5% of R800 000). The allowance would
was completed at a cost of R800 000 and be available to Donovan if the building were
brought into use by Donovan on 15 June used mainly in a process of manufacture or a
1996 to house a process of manufacture. similar process, either by Donovan or his
lessee.
The rate of the allowance is 5% because the
erection of the building commenced on or after
1 January 1989.
Donovan effected improvements to the above Donovan enjoys an allowance of R30 000 a
building during August 1997 at a cost of year (5% of R600 000) on the cost of the im-
R600 000. The improvements were effected provements, since they were effected for the
in order to increase the industrial capacity of purpose of increasing or improving industrial
the building. The improvements were brought capacity.
into use during April 2001.
Enslin commenced the erection of a building Enslin enjoyed an allowance of R200 000
during October 1998. The building was com- a year (10% of R2 000 000). The rate of the
pleted at a cost of R2 000 000 and brought allowance is 10% because the erection of the
into use in a process of manufacture on building commenced between 1 July 1996
15 September 1999. and 30 September 1999 and the building was
brought into use on or before 31 March 2000.
The building is already fully written off.
Note
All buildings of which the erection commenced after 30 September 1999 and brought into use
after 31 March 2000 will revert back to the allowance of 5%.
See 13.12 for a comparison of the provisions of ss 11(e) (wear-and-tear allowance), 12C (movable
assets used by manufacturers, for research and development or by hotelkeepers, and ships, aircraft
and assets used for the storage and packing of agricultural products) and 13.
Recoupments
The annual allowance on buildings and improvements is subject to recoupment in terms of s 8(4)(a),
except if that taxpayer has elected (under s 13(3)) to prevent the recoupment from being included in
his income in the year in which it arises.
406
The recoupment will then not be taxed but will be set off against the cost of another building,
provided that the taxpayer
l purchases or erects the further building within 12 months (or any longer period that the Commis-
sioner may allow) from the date on which the event giving rise to the recoupment occurred, and
l the further building purchased or erected qualifies for the annual allowance under s 13(1).
Please note! Should the untaxed recoupment exceed the cost of the further building, the
excess would be taxed as a recoupment under s 8(4)(a).
Leased assets
Lessees or sub-lessees are also entitled to this allowance. No allowance may be claimed on the
portion of the cost of a building or improvements on which any allowance for leasehold improvements
(under s 11(g) – see 13.7.2) was previously claimed (proviso (a) to s 13(1)). If, for example, a taxpayer
spends R1 500 000 on a building and R1 000 000 is deductible under s 11(g), he may only claim the
annual allowance on the R500 000 not qualifying for the leasehold improvements allowance (under
s 11(g)). It is submitted that the taxpayer can decide which allowance of either s 11(g) or s 13(1) will
provide the most beneficial deduction, since neither of the sections prescribe a specific sequence in
which the deductions should be used.
A lessee or sub-lessee is also liable for tax if he enjoys a recoupment of the annual allowances, and
is also entitled to elect that the recoupment be set off against the cost of a further building (under
s 13(3)).
If a lessee undertakes improvements on leased property in terms of a Public Private Partnership
exempt entities
the property, if the lessee uses the property for earning income. The expenditure incurred by the
lessee to complete the improvements shall be deemed to be the cost for purposes of the allowance
(proviso (d) to s 13(1)).
Section 23D imposes a restriction on the deduction or allowance available on a building, or improve-
ments contemplated in s 13, let to the person from whom the building or improvements were
acquired (for details see 13.7.6).
Example 13.8. Buildings and improvements: Deductions by lessee

As a result of an insurance claim following the destruction of his hired premises by fire, lessee
Tshlaene has enjoyed a recoupment of past allowances claimed on the cost of the destroyed
building amounting to R500 000. Because he erects a further qualifying building, this
recoupment is available for set-off against the cost of the further building instead of being taxed
immediately.
The cost of the further building, which qualifies for the annual allowance, amounts to R1 600 000.
Calculate the portion of the cost of the further building subject to the annual allowance if the
portion of the cost of that building deductible under s 11(g) (obligation to effect improvements) is
R750 000. Tshlaene will elect any option available to him to minimise his tax liability.
SOLUTION
Cost of erection of the further building..................................................................... R1 600 000
Portion of the cost subject to the annual allowance:
The untaxed recoupment will therefore be:
Cost of further building............................................................................................. R1 600 000
Less: Portion of cost deductible under s 11(g) ........................................................ (750 000)
R850 000
Recoupment arising from previous building (s 13(3)) – untaxed recoupment ......... (500 000)
Cost on which annual allowance is based ............................................................... R350 000
Annual allowance (5% of R350 000) ........................................................................ R17 500
continued
407
Note
Had the recoupment amounted to R900 000, the untaxed recoupment would have been R850 000
(the amount of the untaxed recoupment must be calculated on the basis of the full cost of the
building (R1 600 000) less the portion of that cost that is deductible under s 11(g) (R750 000)).
The balance of R50 000 remaining would have been taxable under s 8(4)(a). No annual allow-
ance would therefore be deductible, since the recoupment on the previous building exceeded
the cost (after s 11(g) deductions) of the further building.
Also remember the following:
Section 13(2) ensures that the aggregate of the annual allowances may not exceed:
Less: Untaxed recoupment ...................................................................................... (500 000)
R1 100 000
Less: Portion of cost deductible under s 11(g) ........................................................ (750 000)
R350 000
In terms of s 11(g)(iv), the aggregate of the allowances under s 11(g) may not exceed:
Less: Untaxed recoupment ...................................................................................... (500 000)
R1 100 000
Less: Annual allowances.......................................................................................... (350 000)
R750 000
The aggregate of the leasehold improvements allowances claimable in terms of s 11(g) of
R750 000 is therefore not affected by this limitation.
If the lease contract in terms whereof the improvements must be effected was for a longer period
than 20 years, Tshlaene should have elected to write off the R750 000 in terms of s 13(1) (over
20 years at 5% per year) instead of in terms of s 11(g) over the longer period.
13.4.2 Urban development zones (s 13quat)

When will s 13quat be applicable?
The section is available to owners or lessors who bring derelict or obsolete properties in demarcated
areas (as published by the Minister of Finance in the Government Gazette) in certain municipalities
back onto the market.
If a taxpayer incurred expenditure
l on the erection or improvement (which covers either the entire building or at least 1 000 m² of the
building) of buildings (both residential and commercial)
l owned (also if a lessor (leased buildings) or if acquired from a developer) by the taxpayer
l within specified urban development zones (as set out in s 13quat(6)(a)–(b)), and
l used solely for his trade (s 13quat(2)(a)–(c)).
If the taxpayer purchased the building from a developer, he will only qualify for the urban develop-
ment zone building allowance (s 13quat) if
l the contract for the sale was concluded on or after 8 November 2005
l the developer did not claim the allowance under s 13quat, and
l if it is an improvement, the developer should incur expenditure in respect of those improvements
that is equal to at least 20% of the purchase price of the taxpayer in respect of the building or
part thereof (s 13quat(2)(d)).
The allowance will no longer be available if a building
l ceases to be used solely for the purposes of trade
l was disposed of in the previous year of assessment, or
l was brought into use after 31 March 2023 (s 13quat(5)(c)).
The erection or improvements should commence on or after the date of publication of a notice in the
Gazette declaring the area as an urban development zone to qualify for this allowance.
408
What will the implications be if s 13quat is applicable?
Allowance (construction) = Cost × 20% year 1 (and 8% for next 10 years)

General rule and
Allowance (improvements) = Cost × 20% per year
This section provides an accelerated depreciation allowance on the cost of the buildings. The allow-
ance depends on whether the building was
l erected or extended (construction), or
l improved (refurbishment).
The cost on which the allowance is calculated depends on whether the allowance is claimed by
l the developer, or
l by a taxpayer buying directly from the developer.
In general, the allowance is the following:
l Where a new building is erected, or an existing building is extended (construction), the allowance is
calculated as
– 20% of the cost of the erection or extension in the year in which the building is brought into use,
and
– 8% in each of the following 10 years (s 13quat(3)(a)).
l Where an existing building, or part of that building, is improved (refurbishment) without changing
its structural or exterior framework, the allowance is
– 20% of the cost of the improvement in the year in which it is brought into use, and
– 20% in each of the following four years (s 13quat(3)(b)).
If the building is a ‘low-cost residential unit’ as defined in s 1 (see below), this allowance will be
available for the building, part thereof or improvement thereto, brought into use on or after 21 Octo-
ber 2008 and will be allowed as follows:
l Where a new building is erected, or an existing building is extended, the allowance is
– 25% of the cost of the construction in the year brought into use, and
– 13% in the following five years and 10% in the last year (Year 7) (s 13quat(3A)(a)).
l Where an existing building, or part of that building, is improved, the allowance is
– 25% of the cost of the improvement in the year brought into use, and
– 25% in each of the succeeding three years (s 13quat(3A)(b)).
The cost of an asset for s 13quat is

the cost actually incurred for erecting, adding to or improving a building
including
l the cost of demolishing existing buildings
l excavating land, and
l cost of structures providing certain services (water, power, parking, drainage,
security, waste disposal and access to the building)
but excluding
interest and finance charges (s 13quat(1)).
‘Low-cost residential unit’ is defined in s 1 as:
l a stand-alone unit (a building qualifying as a residential unit located in South
Please note! Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk infra-
structure), and
– on which the owner does not charge a monthly rental of more than 1% of
that cost (plus the proportionate cost of the land and bulk infrastructure)
(see note), or
l an apartment (qualifying as a residential unit in a building located in South
Africa)
– with a cost of R350 000 or less, and
that cost (see note).
409
This same allowance will be available if a building or a part of a building in an urban development
zone was purchased from the developer, but the cost will be limited as follows:
l 55% of the purchase price if the building or part of the building purchased was erected or
extended by the developer (construction), and
l 30% of the purchase price if the building or part of the building purchased was improved by the
developer (s 13quat(3B)).
‘Developer’ is defined in s 13quat(1) as a person who

l erects, extends, adds to or improve a building or part of a building with the
purpose of disposing of the building or part thereof immediately after com-
pletion, and
l disposes of the building or part of a building within three years after com-
Please note! pletion.
The developer is allowed a three-year period in which to sell the building. This
extension period is granted to allow for the situation where the developer is
unable to sell the property immediately after completion and is ‘forced’ to let the
property due to cash-flow problems. Under these circumstances, the developer
will still be able to qualify for the s 13quat allowance. (A matching relief is
granted to VAT vendors in s 18B – see chapter 31.)
If a lessee undertakes improvements on leased property in terms of a Public Private Partnership,

exempt entities,
(s 13quat(2A)).
Example 13.9. Building in an urban development zone
On 30 June 2021, Zone (Pty) Ltd completed the erection of a new building in an urban develop-
ment zone at a total cost of R3 500 000, and immediately brought it into use.
Calculate the allowances for Zone (Pty) Ltd on the building for the years of assessment ending on
28 February 2022 and 28 February 2023.
SOLUTION
2022: R3 500 000 × 20% (s 13quat(3)(a)) .................................................................. (700 000)
2023: R3 500 000 × 8% (s 13quat(3)(a)) .................................................................... (280 000)
13.4.3 Residential units (s 13sex)

When will s 13sex be applicable?
Section 13sex allows a taxpayer to claim an allowance (if not otherwise provided for in the Act) on
l residential units (as defined in s 1), and
l improvements to these residential units (s 13sex(5)),
if the residential unit or improvements to it were acquired, or the erection commenced on or after
21 October 2008.
The section is applicable if a taxpayer
l owns a new and unused residential unit
l that unit or improvements are exclusively used by him for the purposes of a trade carried on by
him (it is submitted that for purposes of trade will also include the letting to an employee)
l it is situated in South Africa, and
410
l the taxpayer owns at least five residential units in South Africa (all of which are used for purposes
of a trade carried on by him)
l but excluding the provision of new and unused low-cost residential units for occupation by mining
employees (allowances for these expenses will be available under s 36) (s 13sex(1)).
‘Residential unit’ is defined in s 1 as

l a building or self-contained apartment
l mainly used for residential accommodation,
but excludes
a building or apartment used by a hotel keeper in his trade.
‘Low-cost residential unit’ is defined in s 1 as
l a stand-alone unit (a building qualifying as a residential unit located in
South Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk
Please note! infrastructure), and
that cost (plus the proportionate cost of the land and bulk infrastructure)
(see note), or
Africa)
that cost (see note).
(Note: the cost on which the 1% rental limitation is calculated should be
increased by 10% annually.)
*
Remember
l A building purchased that was previously used will not qualify for this allowance.
l A lessee that erected a residential building on the premises of the lessor, will not qualify for
this allowance on the amount he spent in excess of the contract amount (which is allowed
under s 11(g)), since this allowance is only available to the owner of the asset, unless the
provisions of s 12N (see 13.7.4) are applicable.
l If a taxpayer owns six residential units and sells two of them, the s 13sex allowance will be
granted in the year of the sale. It will not be granted in the following year of assessment
regarding the two units sold (s 13sex(5)) nor the four units still owned, since the section
requires a taxpayer to own at least five residential units (principle confirmed in Interpretation
Note No. 106 (issued on 20 December 2018)).
What will the implications be if s 13sex is applicable?
An allowance of
l 5% per year on the cost of any new and unused residential unit (or improvements) will be allowed
as a deduction from the income of the taxpayer (s 13sex(1))
AND
l an additional 5% of the cost if it is a low-cost residential unit as defined in s 1 (s 13sex(2)).
Remember
A low-cost residential unit (or improvements thereto) will therefore qualify for a total allowance of
10% over a 10-year period, if it meets all the requirements (of s 13sex(1)).
The full allowance will be deductible, even though the residential unit is brought into use for only a
portion of the year of assessment. The total deductions allowed under this and any other sections of
the Act can never exceed 100% of the cost (s 13sex(7)).
411
The cost of a residential unit or improvements for s 13sex is

the lesser of
l the actual cost, incurred by the taxpayer, of the asset, or
date on which the transaction for the acquisition, erection or improvements
were concluded (market value),
including
the direct cost of acquisition, improvement or erection of the residential unit
Please note! (s 13sex(3))
UNLESS
a part of a building was acquired, without the taxpayer erecting or constructing
it, then cost will be:
l 55% of the acquisition price if a part is acquired, and
l 30% of the acquisition price if an improvement part is acquired
(s 13sex(8)).
(Interpretation Note No. 106 contains a detailed practical discussion of what will
be included as part of cost.)

exempt entities,
(proviso to s 13sex(1)).
However, this allowance will not be available if the cost of the building or improvements, or any part
thereof qualified or will qualify for a deduction under any other section (s 13sex(6)).
l when any residential unit or improvements were, in a previous year of assessment, brought into
use for the first time by the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or, for example,
part of the turnover tax regime (see chapter 23))
the asset was brought into use and any following year, is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 13sex(4)).
Therefore, the tax value of the building or improvements is reduced by the deemed allowance,
although no actual deduction will be granted under this section for the period of use of the asset
(which was excluded from income) in the previous years. The deemed allowance will not be
recouped if the asset is consequently disposed of (s 8(4A)).
No deduction will be allowed on a building in the year after it has been disposed of (s 13sex(5)).
Example 13.10. Allowance on residential units
On 15 January 2022, TDK (Pty) Ltd bought six brand new flats in a residential building directly
from the developer at a total cost of R650 000 each. All of these residential units were rented out,
effective from 1 February 2022.
Calculate the allowances for TDK (Pty) Ltd on the flats for the year of assessment ending on
31 October 2022.
SOLUTION
2022: Section 13sex applicable (more than five units owned and used in trade in
South Africa) (R650 000 x 6 units) × 55% (as a part is required from a developer
(s 13sex(8))) = cost of R2 145 000 × 5% (s 13sex(1)) (the full allowance allowed,
although only used for a part of the year) .................................................................... (R107 250)
412
13.4.4 Low-cost residential units on loan account (s 13sept)

When will s 13sept be applicable?
Employers are moving away from leasing low-cost employer-owned residential units towards the
selling of residential units to employees. Employers will be allowed tax relief under s 13sept for the
sale of employer-provided low-cost residential units (as defined in s 1) to employees (or employees
of associated institutions (as defined in the Seventh Schedule)), in a year of assessment ending on or
before 28 February 2022, via an interest-free loan. The deduction seeks to provide relief to the
employer for the provision of an interest-free loan to the employee and is applicable to any disposal
on or after 21 October 2008 (s 13sept(1)).
The section will only allow a deduction for a disposal if
l the disposal is not subject to any condition, except for the condition that the employee is required
to
– on termination of employment, or
– in the case of consistent failure for a period of three months to pay an amount owing in respect
of the low-cost residential unit
dispose of the unit to the employer for an amount equal to the actual cost (excluding finance or
borrowing cost) to the employee of the unit and the land on which it is built,
l the disposal is financed by an interest-free loan to the employee, and
l the selling price is equal to or less than the actual cost (excluding finance or borrowing cost
incurred by the employer) of the unit and the land for the employer (s 13sept(3)),
‘Low-cost residential unit’ is defined in s 1 as:

l a stand-alone unit (a building qualifying as a residential unit located in
South Africa)
– with a cost of R300 000 or less (excluding the cost of land and bulk infra-
structure), and
– the owner does not charge a monthly rental of more than 1% of that cost
(plus the proportionate cost of the land and bulk infrastructure) (see
Please note! note), or
Africa)
– the owner does not charge a monthly rental of more than 1% of that cost
(see note).
(Note: The cost on which the 1% rental limitation is calculated should be
increased by 10% annually.)
Remember
There will be capital gains consequences for the employer on the sale of the low-cost residential
unit to the employee, as well as a possibility of a fringe benefit being included as part of the
remuneration of the employee as a result of the disposal that is financed by an interest-free loan.
What will the implications be if s 13sept is applicable?
General rule Deduction = 10% of the outstanding loan amount at year-end
A deduction of 10% on the outstanding loan account amount at year-end will be available. This
deduction is available for a maximum of 10 years (the 10% deduction matches the capital allowance
available for low-cost residential units owned and rented out (under s 13sex – see 13.4.3)).
Recoupment
This section contains its own internal recoupment provision, which applies if any outstanding amount
on the loan account of the employee, is paid back to the employer. This deemed recoupment will be
the lesser of
l the amount repaid on the loan by the employee, or
l the amount claimed in the current or any previous year (under s 13sept) that was not yet
recouped or recovered in a previous year (s 13sept(4)).
413
Example 13.11. Allowance on low-cost residential units
On 31 October 2019, Khumbelo Ltd commenced with the erection of a low-cost residential unit
for purposes of selling it to an employee. Khumbelo Ltd incurred a total cost of R150 000 for the
erection of the unit. On 1 December 2019 this unit was sold to one of their employees for
R125 000. The employee is required to pay R25 000 in cash up front and the remaining
R100 000 is incurred via an interest-free loan account from Khumbelo Ltd. The employee repaid
R15 000 in 2020, R12 500 in 2021 and made no repayment in 2022.
Calculate the allowances or recoupments for Khumbelo Ltd on the residential unit for the years of
assessment ending on 31 December 2019 to 2022.
SOLUTION
2019: R100 000 × 10% (s 13sept(2)) (the full allowance allowed, although only
used for a part of the year) .............................................................................. (R10 000)
2020: Allowance on the outstanding loan balance: R100 000 – R15 000 =
R85 000 × 10% (s 13sept(2)) .......................................................................... (R8 500)
Recoupment of R15 000 repayment – since allowances claimed to date
equals R18 500, full repayment recouped (s 13sept(4)) .................................. R15 000
2021: Allowance on the outstanding loan balance:
R85 000 – R12 500 = R72 500 × 10% (s 13sept(2)) ........................................ (R7 250)
Recoupment: Allowances claimed and not yet recouped = R3 500 (allow-
ances of R10 000 (2019) and R8 500 (2020) of which only R15 000 has
already been recouped) + R7 250 = R10 750 – thus the recoupment is the
lesser of: the repayment of R12 500 or the previous allowances not yet
recouped, namely R10 750 (The difference: R12 500 – R10 750 = R1 750
will be carried forward for possible recoupment in 2022) (s 13sept(4)) .......... R10 750
2022: Allowance on the outstanding loan balance: R72 500 × 10% (s 13sept(2)).... (R7 250)
Recoupment: Allowances claimed and not yet recouped of R1 750 (from
2021) carried forward for recoupment in 2022 (limited to the lesser of
repayment made and not yet recouped (R1 750) or amounts previously
claimed as allowances (R7 250)) .................................................................... R1 750
13.4.5 Commercial buildings (s 13quin)

When will s 13quin be applicable?
Section 13quin allows a taxpayer to claim an allowance on commercial buildings (for example an office
building, warehouse, shopping mall or retail store (Interpretation Note No. 107 (issued on
20 December 2018)) and improvements to these buildings, which is not otherwise provided for in the
Act (s 13quin(5)). This allowance is applicable to any building or improvements that were contracted
for, and the construction, erection or installation commenced, on or after 1 April 2007.
Section 13quin is applicable if a taxpayer
l owns a new and unused building, and
l that building or improvements are wholly or mainly used by the taxpayer during the year of
assessment for producing income
l in the course of his trade
l but excluding the provision of residential accommodation (allowances for these expenses will be
available under ss 13sex or 13sept) (s 13quin(1)).
Remember
l A building purchased from a seller who previously used the building, will not qualify for this
allowance.
l A lessee who erected a commercial building on the premises of the lessor, will not qualify for
a deduction on the amount he spent in excess of the contract amount (which is allowed
under s 11(g)), since this allowance is only available to the owner of the asset.
What will the implications be if s 13quin is applicable?
414
An allowance of 5% per year on the cost of the building (or improvements) will be allowed as a
deduction from the income of the taxpayer (s 13quin(1)). The full allowance will be deductible, even
though the building is brought into use for only a portion of the year of assessment. All deductions
allowed in terms of the Act can never exceed 100% of the cost (s 13quin(6)).
The cost of a building or improvement for s 13quin is

the lesser of
date on which the transaction for the acquisition, erection or improvement
was concluded (market value)
(s 13quin(2))
Please note!
UNLESS
a part of a building was acquired on or after 21 October 2008, without the tax-
payer erecting or constructing it, then cost will be:
l 55% of the acquisition price if a part is acquired, and
l 30% of the acquisition price if an improvement part is acquired (s 13quin(7)).
(Interpretation Note No. 107 contains a detailed practical discussion of what will
be included as part of cost.)

exempt entities
(s 13quin(1A)).
However, this allowance will not be available if the cost of the building or improvements, or any part
thereof, qualified or will qualify for a deduction under any other section (s 13quin(5)).
l when any building or improvements were, in a previous year of assessment, brought into use for
the first time by the taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or, for example,
part of the turnover tax regime (see chapter 23))
the asset was brought into use and any following year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 13quin(3)).
Therefore, the tax value of the building or improvements is reduced by the deemed allowance,
although no actual deduction will be granted under this section regarding the period of use of the
asset (which was excluded from income) in the previous years. The deemed allowance will not be
recouped if the asset is consequently disposed of (s 8(4A)).
No deduction will be allowed on a building in the year after it has been disposed of (s 13quin(4)).
Example 13.12. Allowance on commercial buildings
On 15 April 2022, Commercial (Pty) Ltd commenced with the erection of a new office block at a
total cost of R8 500 000. The erection was completed and the offices brought into use for pur-
poses of Commercial (Pty) Ltd’s trade (in the production of income) on 30 September 2022.
Calculate the allowances for Commercial (Pty) Ltd on the office block for the years of assessment
ending on 31 October 2022 and 31 October 2023.
415
SOLUTION
2022: R8 500 000 × 5% (s 13quin(1)) (the full allowance allowed, although only
2023: R8 500 000 × 5% (s 13quin(1)) ......................................................................... (R425 000)
13.4.6 Buildings in special economic zones (s 12S)

When will s 12S be applicable?
Special economic zones (introduced in s 12R – see chapter 19 for details on the provisions applic-
able to special economic zones) were introduced to broaden the industrial development zones
incentive.
Section 12S applies to expenditure incurred during years of assessment commencing on or after
9 February 2016 (the date that the Special Economic Zones Act 16 of 2014 came into operation), but
before 1 January 2031 (s 12S(10)). The section is applicable if a taxpayer
l is a qualifying company for purposes of a special economic zone (as defined in s 12R(1)) but
without taking into account any of the exclusions from qualifying companies (as listed under
s 12R(4)). (A qualifying company for purposes of s 12R will be a company incorporated or that is
effectively managed within South Africa. The company generates at least 90% of its income from
the carrying on of a trade from activities attributable to a fixed place of business within one or
more special economic zone(s) approved by the Minister of Finance (in consultation with the
Minister of Trade and Industry) by notice in the Gazette) (s 12S(1))).
For years of assessment ending on or after 1 January 2019, there will be an

additional requirement to be a qualifying company, namely
l the company must have carried on any trade before 1 January 2013 in an
area later approved as a special economic zone, or
l commenced on or after 1 January 2013, in an area approved or later
approved as a special economic zone with
Please note! – a new trade (not previously carried on by the company or its connected
persons), or
– a new trade that relates to the production of new goods (not previously
produced by the company or its connected persons), that uses new
technology in the production process or that increases the production
capacity of the company in South Africa.
(Definition of qualifying company in s 12R(1).)
l owns a new and unused building, and

l that building or improvements are wholly or mainly used by the taxpayer during the year of
assessment for producing income in an approved special economic zone (means a special
economic zone defined in the Special Economic Zones Act (Act 16 of 2014) that is approved for
the purposes of s 12R by the Minister of Finance)
l in the course of the taxpayer’s trade
l but excluding the provision of residential accommodation (allowances for these expenses will be
available under ss 13sex or 13sept) (s 12S(2)).
Remember
l A building purchased from a seller who previously used the building, will not qualify for this
allowance.
l A lessee who erected a building on the premises of the lessor, will not qualify for a
deduction under s 12S on the amount he spent in excess of the contract amount (which is
allowed under s 11(g)), since s 12S is only available to the owner of the asset.
What will the implications be if s 12S is applicable?
416
An allowance of 10% per year on the cost of the building (or improvements) will be allowed as a
deduction from the income of the taxpayer (s 12S(1)). The full allowance will be deductible, even
though the building is brought into use for only a portion of the year of assessment. No deduction will
be available under any other section for the cost of a building or improvements, if it has qualified or
will qualify either as a deduction of expenditure or as an allowance under this section (s 12S(6)).
All deductions allowed in terms of the Act can never exceed 100% of the cost (s 12S(7)).
The cost of a building or improvement for s 12S is

the lesser of
Please note! l the actual cost, incurred by the taxpayer, of the building, or
were concluded (market value) (s 12S(4))

exempt entities
ment Programme administered by the Department of Energy
(s 12S(3)).
No deduction will be allowed on a building in the year after it has been disposed of (s 12S(5)).
Example 13.13. Allowance on commercial buildings in special economic zones
On 15 July 2022, Zones (Pty) Ltd, a qualifying company as defined in s 12R(1), commenced with
the erection of a new office block at a total cost of R8 500 000 in an approved special economic
zone. The erection was completed and the offices brought into use for purposes of Zone (Pty)
Ltd’s trade (in the production of income in the special economic zone) on 30 September 2022.
Calculate the allowances for Zones (Pty) Ltd on the office block for the years of assessment
ending on 31 July 2023 and 31 July 2024.
SOLUTION
2023: R8 500 000 × 10% (s 12S(2)) (the full allowance allowed, although only
used for a part of the year of assessment) ................................................................. (R850 000)
2024: R8 500 000 × 10% (s 12S(2))............................................................................ (R850 000)
Remember
The s 12S allowance is only claimed from the year of assessment that the building is brought into
use, and not from the year of assessment that erection commences.
If a qualifying company is guilty of

l fraud, or
l misrepresentation, or
l non-disclosure of material facts
with regard to any type of tax, duty or levy administered by SARS, SARS may (notwithstanding ss 99
and 100 of the Tax Administration Act – see chapter 33) disallow all deductions provided for in this
section and can, as a result, raise an additional assessment (s 12S(8) and (9)).
13.4.7 Pipelines, transmission lines and railway lines (s 12D)
When will s 12D be applicable?
Section 12D will be applicable if a taxpayer actually incurred expenditure in respect of the acquisition
or improvement of certain pipelines, transmission lines and railway lines (‘affected assets’). (Only
improvements to assets brought into use on or after 1 January 2008 will qualify for a deduction under
s 12D.)
417
The affected asset must be

l new and unused (except for a line or cable used for the transmission of electricity that, from
1 April 2015, will still qualify even if it is second-hand – all other requirements should however still
be met)
l owned by the taxpayer
l brought into use by him for the first time, and
l used by him directly for the purposes as listed in the definition of ‘affected asset’ (in s 12D(1) –
see Please note below) (s 12D(2)).
‘Affected assets’ are defined in s 12D(1) as any:

l pipeline used for the transportation of natural oil
l pipeline used for the transportation of water used by power stations in the
process of generating electricity
l line or cable used for the transmission of electricity
l line or cable used for the transmission of electronic communications (for
Please note! example telephone lines), and
l railway line used for the transportation of persons, goods or things
and will include
l earthworks or supporting structures and equipment forming part of these
assets (for example communication cables used for the transmission of
electronic communication relating to pipeline), and
l any improvements to these assets.
What will the implications be if s 12D is applicable?
Allowance (pipeline for natural oil) = Cost × 10% per year

Allowance (line/cable for electronic communication) = Cost × 10% per
General rule year (if acquired from 1 April 2019, 6,67% before that)
and
Allowance (all other affected assets) = Cost × 5% per year
An allowance can be deducted in respect of the cost actually incurred of:

l 10% per year for pipelines used for the transportation of natural oil
l 5% per year for all other affected assets, and
l 10% per year, for acquisitions from 1 April 2019, (previously a 6,67% allowance per year for
acquisitions between 1 April 2015 and 31 March 2018 and a 5% per year allowance for acqui-
sitions before 1 April 2015) for line or cable used for the transmission of electronic communica-
tions (s 12D(3)(c)).
The deduction is allowed to the extent that the affected asset is used in the production of the tax-
payer’s income.
The cost of an asset for s 12D is

the lesser of
date on which the purchase transaction or improvements were concluded
Please note! (market value),
including
the direct cost of installation or erection of the asset
but excluding
interest and finance charges
(s 12D(4)).

exempt entities
418
(s 12D(2A)).
Following the introduction of the turnover tax (see chapter 23), a special ‘deemed allowance’ rule
provides:
l when an asset was previously brought into use by the taxpayer in a trade carried on by him
l in the production of income that was excluded from income (for example under the turnover tax
regime)
l any deduction that could have been allowed under s 12D during the previous year in which the
asset was brought into use and any following year is deemed to have been allowed during those
years of assessment, as if the receipts and accruals were included in the taxpayer’s income
(s 12D(3A)).
Therefore, the tax value of the asset is reduced by the deemed allowance, although no actual deduc-
tion will be granted under this section regarding the period of use of the asset (which was excluded
from income) in the previous years. The deemed allowance will not be recouped if the asset is
13.4.8 Deductions in respect of improvements on property in respect of which Government

holds a right of use or occupation (s 12NA)
Section 12NA was introduced to allow for the deduction by taxpayers of the cost of improvements
undertaken
l on land or to buildings owned by government entities
l where the taxpayer does not have a right of use or occupation and thus the taxpayer is not
meeting the requirements of s 12N (see 13.7.4).
This would happen where the government enters into a contract with a private party for the financing,
designing and constructing, as well as maintaining of a government building. The taxpayer will there-
fore service the building but will not occupy it (Explanatory Memorandum on the Taxation Laws
Amendment Act, 2014).
When will s 12NA be applicable?
The section is applicable if a taxpayer
l is obliged to effect an improvement on land or building in terms of
– a Public Private Partnership
– if the right of use or occupation of the land or building is held by the government of the
Republic in the national, provincial or local sphere (s 12NA(1)).
The provisions do not apply if the taxpayer carrying out the improvements carries on any banking,
financial services or insurance business (s 12NA(4)).
What will the implications be if s 12NA is applicable?
Allowance = Actual cost of improvements divided by

lesser of
General rule
*25 years OR
*the number of years that income is derived from the Public Private
Partnership
If this section is applicable, the taxpayer will qualify for a deduction of

l the expenditure (not previously deducted under s 12NA) actually incurred to effect the improve-
ments
l divided by the lesser of the number of years for which the taxpayer will derive income from the
Public Private Partnership agreement (including the year in which the improvement is effected),
or 25 years (s 12NA(2)).
If an exempt receipt or accrual (under the now repealed s 10(1)(zl) that was only
effective until 31 December 2015) was received from Government and it was
Please note! used to effect the improvements or to fund the improvements, the allowance
needs to be reduced by the tax exempt contribution (this is to prevent a further
tax deduction of a tax exempt award) (s 12NA(3)).
419
Example 13.14. Deduction for improvements on property in respect of which Government

holds a right of use or occupation
On 1 July 2021, Masango (Pty) Ltd and the municipality entered into a 20-year agreement where-
by Masango (Pty) Ltd will be responsible for the financing, design, constructing, operating and
maintenance of a new building that will house the Electricity Department. Masango (Pty) Ltd
received a R2 million capital contribution on 15 July 2021 from the municipality (which is exempt
from tax in the hands of Masango (Pty) Ltd under s 10(1)(zl)).
Masango (Pty) Ltd immediately (during 2021) commenced with the erection of the new building
at a total cost of R8 500 000. The erection was completed on 30 April 2023.
Calculate the s 12NA deduction available to Masango (Pty) Ltd for the year of assessment
ending on 30 June 2023.
SOLUTION
In terms of the provisions of s 12NA(2), Masango (Pty) Ltd will qualify for an allowance of:
(R8 500 000 – R2 000 000) / 20 years (lesser of 25 or 20 years)................................. (R325 000)
13.5 Hotels
Hotelkeepers and lessors whose lessees are hotelkeepers are currently entitled to the following
special allowances for their qualifying buildings and improvements and equipment:
l the annual allowance for hotel buildings and improvements (s 13bis(1); see below)
l the 20% straight-line depreciation allowance for hotel equipment brought into use after 15 Decem-
ber 1989 (s 12C; see 13.3.3)
l the alienation, loss or destruction allowance for hotel equipment (see 13.11).
These allowances are subject to tax in terms of s 8(4)(a) if recovered or recouped (see 13.10).
13.5.1 Immovable assets of hotels: Annual allowance on buildings (s 13bis)

When will s 13bis be applicable?
Section 13bis(1) is applicable to
l a building and any improvements (other than repairs) that are
l exclusively or mainly used by the taxpayer during the year of assessment for the purpose of
carrying on in it his trade as a hotel keeper, or
l let by the taxpayer and exclusively or mainly used by the lessee for the purpose of carrying on in
it the lessee’s trade as a hotel keeper.
What will the implications be if s 13bis is applicable?
Allowance = Cost × 5% per year

General rule and
Allowance (improvements not extending the exterior framework) =
Cost × 20% per year
Section 13bis(1) provides an annual allowance, the rate of which varies, depending on when the
erection of the building or qualifying improvements commenced. The different rates that are applied
to cost, can be summarised as follows:
Erection of the building or qualifying improvements commenced: Rate of allowance

before 4 June 1988 2%
from 4 June 1988 onwards 5%
from 17 March 1993, but
only in respect of improvements that do not extend the existing exterior framework 20%
420
The cost of an asset for s 13bis is

l the cost of the building or improvements
Please note! less
l the amount of any recovery or recoupment (under s 13bis(6)) that is set off
against the cost (s 13bis(1) and second proviso to s 13bis(1) (see below)).
In calculating this allowance, the following are important:

l The annual allowance can be claimed in full even though the building is used for only a portion of
the year of assessment.
l The allowance is available only on the cost of a building, and is not granted on the cost of the
land on which the building is erected.
l The allowance may be claimed only for buildings erected by the taxpayer and not for buildings
purchased by him. However, the allowance is available for improvements to purchased or
‘second-hand’ buildings registered as hotels under the Hotels Act.
l The total amount of all allowances claimed under the Act, in respect of the building (or improve-
ments) shall be limited to the cost (s 13bis(5)).
l If any part of the cost of a building, or any improvements, has previously been taken into account
as part of a leasehold improvement allowance (under s 11(g) – see 13.7.2), that part of the cost
will not qualify for the s 13bis allowance (first proviso to s 13bis(1)).
Recoupment
Although the annual allowance on buildings and improvements is subject to the recoupment in terms
of s 8(4)(a), the taxpayer can elect to defer the recoupment, as follows (s 13bis(6)(a)):
l A taxpayer can defer or even prevent a recovery or recoupment of the annual allowance from
being included in his income and instead choose (make an election) to have it set off against the
cost of a further building (hereinafter referred to as the ‘replacement’ building), if
– the replacement building was erected by the taxpayer (thus not applicable if the replacement
building was purchased)
– the replacement building must be erected within 12 months (or any longer period that the
Commissioner may allow) from the date on which the event giving rise to the recovery or
recoupment occurred
– the replacement building erected should also qualify for the allowance under s 13bis(1).
l So much of the recovery or recoupment as is set off against the cost of a qualifying replacement
building will then, despite s 8(4)(a), not be included in his income for that year of assessment.
The recoupment will be set off against the cost of the qualifying replacement building. The cost of
the qualifying replacement building, for the purposes of s 13bis will be calculated as follows:
421
Original cost of a qualifying replacement building
LESS
Portion of the cost for which an allowance has been granted under
s 11(g)
(leasehold improvements) – if applicable
LESS
Set-off of recoupment on previous building under s 13bis(6)(a)
Cost of replacement building for purposes of s 13bis
Please note! If the untaxed recoupment exceeds the cost of the replacement building, the
excess would be taxed as a recoupment under s 8(4)(a).
l The taxpayer’s election to defer may be made for a building or portion of a building or to improve-
ments or a portion of the improvements.
Example 13.15. Hotels: Buildings and improvements

Facts Allowances to be granted
l Leisure Ltd, whose financial year ends Leisure Ltd enjoys an annual allowance of
on 31 March, commenced the erection R750 000 (5% of R15 000 000) in its financial year
of a hotel building on 15 April 2019. It ended 31 March 2020 (the year in which the build-
completed the building at a total cost of ing was brought into use) and each subsequent
R15 000 000 on 1 February 2020 and year while it continues to use the building as a hotel
immediately brought it into use in its (s 13bis). The aggregate of the annual allowances
trade of hotel keeper. may ultimately not exceed the cost of R15 000 000.
l Leisure Ltd spends R2 500 000 on Leisure Ltd enjoys an annual allowance of
improvements (that extended the R750 000 on the original cost of the hotel and
existing exterior) to the above hotel in R125 000 (5% of R2 500 000) on the cost of the
its financial year ending 31 March improvements. It may claim the annual allowances
2021. It lets the hotel to another hotelier on the building and the improvements even though
for the last few months of the year the building is let. (Leisure Ltd will not qualify for
(2021). the 20% allowance on improvements, as the
improvements extended the existing exterior of
the hotel.)
l Leisure Ltd sells the hotel building for Recoupment:
R20 000 000 on 1 April 2021. It An amount of R1 625 000 (R750 000 (2020) +
immediately started the erection of a (R750 000 + R125 000 (2021) (recoupment of
new hotel on 1 April 2021. The new previous allowances)) would be a recoupment on
hotel (built for a total cost of sale of the hotel under s 8(4)(a).
R25 000 000) was brought into use in (The recoupment can also be calculated as
its trade as hotel keeper on 1 March follows:
2022. Leisure Ltd would make any
election to limit their tax liability. Selling price of R20 million, but limited to cost of
R17,5 million (R15 million + improvements of
R2,5 million) less tax value of R15 875 000
(R17,5 million – R750 000 (2020) – (R750 000 +
R125 000 (2021)) = R1 625 000.)
Capital gain:
The balance of the profit on the sale; that is,
R2 500 000 (excess above cost price) will be of a
capital nature and subject to capital gains tax
(see chapter 17).
continued
422
Facts Allowances to be granted

Since the hotel was replaced by a qualifying
replacement hotel, the recoupment on the old
hotel will not be included in taxable income for
2022, but can be set off against the cost price of
the new hotel (s 13bis(6)(a)).
Cost price for the replacement hotel under
s 13bis:
R25 million – R1 625 000 (recoupment on
previous hotel) = R23 375 000.
Annual allowance under s 13bis on replacement
hotel for 2022:
5% × R23 375 000 = R1 168 750
(Leisure Ltd would have elected to set off the
recoupment against the cost price of the replace-
ment hotel under s 13bis(6)(a) to minimise their
tax liability.)
Boulders Ltd erects a hotel building costing Boulders Ltd enjoys a leasehold improvement
R4 000 000 on hired land in pursuance of an allowance (s 11(g) – see 13.7.2) of R200 000
obligation imposed by the lease of the land (1/15 of R3 000 000) in the year ended 30 June
to erect a hotel to a value of R3 000 000. The 2022 and each of the subsequent 14 years of the
erection of the building commenced on lease. It enjoys an annual allowance of R50 000
1 August 2020 and it was completed and (5% of R1 000 000) a year under s 13bis for the
brought into use on 1 July 2021. The com- expenditure it incurred in excess of the amount
pany’s financial year ends on 30 June. The that it was obliged to spend in terms of the lease
lease had 15 years to run from 1 July 2021. (R4 000 000 – R3 000 000).
Interpretation Note No. 105 (issued on 28 November 2018) contains detailed

Please note! explanations and examples that explain the annual allowance on hotel buildings
(under s 13bis).
13.5.2 Hotels: Movable assets (s 12C)

Machinery, implements, utensils or articles owned or purchased (under an instalment sale agreement)
and brought into use after 15 December 1989 for the first time by
l the taxpayer, or
l the lessee, where the asset is let
for the purposes of his trade as hotelkeeper and used by the taxpayer or lessee in a hotel, will qualify
for the s 12C 20% straight-line depreciation allowance (see 13.3.3).
Specifically excluded from the provisions of s 12C are
l any vehicle, or
l equipment for offices or managers’ or servants’ rooms (s 12C(1)(d) and (e)).
These assets that are excluded could, however, qualify for a deduction under the wear-and-tear allow-
ance in s 11(e) (see 13.3.1)
The general recoupment (s 8(4)(a) – see 13.10) and the alienation, loss or destruction allowance
under s 11(o) (see 13.11) is also available on hotel equipment, if all requirements are met.
13.6 Owners and charterers of aircraft or ships (s 33)

The method of taxation of owners and charterers of aircraft or ships depends upon whether they are
resident in South Africa.
South African residents are assessed on their worldwide taxable income in accordance with the
ordinary provisions of the Act, while non-resident owners and charterers of aircraft or ships are
assessed in accordance with the provisions of s 33 of the Act (which is not covered in Silke).
423
13.6.1 Movable assets: Aircraft and ships (ss 12C, 8(4)(a), 8(4)(e), 11(o), 12E and 24P)
The following allowances may be applicable to aircraft and ships:
l Aircraft and ship owners are entitled to deduct the s 12C 20% straight-line allowance for aircraft
and ships brought into use for the first time by them (see 13.3.3). If, however, the taxpayer is a
small business corporation (as defined in s 12E(4)), the aircraft or ship may qualify for the
50%:30%:20% allowance over a three-year period (under s 12E(1A) – see 13.3.4).
l Section 24P allows for an allowance for future expenditure (notwithstanding the provisions of
s 23(e)) on repairs to any ship of a resident used for purposes of trade in the carrying on of a
business as owner or charterer of any ships. The taxpayer should be likely to incur the
expenditure within five years of the year in which the allowance is claimed (s 24P(1)).
In determining the amount of the allowance for future repairs, the taxpayer should consider the
estimated cost and the date on which the cost for the repairs is likely to be incurred (s 24P(2)).
The allowance claimed in a specific year of assessment must be included in (added back to) the
income of the taxpayer in the following year of assessment (s 24P(3)).
l Section 23A, which in certain circumstances may limit the s 12C allowance available to lessors of
aircraft or ships, should also be considered (see 13.7.5). The taxpayer affected by this limitation
is one who lets ‘affected assets’ as defined. The limitation ensures that the sum of the allowances
allowed in any year on the affected assets let, do not exceed the taxable income (determined
before the deduction of the restricted allowances) derived by the lessor during that year from
‘rental income’ as defined. The limitation applies notwithstanding the provisions of the allowances
it restricts.
l The taxpayers are liable for tax on recoupments arising on the sale of an aircraft or a ship
(s 8(4)(a)). In certain circumstances the recoupment can be delayed for an aircraft or ship dis-
posed of, if the taxpayer elected that the provisions of par 65 or 66 of the Eighth Schedule (see
chapter 17) should apply. This election will provide a delayed taxation of the recoupment of the
allowance (under s 8(4)(e) – see 13.10).
l The provisions of s 11(o) will apply on the alienation, loss or destruction of an aircraft or a ship
(see 13.11).
l Interpretation Note No. 73 (Issue 3) (issued on 20 December 2017) relates

to the tax implications of rental income from tank containers and could be
applicable to local and international shipping companies.
l Section 12Q (exemption of income in respect of ships used in international
Please note! shipping (see chapters 5, 17 and 21)) provides tax relief for shipping com-
panies. It provides relief for qualifying domestic shipping companies
including exemption from normal tax (see chapter 5), capital gains tax (see
chapter 17), dividends tax (see chapter 19) and also from withholding tax
on interest paid to any foreign person (see chapter 21).
Remember
If a taxpayer qualifies as a small business corporation, allowances on aircraft and ships can be
claimed under the provisions of s 12E(1A).
13.6.2 Immovable assets: Airport and port assets (s 12F)

When will s 12F be applicable?
The section is applicable to
l airport assets, which include
– any aircraft hangar, apron, runway or taxiway and any earthworks or supporting structures that
form part of the aircraft hangar, apron, runway or taxiway and any improvements to such aircraft,
hangar, apron, runway or taxiway
– on any designated airport, which is an airport approved by the Minister of Finance in consul-
tation with the Minister of Transport, and
424
l port assets, which include

– any port terminal, breakwater, sand trap, berth, quay wall, bollard, graving dock, slipway, single
point mooring, dolos, fairway, surfacing, wharf, seawall, channel, basin, sand bypass, road,
bridge, jetty or off-dock container depot and any improvements thereto, and
– includes any earthworks or supporting structures forming part of such asset.
The airport or port assets should be
l new and unused
l brought into use for the first time by the taxpayer on or before 28 February 2022
l in the carrying on of a trade, and
l should be used directly by the taxpayer exclusively for the purposes of carrying on his business
as an airport, terminal or transport operator or port authority (s 12F(1) and (2)).
What will the implications be if s 12F is applicable?
An allowance equal to 5% each year on the cost of acquisition (including constructing, erecting or
installing) of the asset will be deductible to the extent that the asset is used in the production of the
taxpayer’s income. The allowance can be claimed in full (no apportionment), even if the asset was
only used in the taxpayer’s trade for a few days (s 12F(3)). All deductions allowed in terms of the Act
can never exceed 100% of the cost (s 12F(6)).
l when an asset was previously brought into use for the first time by the taxpayer in any trade
carried on by him
l in the production of income but that was excluded from income (exempt income or the taxpayer
was taxed in terms of the turnover tax regime (the Sixth Schedule) – see chapter 23)
l any deduction that could have been allowed under s 12F during the previous year in which the
asset was brought into use and any following year, is deemed to have been allowed during those
years, as if the receipts and accruals were included in the taxpayer’s income (s 12F(3A)).
Therefore, the tax value of the asset is reduced by the deemed allowance, and although no further
deduction will be granted under this section in respect of the period of use of the asset (which was
excluded from income) in the previous years. The deemed allowance will not be recouped if the
asset is consequently disposed of (s 8(4A)).
The cost of an asset for s 12F is

the lesser of
including
Please note! the direct cost of installation or erection of the asset.
(Where the asset was acquired to replace an asset that was damaged or
destroyed, the deduction is determined on the cost after deducting any amount
that has been recovered or recouped in respect of the damaged or destroyed
asset and excluded from the taxpayer’s income in terms of s 8(4)(e) (s 12F(4)).)
The taxpayer can elect that par 65 or 66 of the Eighth Schedule should apply
in order for s 8(4)(e) to provide for a delayed taxation of the recoupment
(see 13.10.3).)

exempt entities
(s 12F(2A)).
425
13.7 Leases
13.7.1 Lease premiums (s 11(f))

When will s 11(f) be applicable?
If a premium, or consideration in the nature of a premium,
l was paid by a taxpayer
l for any of the following items:
(1) the right of use or occupation of land or buildings
(2) the right of use of plant or machinery
(3) the right of use of a motion picture film or any sound recording or advertising matter connected
with the film
(4) the right of use of
– a ‘patent’ as defined in the Patents Act 57 of 1978
– a ‘design’ as defined in the Designs Act 195 of 1993
– a ‘trade mark’ as defined in the Trade Marks Act 194 of 1993
– a ‘copyright’ as defined in the Copyright Act 98 of 1978, or
– any other property that is of a similar nature
(5) the providing of or the undertaking to provide any knowledge directly or indirectly connected
with the use of the items listed in (3) and (4) above
(6) the right of use of any pipeline, transmission line or cable or railway line (as meant in the
definition of an ‘affected asset’ (other than par (c) of the definition that is listed below under
(7)) in s 12D (see 13.4.7)), or
(7) the right of use of any line or cable used for the transmission of electronic communications
(as meant in par (c) of the definition of ‘affected asset’ in s 12D (see 13.4.7)), and
l it is used for the production of income or from which income is derived
l the provisions of s 11(f ) will apply.
The allowance is available only when a premium is paid for the right of use or occupation of an asset.
Amounts paid for the complete acquisition of an asset do not fall within the ambit of the allowance.
‘Premium or consideration in the nature of a premium’ for purposes of s 11(f )

means:
A consideration in the nature of rent passing from a lessee to a lessor over
and above or in lieu of the rental payments.
Please note! (CIR v Butcher Bros (Pty) Ltd (1945 AD))
In summary, a lease premium is an amount, with a specific money value, paid
by a lessee to a lessor for the use or right of use of an asset which is separate
from and in addition to, or an alternative to, rent paid (Interpretation Note
No. 109 (issued on 7 February 2019.)
Remember
The person receiving the premium is obliged to include in his gross income the full premium in
the year of its receipt or accrual (par (g) of the definition of the term ‘gross income’ in s 1 – see
chapter 4).
The lease premium allowance will also be available to a sub-lessee, since under a sublease a premium
is additional rent passing from the sub-lessee to the sub-lessor (Interpretation Note No. 109).
The following will not be classified as lease premiums for purposes of s 11(f ):
l A premium or consideration that will not qualify as ‘income’ for the recipient. For example, if the
lessor is a tax exempt person or body in terms of s 10 (for example a pension fund), a premium
paid to it cannot be deducted by the taxpayer under the s 11(f ) allowance. There is an exception,
namely the right of use of a line or cable (refer to item (6) above)
– used for the transmission of electronic communications, and
– of which substantially the whole (90% or more (Interpretation Note No. 109)) is located outside
the territorial waters of South Africa, thus international submarine (underwater) telecommuni-
cation cables, where
426
– the terms of the right of use is 10 year or more (before 1 April 2019 it was 15 years or more)
(proviso (dd) to s 11(f )).
l When a lease contract is transferred from one lessee to another, any amount paid will not qualify
for this allowance. This is since the payment did not pass from the lessee to the lessor by way of
additional rent, but between the previous lessee (cessionary) and the new lessee. It is expendi-
ture of a capital nature for the substitute lessee and will be a capital gain in the hands of the pre-
vious lessee.
l If a lessor pays an amount to a lessee to vacate business premises before the end of the lease, it
will not qualify for this allowance.
l An amount paid by a lessee to a lessor for the cancellation of a lease is not a premium or like
consideration, since it is not paid for the right of use or occupation of the property. The question
of whether such a payment will be deductible will depend upon whether it complies with the
requirements of ss 11(a) and 23(g) (see chapter 6).
What will the implications be if s 11(f) is applicable?
Total lease premium or like consideration

DIVIDED BY
General rule Number of years (maximum of 25 years, including renewals) of use
MULTIPLIED BY
Period (either days or months) in the year of assessment used in the
production of income
An allowance, calculated under s 11(f ), will be available to the taxpayer. The allowance (except for
the provision of any knowledge (item 5 above) and the right of use of any line or cable used for the
transmission of electronic communications (item 7 above)) are calculated as follows (proviso (aa) to
s 11(f )):
Total lease premium or like

consideration
DIVIDED BY
Number of years for which the taxpayer is entitled to the use or

occupation of the property.
(Limited to a maximum of 25 years)
The allowance for a lease premium paid on the provision of or the undertaking to provide any know-
ledge (item 5 above) is calculated as follows (proviso (cc) to s 11(f )):

consideration
DIVIDED BY
Number of years for which the taxpayer is entitled to the right

of use (also taking into account any other relevant
circumstances) of the property.
The allowance for a lease premium paid for the right of use of any line or cable used for the trans-
mission of electronic communications (item 7 above) is calculated as follows (proviso (ee) to s 11(f )):

consideration
DIVIDED BY
Number of years for which the taxpayer is entitled to the right

of use of the asset
427
In calculating the s 11(f ) allowance the following should be remembered:

l The allowance will be apportioned taking into account the period during the
year of assessment it was used for the production of income or from which
income is generated (as required by s 11(f )(i)–(iii) and (v)).
l Should the taxpayer be entitled to
– the use or occupation for an indefinite period, or
– if the taxpayer or the person by whom the right was granted, holds a
right or option to extend or renew the original period of the use or
occupation,
Please note! the taxpayer will be deemed to be entitled to use or occupy for the period
that represents the probable duration of that use or occupation, but limited
to 25 years (proviso (aa), (bb) and (cc) to s 11(f )). Renewal periods will be
taken into account.
l If a taxpayer cedes or surrenders his rights under the agreement
– a full year’s allowance will in practice be granted in the year of the
cession or surrender, and
– the balance of the premium not yet deducted will fall away (be forfeited).
This will also be the case in the event of a premature termination of an agree-
ment.
These above principles are all confirmed in Interpretation Note No. 109.
Recoupment
On the disposal of his right of use or occupation, the lessee will have to include in his income that
portion of the selling price that represents a recoupment or recovery of allowances previously
granted under this section (s 8(4)(a)).
Remember
l The allowance will be apportioned taking into account the number of months it was used or
occupied (as provided for in s 11(f)).
l The premium should be in respect of items used for the production of income or from which
income is derived.
l In the event of the early termination of an agreement, the balance of the amount of the
premium not yet deducted will fall away (but there is the possibility of a capital loss in the
taxpayer’s hands).
l The duration of use or occupation of the item on which the lease premium was paid is limited
to a maximum of 25 years (or 10 years for lines or cables used for electronic communica-
tion).
l In calculating the duration of the lease, renewal periods are taken into account.
Example 13.16. Lease premiums
Calculate the lease premium allowance deductible in the following instances in terms of s 11(f)
(assume that all years of assessment end on the last day of February):
A For a lease over premises entered into on 1 September 2021, Walter paid the lessor a
premium of R150 000. He is entitled to occupation for 15 years. The annual rental is
R120 000.
428
SOLUTION
Allowances to Walter
28 February 2022
6
R5 000, that is, (R150 000 ÷ 15) ×
12
Walter’s allowance has been reduced since the property was occupied for only 6 months of the tax
year.
2023 to 2036 years of assessment
R10 000 each year (R150 000 ÷ 15).
R5 000 (balance not yet deducted).
Notes
(1) The lessor is liable for tax on the full amount of the premium of R150 000 in the 2022 year of
assessment (par (g) of the definition of the term ‘gross income’ in s 1).
(2) If Walter ceased business in the middle of the 2026 year of assessment and surrendered his
interest in the lease, the allowance for the 2026 year of assessment would be R10 000, even
though the property was occupied for only six months of that year of assessment. The
balance of the premium not yet deducted (i.e., R150 000 – R45 000 = R105 000) falls away.
(This is the practice. It could, however be recognised as a capital loss – see chapter 17.)
Example 13.16. Lease premiums – continued
B For the use of a trade mark with effect from 1 June 2021, Faheem paid Seluh a royalty of
10% of the net profit earned plus a lump sum payment of R1 500 000. The lease is for
30 years.
SOLUTION
Allowances to Faheem
28 February 2022
9
R45 000, that is, (R1 500 000 ÷ 25) ×
12
Reduced since use of patent is from 1 June.
R60 000 each year (R1 500 000 ÷ 25).
R15 000 (balance not yet deducted (R1 500 000 ÷ 25 × 3/12)).
Nil
Note
When the period of the lease exceeds 25 years, the premium is limited to 25 years.
Example 13.16. Lease premiums – continued
C Modise is the lessee under a ten-year lease of property entered into on 1 March 2019. For
the cession and assignment of all his rights under the lease on the last day of his 2022 year
of assessment, Modise received from Nell an amount of R70 000. Modise originally paid Nell
(the landlord) R30 000 as a premium for the granting of the lease.
429
SOLUTION
Allowances to Modise
2020 tax year: R3 000 (R30 000 ÷ 10).
2021 tax year: R3 000 (R30 000 ÷ 10).
2022 tax year: R3 000 (R30 000 ÷ 10).
Allowances to Nell: Nil
Notes
(1) The balance of the premium not yet deducted by Modise, i.e., R21 000 (R30 000 less R9 000),
falls away (but could be recognised as a capital loss) since the property is no longer used or
occupied for the purpose of trade.
(2) Modise is not liable for normal tax on the R70 000 received on the cession of the lease,
except to the extent to which it represents a recoupment of allowances made in terms of
s 11(f ) (see note 3 below). Capital gains tax will, however, apply to the capital gain of
R40 000 (Proceeds of R61 000: R70 000 (selling price) – R9 000 (recoupment), less base
cost of R21 000: R30 000 (original cost) – R9 000 (s 11(f) deduction).
(3) Since Modise paid R30 000 for the lease but sold it for R70 000, a taxable recoupment
arises in terms of s 8(4)(a) of allowances granted under s 11(f ). Therefore R9 000 (three
years’ allowances) must be included in Modise’s income in his 2022 year of assessment.
(4) Nell is not entitled to any allowance for the R70 000 paid for the lease, since it is expen-
diture of a capital nature and not a premium (in terms of s 11(f) – Turnbull v CIR
(1953 A)).
(5) If instead of ceding his lease to Nell, Modise had subleased the premises on the same
terms and conditions enjoyed by him but in return for a premium of R70 000, Nell would be
entitled to the following allowance during each year:
2023 to 2029 years of assessment: R10 000, that is: R70 000 ÷ 7.
Modise would be liable for tax on the full amount of R70 000 in his 2022 year of assessment,
but the Commissioner is likely to grant him an allowance of R21 000 in terms of s 11(h) for
the non-deducted portion of the premium originally paid by him for the lease.
13.7.2 Leasehold improvements (s 11(g))

When will s 11(g) be applicable?
Section 11(g) makes an allowance available for:
l expenditure actually incurred by a taxpayer
l enforced by a leasehold agreement
l to undertake improvements on land or to buildings
l used or occupied for the production of income or income must be derived from it.
The allowance is only available when the lessee is forced (obliged) to effect
improvements in terms of the contract of lease.
The terms of a lease may be such that there is an implied obligation to effect
Please note! improvements. It is also not essential, it is submitted, that the exact nature or
amount of the improvements be decided upon by the parties. When no amount
is stipulated as the value of the improvements, their fair and reasonable value
must be determined.
Remember
The lessor is required to include in his gross income the value of the improvements allowable
as a deduction to the lessee in the year of assessment in which the right to have the
improvements effected accrues to him (par (h) of the definition of the term ‘gross income’ in s 1 –
see chapter 4).
The provisions of the leasehold improvements allowance do not apply if:

l the value of the improvements or the amount to be expended
l does not constitute income of the lessor.
430
What will the implications be if s 11(g) is applicable?
The stipulated value of the improvements

DIVIDED BY
Number of years of use (calculated from the date when improvements are
General rule completed (including renewal periods)) but limited to 25 years
MULTIPLIED BY
Period (either days or months) in the year of assessment used in the
production of income
If s 11(g) is applicable, an allowance may be claimed on the leasehold improvements. The allowance
is calculated as:
The stipulated value
(or the fair and reasonable value if no value is stipulated)
DIVIDED BY
Number of years that the taxpayer is entitled to the use or occupation of

the property.
(Calculated from the date on which the improvements are completed, but
limited to a maximum of 25 years (s 11(g)(ii)).)
In other words, the expenditure actually incurred is not allowed in full in the year of assessment in
which it is incurred. It is allowed in annual instalments over the number of years from the completion
of the improvements until the end of the lease, with a maximum of 25 years. Therefore, if the lessee is
entitled to the use or occupation of the premises for more than 25 years, the expenditure must be
written off in only 25 annual instalments.
In calculating the s 11(g) allowance the following should be remembered:

l As a result of the requirement that the number of years be calculated from
the date on which the improvements are completed, the first allowance
available to a taxpayer will be granted only in the year of assessment in
which the improvements are completed and brought into use.
l The allowance is proportionately reduced in the year the improvements are
completed if the property is used for less than a full year (Interpretation Note
No. 110 (issued on 7 February 2019).
l SARS does not require the allowance to be reduced proportionately if the
property does not produce income for the full year because of the early
termination of the lease. The full annual allowance can still be claimed in the
year of termination (for example, if he surrenders or cedes his rights under the
Please note! lease or if he vacates the premises upon the cancellation of the lease)
(s 11(g)(vii)).
l If the leasehold agreement is terminated before the expiry date, the portion of
the leasehold improvements allowance that has not been claimed yet will be
allowed in the year of assessment when the termination occurred (s 11(g)(vii)).
l If the lessee is entitled to the use or occupation for an indefinite period, or the
lessee or lessor could renew or extend the original lease period, the lessee is
deemed to be entitled to the use or occupation for a period that represents
the probable duration of his use or occupation (s 11(g)(iii)). This period may
not exceed 25 years. (Renewal periods (an option to extend the lease) will be
taken into account to determine the period of the lease (Interpretation Note
No. 110).)
The aggregate of the allowances granted may not be more than

l the amount stipulated in the lease agreement as the value of the improvements or as the amount
to be spent on the improvements, or
l if the lease agreement does not stipulate an amount, the fair and reasonable value of the
improvements (s 11(g)(i)). The fair and reasonable value should be determined objectively taking
into account the facts and surrounding circumstances. In many cases it will be the actual cost to
the lessee of the improvements (Interpretation Note No. 110).
The following situations can therefore occur:
The lessee spends > the amount in the contract Î

allowance limited to stipulated amount in contract.
431
For example, if the lease stipulates that improvements to the value of R1 200 000 must be effected
and the lessee spends R1 500 000, the annual allowances must be calculated on R1 200 000; that is,
the amount stipulated in the lease. The lessee is a volunteer in respect of the R300 000 (1 500 000 –
R1 200 000) on which the taxpayer may claim any other allowance on buildings (for example s 13,
but not s 13quin, since only the owner can claim the s 13quin allowance – see 13.4.5), if the asset
qualifies.
The lessee spends = the amount in the contract Î

allowance limited to stipulated amount in contract.
and the lessee spends R1 200 000, the annual allowances must be calculated on R1 200 000.
The lessee spends < the amount in the contract Î

allowance limited to actual amount incurred for improvements.
and the lessee spends R1 100 000, the annual allowances must be calculated on R1 100 000.
When a lessee is forced to undertake improvements in terms of a lease:
l a variation of the original agreement of lease at a later date
l with the effect of increasing the value of the improvements to be done
l would entitle him to claim the leasehold improvements allowance on the increased sum
l provided that the improvements are still in the course of construction at the date of the variation.
A variation of the original agreement concluded after the improvements have been effected, would
not enable the lessee to base the allowances on the increased sum (Interpretation Note No. 110).
Provision is made for the situation in which the lessee is or has been entitled to
both
l the leasehold improvements allowance, and
l the annual allowance for buildings used in a process of manufacture or
similar process on the cost of the buildings or improvements (s 13(1)) or the
annual allowance made available on the cost of the storage buildings and
improvements of an agricultural co-operative (s 27(2)(b)).
In such an event, the aggregate of the leasehold improvements allowance must
Please note! be limited to:
l the cost to the taxpayer of the building or improvements
Less
l any untaxed recoupments set off against that cost (under ss 13(3) or 27(4))
Less
l total allowances allowed under ss 13(1) or 27(2)(b).
(Section 11(g)(iv).)
The purpose of this provision is to deny the taxpayer deductions by way of
annual allowances and the leasehold improvements allowance in excess of the
cost of a building or improvements as reduced by any untaxed recoupment.
It is submitted that the taxpayer can decide which allowance of either the leasehold improvements
(s 11(g)) or s 13(1) (see 13.4.1) will provide the most beneficial deduction, since neither section pre-
scribes a specific sequence in which the deductions should be used.
Recoupment
On the disposal of his right under a lease, the lessee will have to include in his income that portion of
the selling price that represents a recoupment or recovery of allowances previously granted under
this section (s 8(4)(a)).
If, on the termination of the lease, the lessee receives compensation from the lessor for improvements
done during the lease, such payment will be included in his income to the extent to which it repre-
sents a recoupment of previously enjoyed allowances.
432
Remember
l The allowance is proportionately reduced (either by way of days or months) in the year the
improvements are completed if the property is used for less than a full year of assessment.
l The leasehold improvements should be in respect of assets used for the production of
income or from which income is derived.
l In the event of the premature termination of an agreement, the balance of the improvement
not yet deducted will be allowed in full as a deduction in the year of termination.
l The allowance is calculated over the number of years left after the completion of the
improvements for which the lessee is entitled to the use or occupation of the land or
buildings in terms of the lease, with a maximum of 25 years.
l In calculating the duration of the lease, renewal periods are taken into account if it is part of
the probable duration of the use or occupancy.
Example 13.17. Leasehold improvements
In terms of a leasehold agreement of land, Builder, the lessee, has to erect a factory (for sole use
in its manufacturing operations) to a value of R3 000 000 within a period of 18 months from the
date of commencement of the lease, which was 1 January 2021. The lease is for a period of
20 years. On the expiry of the lease, the factory will revert to the landlord without compensation
to Builder. At the end of the first year of assessment (30 June 2021) the factory had not been
completed, but R1 250 000 had actually been spent on its erection. The building was completed
on 31 March 2022, at a total cost of R3 500 000, and the factory was immediately let to tenants
(that also carries on a qualifying manufacturing trade).
Calculate the allowances to be granted to Builder in terms of s 11(g), as well as any other
allowances for which the factory may qualify.
SOLUTION
Leasehold improvements allowance:
No allowance, since the factory was not completed during the year of assessment.
Factory completed on 31 March 2022.
Lease expires 18¾ years after completion.
Therefore the value of the improvements stipulated in the lease is to be amortised over a period
of 18¾ years, but must be reduced since the buildings were brought into use only on 31 March
2022.
R3 000 000 3
Annual allowance × = R40 000
3
18 /4 12
The next 18 years of assessment
R3 000 000
An allowance of R160 000 for each of the 18 years ( 183/4 )
R3 000 000 6
Annual allowance × = R80 000
183/4 12
Section 13 allowance (see 13.4.1) on the excess cost not qualifying for the s 11(g) allowance:
No allowance, since the factory was not yet brought into use in a process of manufacture.
Section 13 annual allowance: 5% of R500 000 (the excess cost not qualifying for the
s 11(g) allowance) .......................................................................................................... R25 000
If the lease contract in terms whereof the improvements must be effected was for a
longer period than 20 years, Builder should have elected to write off the R3 000 000
in terms of s 13(1) (over 20 years at 5% per year) instead of in terms of s 11(g) over
the longer period.
433
13.7.3 Relief for lessor (lessor’s special allowance) (s 11(h))

When will s 11(h) be applicable?
Section 11(h) provides a taxpayer in special circumstances (the onus will be on the taxpayer to prove
that there are special circumstances (Interpretation Notes No. 109 and 110 (both issued on
7 February 2019))) with an allowance referred to here for convenience as the ‘lessor’s special allow-
ance’. The allowance is made for amounts included in the taxpayer’s ‘gross income’ under the
following paragraphs:
l Paragraph (g) (lease premiums)
A lessor who derives a premium for granting a lease will have the full premium included in his
‘gross income’ (under par (g) of the definition of that term) in the year of its receipt or accrual.
OR
l Paragraph (h) (leasehold improvements)
When a lessee is forced to effect improvements in terms of a lease the lessor will effectively
include in his ‘gross income’ (under par (h) of the definition of that term) the value of the improve-
ments allowable as a deduction to the lessee in the year in which the right to have the improve-
ments effected accrues to him. He is not entitled to spread that value over the period of the lease
but must include the full amount in that year, although the lessor will only receive a benefit, at the
expiry of the lease.
In the following circumstances the lessor’s special allowance may not be made to the taxpayer:
l if either the lessor or the lessee is a company and the other party has an interest in more than
50% of any class of shares issued by that company, whether directly as a holder of shares in that
company or indirectly as a holder of shares in any other company (s 11(h)(i)), or
l if both the lessor and the lessee are companies and any third person has an interest in more than
50% of any class of shares issued by each of these companies, whether directly or indirectly
(s 11(h)(ii)).
This exclusion avoids abuse of the allowance when the lessor and lessee are not independent
persons (for example when one is a company and the other is its holder of shares or both are
companies controlled by the same holder of shares).
What will the implications be if s 11(h) is applicable?
The amount included in gross income (under par (g) or (h) of the
gross income definition)
General rule
LESS
Present value of the amount included in the lessor’s gross income
The ‘lessor’s special allowance’ will be granted as a deduction to the taxpayer. The allowance will be
whatever amount the Commissioner, having regard to any special circumstances, might consider to
be reasonable.
The Commissioner, in fixing the amount of the allowance, must have regard to the number of years
taken into account in the determination of the allowance granted to any other person (the lessee)
under the leasehold improvements allowance made available by s 11(g). This is the number of years,
calculated from the date on which the leasehold improvements are completed, but not more than
25 years, for which the lessee is entitled to use or occupation. In this way, the lessor and lessee are
prevented from arranging the lease in such a way that it has a brief compulsory duration, in order to
maximise the deductions enjoyed by the lessee under the leasehold improvements allowance, and a
lengthy optional extension, in order to maximise the deduction enjoyed by the lessor under the
special lessor’s allowance.
The lessor’s special allowance is generally determined as follows (Interpretation Note No. 110):
(1) Establish the amount that has been included in the lessor’s gross income as the value of the
improvements under par (h) of the definition of the term ‘gross income’ in s 1.
(2) Discount that amount to its present value at 6% over the same period taken into account in the
determination of the leasehold improvements allowance granted to the lessee. This period would
include renewal periods available at the option of the lessee (see 13.7.2).
(3) Set the lessor’s special allowance at an amount sufficient to reduce the amount referred to in
item 1 above to the discounted amount referred to in item 2.
434
The allowance will therefore be:
The amount included in gross income

(under par (g) or (h) of the gross income definition)
LESS
Present value of the amount

included in the lessor’s gross income
EQUALS
Special lessor’s allowance (s 11(h))
Example 13.18. Lessor’s special allowance

Lessor Ltd lets premises to Mr Lessee for a period of five years, with an option to renew the lease for
a further three years. The lease forces Mr Lessee to effect improvements to the leased premises to
the value of R1 800 000. The Commissioner regards the duration of the lease to be eight years.
Show the effect of the improvements on Lessor Ltd’s taxable income in the year of assessment in
which the lease is signed.
SOLUTION
Value of improvements included in gross income in terms of par (h) of the
definition of ‘gross income’ ............................................................................................ R1 800 000
Less: Deduction under s 11(h) [Present value of R1 800 000 is R1 129 342,
therefore the allowance is (R1 800 000 – R1 129 342)] ........................................ (670 658)
Taxable income in respect of improvements ............................................................ R1 129 342
Note
The deduction allowed under s 11(h) is calculated to discount the amount required to be expended
by the lessee on the improvements to its present worth at 6% over the period of the lease.
(FV = R1 800 000; n = 8; i = 6%; Comp PV = R1 129 342)
l The s 11(h) allowance is only claimed by the lessor in the year of assess-
ment in which the right to occupy or the right to effect improvements is
granted to the lessee and a corresponding inclusion is made in the gross
income of the lessor under special inclusion paras (g) and (h) respectively
Please note! (see chapter 4).
l Although the lessee deducts the whole of the value of improvements over
the period of the lease, when a lease is of substantial duration the lessor
may (as a result of the special lessor’s allowance) have to include in his
gross income only a small portion of that value.
13.7.4 Deductions in respect of improvements not owned by the taxpayer (s 12N)

Section 12N was introduced to allow for the deduction by the lessee of the cost of improvements
undertaken on leased land or to buildings owned by government or semi-government entities. These
improvements would not qualify for a deduction in terms of s 11(g) (see 13.7.2), since the improve-
ments are not income in the hands of the tax exempt recipients.
When will s 12N be applicable?
Section 12N is applicable if a taxpayer (the lessee)
l holds a right of use or occupation of land or a building, and
l will (whether contractually or voluntarily) undertake (effect) an improvement on the land or to the
building in terms of
– a Public Private Partnership, or
435
– a leasehold agreement, if the land or building is owned by

• the government of the Republic in the national, provincial or local sphere, or
• by any entity exempt from tax under s 10(1)(cA) or (t) (see chapter 5 – for example Black
tribal authorities, certain water service providers, the Council for Scientific and Industrial
Research (CSIR) and the South African Roads Agency Limited), or
• the Independent Power Producer Procurement Programme administered by the Department
of Energy
l incurs expenditure to do these improvements, and
l uses or occupies the land or buildings for the production of income or income must be derived
from it (s 12N(1)).
The provisions of this section do not apply if the lessee
l carries on banking, financial services or an insurance business, or
l enters into an agreement to sub-lease the land or building to another person, unless
– the land or building is occupied by the other person (sub-lessee) and it is a company that is a
member of the same group of companies as the lessee
– the lessee (the taxpayer) carries
• the cost of maintaining the land or building, and
• the responsibility for repairs as a result of normal wear and tear, and
– the potential risk of destruction or repair is borne by the lessee (s 12N(3)).
What will the implications be if s 12N is applicable?
The lessee is deemed to be the owner of the improvements made to the

General rule property of the lessor. He can claim the applicable allowances although
the property is not legally owned by him.
If this section (s 12N) is applicable, the lessee will be deemed to be the owner of the improvements
for purposes of
l the allowances on intellectual property, and research and development (s 11D – see 13.8.1)
l the allowance on movable assets used in farming or production of renewable energy (s 12B – see
13.3.2)
l the s 12C allowance (see 13.3.3)
l the allowance on railway lines (s 12D – see 13.4.7)
l the allowance on airport and port assets (s 12F – see 13.6.2)
l the industrial policy project allowance (s 12I – see 13.9.2)
l the allowance for buildings in special economic zones (s 12S – see 13.4.6)
l the manufacturing building allowance (s 13 – see 13.4.1)
l the s 13ter allowance (replaced – see 2013 edition of Silke)
l the allowance for buildings in urban development zones (s 13quat – see 13.4.2)
l the commercial building allowance (s 13quin – see 13.4.5)
l the residential unit allowance (s 13sex – see 13.4.3), or
l s 36 (mining assets))
and will therefore qualify for the same allowance as other owner taxpayers, on the amount of the
improvements completed.
The lessee will also be deemed to be the owner of the improvements for purposes of the Eighth
Schedule (see chapter 17) and will therefore be liable for capital gains tax on the improvements
(s 12N(1)).
When the right of use or occupation terminates, the taxpayer is deemed to have disposed of the
improvements to the owner on the later of
l the date that the lease terminates, or
l the date that the use or occupation ends (s 12N(2)(a)).
436
If the lease terminates and the lessee continues to use or occupy the land or building, or extends the
period of the lease, the deemed disposal will be postponed until the end of the extension period
(s 12N(2)(b)).
Example 13.19. Deduction for improvements not owned by the taxpayer

On 15 April 2022, Twintopia (Pty) Ltd and the Municipality entered into an agreement whereby
the Municipality leased a piece of land to Twintopia (Pty) Ltd and Twintopia (Pty) Ltd undertook
to erect a new office block for use in its business on the piece of land. Twintopia (Pty) Ltd
immediately commenced with the erection of a new office block at a total cost of R6 500 000. The
erection was completed and the offices brought into use for purposes of Twintopia (Pty) Ltd’s
trade (in the production of income) on 30 September 2022.
Calculate the allowances (if any) on the office block for Twintopia (Pty) Ltd for the years of
assessment ending on 31 October 2022 and 31 October 2023.
SOLUTION
In terms of the provisions of s 12N, Twintopia (Pty) Ltd is deemed to be the owner of the office
block and will qualify for the accelerated s 13quin allowance on the cost of the improvements
(s 12N(1)).
2022: R6 500 000 × 5% (s 13quin(1)) (the full allowance allowed, although only
2023: R6 500 000 × 5% (s 13quin(1)) ......................................................................... (R325 000)
Note
A deemed disposal event will arise for Twintopia (Pty) Ltd on the later of the date that the right of
use or occupation terminates, or use or occupation ends (s 12N(2)(a)). Rights or options to
renew the lease period need to be included when the lease period is determined (s 12N(2)(b)).
13.7.5 Limitation of allowances for lessors of certain assets (s 23A)

When will s 23A be applicable?
Section 23A will be applicable if a taxpayer lets ‘affected assets’ as defined (s 23A(2)).
‘Affected assets’ include any asset that has been let under a lease agreement on
which the lessor is or was entitled to (see note 1) an allowance under ss 11(e),
12B, 12C, 12DA (allowance for rolling stock) or 37B(2)(a) (allowance on environ-
mental treatment and recycling assets), no matter whether in the current or a
previous year of assessment.
Please note! But exclude:
l assets let by the lessor under an ‘operating lease’ as defined (see below),
and
l assets that, during the year of assessment, were mainly (more than 50%)
used in a non-letting trade (see note 2).
(Section 23A(1).)
Note 1: The phrase ‘entitled to’ is defined in the Business Dictionary as:
Having rights and privileges to something either by legal mandates or by policies set in
place.
Take note that an asset will remain an affected asset even if no allowance was claimed but
the lessor was entitled to the allowance (Interpretation Note No. 53 (Issue 3) (issued on
18 March 2020)).
Note 2: To determine whether an asset was mainly used (more than 50%) in a non-letting trade,
Interpretation Note No. 53 (Issue 3) provides that the taxpayer needs to determine the
period for which the asset was made available for letting, whether it was actually let or not.
437
An ‘operating lease’ is defined as

l a lease of movable property
l concluded by a lessor in the ordinary course of a business of letting such
property.
Letting in the banking, financial services or insurance business is, however,
excluded (with the consequence that the banking, financial services or insurance
business cannot enter into operating leases in order to escape the application of
the limitation).
Please note! In addition, the movable property let must satisfy all of these requirements:
l It must be possible for members of the general public to hire it directly from
the lessor for a period of less than one month.
l The cost of maintaining it and of carrying out the repairs to it required in con-
sequence of normal wear-and-tear must be borne by the lessor.
l Subject to any claim that the lessor might have against the lessee owing to the
lessee’s failure to take proper care of it, the risk of its destruction or loss or any
other disadvantage must not be the responsibility of the lessee.
(Section 23A(1).)
What will the implications be if s 23A is applicable?
The sum of the capital allowances on all affected assets

General rule CANNOT EXCEED
The sum of the net rental income (i.e. taxable income) on all the affected
assets.
Section 23A limits certain allowances available to lessors of affected manufacturing machinery or
plant, aircraft or ships. The limitation is applied as follows (s 23A(2)):
The sum of the deductions allowable to a lessor in a year of assessment under

l s 11(e) (the wear-and-tear allowance)
l s 11(o) (the alienation, loss or destruction allowance)
l s 12B (allowance on movable assets used in farming or production of renewable energy)
l s 12C (20% or 40% allowance (manufacturing assets))
l s 12DA (allowance on rolling stock), and
l s 37B(2)(a) (40/20/20/20% allowance on new and unused environmental treatment and recycling assets)
(referred to as the restricted allowances) on the affected assets let by him.
CANNOT EXCEED
Taxable income (determined before the deduction of the restricted allowances)
derived by him during that year from ‘rental income’ as defined (thus net rental
income).
Interpretation Note No. 53 (Issue 3) explains that the limitation is applied on an aggregate basis and
not on an asset-by-asset basis. The sum of the specified capital allowances on all affected assets is
therefore limited to the sum of the net rental income derived from all such assets. This limitation
applies notwithstanding the provisions of the allowances (listed above) that it restricts.
‘Rental income’ is defined for the purposes of s 23A as income derived by way of
rent from the letting of any affected asset in respect of which an allowance has
been granted to the lessor, either in the current or any previous year of assess-
ment, and includes any amount
l recouped under s 8(4) in respect of an affected asset, and
Please note! l derived from the disposal of any affected assets (including capital gains
realised (s 23A(1)).
(The inclusion of the recoupment on the date of sale and of the income from the
disposal ensures that ring-fenced losses are fully permitted against the trade
associated with the leased asset.)
438
It is important to note that rental income from any movable property and not just
the assets giving rise to the restricted allowances sets the cap on the limitation.
Lease premiums received from the letting of assets will be included in rental
income, whilst a foreign exchange gain will not be included (a foreign exchange
loss will however be allowed – Interpretation Note No. 53 (Issue 3)).
Please note! A qualifying foundation and supporting structure will be treated in the same way
as the machinery, implement, utensil or article mounted on or affixed to it;
therefore, the allowances available on the foundation or structure will also be
restricted by the limitation.)
When a taxpayer is entitled to a deduction that relates to both rental income and other income, he
can apportion the deduction when calculating the taxable income he derived, from rental income
(s 23A(3)). The Commissioner will accept any fair and reasonable apportionment based on the facts
of the case.
Any disallowed deduction can be carried forward to the following year of assessment. It will be
deemed to be part of the allowable deductions for the following year and the s 23A limitation will
again be applied in that year (s 23A(4)). The implication of this limitation is that a rental loss as a
result of capital allowances will be ring-fenced and cannot be used against the taxpayer’s other
income. If the taxpayer has a balance of an assessed loss from the previous year, the taxpayer must
first deduct the capital allowances from the net rental income (in terms of s 23A(4)), after which the
balance of the assessed loss must be set off (Interpretation Note No. 53 (Issue 3)).
If an affected asset is sold, the taxpayer should make the assumption, when determining the recoup-
ment on the sale of the asset, that all capital allowances on the affected asset have been allowed. If
this results in an assessed loss, the excess must be carried forward to the following year (under
s 23A(4)) (Interpretation Note No. 53 (Issue 3)).
Remember
l The deduction of the allowance is limited to the taxable income derived from rentals (net
rentals), therefore gross income from rentals less applicable expenses.
l Assets let under operating leases and assets used mainly in non-letting trades are
unaffected by the limitation of lessors’ allowances under s 23A.
l The provisions of both ss 23A and 23D (see 13.7.6) can apply to the same leased asset.
Example 13.20. Limitation of lessors’ allowances under s 23A

Clown Ltd lets a machine to Circus (Pty) Ltd for a rental of R240 000 a year. The machine quali-
fies for a s 12C allowance of R180 000 in the year of assessment ending 28 February 2022.
Clown Ltd derives no other rental income, but has spent R90 000 on tax-deductible expenses
relating to the generating of the rental income.
Calculate the taxable income derived by Clown Ltd during the 2022 year of assessment from this
transaction.
SOLUTION
Rental received .............................................................................................................. R240 000
Less: Related tax deductible expenses ......................................................................... (90 000)
Taxable income from rentals before restricted allowance ............................................. 150 000
Less: Section 12C allowance (R180 000 but limited to the taxable income from
rentals) ................................................................................................................. (150 000)
Taxable income from lease ............................................................................................ nil
The balance of the allowance (R30 000) is carried forward to the 2023 year of assessment.
439
13.7.6 Sale and leaseback arrangements (ss 23D and 23G)

A ‘sale and leaseback’ arrangement is any arrangement whereby
l a person (the seller) disposes of an asset (directly or indirectly) to another person (the purchaser),
and
l the seller or any connected person in relation to him hires (directly or indirectly) the asset (back)
from the purchaser (s 23G(1)).
Both ss 23D and 23G (discussed below) make reference to transactions referred to as a ‘leaseback’
or a ‘sale and leaseback.’
Section 23D
Section 23D will apply in the following circumstances:
A depreciable asset (see 13.2.4) has been let or

licensed by the taxpayer to a lessee or licensee.
AND
It was held, within a period of two years preceding the commencement of the lease or licence, by:
l the lessee or licensee, or by a person who is a connected person in relation to the lessee or licensee, or
l a sub-lessee or sub-licensee in relation to the asset (that is, a person to whom the right of use of the
asset has been granted by a lessee or licensee or by any person to whom the right of use of the asset
has previously been granted) or from a person who is a connected person in relation to the sub-lessee
or sub-licensee (hereafter referred to as ‘the other party’ – s 23D(2)).
Amount on which allowances or deductions can be claimed is:

LESSER OF
Purchase price (lessor or licenser)
General rule OR
Original cost (for lessee or licensee)
Less: allowances claimed (lessee or licensee)
Plus: Recoupment and taxable capital gain on disposal to lessor or
licenser
Section 23D will restrict the amount of the purchase price used to calculate deductions or allowances
if a taxpayer lets a depreciable asset, or licenses a depreciable asset to a person (or his connected
person) who held the asset within two years before the start of the lease or licence.
Any deduction or allowance claimed by the lessor or licenser on the depreciable asset must be
calculated on the purchase price of the asset for the taxpayer, but not exceeding the sum of:
Cost of the asset to the other party (lessee or licensee)

Less
l all deductions previously allowed to the other party on that asset, and
l all deemed allowances allowed to the other party under ss 11(e), 12B, 12C or any of the following allow-
ances, namely the allowance on railway lines (s 12D), the allowance for rolling stock (s 12DA),
allowance on airport and port assets (s 12F), the manufacturing building allowance (s 13), the allow-
ance on hotels (s 13bis), the s 13ter allowance (replaced – see 2013 edition of Silke), the commercial
building allowance (s 13quin), or the allowance on environmental assets (s 37B). (The ‘deemed allow-
ance’ rule provides that when an asset was previously brought into use for the first time in the
production of income, but was excluded from income (exempt income), any deduction that could have
been allowed under the specific section in any year is deemed to have been allowed. Therefore, the tax
value of the asset is reduced by the deemed allowance, although no actual deduction will be granted
under this section in respect of the period of use of the asset (which was excluded from income) in the
previous years. The deemed allowance will not be recouped if the asset is consequently disposed of
(s 8(4A)).)
continued
440
ADD
Any recoupment (under s 8(4)) on the sale of the asset by the other party
ADD
The capital gain that realised in the hands of the seller, multiplied by the applicable capital gains tax
inclusion rate (either 40% or 80%) (note: the inclusion rate will be determined by the person status of the
seller) (s 23D(2A)).
Remember
l The provisions of both ss 23A (see 13.7.5) and 23D can apply to the same leased asset.
l These limitation provisions could be triggered even if the asset was not bought directly from
the lessee or licensee or sub-lessee or sub-licensee (or their connected person) as a result
of the two-year time period for previous ownership.
Example 13.21. Sale and leaseback (s 23D)
Zibi Ltd sold a machine (that qualified for a s 11(e) allowance) to Fimble Ltd for R2 500 000 and
then leased it back from Fimble Ltd on 1 March 2021. The machine would qualify for a 20%
wear-and-tear allowance. Zibi Ltd originally purchased the machine for R2 000 000. Zibi Ltd had
previously claimed allowances of R800 000 on the machine and made a recoupment of
R800 000 on the sale to Fimble Ltd. Zibi Ltd also realised a capital gain of R500 000 on the sale.
Calculate the allowances available to Fimble Ltd from this transaction for the year of assessment
ending on 28 February 2022.
SOLUTION
Machine purchased by Fimble Ltd for R2 500 000, but allowance calculated on an
amount that may not exceed the lesser of (s 23D(2A)):
l Purchase price for lessee (Zibi Ltd) R2 000 000 less allowances of R800 000
plus the recoupment of R800 000 and plus R400 000 (the capital gain of
R500 000 × 80%) = R2 400 000, or
l Purchase price for Fimble Ltd of R2 500 000,
Thus allowance: R2 400 000 × 20% ........................................................................... (R480 000)
Section 23G (Tax-exempt bodies)

When will s 23G be applicable?
Section 23G addresses sale and leaseback arrangements in respect of an asset where either the les-
sor or the lessee is a tax-exempt body. For purposes of this section, an ‘asset’ is defined as any asset,
whether movable or immovable, corporeal or incorporeal.
What will the implications be if s 23G is applicable?
Lessee or sub-lessee Î Tax-exempt Lessor or sub-lessor ÎTax-exempt
Tax implications for the lessor (or sub-lessor): Tax implications for the lessee (or sub-lessee):
l Amounts received by or accrued to the lessor l Deductions in relation to the sale and leaseback
(the lease income) will be limited to an amount will be limited to an amount that constitutes
that constitutes ‘interest’ as contemplated in interest as contemplated in s 24J (s 23G(3)).
s 24J (s 23G(2)(a)). (This provision is made subject to the provi-
(This provision does not apply to a person who sions of the allowance for lease premiums
is both a lessor and a lessee in relation to the (s 11(f )).)
same sale and leaseback arrangement during a
Note: Take note that no lease premium allowance is
year of assessment, with the result that during
available for the lessee (if the lease premium does
such a year there will be no accrual of interest
not constitute income in the hands of the lessor
(s 23G(4)).)
(s 11(f)(dd)). It is considered that deductions for the
l The lessor will not be entitled to any of the lease premium will in circumstances qualifying for
following capital allowances on the assets that s 23G not be limited to interest calculated under
are the subject of the sale and leaseback s 24J, but will be zero, as no deduction for the lease
arrangement: premium will be available if the lessor is tax-exempt.
– s 11(e) (the wear-and-tear allowance)
continued
441
Lessee or sub-lessee Î Tax-exempt Lessor or sub-lessor ÎTax-exempt

– s 11(f) (the allowance for lease premiums)
– ss 11(gA) or 11(gC) (allowances for patents
and similar rights)
– s 12B (allowance for movable assets used in
farming or production of renewable energy)
– s 12C (the 20% or 40% allowance)
– s 12DA (the allowance for rolling stock)
– s 13 (the annual allowance on ‘industrial’
buildings and improvements to these build-
ings), or
– s 13quin (allowance on commercial buildings)
(Section 23G(2)(b).)
For purposes of a sale and leaseback arrangement, the interest (determined

under s 24J) for these purposes is the absolute value of the difference between
all amounts receivable and payable throughout the full term of the arrangement.
Please note!
The manner in which the interest amount is calculated, be it using a fixed rate or
a variable rate of interest, or if it is payable or receivable as a lump sum or in
unequal instalments, will not affect this calculation.
Example 13.22. Sale and leaseback: Lessee is tax-exempt (s 23G)
The Zero Municipality sold a machine to Lesu Ltd for R1 500 000 and then leased it back from
the company for an annual rental of R220 000. The machine would usually qualify for a 20%
wear-and-tear allowance. Assume that the equivalent interest under s 24J amounts to R200 000
for the year of assessment in which the arrangement commenced.
Calculate the income of Lesu Ltd from this transaction in that year.
SOLUTION
Income: Rental received (R220 000, but income limited to equivalent interest) ............ R200 000
Note
The company will not be entitled to a wear-and-tear allowance on the machine.
Example 13.23. Sale and leaseback: Lessor is tax-exempt (s 23G)
Lesu Ltd sold a machine to the Zero Municipality for R1 500 000 and then leased it back from the
municipality for an annual rental of R220 000. The machine would usually qualify for a 20% wear-
and-tear allowance. Assume that the equivalent interest under s 24J amounts to R200 000 in the
year of assessment in which the arrangement commenced.
Calculate the deductions to which Lesu Ltd would be entitled from this transaction in that year.
SOLUTION
Rental paid (R220 000, but deductions limited to equivalent interest) ........................ (R200 000)
442
13.8 Intellectual property and research and development

The following table summarises the deductions available for intellectual property and research and
development:
Qualifying expenses: Expenditure Expenditure Expenditure
incurred on or after incurred on or after incurred on or after
(Legislation applicable to 2 November 2006, 1 October 2012 1 January 2014
expenditure incurred but before but before but before
before 2 November 2006 1 October 2012 1 January 2014 1 October 2022
has been repealed – see (see 2013 edition of (see 2014 edition of (see 13.8.1)
2010 edition of Silke) Silke) Silke)
Expenses to acquire Section 11(gC) Section 11(gC) Section 11(gC)
intellectual property (note 1) (note 1) (note 1)
Intellectual property Section 11D Section 11D, 12C and Section 11D, 12C and
developed, created or (note 1) 13(1) 13(1)
devised (producing) (see 2013 edition of (note 1) (note 1)
Silke) (see 2014 edition of Silke) (see 13.8.1)
Discovery of information Section 11D Section 11D, 12C and Section 11D, 12C and
(note 1) 13(1) 13(1)
(note 1) (note 1)
Registration or renewal of Section 11(gB) Section 11(gB) Section 11(gB)
registration
Note 1: No deduction is allowed under this section if it is in respect of or relates to a trade mark.
Section 23I, which is effective for any expenditure incurred on or after 1 January 2009, was intro-
duced to prevent ‘tax leakages’ stemming from tax planning schemes involving intellectual property.
This anti-avoidance measure will be discussed as part of 13.8.1.
13.8.1 Legislation for expenditure incurred on or after 1 January 2014 but before
1 October 2022 (ss 11(gB), 11(gC), 11D, 12C, 13(1) and 23I)
Sections relating to intellectual property and research and development for this period can be sum-
marised as follows:
Expenses to acquire intellectual property S 11(gC)
Intellectual property developed, created or devised (producing)

Ss 11D, 12C
Discovery of scientific or technological information and 13(1)
Registration or renewal of registration S 11(gB)
A discussion of each of these sections follows below:

Section 11(gB): Registration or renewal of registration of intellectual property effective for expenditure
incurred on or after 2 November 2006
The section will be If a taxpayer actually incurred expenditure during the year of assessment in
applicable: obtaining the
(WHEN is it applicable?) l grant, restoration or extension of the term of any patent under the Patents
Act 57 of 1978, or
l registration or extension of registration of a design under the Designs Act
195 of 1993, or
l registration or renewal of registration of a trade mark under the Trade
Marks Act 194 of 1993
(or under similar laws of any other country)
if that intellectual property is used by the taxpayer in the production of his
income.
(The section specifically excludes expenditure that has qualified either in
whole or in part for deduction or allowance under any of the other provisions
of s 11 (to prevent a double deduction).)
continued
443
General rule Deduction = Expenditure to extent or renew registration × 100%
The implications if the A deduction for the full expenditure in obtaining the extension or renewal of
section is applicable: registration will be allowed.
(WHAT can be claimed?):
Remember
The only expenditure allowed for a trade mark on or after 2 November 2006 is registration and
renewal of registration expenses (under s 11(gB)).
Section 11(gC): Acquisition of intellectual property
The section will be If a taxpayer actually incurred expenditure for years of assessment com-
applicable: mencing from 1 January 2004, to acquire (but not to devise, develop or create)
(WHEN is it applicable?) l an invention or patent
l a design
l a copyright
l other similar property (but not a trade mark), or
l knowledge essential to the use of any of these assets or the right to have
such knowledge provided
that is used in the production of the taxpayer’s income.
Allowance ( R5 000) = Cost × 100%

and
General rule
Allowance (> R5 000) = Cost × 5% (patent, invention or copyright) or 10%
(design) per year
The implications if the The taxpayer can deduct the following allowance from income, commencing
section is applicable: during the year of assessment that such asset is brought into use for the first
(WHAT can be claimed?) time by the taxpayer:
l If the expenditure incurred is R5 000 or less
Î deduct the full amount in the year of assessment brought into use
l If the expenditure is more than R5 000, the annual allowance on cost
incurred will be limited to
Î 5% per year of assessment for a patent, invention or copyright (not
trade marks)
OR
Î 10% per year of assessment for a design.
(No apportionment if for less than a full year of assessment)
(Proviso (aa).)
Example 13.24. Patent rights acquired

Mickey Ltd acquired a patent on 1 April 2022 at a cost of R550 000 and immediately brought it
into use in its income-producing operations. The probable duration of use of the patent was esti-
mated to be ten years. Calculate the allowance that Mickey Ltd may deducted under s 11(gC) for
the year of assessment ending on 31 December 2022.
SOLUTION
Cost of acquisition of the patent .................................................................................. R550 000
Deduction under s 11(gC) (5% of R550 000) .............................................................. (R27 500)
Even though the patent was held for less than a full year of assessment, the full 5% can be
claimed.
444
Sections 11D, 12C and 13(1): Deductions in respect of scientific or technological research and
development undertaken on or after 1 January 2014, but before 1 October 2022
The section will be If a taxpayer, that is a company, actually incurred expenditure

applicable: l on or after 1 January 2014, but before 1 October 2022
(WHEN is it applicable?) l directly and exclusively for the carrying on of research and development
(as defined in s 11D(1)) in South Africa (see note 1 and 3)
l if (test)
– it is incurred by the taxpayer in the production of income,
– it is incurred in the carrying on of any trade
– the research and development is approved by the Minister of Science
and Technology (under s 11D(9) – see note 2), and
– that expenditure is incurred on or after the date that the application for
approval of that research and development is received by the Depart-
ment of Science and Technology (s 11D(2)(a)).
No deduction will be allowed for expenditure incurred in respect of
– immovable property, machinery, plant, implements, utensils or articles
(deduction for allowances on these assets will however be allowed
under s 12C and s 13(1)) excluding any prototype or pilot plant
created exclusively for the purpose of the process of research and
development, and that asset is not intended to be used or is not used
for production purposes after the completion of that research and
development (a deduction will be allowed for these assets under
s 11D(2)), and
– financing, administration, compliance and similar costs (s 11D(2)(b)).
Research and development is defined (in s 11D(1)) as
l systematic investigative or systematic experimental activities of which the
results are uncertain for the purposes of
– the discovery (being something that is already in existence and is
brought to the discoverer’s awareness) of non-obvious (therefore
inventive) scientific or technological knowledge (s 11D(1)(a)),
– the creation or development of any
• invention (as defined in s 2 of the Patents Act, 1978 (57 of 1978))
(the invention should be new, involve an inventive step and be
capable of being used or applied in trade or industry or agriculture)
• functional design (as defined in s 1 of the Designs Act, 1993 (Act
195 of 1993)) that is capable of qualifying for registration under s 14
of that Act and that is innovative in respect of the functional char-
acteristics or its intended uses (thus the design should be functional
to qualify and not only aesthetic)
• computer program (as defined in s 1 of the Copyright Act, 1978 (98
of 1978)) which is of an innovative nature (a computer program for
sale for use under license should qualify if not for internal business
processes), or
• research knowledge (defined in the Oxford English Dictionary as
‘facts, information, and skills acquired by a person through experi-
ence or education: the theoretical or practical understanding of a
subject; what is known in a particular field or in total; facts and infor-
mation; or awareness or familiarity gained by experience of a fact or
situation’) essential to the use of an invention, functional design or
computer program but not the creating or development of operating
manuals or instruction manuals or documents of a similar nature
intended for use after the completion of the research and develop-
ment (s 11D(1)(b)),
– making a significant and innovative improvement to any of the above for
purposes of
• new or improved function
• improvement of performance
• improvement of reliability, or
• improvement of quality
of that invention, functional design, computer program or knowledge
(s 11D(1)(c)),
continued
445
– the creation or development of a multisource pharmaceutical product,

conforming to the requirements prescribed by regulations made by the
Minister after consultation with the Minister for Science and Technology
(s 11D(1)(d)), or
– conducting a clinical trial, conforming to such requirements as must be
prescribed by regulations made by the Minister after consultation with
the Minister for Science and Technology (s 11D(1)(e)).
l but s 11D specifically excludes expenditure for
– routine testing, analysis, collection of information or quality control in
the normal course of business (thus unrelated to a significant research
and development project)
– development to enhance internal business processes (for example
typical computer software), unless the development in respect of the
internal business processes is conducted for possible sale or license
to external customers who are not connected persons to the company
– market research, market testing or sales promotion
– social science research, including the arts and humanities (for
example languages, history, philosophy, religion, visual and perform-
ing arts and economics)
– oil and gas or mineral exploration or prospecting, except research
and development carried on to develop technology used for that
exploration or prospecting
– create or develop financial instruments or financial products (for
example development of financial derivatives)
– trade mark or goodwill creation or enhancement, and
– any expenditure incurred or allowances granted for the acquisition of
pre-existing inventions, designs or computer programs already
deductible (under s 11(gB) or 11(gC))
(proviso to the definition of research and development in s 11D(1)).
Deduction (operational expenses) = Qualifying research and development

expenditure × 150%
and
Allowance (capital expenditure) = Cost × 150%
except
General rule Allowance (new and unused research and development plant or
machinery) = Cost × 50/30/20% per year (s 12C)
and
Allowance (buildings used for research and development) = Cost × 5%
per year (s 13(1))
The implications if the The following deductions will be available from income derived from the
section is applicable: taxpayer’s trade:
(WHAT can be claimed?) l Operational (non-capital) expenditure
– 150% deduction
Î Research and development expenditure incurred, may be deducted in
the following two situations:
Situation 1 – Taxpayers perform approved research and development:
A taxpayer may qualify for the deduction of 150% of the research and
development expenditure incurred directly and solely for the carrying on
of research and development (s 11D(2)).
Situation 2 – Funded research:
A taxpayer that funded the expenditure of another person carrying on
research and development on behalf of the taxpayer, may deduct an
amount of 150% of such expenditure incurred, if
• the research and development is approved by the Minister of Science
and Technology (under s 11D(9) – see note 2)
• that expenditure is incurred in respect of research and development
carried on by that taxpayer (see note 3),
continued
446
• to the extent that the other person carrying on the research and
development is:
* an institution, board or body that is exempt from normal tax under
s 10(1)(cA) (see chapter 5), or
* the Council for Scientific and Industrial Research, or
* a company forming part of the same group of companies as
defined in s 41 (see chapter 20), if the company that carries on the
research and development does not claim a deduction under
s 11D(2) (situation 1 discussed above) (see note 4), and
• that expenditure is incurred on or after the date of receipt of the
application by the Department of Science and Technology for
approval of that research and development (s 11D(4)).
Note: If any funding from government or semi-governmental agencies
is received by or accrues to a taxpayer, the funding received must be
deducted from the actual research and development expenditure
incurred, before the 150% deduction is calculated (s 11D(7)). The
purpose of this is to enhance private funding through the 150%
deduction (Explanatory Memorandum on the Taxation Laws Amend-
ment Bill, 2013).
The implications if the l Capital expenditure

section is applicable: Capital expenditure, excluding immovable property, machinery, plant,
(WHAT can be claimed?) implements, utensils or articles (therefore allowance assets), can also
(continued) qualify for a 150% deduction (s 11D(2)(b)(i)) (or possibly the deduction
under s 11D(4) for funded research). An example of a qualifying expense
is expenditure for any prototype or pilot plant created exclusively for
research and that asset will not be used after the research has been com-
pleted.
Capital expenditure relating to allowance assets will however qualify for
the following deductions:
– a deduction will be allowed on the cost of new and unused research
and development machinery or plant, at a write-off of 50:30:20 (no
apportionment for part of a year) under s 12C (see 13.3.3), and
– a deduction will be allowed on the cost of a building owned by the
taxpayer and used for research and development, at a write-off of 5%
over a 20-year period (no apportionment for part of a year) under
s 13(1) (see 13.4.1).
Take note that pre-trade research expenditure (both capital and operational)
will qualify for possible deduction under s 11A (refer chapter 6).
Note 1: Foreign registered intellectual property can still fall under s 11D, since no requirement exists
that the intellectual property must be registered in South Africa.
Note 2: Research and development carried on or funded by taxpayers claiming the 150% deduction
(s 11D(2) or (4)) must be approved by the Minister of Science and Technology, taking into
account
l whether the taxpayer has proved to the committee that the research and development in
respect of which approval is being sought complies with the criteria as set out in the
definition of ‘research and development’ (in s 11D(1) – see above), and
l such other criteria as the Minister of Finance, in consultation with the Minister of Science
and Technology may prescribe by regulation (s 11D(9)).
If any research and development is approved by the Minster and
l any material fact changes that would have resulted in that project not being approved
initially,
l the taxpayer carrying on that research and development fails to submit a report to the
committee (This is an annual report, submitted within 12 months after the end of the year
of assessment from the year after which approval was granted. It should be in the form
and manner prescribed by the Minister of Science and Technology and should contain
the progress of the research and development and the extent to which that research
requires specialised skills (s 11D(13)), or
l the taxpayer carrying on that research and development is guilty of fraud, or misrepre-
sentation or non-disclosure of material facts which would have resulted in the approval
(under s 11D(9)) not being granted
447
the Minister of Science and Technology may, after taking into account the recommendations
of the committee, withdraw the approval granted in respect of that project effective from a
specified date (s 11D(10)).
The Minister of Science and Technology must provide the decision to grant or deny (under
s 11D(9)) or to withdraw (under s 11D(10)) approval, in writing and also inform the Commis-
sioner of these decisions. If an approval was granted, the Commissioner should be informed
of the amount on which the 150% deduction should be calculated and if an approval was
withdrawn the date on which the withdrawal takes effect (s 11D(16)). If approval was with-
drawn, the Commissioner may raise an additional assessment for any year of assessment
where a deduction in respect of research and development was allowed (s 11D(19)).
A committee must be appointed to approve the research and development (see s 11D(9))
and must consist of:
l three employees of the Department of Science and Technology appointed by the Minister
of Science and Technology,
l one employee of National Treasury, appointed by the Minister of Finance, and
l three persons from SARS, appointed by the Minister of Finance.
If any person appointed cannot perform any function as a member of the committee, the two
Ministers may appoint an alternative person (from the same institution) to the committee to
perform the functions (s 11D(11)).
This committee must perform its functions impartially and without fear, favour or prejudice. It
may appoint its own chairperson and determine the procedures for meetings. It should
evaluate any application and make recommendations to the Minister of Science and Tech-
nology for purposes of the approval of research and development and investigate research
and development approved, if necessary. Further, it should monitor all research and devel-
opment approved to determine whether the objectives of s 11D are achieved and to advise
the Minister of Finance and the Minister of Science and Technology on any future proposed
amendment or adjustment to s 11D. The committee may obtain the assistance of advisors.
Lastly, the committee may require any taxpayer applying for approval to furnish any
information or documents necessary to perform its functions (s 11D(12)).
The Minister of Science and Technology must annually submit a report to Parliament advising
them of the direct benefits of the research and development and the aggregate expenditure
in respect of such activities (s 11D(17)). Notwithstanding the preservation of secrecy under
Chapter 6 of the Tax Administration Act (see chapter 33), the Commissioner may disclose to
the Minister of Science and Technology information required for purposes of submitting the
above report to parliament and if that information is material in respect of the granting or the
withdrawal of the approval (s 11D(14)). The employees of the Department of Science and
Technology, members of the committee and any advisors appointed must preserve secrecy
with regards to any information obtained whilst performing their functions (s 11D(18)).
Due to the delay in the processing of approvals, a taxpayer may apply to the Commissioner to
allow the deductions under this section (although final approval has not yet been granted), if:
l that expenditure is incurred on or after the date of receipt of the application by the Depart-
ment of Science and Technology for approval
l that expenditure was only disallowed as a deduction due to the approval not yet being
granted, and
l the research and development is approved by the Minister of Science and Technology
in a following year.
The Commissioner may reopen a previous assessment, where expenditure would have been
allowed if the approval had been granted. In these circumstances the authority to revise an
assessment will not prescribe within three years after assessment (s 11D(20)).
Note 3: For purposes of the 150% deduction, it will be deemed that research and development are
carried on if that person may determine or alter the methodology of the research. Certain
additional categories of development designated by the Minister, by notice in the Govern-
ment Gazette, will also be deemed to constitute the carrying on of research and develop-
ment (s 11D(6)).
Note 4: If a company funds research on his behalf by another group company, it will only qualify for
a 150% deduction on the actual expenditure incurred by the funded company. No deduc-
tion will be allowed on the profit charged between group companies (s 11D(5)).
448
Example 13.25. Section 11D allowances and recoupments
During May 2021, the management of Baby Boom Ltd decided to develop a new type of baby
bottle. A patent would ultimately be registered in terms of the Patents Act. The research and
development has been approved by the Minister of Science and Technology under s 11D(9).
The following expenses relating to this research were incurred during the 2022 year of assess-
ment ending April:
l A new laboratory at a cost of R1 500 000 was brought into use on 15 May 2021 for the pur-
poses of this research.
l A new machine at a cost of R850 000 was brought into use on 15 May 2021 for the purposes
of this research.
l Computers purchased for R75 000 and used exclusively for the research, were brought into
use on 1 June 2021. Binding General Ruling (Income Tax) No. 7 and Interpretation Note
No. 47 (which is in line with the public notice issued by the Commissioner) allows for a three-
year write-off period on these computers.
l Research consumables for this project were purchased on 25 May 2021 for an amount of
R250 000.
l Salaries of R1 500 000 were paid to research assistants. A taxable government grant of
R500 000 was received on 15 May 2021 to help fund this research project. The full amount of
the grant was used to pay these salaries.
Calculate the allowances available to Baby Boom Ltd for the year of assessment ending on
30 April 2022 (ignore VAT).
SOLUTION
Year ended 30 April 2022
Laboratory:
Section 13(1) allowance (5% of R1 500 000)) ........................................................... (R75 000)
Machine:
Section 12C allowance (50% of R850 000)) ............................................................. (R425 000)
Computer:
Section 11(e) allowance (R75 000 / 3 × 11/12) ......................................................... (R22 917)
Research consumables:
Section 11D(2) 150% deduction applicable (R250 000 × 150%) ............................. (R375 000)
Government grant:
Taxable (given) ......................................................................................................... R500 000
Salaries:
Section 11D(2) 150% deduction applicable ((R1 500 000 – R500 000) × 150%)..... (R1 500 000)
Section 23I: Prohibition of deductions in respect of certain intellectual property

This anti-avoidance section was introduced to prevent that intellectual property, subsidised by
government (via tax allowances), is used as a tool to erode the South African tax base. The goal of
s 23I is therefore to prevent avoidance of tax, without undermining foreign investment in South African
research and development.
The section will be applicable: If a taxpayer actually incurred expenditure

(WHEN is it applicable?) l on or after 1 January 2009
l for the use or right of use or permission to use any tainted intellec-
tual property (see note 1), or
l if the incurral, or the amount of the expenditure incurred is deter-
mined directly or indirectly with reference to expenditure incurred for
the use or right of use or permission to use any tainted intellectual
property (see note 1)
AND
l the amount of expenditure is not income received by or accrued to
any other person,
OR
l is not included in the income of any resident under the provisions of
s 9D (a percentage of net income – see chapter 21) (s 23I(2)).
continued
449
If a controlled foreign company’s (CFC) total taxes paid in any foreign

country (in respect of the tax year in the foreign country) are in aggre-
gate at least 67.5% (75% for years of assessment ending before
1 January 2020) of the local taxes that would have been payable on any
taxable income had the CFC been a resident for that foreign tax year
(the net income of the CFC for inclusion will be deemed to be Rnil under
s 9D (see chapter 21) due to the application of the high-tax exemption),
the provisions of this section will not be applicable (s 23I(4)). The aggre-
gate foreign tax must be calculated by
l taking into account any applicable double tax agreement and any
credit, rebate or other right of recovery of tax of any foreign country,
and
l disregarding any loss of a year, other than the foreign tax year, or
from a company other than the CFC.
No deduction for the use or right of use or permission to use tainted

intellectual property,
General rule or
for any expenditure incurred that was calculated on the expenditure
paid for the above to the extent that it is not income in the hands of the
recipient.
The implications if the section No deduction shall be allowed for

is applicable: l the use or the right of use of or permission to use any tainted
(WHAT can be claimed?) intellectual property (see note 2), or
l for any expenditure incurred that is calculated on the expenditure
paid for the use or right of use of or permission to use any tainted
intellectual property (see note 3),
to the extent that the amount is not income in the hands of the other
party or is not included in the income of any resident under the provi-
sions relating to Controlled Foreign Companies (s 9D – see chapter 21)
(s 23I(2)).
l Expenditure incurred to acquire intellectual property, allowed as a
deduction under s 11(gC) (see 13.8.1)
AND
l expenditure allowed as a deduction in respect of trading stock
(s 22 – see chapter 14)
will be excluded from the provisions of s 23I and will be deductible
(unless s 31 is applicable – see chapter 21).
Note 1: Tainted intellectual property is defined as

l intellectual property, which includes
– a patent, design, trade mark or copyright, protected by South African law
– any of the above protected by foreign law
– property or rights similar to the above, and
– knowledge connected to the use of any of the intellectual property mentioned (defini-
tion of ‘intellectual property’ in s 23I(1))
l which was the property of the end user or of a taxable person that is or was a connected
person in relation to the end user, or
l if the intellectual property is the property of a taxable person, or
l if a material part of the intellectual property was used by a taxable person in carrying on
a business while that property was the property of a taxable person and the end user of
that property acquired that business or a material part thereof as a going concern.
The following is a practical example of this provision: South African company A sells
intellectual property to Foreign Company and the rest of the business (in which the
intellectual property was used) to South African company B as a going concern.
450
Foreign Company subsequently licenses the intellectual property (which it acquired from
South African company A) to South African company B, for which South African com-
pany B pays royalties to Foreign Company.
Section 23I will classify the intellectual property as tainted. South African company B will
be denied a deduction of the royalties paid (note that any person acquiring the business
from South African company B, as a going concern, will also fall into the ambit of s 23I
(example adapted from the Explanatory Memorandum to the Revenue Laws Amendment
Act, 2008)), or
l if the intellectual property, or any material part thereof, was exclusively or mainly discovered,
devised, developed, created or produced by
– the end user of that property, or
– by a taxable person that was a connected person to the end user, if that end user and
that connected person holds at least 20% of the participation rights, as defined in
s 9D, in a person that received an amount or to whom an amount accrues:
– for the grant of use, right of use or permission to use that property, or
– where the receipt, accrual or amount is determined directly or indirectly with refer-
ence to expenditure incurred for the use, or right of use of or permission to use
that property (s 23I(1)).
Taxable person for purposes of s 23I, means any person other than:
l a non-resident
l the government of the Republic in the national, provincial or local sphere (exempt enti-
ties under s 10(1)(a))
l specified research and related entities (exempt under s 10(1)(cA))
l approved public benefit organisations (defined in s 30)
l approved recreational clubs (defined in s 30A)
l closure rehabilitation company or trust (under s 37A)
l any benefit, pension, pension preservation, provident, provident preservation or retire-
ment annuity fund, or a beneficiary fund defined in s 1 of the Pension Funds Act, 1956
(Act 24 of 1956), exempt under s 10(1)(d)(i) and (ii), or
l any exempt entity listed in s 10(1)(t) (for example the CSIR and any water service provider),
An end user is a taxable person or a person with a permanent establishment in South Africa,
who uses intellectual property or any corresponding invention during a year of assessment
to derive income from it (but not by the receipt of royalties from the grant of use of intellec-
tual property) (s 23I(1)).
Connected person is a ‘connected person’ as defined in s 1 (see 13.2.1). The only differ-
ence is that a company that is a holder of shares will be treated as connected to the com-
pany if it holds 20% or more of the shares. This will be the situation even if another holder of
shares holds the majority interest (s 23I(1), read with s 31(4)).
Note 2: A licensee will be denied deductions for royalty expenditure incurred for the use of tainted
intellectual property to the extent that the royalty receipts are not income of the licensor (if,
for example, the licensor has tax exemption or treats the income as not from a South African
source or deemed source) (s 23I(2)(a)).
If the payment of royalties for the use of tainted intellectual property triggers a withholding
tax (s 49A–H – see chapter 21), the licensee can deduct an amount equal to half of the
royalty expenditure. This deduction will be allowed if, as a result of any double tax agree-
ment, the tax payable on the royalty is at a rate of 15% (s 23I(3)).
Note 3: Section 23I(2)(b) prevents taxpayers from eluding this provision by introducing a third party
that converts royalty income into a financial instrument (for example a promissory note).
These payments are then distributed to entities with a lower effective tax rate.
451
Example 13.26. Section 23I prohibition of expenditure relating to intellectual property

During 2020, Intelligent Ltd (with a December year-end) developed a patent and deducted all
the related expenditure under s 11D. On 30 September 2021, the patent was assigned to Out-
side (a foreign company (not a CFC as defined in s 9D) in which Intelligent Ltd holds a 30%
share). Outside filed a patent application in South Africa and then licensed the South African
patent to Intelligent Ltd from 1 January 2022, for an annual licence fee of R900 000.
Calculate the tax deductibility of the royalty payment made by Intelligent Ltd for the 2022 year of
assessment, if s 49B withholding tax of R135 000 was withheld from the payment made to Outside.
SOLUTION
Section 23I prohibits the deduction of the royalty payment. It is paid in respect of
tainted intellectual property (it was originally developed by Intelligent Ltd and is
now licensed back from a CFC in which Intelligent Ltd holds more than 20% of
the participation rights (par (d) of the definition of ‘tainted intellectual property’ in
s 23I(1)) (s 23I(2)). But since withholding tax was withheld from the royalty
payment made to Outside, Intelligent Ltd will be allowed to deduct an amount of
R900 000 × ½ (s 23I(3)) ............................................................................................ (R450 000)
13.9 Allowances on other types of expenses
13.9.1 Government business licences (s 11(gD))
When will s 11(gD) be applicable?

Businesses often require a government licence in order to conduct certain specific business activities
(for example telecommunications). The licence fee is of a capital nature and a special allowance is
necessary in order to enable taxpayers to deduct these expenses. Section 11(gD) allows for a
deduction
l of any expenditure incurred to acquire a licence
l from the government of the Republic in the national, provincial or local sphere or by a regulatory
entity governed by the Public Finance Management Act 1 of 1999 (PFMA entities)
l if the licence is a prerequisite for the carrying on of that trade.
Trade for this section includes:
l the provision of telecommunication services
l the exploration, production or distribution of petroleum, or
l the provision of gambling facilities.
What will the implications be if s 11(gD) is applicable?
General rule Allowance = Cost / lesser of number of years that license is valid OR
30 years
The taxpayer can deduct any expenditure incurred to acquire the licence over the lesser of
l the remaining number of years that the taxpayer is entitled to the licence, or
l 30 years.
Example 13.27. Licence acquired

Chobe Ltd is, in terms of an agreement signed on 1 March 2022, contractually required to pay
R100 000 000 to the national government for the acquisition of a licence to operate a new cellular
network. The licence covers a period of 10 years. R50 000 000 is payable on 1 March 2022 and
R50 000 000 on 1 March 2023.
Calculate the allowances that may be deducted by Chobe Ltd under s 11(gD) for years of
assessment ending on the last day of February.
452
SOLUTION
Cost of acquisition of licence .................................................................................... R100 000 000
Deduction under s 11(gD):
From 2023–2032: R100 000 000/10 years) ............................................................... (R10 000 000)
Note
The full amount of R100 000 000 was incurred on 1 March 2022 and thus the full amount will
qualify for a deduction, although R50 000 000 of this amount was only paid on 1 March 2023.
13.9.2 Industrial policy project allowance (s 12I)

Section 12I provided an incentive to assist the transformation of current production processes and
methods to attain cost reductions and greater efficiency in the use of resources. It supported the
investment in manufacturing assets and the provision of training to personnel to improve labour pro-
ductivity. This section was available to the manufacturing sector in respect of new projects (green-
field projects), but also expansions or upgrades of existing projects (brownfield projects) that quali-
fied as industrial projects. For a project to have qualified, it must have related solely or mainly to the
manufacturing of products, articles or other things as classified under ‘Section C: Manufacturing’ in
version 7 of the Standard Industrial Classification Code issued by Statistics South Africa. (Projects for
the manufacturing of wine, malt liquors, malt and tobacco products, weapons and ammunition, and
certain bio-fuels, as well as the distilling, rectifying and blending of spirits were specifically dis-
qualified.) (Definition of ‘industrial project’ in s 12I(1).) Every project also had to satisfy, amongst other
requirements, a minimum asset holding. Two types of allowances (in addition to any other allowances
granted under the Income Tax Act) were available on qualifying industrial projects, namely an
additional investment allowance and an additional training allowance (s 12l(2) to 12I(5)). Applications
for this additional incentive allowance were only considered until 31 March 2020 (s 12I(7)(d)). For a
detailed discussion of the legislation applicable to the industrial policy project allowance, refer to the
2021 edition of Silke.
13.9.3 Energy efficiency savings deduction (s 12L)

When will s 12L be applicable?
This section was introduced to give taxpayers a tax benefit or notional allowance for energy efficiency
savings. This notional allowance seeks to stimulate investment in the conversion by taxpayers of old
technologies to new ones (often at a great cost) to address the challenges of climate change and
improved energy usage.
Section 12L allows a taxpayer to claim a deduction for all the forms of energy efficiency savings
resulting from activities in the production of income. The taxpayer needs to be in possession of a
certificate before being able to claim a deduction under s 12L during any year of assessment.
453
The certificate must be issued by an institution, board or body prescribed by the

regulations, reflecting the following:
l a pre-determined energy use baseline (at the beginning of the year of
assessment)
l a reporting period energy use (at the end of the year of assessment)
l the annual energy efficiency savings expressed in kilowatt hours or kilowatt
hours equivalent for the year of assessment, and
l any other information that may be required by the regulations (s 12L(3)).
The Minister of Finance, in consultation with the Minister of Energy and the Min-
Please note! ister of Trade and Industry, must make regulations prescribing:
l the institution, board or body that may issue the certificate indicating the
energy efficiency savings,
l the powers and responsibilities of the institution, board or body,
l the information that the certificate must contain,
l since a deduction may not be claimed if the person claiming the deduction
receives any concurrent benefit in respect of energy efficiency savings
(s 12L(4)), clarity regarding what is meant under concurrent benefits, and
l any limitation of energy sources in respect of which the deduction may be
claimed (s 12L(5)).
What will the implications be if s 12L is applicable?
General rule Deduction = 95c × number of kilowatt hours of energy efficiency savings
A deduction of the energy efficiency savings by a person calculated as

l 95 cents (per kilowatt hour or kilowatt hour equivalent) × the energy efficiency savings expressed
in kilowatt hours or kilowatt hours equivalent
l will be allowed as a deduction from the taxable income of any person
l in any year of assessment ending before 1 January 2023
l from the carrying on of any trade (s 12L(1) and (2)).
Interpretation Note No. 95 (Issue 2) (issued on 11 January 2019) provides

Please note! guidance and examples that explain the energy efficiency savings deduction
(under s 12L read with the regulations).
13.9.4 Additional deduction for roads and fences used in respect of the production of
renewable energy (s 12U)
When will s 12U be applicable?
This section was introduced to assist taxpayers with an additional deduction for the cost actually
incurred regarding some of the supporting capital infrastructure (roads and fences) in large-scale
renewable energy projects. Section 12U (effective for years of assessment commencing from 1 April
2016) will be applicable if
l a person incurred any amount
l for purposes of his trade of the generation of electricity which exceeds 5 megawatts from
– wind power,
– solar (sunlight) energy,
– hydropower (gravitational water forces) to produce electricity of not more than 30 megawatts, or
– biomass comprising organic wastes, landfill gas or plant material
l in respect of:
– the construction of, or improvements (other than repairs) to
• any road, or
• the erecting of any fence, including a foundation or supporting structure designed for such
a fence (s 12U(1)).
454
The foundation or supporting structure for a fence should be an integral part of

Please note! the foundation or fence for its useful life to be regarded the same as that of the
fence it supports (s 12U(2)).
What will the implications be if s 12U is applicable?
General rule Deduction = Cost of qualifying roads or fences × 100%
The full amount (although capital in nature) actually incurred during the year regarding the construc-
tion or improvement of a qualifying road or fence (or supporting structure of such fence), in respect of
a large-scale renewable energy project, will be allowed as a deduction (s 12U(1)).
If a qualifying expense (not previously deducted) was incurred before the commencement (or in
preparation) of a project, it will be allowed as a deduction, as soon as the project commences
(s 12U(3)).
13.9.5 Environmental expenditure (s 37B)

When will s 37B be applicable?
Section 37B seeks to provide deductions for general capital environmental expenditure and post-
trade environmental expenses (for example decommissioning and restoration). These expenses are a
legal precondition for operations in many instances.
Section 37B will be applicable if a taxpayer uses either
l environmental treatment and recycling assets (air, water and solid waste treatment and recycling
plant or pollution control and monitoring equipment) and any improvements to the plant and
equipment, or
l environmental waste disposal assets (air, water and solid waste disposal site, dam, dump, reser-
voir, or other structure of a similar nature, or any improvements thereto) of a permanent nature
l owned by the taxpayer, or acquired by him in terms of an instalment sale agreement
l in the course of his trade, in a supplementary process to a manufacturing or similar process
l which is required by law for purposes of complying with measures that protect the environment
(s 37B(1) and (2)).
It will also provide relief to a taxpayer who incurred any expenditure or a loss in respect of decom-
missioning, remediation or restoration arising from a trade previously carried on by the taxpayer
(s 37B(6)).
What will the implications be if s 37B is applicable?
Allowance (environmental treatment and recycling assets) =

General rule Cost × 40%/20%/20%/20% per year
and
Allowance (environmental waste disposal assets) = Cost × 5% per year
Two different allowances are available for the two types of environmental capital assets:
l new and unused environmental treatment and recycling assets:
– an allowance of 40% on the cost of the asset in the year that the asset is first brought into use
and 20% in each of the following three years of assessment
l new and unused environmental waste disposal assets:
– an allowance of 5% per year on the cost of the asset will be allowed as a deduction from the
income of the taxpayer from the year of assessment that the asset is first brought into use
(s 37B(2)).
455
The full allowance will be deductible, even if the asset was not used for the full year. The total deduc-
tion allowed under s 37B can never exceed 100% of the cost (s 37B(9)).
The cost of an asset for s 37B is

the lesser of
Please note! l the direct cost under a cash transaction concluded at arm’s length on the
was concluded (market value),
including
the direct cost of acquisition (s 37B(3)).
No deduction will be available for an environmental treatment and recycling asset or an environ-
mental waste disposal asset under ss 11, 12C and 13 (s 37B(8)).
A special ‘deemed allowance’ rule provides
l when any asset was, in a previous year of assessment, brought into use for the first time by the
taxpayer in any trade carried on by him
l in the production of income but that was excluded from income (exempt income or the taxpayer
taxed in terms of the turnover tax regime (see chapter 23))
the asset was brought into use and any following year is deemed to have been allowed during
those years, as if the receipts and accruals were included in the taxpayer’s income (s 37B(4)).
Therefore, the tax value of the asset is reduced by the deemed allowance although no actual deduc-
tion will be granted under this section regarding the period of use of the asset (which was excluded
from income) in the previous years. The deemed allowance will not be recouped if the asset is
No deduction will be allowed on an asset in the year after it has been disposed of (s 37B(5)).
Remember
If an environmental treatment and recycling asset or an environmental waste disposal asset is
sold at a price above its tax value, the amount exceeding the tax value will be included in income
in terms of s 8(4)(a) to the extent that it represents a recoupment of any capital allowances
previously made.
A further deduction is available of the full amount of any expenditure or loss in respect of decom-
missioning, remediation or restoration arising from a trade previously carried on by the taxpayer, to
the extent that
l it is incurred for purposes of complying with any law of South Africa that provides for environ-
mental protection upon cessation of trade
l if the taxpayer was still carrying on that trade, these expenses would have been allowed as a
deduction under s 11, and
l it is not otherwise allowed as a deduction (s 37B(6)).
Any assessed loss created as a result of the deduction of these environmental expenses (under
s 20(2)) on cessation of trade, can still be set off against income, although the taxpayer is not
carrying on a trade during the year (s 37B(7)).
13.9.6 Environmental conservation and maintenance (s 37C)

Government has created a regime for entering into bilateral agreements with private landowners to
conserve and maintain particular areas of land for the public good. Section 37C recognises that
landowners incur nature conservation maintenance expenses for the public good and for loss of a
right to the use of land. It will be applicable if a taxpayer has
l actually incurred expenditure
l to conserve or maintain land, and
456
l the conservation or maintenance is carried out in terms of a biodiversity management agreement

that has a duration of five or more years entered into by the taxpayer in terms of s 44 of the
National Environmental Management: Biodiversity Act, 2004 (Act 10 of 2004), and
l the taxpayer must use the land or other land in the immediate proximity for the production of
income and for the purposes of a trade (Biodiversity Management Agreements – s 37C(1))
OR
l he has actually incurred expenditure
l to conserve or maintain land owned by him, and
l the conservation or maintenance is carried out in terms of a declaration that has a duration of at
least 30 years under ss 20, 23 and 28 of the National Environmental Management: Protected
Areas Act, 2003 (Act 57 of 2003) (Protected Area Agreements – s 37C(3)).
What will the implications be if s 37C is applicable?
Deduction (biodiversity agreement) =

100% × environmental maintenance rehabilitation and management
expenses (limited to income from the land Î excess carried forward)
General rule and
Deduction (protected area agreements) =
Land conservation and maintenance expenses × 10% of taxable income
(Deemed s 18A deduction – excess carried forward to next year)
Section 37C creates a deduction for environmental maintenance rehabilitation and management
expenses. It furthermore allows for the deduction of the loss of land use rights associated with formal
conservation agreements in limited circumstances.
The following deductions will be allowed:
1. Biodiversity agreements
Non-capital land conservation and maintenance expenditure will be treated as being incurred in
the production of income and for purposes of trade and thus deductible under s 11(a).
The deduction will be limited to income derived by the taxpayer from the land (or land in the
immediate proximity), with excess expenditure being carried forward to the following year (being
deemed to again be a potential deduction in the following year) (s 37C(1) and (2)).
2. Protected area agreements
Land conservation and maintenance expenses are treated as a deemed s 18A deductible dona-
tion (see chapter 7) (s 37C(3)). Binding General Ruling No. 24 (Issue 2) (issued on 15 February
2016) clarifies that this deduction will be allowed notwithstanding the fact that a s 18A receipt has
not been issued.
Recoupment:
Taxpayers contravening their biodiversity management and protected areas
Please note! agreements are subject to a recoupment (deductions 1. and 2. above) equal to the
deductions previously allowed under s 37C, but limited to deductions allowed
within five years before the contravention (s 37C(4)).
13.9.7 Land conservation in respect of nature reserves and national parks (s 37D)

If a taxpayer is the owner of declared land in a year of assessment commencing on or after
1 March 2015 the taxpayer will qualify for allowances and deductions under s 37D.
Declared land means
l land that is declared a national park or nature reserve in terms of an agreement under ss 20 or 23
of the National Environmental Management: Protected Areas Act, 2003 (Act 57 of 2003), and
l land in respect of which the declaration is endorsed on the title deed of the land, and
l it has a duration of at least 99 years (land declared a national park or nature reserve – s 37D(1)).
457
Allowance = Actual expenditure* × 4% per year

General rule *Actual expenditure will be used, unless it is < the market value or
municipal value, then:
Actual expenditure (A) = B + (C × D)
Section 37D creates an allowance for the acquisition cost and improvements effected to declared
land.
An allowance of 4% per year (thus over 25 years – no apportionment) will be allowed from the year in
which the land becomes declared land and in every subsequent year that it qualifies as declared
land. The 4% annual allowance will be based on actual expenditure, which is:
l the total of
– the acquisition cost of the declared land plus
– the cost of any improvements effected to the declared land
– but excluding any borrowing or finance costs, unless
l the actual expenditure is less than the lesser of market value or municipal value of the declared
land
– then the allowance will be based on an amount determined in accordance with the following
formula:
A = B + (C × D)
• A = the amount on which the annual allowance of 4% will be based on
• B = the total cost of acquisition and any improvements effected to the declared land
• C = the amount of the capital gain (if any), had the declared land been disposed of for the
lesser of market value or the municipal value of the declared land on the date of the
agreement, and
• D = 60% for a natural person or special trust, or
20% in any other case (s 37D(2)).
The total amount of the allowances claimed under s 37D is limited to the actual expenditure or the
formula (if the formula was used to calculate the allowance) (s 37D(4)).
If the taxpayer retains a partial right of use in the land, he will qualify for only a partial deduction, cal-
culated as follows (s 37D(3)):
Deductible amount MV of land declared

×
(determined under s 37D(2)) MV of land declared + MV of land rights retained
Capital gains tax implications:

The 99-year declaration of land as a national park or nature reserve will qualify as a
deemed disposal under par 11(2) of the Eighth Schedule, but since the capital gain is
already taken into account when calculating the s 37D allowance, this would result in
double capital gains implications for the taxpayer. To alleviate this problem, par 38 of
the Eighth Schedule has been amended to specifically exclude such land from the
date on which that land becomes declared land as defined in s 37D(1). As a result,
the declaration will not be deemed to be a disposal at market value for capital gains
Please note!
purposes (par 38(2)(f) of the Eighth Schedule – see chapter 17).
Recoupment:
Taxpayers contravening their 99-year declaration of land as a national park or nature
reserve are subject to a recoupment equal to the deductions previously allowed
under s 37D, in the five years of assessment preceding the termination. This
amount must be included in the income of the taxpayer in the year of assessment in
which the agreement is terminated (s 37D(5)).
458
Example 13.28. Land declared a national park

Mr Strange enters into an agreement during March 2022 to declare land he owns as a national
park. The cost of the land declared as a national park was R10 000 000. The total market value of
the land is R25 000 000 while the market value and the municipal value of the declared land
equals R13 million.
Calculate the allowance that Mr Strange may claim annually under s 37D.
SOLUTION
The allowance will be 4% per annum (s 37D(2)).
Since the acquisition cost of the declared land (R10 million) is < the lesser of
market value (R13 million) and the municipal value (also R13 million), the formula
will be used to determine the amount on which the allowance should be based:
A = B + (C × D)
B = R10 million (acquisition cost)
C = R13 million – R10 million = R3 million capital gain
D = 60% inclusion rate for capital gain since a natural person
A = R10 000 000 + R1 800 000 (R3 000 000 × 60%)
A = R11 800 000
Section 37D allowance = R11 800 000 × 4% (s 37D(2)) ............................................. (R472 000)
13.10 Recoupments
As indicated in 13.2, where the core concepts were discussed, if a taxpayer disposes of an asset on
which allowances were granted for normal tax purposes, there might be certain normal tax conse-
quences:
The proceeds of Tax value of the Recoupment

the disposal EXCEEDS asset (see 13.10)
The proceeds of Tax value of the A possible s 11(o)

the disposal IS LESS THAN asset allowance
(see 13.11)
Therefore, if:
l proceeds (limited to original cost price) – tax value = positive (+): add recoupment to income
l proceeds (limited to original cost price) – tax value = negative (–): claim s 11(o) allowance if circum-
stances qualify.
The general recoupment provisions are mainly found in s 8(4) and (5). This part of the chapter will
focus on these recoupments, which can be categorised as follows:
Recoupments arising as a result of a disposal of an asset

l Section 8(4)(a): General recoupment provision (13.10.1)
l Section 8(4)(k): Donations, asset in specie distributions, disposal to connected persons or
change in use of trading stock (13.10.2)
l Section 8(4)(e), (eA)–(eE): Deferred recoupments (13.10.3)
Recoupments resulting from other circumstances

l Section 8(4)(b): Actuarial surplus paid to employer from a pension fund (13.10.1)
l Section 8(4)(l): Interest or related finances (13.10.4)
l Section 8(4)(n): Additional industrial policy project allowance (under s 12I) (13.10.5)
l Section 8(5): On acquisition of hired assets (13.10.6)
l Section 19: Concession or compromise regarding a debt (13.10.7)
459
A discussion on each of these recoupments will follow.
There are specific sections, for example s 13sept (low-cost residential units on
Please note! loan account – see 13.4.4), which contain their own recoupment provisions.
13.10.1 Recoupments: General recoupment provision (ss 8(4)(a), 8(4)(b) and 24M)
When will s 8(4)(a) be applicable?
Section 8(4)(a) will be applicable if a taxpayer recovered or recouped certain amounts allowed as
deductions in the current or any previous year of assessment. The deductions included in the ambit of
s 8(4)(a) are:
l ss 11 to 20 (with certain exclusions)
l s 24D (security expenditure)
l s 24F (film allowance)
l s 24G (toll roads)
l s 24I (foreign exchange gains or losses)
l s 24J (interest)
l s 27(2)(b) (agricultural co-operatives), and
l s 37B(2) (environmental expenditure).
The scope of s 8(4)(a) is further extended by s 8(4)(k) to include certain donations, asset in specie
distributions, the disposal of assets to connected persons and change in use of assets to trading
stock (see 13.10.2).
Since s 8(4)(a) applies only to recoupments of certain amounts, recoupments of amounts deducted
under other provisions of the Act would not be taxable under s 8(4)(a). For example, there can be no
recoupment under s 8(4)(a) of the farming development expenditure allowed as a deduction in terms
of the First Schedule to the Act, although the Schedule itself contains a limited recoupment provision.
Section 8(4)(a) specifically excludes the following recoupments from its application:
l recoupment of pension fund, provident fund or retirement annuity fund contributions made by an
employee, even though he was entitled to deduct these contributions from his income in terms of
s 11F. Previously some of these deductions were allowed under s 11(k) (for pension fund contri-
butions) and under s 11(n) (for retirement annuity fund contributions), the recoupment of any
deductions under these two sections are also excluded from s 8(4)(a)
l recoupment of the capital expenditure in connection with mining operations deducted in terms of
s 15(a)
l proceeds from the disposal of assets originally manufactured, produced, constructed or assembled
by the taxpayer for the purposes of manufacture, sale or exchange, to the extent that these
proceeds are included in his gross income in terms of par (jA) of the definition of ‘gross income’
in s 1
l any debt reduction amount applied to reduce the cost or expenditure incurred by the taxpayer in
terms of s 19 (note however that s 19 specifically allows for certain portions of a debt reduction
amount to be recouped under s 8(4)(a))
l any amount previously taken into account as an amount deemed to be recovered or recouped in
terms of ss 19(4) to (6A) (this is to prevent a double recoupment because s 19 already gives rise
to a recoupment for certain debt reductions (see 13.10.7 for a detailed discussion on s 19)).
Certain other provisions of the Act specifically prohibit the application of s 8(4)(a):
l Section 13bis(6) permits the taxpayer to choose not to be subjected to tax on a recoupment of
the annual and grading (no longer applicable) allowances on a hotel building provided by
s 13bis(1) and (2) but to set the recoupment off against the cost of a replacement building.
l The deduction for qualifying security expenditure provided by s 24D, including s 24D(3), a limited
suspension of the operation of s 8(4)(a).
l Paragraph 12(1B)(b) of the First Schedule to the Act provides for the exclusion of certain wear-
and-tear allowances enjoyed by farmers from the application of s 8(4)(a).
460
What will the implications be if s 8(4)(a) is applicable?
Recoupment (amount included in income) =

General rule Amounts previously allowed as deduction or an allowance and then
recovered (if an allowance asset:
Recoupment = Proceeds (limited to cost) – Tax value)
Qualifying amounts (amounts previously allowed as a deduction or an allowance) will be included in

income if they have been recovered or recouped during the current year of assessment. Therefore,
on the disposal of an asset, the recoupment under s 8(4)(a) will always be limited to the original cost
(on which allowances were calculated). If an amount is recovered under s 8(4), it should be included
in gross income (par (n) of the definition of ‘gross income’ in s 1 – see chapter 4).
Take note of the following special circumstances:
l An asset that was originally acquired for no consideration (for example, by way of a donation or
inheritance)
If the taxpayer has claimed wear-and-tear allowances on the asset, the proceeds derived on
disposal will represent a recoupment.
l An asset originally used elsewhere and subsequently used for trade purposes
In the case of an asset originally used elsewhere, for example, for private or domestic purposes,
but subsequently used for trade purposes, on its ultimate disposal any recoupment or recovery of
wear-and-tear allowances must be calculated with reference to its original cost and not to its
value at the date when it was introduced into the business.
For example, an asset costing R10 000 was introduced into the business at a time when its value
was R4 000. After SARS had allowed R1 500 wear and tear on this asset, it was sold for R6 500.
There will be no recoupment in terms of s 8(4)(a), since the taxpayer incurred a loss of R2 000 on
the disposal of the asset (tax value of R8 500 less proceeds of R6 500), while only R1 500 was
allowed by way of wear and tear.
l An asset used partly for purposes of trade and partly for private purposes
When an asset is used partly for purposes of trade and partly for private purposes and then
disposed of, SARS (in practice) will apply a reasonable basis of apportionment to the proceeds,
based on the extent to which the asset was used for trade and non-trade purposes respectively.
This approach is also applied to the wear-and-tear and s 11(o) allowances.
l It is important to remember that the recoupment is taxable in one sum in the

year in which it occurs.
l A recoupment of allowances can also result from a receipt of money derived
from an insurance company representing compensation received upon the
destruction of the asset by fire or some other hazard.
l In a ‘lock-stock-and-barrel’ sale of a business with depreciated assets in cir-
cumstances in which the purchase price is not allocated to any particular
asset, the Commissioner is at liberty to place a reasonable value on the
Please note!
various assets sold in order to determine any recoupment of allowances for
wear-and-tear. The same will apply if a number of assets are sold for a lump
sum. For example, it may be necessary to apportion a lump sum considera-
tion derived for a developed industrial property held as a capital asset
between the land, on the cost of which no deductions would have been
claimed, and the buildings, on the cost of which the industrial building allow-
ances would have been claimed.
l If the taxpayer disposes of an asset for consideration which cannot be
quantified in terms of s 24M, the amount of the recoupment should be taken
into account in the years of assessment when the consideration becomes
quantifiable (s 24M(3)).
461
Example 13.29. Recoupments: Cessation of trading
Short Lived (Pty) Ltd ceased manufacturing operations on 30 June and sold or ceded the
following assets to Better Equipped Ltd:
Amount realised Book value
Land and factory buildings (note 1 of solution) .................... R6 000 000 R4 000 000
Trade marks (acquired at no cost) (note 2 of solution) ......... 1 000 000 nil
Machinery and plant ............................................................. 2 500 000 900 000
Motor vehicles ....................................................................... 200 000 150 000
Office furniture and fittings (note 4 of solution) ..................... 250 000 300 000
Trading stock ........................................................................ 3 000 000 2 500 000
(cost)
Debts due (all recoverable) (note 5 of solution) .................... 1 500 000 1 700 000
(face value)
Leasehold land and buildings .............................................. 2 500 000 1 800 000
Short Lived (Pty) Ltd rendered accounts from 1 January to 30 June covering the six months’
trading to the date of cessation of business. These accounts showed a taxable profit of R1 000 000
before the following transactions were taken into account. Further information about assets are as
follows:
Land and factory buildings
The original cost was R5 000 000. Over the years the company wrote off R1 000 000 depre-
ciation in its books but no allowance for wear and tear in terms of the proviso to s 11(e) was
permitted. The buildings did not qualify for the annual allowance in terms of s 13.
Machinery and plant, motor vehicles, office furniture and fittings
The income tax values are the same as the book values. The following allowances have been
permitted so far:
Section 12C allowance on manufacturing assets ........................................................ R1 100 000
Wear-and-tear allowances: Motor vehicles .................................................................. R170 000
Wear-and-tear allowances: Office furniture and fittings ............................................... R100 000
Leasehold land and buildings
The book value of R1 800 000 represents a cash premium of R500 000 paid for the right of use,
plus R1 300 000 expended on buildings that Short Lived (Pty) Ltd was forced to erect on the
hired land. So far, R100 000 in terms of s 11(f) for the premium, and R250 000 in terms of s 11(g),
for the improvements, have been allowed.
Calculate the taxable income of the company on the assumption that it received no other income
for the remaining six months of the year of assessment. (Capital gains tax can be ignored in the
calculation of taxable income, but will be mentioned for the sake of completeness.)
462
SOLUTION
Taxable profit (in accounts) ........................................................................................ R1 000 000
Add: Recoupment of s 12C allowance on machinery and plant:
Proceeds of sale ..................................................................... R2 500 000
Less: Income tax value ........................................................ (900 000)
Profit ........................................................................................ R1 600 000
Recoupment limited to allowances claimed (note 6) ....................................... 1 100 000
(Or recoupment = R2 000 000 – R900 000 = R1 100 000)
Balance of profit, R500 000, of a capital nature.
Add: Recoupment of wear-and-tear allowances on motor vehicles
Proceeds of sale ..................................................................... R200 000
Less: Income tax value ........................................................ (150 000)
Recoupment (note 6) .............................................................. R50 000
Recoupment (no need to limit to allowances as less than allowances 50 000
claimed) ...........................................................................................................
Add: Difference between realised value of trading stock and its cost (R3 000 000
(gross income) less R2 500 000 (s 22)) (note 3) .............................................. 500 000
Add: Recoupment of allowances made on leasehold land and buildings
Proceeds of cession of rights.................................................. R2 500 000
Less: Income tax value (R1 800 000 less R350 000) ........... (1 450 000)
Profit ........................................................................................ R1 050 000
Recoupment limited to total allowances granted (note 6) ................................ 350 000
(Or recoupment = R1 800 000 – R1 450 000 = R350 000)
Balance of profit, R700 000, of a capital nature
Taxable income................................................................................................ R3 000 000
Notes
(1) The profit on the sale of land and factory buildings of R2 000 000 is a capital profit, and
since no wear-and-tear allowances or annual allowance have been granted on this asset,
there is no taxable recoupment in terms of s 8(4)(a).
(2) The amount realised for the trade marks is a receipt of a capital nature.
(3) A profit on the sale of trading stock is taxable, despite the closing down of the business.
(4) The loss of R50 000 (R250 000 – R300 000) on the sale of office furniture and fittings has not
been allowed in the example, being a loss of a capital nature. The allowance under s 11(o),
does not apply when the asset is disposed of on the total abandonment of trading operations,
since they are no longer carrying on a trade (requirement in first part of s 11 not met).
(5) The loss on the sale of the debts due is not allowed, since it is not a loss incurred in the
production of income. (If the company did not cease trading and did not sell the debts to
the purchaser but retained them, any bad debts incurred in later years would be allowed as
a deduction from trade income in those years.)
(6) The profits derived from the sale of the plant and machinery, motor vehicles and the lease
are of a capital nature. Remember, however, the recoupment of allowances previously made.
Example 13.30. Recoupments: Proceeds received in instalments
A taxpayer sold office furniture for R100 000 on 31 January 2020, the proceeds being due and
payable as follows:
Year ending 29 February 2020: 31 January 2020 .......................................................... R25 000
Year ending 28 February 2021: 31 July 2020 ................................................................ 25 000
31 January 2021 .......................................................... 25 000
Year ending 28 February 2022: 31 July 2021 ................................................................ 25 000
Up to the date of sale, wear-and-tear allowances amounts totalling R35 000 were permitted, the
furniture having cost R80 000 a number of years ago.
Calculate the recoupments arising in each of the relevant years of assessment.
463
SOLUTION
Since the income tax value is R45 000 (R80 000 less R35 000), a total profit of R55 000
(R100 000 – R45 000) has been made, but this may be taxed as a recovery or recoupment within
the terms of s 8(4)(a) only to the extent of R35 000 (the allowances previously granted). The
recoupment of R35 000 will be taxable as follows:
Year ending 29 February 2020
There is no recoupment, since the seller has only received R25 000, while the written-down
income tax value is R45 000 (therefore, until another R20 000 has been received to equal the tax
value (R25 000 (2020) plus R20 000 = R45 000 (tax value), no recoupment will be recorded).
The seller has received R50 000 during 2021 and may use this to calculate the recoupment. Of
this amount R20 000 must be appropriated to the balance of the income tax value (R25 000
(2020) plus R20 000 (2021), thus R30 000 has so far been received in excess of the tax value).
R30 000 ((R25 000 (2020) plus R50 000 (2021)) less R45 000 (tax value)) constitutes a recoup-
ment under s 8(4)(a).
The seller has received an additional R25 000. Although the full amount of the income tax value
has been recovered, only R5 000 constitutes a recoupment, since the total recoupment to be
taxed must be limited to the allowances actually granted; namely, R35 000 (R30 000 having been
taxed as a recoupment in the previous year).
(This can also be calculated as follows: received in total R100 000, but limited to original cost
price of R80 000 less tax value of R45 000 = R35 000 recoupment in total (R30 000 already
included in 2021, thus R5 000 included in 2022.)
The balance of R20 000 is a capital gain and may be subject to income tax under the Eighth
Schedule (calculated as follows: (R100 000 – R35 000 (total recoupment under s 8(4)(a)) less
(R80 000 – R35 000 (total amount of wear and tear) = R20 000 capital gain).
If an actuarial surplus is paid to an employer (in terms of s 15E(1)(f) or (g) of the

Pensions Fund Act) the amount recovered or recouped will be taxable in terms of
s 8(4)(a). Note however that any previous non-deductible expenditure (in terms of
Please note! s 11(l) – refer chapter 12) paid by the employer to the Pension Fund in respect of
that surplus (s 8(4)(b)) will be excluded from the taxable portion. The non-
deductible portion will be tax-free (it will not be recouped under s 8(4)(a)) by the
employer.
13.10.2 Recoupments: Donations, asset in specie distributions, the disposal of assets to

connected persons and change of use to trading stock (s 8(4)(k))
When will s 8(4)(k) be applicable?

Section 8(4)(k) comes into operation when
l a person donates an asset
l a company transfers an asset in any manner to a holder of a share in that company (i.e., an asset
in specie distribution as a dividend),
l a person disposes of an asset to a connected person, or
l a person begins to hold an asset as trading stock, which was not previously held as trading stock
(change in use of trading stock)
but it is only applicable to assets on which wear and tear was claimed (under any of the provisions
referred to in s 8(4)(a) – see 13.10.1).
A donation encompassed by this provision will be a donation in the ordinary

sense of the word in the common law and is not restricted to a ‘donation’ as
Please note! defined in s 55(1) for the purposes of donations tax. However, the term
‘dividend’ is used in its sense as defined in s 1.
What will the implications be if s 8(4)(k) is applicable?
Proceeds on disposal = Market value* on date of donation, distribution,

disposal or change in use
General rule
*Note that the market value will still be limited to the cost when calculating
the recoupment.
464
Section 8(4)(k) deems the asset to be disposed of at market value as at the date of the donation, dis-
tribution, disposal or change in use of trading stock. Therefore, if an asset
l is donated
l is distributed as a dividend in specie
l is disposed of to a connected person, or
l begins to be held as trading stock (if it was not previously held as trading stock),
s 8(4)(k) will deem the amount recovered to be the market value.
Remember
Section 8(4)(k) only deems the asset to be sold at market value (thus proceeds equals market
value); it does not regulate the recoupment or the amount of the recoupment, as this is regulated
by s 8(4)(a). It therefore follows that the amount actually subjected to tax is limited to the extent of
the deductions or allowances previously granted.
Example 13.31. Recoupments: Disposal of an asset to a connected person

On 1 October 2022, Fast Feathers Ltd (with an October year-end) sold a manufacturing machine
to Slow Feathers (Pty) Ltd (its 100% subsidiary) at R1 500 000 (when market value was
R1 800 000). Fast Feathers Ltd originally acquired the new machine for R3 000 000 on
1 March 2021.
Calculate all the tax implications of the disposal of the machine for Fast Feathers Ltd for the 2022
year of assessment.
SOLUTION
Year ending 31 October 2022
Selling price is R1 500 000, but since it was sold to a connected person, it is deemed to have
been sold at market value at date of sale, being R1 800 000 (1 October 2022) (s 8(4)(k)).
Recoupment in respect of sold machinery under s 8(4)(a):
R1 800 000 (value (proceeds) in terms of s 8(4)(k))
Less:
Tax value of R1 200 000
(R3 000 000 – R1 200 000 (R3 000 000 × 40% (s 12C – 2021)) – R600 000
(R3 000 000 × 20% (s 12C – 2022 (allowance))
= R600 000
Allowance (s 12C) .......................................................................................................... (R600 000)
Recoupment .................................................................................................................. R600 000
Note
l If the market value on 1 October 2022 was R3 200 000, the recoupment would have been
limited to R3 000 000 (the amount on which allowances were claimed).
l As the machine was acquired from a connected person, Slow Feathers (Pty) Ltd can only
claim the s 12C allowance of 20% (as it is a second-hand machine) on the purchase price of
R1 500 000.
13.10.3 Recoupments: Deferred recoupment of allowances (s 8(4)(e)–(eE))

When will s 8(4)(e) be applicable?
Section 8(4)(e) will be applicable if a taxpayer
l has replaced one asset with another asset (the replacement asset), and
l has elected that par 65 (that deals with involuntary disposal) or par 66 (that deals with reinvest-
ment in replacement assets (all of which are depreciable)) of the Eighth Schedule (see chap-
ter 17) applies in respect of that disposal.
The most important requirement (other than the fact that the full proceeds should be reinvested in the
replacement asset(s)) that needs to be met before either of paras 65 or 66 of the Eighth Schedule
can be elected is that
proceeds = base cost
OR
proceeds > base cost
on disposal of the asset.
465
No capital gain is realised if

proceeds = base cost.
Although NO capital gain is realised (thus proceeds = base cost), the provisions
of s 8(4)(e) may still be applicable, since paras 65 and 66 of the Eighth
Please note! Schedule can be elected if proceeds are either
l EQUAL to (thus no capital gain is realised), or
l exceeds (a capital gain is realised)
base cost.
What will the implications be if s 8(4)(e) is applicable?
Deferred recoupment included in income:

General rule Depreciable asset Î over the same period as the allowance claimed on
the replacement asset
Non-depreciable asset Î when the replacement asset is disposed of
Amounts recovered or recouped by the taxpayer upon the disposal of an asset will not be included in
his income, but will be deferred (under s 8(4)(eA)–(eE)).
Remember
The deferral in terms of s 8(4)(e) takes preference over the provisions of s 8(4)(a), which would
have deemed the full recoupment to be included in income in the year of assessment of the
disposal of the asset.
The deferral will be treated as follows:

l The treatment of the deferral of the recoupment will depend mainly on the type of replacement
asset that is acquired:
– If the replacement asset is a ‘depreciable asset’ (see 13.2.4):
The recoupment on the original asset is spread and included in income over the same period
as the deduction or allowance is claimed on the replacement asset. This is calculated by
apportioning the recoupment allocated to the replacement asset in the same ratio as the
amount of the deduction or allowance in that year bears to the total amount of the deductions
or allowances claimable for the replacement asset for all years of assessment (s 8(4)(eB)).
– If the replacement asset is not a depreciable asset:
The recoupment is deferred until the replacement asset is disposed of and the full recoupment
is then included in income. This will only be applicable if the taxpayer has elected to apply the
provision of par 65 of the Eighth Schedule (involuntary disposals).
Example 13.32. Recoupments: Deferred recoupment of allowances

During the 2022 year of assessment, Diverse Ltd’s plant and machinery was destroyed in a fire.
The plant and machinery qualified for the accelerated s 12C allowance. The company was
insured, and received an insurance payment of R1 800 000 in the same year of assessment. The
amount was immediately used to fund the acquisition of a new, similar plant and machinery for
R2 000 000. The recoupment of allowances (under s 8(4)(a)) on the destroyed plant amounted to
R700 000. Diverse Ltd’s year of assessment ends on the last day of February.
Calculate the allowances and recoupments with regard to the above if Diverse Ltd elected the
application of par 65 of the Eighth Schedule (ignore capital gains tax implications and VAT).
466
SOLUTION
Section 12C allowance on new plant and machinery (40% × R2 000 000) ................. (R800 000)
Recoupment in respect of destroyed plant and machinery – deferred in
accordance to allowance on new asset
R700 000 × R800 000/R2 000 000 (or R700 000 × 40%) ............................................ R280 000
Years ending 28/29 February 2023, 2024 and 2025
Section 12C allowance on new plant and machinery purchased in 2022
(20% × R2 000 000) ..................................................................................................... (R400 000)
Recoupment in respect of destroyed plant and machinery – deferred in
accordance to allowance on new asset
R700 000 × R400 000/R2 000 000 (or 20% × R700 000) ............................................ R140 000
l An asset may be replaced with multiple assets. If this occurs, the amount recovered or recouped
on the disposal of the original asset (calculated in terms of s 8(4)(a)) must be apportioned
between the replacement assets. The recoupment will be allocated to the replacement assets in
proportion to their respective purchase prices (costs) (s 8(4)(eA)).
Example 13.33. Recoupments: Deferred recoupment – more than one replacement asset
During the 2022 year of assessment, Brando Ltd’s Manufacturing machine A was destroyed by a
fire. Manufacturing machine A qualified for the accelerated s 12C allowance. The company was
insured at replacement value and when the insurance payment (of R3 750 000) was received, a
s 8(4)(a) recoupment of R250 000 was made.
Brando Ltd used the insurance amount received to immediately replace Manufacturing machine
A with a similar, but smaller, new Machine B at a cost of R1 750 000. The rest of the insurance
payment of R2 000 000 was used to acquire a much-needed new office block.
The company elected that the provisions of par 65 of the Eighth Schedule be applicable to the sale.
Since s 8(4)(e) will apply and the recoupment will be deferred, calculate the allocation of the
recoupment on Machine A to the replacement assets. (Ignore capital gains tax implications.)
SOLUTION
Recoupment amounted to R250 000:
Recoupment allocated to Machine B:
R250 000 × R1 750 000/R3 750 000 = ....................................................................... R116 667
(This part of the recoupment will be deferred in accordance to the allowance on
Machine B, thus 40:20:20:20 over the next four years.)
Recoupment allocated to office building:
R250 000 × R2 000 000/R3 750 000 = ....................................................................... R133 333
(This part of the recoupment will be deferred in accordance to the allowance on the
office block (s 13quin) at 5% over the next 20 years.)
l At the time of disposal of the replacement asset, any deferred recoupment not yet included in the
taxpayer’s income (in terms of s 8(4)(eB) or (eD)), is deemed to be an amount recovered or
recouped by the taxpayer. The full balance of the recoupment not yet recognised will be included in
income at the time of disposal (s 8(4)(eC)).
l Where a taxpayer ceases to use a replacement asset without disposing of it, any deferred
recoupment not yet included in income (under s 8(4)(eB) or (eC)) will be deemed to be recovered
or recouped in full. It will be included in the taxpayer’s income at the time of ceasing to use the
replacement asset (s 8(4)(eD)).
Example 13.34. Recoupments: Deferred recoupment of allowance – disposal of

replacement asset
On 1 December 2020, Selby CC sold a delivery vehicle (that qualified for a s 11(e) allowance)
and a s 8(4)(a) recoupment of R15 000 was made on the sale. The full selling price was used to
purchase a new delivery vehicle for R150 000.
The company elected that the provisions of par 66 of the Eighth Schedule should apply to the
sale and accounted for R1 875 of the recoupment in 2021 (under s 8(4)(e)).
continued
467
On 31 May 2022, the last day of their year of assessment, Selby CC decided to sell the replace-
ment delivery vehicle.
(Binding General Ruling (Income Tax) No. 7 and Interpretation Note No. 47 (which is in line with
the public notice issued by the Commissioner) allows for a four year write-off on delivery
vehicles.)
Calculate the amount that Selby CC needs to recoup under s 8(4)(e) during the 2022 year of
assessment.
SOLUTION
Year ending 31 May 2022
Section 8(4)(eC) provides that the remaining amount of the recoupment not yet included in
taxable income be accounted for on the sale of the replacement asset, thus
Recoupment (s 8(4)(e)) (R15 000 – R1 875 (2021)) ....................................................... R13 125
Note
The solution would have been the same if the CC ceased to use the replacement asset
(s 8(4)(eD)).
l If a taxpayer fails to conclude a contract or to bring a replacement asset into use within the pre-
scribed period (contract for acquisition concluded within 12 months and replacement asset
brought into use within three years after disposal – par 65 or 66 of the Eighth Schedule (see
chapter 17)), the deferred recoupment provision falls away.
The taxpayer is then required to include in his income on the date the prescribed period ends
– the recoupment, and
– interest at the prescribed rate on the amount of the recoupment from the date of disposal until
the end of the prescribed period (s 8(4)(eE)).
The interest is deemed to be an amount recovered or recouped for the purposes

Please note! of s 8(4)(a) (i.e., it is included in income as a recoupment).
13.10.4 Recoupments: Interest or related finance charges (s 8(4)(l))

When will s 8(4)(l) be applicable?
Section 8(4)(l) will come into operation where a financial arrangement or instrument (treated in terms
of s 24J) is transferred by one person (the transferor) to another person (the transferee) and any
interest or related finance charges that the transferor was legally liable to pay were also transferred to
the transferee.
A specific recoupment provision is required since s 24J, that provides for the taxation of the returns
generated by financial instruments, specifically requires that the accrual basis be used in order to
spread interest, including a discount or premium, on a daily basis (see chapter 16).
It is therefore possible for
the transferor to have claimed (and been allowed) a deduction in terms of s 24J
but,
by transferring the underlying financial arrangement to the transferee, the obligation to pay the
interest or related finance charges is transferred to the transferee.
To prevent the transferor from claiming a deduction without effectively paying the interest or related
finance charges, the provisions of s 8(4)(l) will be applicable in such circumstances (read with
s 24J(4A)(b)).
468
What will the implications be if s 8(4)(l) is applicable?
Amount of taxable recoupment (under s 8(4)(a)) for transferor =

General rule Interest deducted and not yet paid less amount paid on transfer of the
obligation
The transferor will be deemed to have recovered or recouped an amount equal to the amount of the
obligation transferred. The recoupment must be included in income in the year that the financial
arrangement is transferred.
The following is deemed to be recovered or recouped by the transferor and taxable under s 8(4)(a):
l the amount of any obligation in respect of interest or related finance charges which a person has
been allowed as a deduction for income tax purposes but which has not been actually paid
less
l the amount actually paid in respect of the transfer of the obligation to another person.
13.10.5 Recoupments: Industrial policy project allowance (s 8(4)(n))

When will s 8(4)(n) be applicable?
Section 8(4)(n) provides for the recoupment of the additional industrial investment allowance claimed
(under ss 12G (now repealed) or 12I (see 13.9.2)). It arises where a taxpayer disposes of an
industrial asset before completion of the write-off period of that asset for the purposes of ss 11(e),
12C or 13.
What will the implications be if s 8(4)(n) is applicable?
Amount of taxable recoupment (under s 8(4)(n)) =

General rule All allowances previously claimed (under s 12I) and recovered on
disposal
All allowances previously claimed (under ss 12G (now repealed) or 12I (see 13.9.2)) and recovered
on disposal, will be included in the taxpayer’s income.
Remember
This recoupment applies in addition to any recoupment under s 8(4)(a) (see 13.10.1).
13.10.6 Recoupments: Acquisition of hired assets (s 8(5))
When will s 8(5) be applicable?

Section 8(5)(a) comes into operation when
l an amount has been paid (for example rent or a lease premium) by a person for the right of use
or occupation of any movable or immovable property
l that amount has been allowed as a deduction in the determination of that person’s taxable
income, and
l that amount or its equivalent is upon the subsequent acquisition of the property by that or any
other person applied in reduction or towards settlement of the purchase price of the property.
This section will not be applicable if an employee acquired a hired asset from his employer for no
consideration, or for a consideration less than the determined value, and has, as a result, been taxed
on the acquisition as a fringe benefit (under par (i) of the definition of ‘gross income’ in s 1). The pur-
pose of this exclusion is to prevent the acquisition of the same asset from generating both a taxable
recoupment and a taxable fringe benefit.
469
What will the implications be if s 8(5) is applicable?
Termination of lease (recoupment for former lessee):

1. Asset acquired
• Rental applied to reduce purchase price
Î recoupment = rentals used to reduce purchase price (s 8(5)(a))
General rule • Acquired for consideration less than fair market value or for no con-
sideration
Î recoupment = market value – consideration paid (if any) (s 8(5)(b))
2. Continue use of asset (but not acquired)
• No rental or nominal rental (< 10% of fair market value per year) paid
Î recoupment = fair market value (s 8(5)(bA))
The amount applied in reduction or towards settlement of the purchase price of the property must
then be included in the income of the person who acquires the property for the year of assessment
during which he
l exercised his option to acquire it, or
l concluded the agreement to acquire it (s 8(5)(a)).
For example, if Lindani (the lessor) agrees to sell the hired property to Rall (the lessee) at an agreed
price less whatever amount has previously been paid by way of rent by Rall (say R3 000), Rall is
liable for tax on the amount of the rent previously allowed as a deduction to him, namely R3 000.
SARS will also apply this provision when a lessee undertakes improvements at a certain cost, being
given an option to purchase the premises during the lease at a price that is reduced by the cost to
the lessee of the improvements undertaken. To the extent to which the cost of the improvements has
been allowed as a deduction to the lessee in terms of s 11(g), it must be included in his income in the
year of assessment during which he exercised the option to purchase.
If rental property is acquired by the lessee (or some other person), for a consideration that is less
than the fair market value, the following must be deemed to have been applied in reduction or
towards settlement of the purchase price of the property and will be taxable:
Fair market value

of the property LESS Purchase price (if any)
(as defined in s 1 of the Tax Administration Act)
limited to the amount previously paid for the right of use or occupation of the property (for example
rentals and a lease premium) (s 8(5)(b)).
Example 13.35. Recoupment on acquisition of hired asset
Sisa (the lessor) gives Leroy (the lessee) an option to acquire property at any time during the
lease at a price of R1 000 000. Leroy exercises the option at a time when the fair market value is
R1 500 000. Leroy will be subject to tax in the year in which he exercises the option on the
difference between R1 500 000 and R1 000 000 (i.e., on R500 000), but limited to a maximum of
the aggregate amount he has paid for the right of use or occupation and allowed to him as a
deduction in previous years. For example, if R300 000 has been allowed to him by way of
deductions, only R300 000 is taxable. If R800 000 has been allowed to him, R500 000 is taxable.
If Leroy has ceded all his rights under the lease to Eben, who exercises the option, it is Eben
who may be subject to tax on the recoupment in terms of s 8(5)(a), even though Eben enjoyed
no deductions from his taxable income in respect of prior rentals paid. (Capital gains tax was
ignored in this discussion.)
A lessee is deemed to have acquired the property for no consideration (under s 8(5)(b)) if, after the
termination of a lease, he is allowed to use the property with the express or implied agreement of the
former lessor (or owner) of the property
l without the payment of any rental or other consideration, or
l subject to the payment of a consideration that is nominal in relation to the fair market value of the
property (s 8(5)(bA)).
470
This is only applicable to a lease of

l property consisting of corporeal movable goods, or
l of machinery or plant on which the former lessor was entitled to claim any allowance (including
immovable machinery or plant (perhaps due to fixture to the building in which it is housed) if it
previously qualified for any allowance).
If the property was owned by the former lessor, its fair market value (the amount to be included in
taxable income, which is always limited to the amounts paid for the right of use or occupation of the
property) will be deemed to be
The cost to the former lessor of Depreciation allowance at the rate of 20% per year on
the property LESS the reducing-balance method (s 8(5)(bB)(i)).
A consideration payable for the property is deemed to be nominal in relation to the fair market value
if,
l in relation to the period for which it is payable
l it is less than 10% per year of the fair market value (s 8(5)(bB)(iii)).
For example, if after the termination of the lease the former lessee is permitted to continue to use
property that has a fair market value of R20 000 for a consideration of less than R2 000 per year (thus
10% of the fair market value), the consideration will be nominal. The former lessee will be deemed to
have acquired the property for no consideration. He will be liable for tax on a recoupment of R20 000
(fair market value, but limited to the amounts previously paid for the right of use of the property that
have been deducted, if less than R20 000). He will be able to claim a deduction of the current rentals
under s 11(a).
If, after three months from the date of the termination of the lease, the former lessor (or owner) has not
instituted legal proceedings against the lessee to return the property, he will be deemed to have
agreed to the former lessee’s use, enjoyment or dealing with the property (for s 8(5)(bA))
(s 8(5)(bB)(ii)).
In certain circumstances a lease is deemed to have terminated:
A lease will be deemed to have terminated (which would result in a recoupment) when the former
lessee is required to pay a consideration, after the termination, in respect of his right to use, enjoy or
deal with the property but
l ceases to pay that consideration, or
l if he pays a consideration for the right that is nominal (see above) in relation to the fair market
value of the property.
The lease is deemed to have been terminated on the date from which the former lessee is no longer
required to pay the consideration, or from which the consideration payable by the lessee becomes
nominal (s 8(5)(bB)(iv)).
Example 13.36. Recoupment on acquisition of hired assets
(1) Mr Holmes hired computer equipment for his business from Picoult Ltd for three years at an
annual rental of R30 000, which was fully deductible. At the end of the lease he exercised his
option to acquire the equipment for R100 000 less half of the rentals of R90 000 paid to date
(that is, for R100 000 less R45 000, or a net price of R55 000).
What amount must be included in Mr Holmes’ income on the exercise of the option?
SOLUTION
Total amount paid as rentals for hire of equipment and allowed as deductions.......... R90 000
Amount to be included in Mr Holmes’ income in terms of s 8(5)(a) – amount of rentals
previously deducted applied in reduction of the purchase price of the asset ................ R45 000
471
Example 13.36. Recoupment on acquisition of hired assets – continued

(2) Goddard (Pty) Ltd hired computer equipment for its business from Todd Ltd for three years
at an annual rental of R30 000, which was fully deductible. In terms of the lease, Mr Cussler,
the sole holder of shares of Goddard (Pty) Ltd, was entitled to acquire the equipment at the
end of the lease for R100 000 less the rentals paid to date (that is, for R100 000 less
R90 000 or a net price of R10 000).
What amount should Mr Cussler include in his income when he acquires the equipment?
SOLUTION
Amount paid as rentals for hire of equipment and allowed as deductions to
Goddard (Pty) Ltd ........................................................................................................ R90 000
Amount to be included in Mr Cussler’s income in terms of s 8(5)(a) – amount of
rentals previously deducted by Goddard (Pty) Ltd applied in reduction of the
purchase price of the asset by Mr Cussler .................................................................. R90 000
Note
The amount in question must be included in the income of the person who acquires the equipment,
even if that person was not the one who was allowed the deduction of rentals in the first instance.

(3) Mr Pitt hired imported computer equipment for his business from Clive Ltd for three years at
an annual rental of R30 000, which was fully deductible. He was given the option to acquire
the equipment at a price of R10 000 at the end of the lease. He exercised this option at the
end of the lease when the fair market value of the equipment had increased to R160 000 due
to currency fluctuations.
What amount must be included in Mr Pitt’s income on the exercise of the option?
SOLUTION
Amount paid as rentals for hire of equipment and allowed as deductions .................. R90 000
Value of equipment at the time of the exercise of the option ....................................... R160 000
Less: Amount payable by Mr Pitt for the acquisition of the equipment ...................... (10 000)
Excess ......................................................................................................... R150 000
This excess must be included in Mr Pitt’s income in terms of s 8(5)(b) read with
s 8(5)(a), but the amount to be included is limited to the amount of rentals
previously deducted; that is, ........................................................................................ R90 000

(4) Mr Koontz hired imported computer equipment for his business from Dean Ltd for three years
at an annual rental of R180 000, which was fully deductible. The equipment had cost Dean
Ltd R400 000. Mr Koontz was permitted to continue to use the equipment at the end of the
three-year period for a rental of R10 000 a year.
What amount must be included in Mr Koontz’s income on the termination of the initial lease?
SOLUTION
Determination of fair market value of equipment
Cost of equipment to Dean Ltd.................................................................................... R400 000
Less: Depreciation at 20% a year on reducing balance method
(in terms of s 8(5)(bB)(i):
Year 1 (20% of R400 000) ................................................................................. (80 000)
R320 000
Year 2 (20% of R320 000) ................................................................................. (64 000)
R256 000
Year 3 (20% of R256 000) ................................................................................. (51 200)
Deemed fair market value of equipment at the end of the initial lease period ............ R204 800
continued
472
Since the annual rental, R10 000, is less than 10% of the fair market value as determined above,
that is, R20 480, it is in terms of s 8(5)(bB)(iii) deemed to be nominal and Mr Koontz is under
s 8(5)(bA) deemed to have acquired the equipment for no consideration for the purposes of
s 8(5)(b). He must therefore include in his income in terms of s 8(5)(b) read with s 8(5)(a) the
lesser of the following two amounts:
Fair market value as determined ................................................................................. R204 800
Rentals previously deducted (R180 000 × 3) .............................................................. 540 000
Therefore, R204 800 must be included in Mr Koontz’s income. If the rental payable after the
termination of the initial lease had exceeded the nominal amount of R20 480 a year, then there
would have been no deemed recoupment under s 8(5).
13.10.7 Recoupments: Concession or compromise regarding a debt (s 19)

Government wanted to introduce a uniform system for the taxation treatment of debt reduction or
relief that would assist in local economic recovery. The uniform system that was introduced
addressed debt relief (thus debt reductions (including cancellations) for less than the full consider-
ation) resulting from a debtor’s inability to pay. The system covers both the rules relating to ordinary
revenue (s 19) and the rules relating to capital gains (par 12A of the Eighth Schedule – see chap-
ter 17) (Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012). A discussion of the
legislation applicable to debt benefits due to concessions or compromises in respect of debt for
years of assessment beginning on or after 1 January 2018 follows below. For a detailed discussion of
the legislation applicable to debt reductions relating to years of assessment beginning before
1 January 2018, refer to the 2019 edition of Silke.
When will s 19 be applicable?

If a debt benefit arises due to a concession or compromise regarding a debt that was initially used to
finance deductible expenditure or allowance assets (for example assets on which a s 11(e) allow-
ance could be claimed) and the reduction of the debt is not a bequest, a donation (unless no
donations tax was payable – effective for years of assessment beginning on or after 1 January 2019),
a fringe benefit, specific debt between group companies or done by a share issue or conversion and
represents an amount of interest, the ‘ordinary’ debt relief system under s 19 will be applicable.
Section 19 applies when
l a debt benefit in respect of debt that is owed by a person
l arises in a year of assessment due to or because of a concession or compromise regarding that
debt during that year of assessment, and
l the amount of the debt is owed by that person in respect of, or was used to fund (either directly or
indirectly), any expenditure for which a deduction or allowance was granted in terms of the Act
(s 19(2)).
473
Debt for the purposes of s 19 includes any amount that is owed by a person in
respect of
l expenditure incurred by that person, or
l a loan, advance or credit that was used (directly or indirectly) to fund any
expenditure incurred by that person
but will exclude a ‘tax debt’ (as defined in s 1 of the Tax Administration Act – see
chapter 33) (s 19(1)). It can include, for example, an advance, debenture or a
loan that needs to be repaid (Interpretation Note No. 91 (issued on 21 October
2016)).
Concession or compromise is any arrangement in terms of which
l a debt is
– cancelled or waived, or
– extinguished by
• the redemption of that debt by the person (debtor) owing the debt, or
by any connected person in relation to that debtor (for example a
compromise with creditors), or
• a merger where the debtor acquires the claim in respect of that debt
l a debt owed by a company (debtor) is settled (paid), directly or indirectly
– by conversion or exchange for shares in that company (debtor), or
– by applying the proceeds from shares issued by that company (debtor)
(s 19(1)).
Debt benefit in respect of a debt owed by a person means
l if a debt is cancelled or waived Î the amount cancelled or waived, or
Please note! l in the case of the redemption of the debt by the debtor (or a connected
person in relation to that debtor) Î the amount by which the face value of
the debt exceeds the expenditure incurred to either redeem that debt, or to
acquire the claim in respect of that debt, or
l in the case where the debt is extinguished by way of a merger where the
debtor company is being acquired Î the amount by which the face value of
the debt exceeds the expenditure incurred to either redeem that debt, or to
acquire the claim in respect of that debt, or
l where the debt is settled by way of a debt to equity conversion or exchange
for shares in the debtor company and the person acquiring the shares
– did not previously hold an effective interest in that debtor company Î
the face value of the debt (before the shares were acquired) less the
market value of the shares acquired by reason of the conversion, or
– did previously hold an effective interest in that debtor company Î the
face value of the debt (before the shares were acquired) less the
difference between the market value of the effective interest held imme-
diately after the implementation of the arrangement (i.e. to convert or
exchange the shares) and immediately before entering into the arrange-
ment
l where the debt is settled by applying the proceeds of shares issued by the
debtor company Î the face value of the debt (before the shares were
issued) less the market value of the shares (s 19(1)).
Market value of shares acquired or held due to the implementation of a debt
‘concession or compromise’ arrangement means the market value of those
shares immediately after the implementation of such concession or compromise
(s 19(1)).
474
This section will, however, not apply to any debt benefit regarding debt owed by a person
l who is an heir or legatee of a deceased estate, to the extent that
– the debt is owed to the deceased estate
– the debt is reduced by the deceased estate, and
– the amount of the reduction forms part of the property of the estate for the purposes of the
Estate Duty Act, 1955 (Act 45 of 1955) (see chapter 27)
(This is excluded since the reduction will constitute a bequest and estate duty will potentially
apply.)
l to the extent that the debt is reduced by way of
– a donation (as defined in s 55(1)), or
– a deemed donation in terms of s 58
and effective for years of assessment beginning on or after 1 January 2019, in respect of which
donations tax is payable (see chapter 26)
(This is excluded since it will qualify as a donation for donations tax purposes and as such will
already be taxed. Therefore, the debt benefit must arise due to commercial reasons (that is the
inability to pay on the side of the person owing the debt) and should not constitute a donation or
a deemed donation. If, however, the amount is exempt from donations tax, resulting in no dona-
tions tax being payable, it will not be excluded from possible recoupment under this section.)
l to his employer, to the extent that it will be a taxable fringe benefit under par 2(h) of the Seventh
Schedule (employee debt is discharged by the employer – see chapter 8)
l to another company in the same group and the company (referred to as the dormant company)
owing the debt has not carried on a trade in the current or previous year of assessment (this
mirrors the exclusion for the waiver of debt regarding capital or allowance assets for group
companies (contained in par 12A(6)(d) of the Eighth Schedule – see chapter 17)).
This exclusion will not apply to debt
– that arose directly or indirectly to fund expenditure for an asset that was later disposed of
under the corporate roll-over relief provisions (as part of an asset-for-share, amalgamation,
intragroup transaction or a liquidation distribution under ss 42, 44, 45 or 47 respectively – see
chapter 20), or
– incurred by the dormant company to settle, take over, refinance or renew, directly or indi-
rectly, any debt of another company that forms part of the same group, or a CFC of the dor-
mant company that forms part of the same group of companies, or
l to another company in the same group and reduces or settles the debt, directly or indirectly, with
shares issued in the company owing the debt (the debtor)
This exclusion will not apply to debt
– incurred when the debtor was not part of the same group of companies, or
– that is settled or reduced by the issuing of shares in the debtor at a time when the debtor was
not part of the same group of companies, or
l to the extent that the debt owed is settled either by way of
– converting that debt into, or exchanging that debt for, shares in the debtor company, or
– applying the proceeds of shares issued by the debtor company
and does not represent an amount of interest (as defined in s 24J(1) – see chapter 16) incur-
red and owed by the debtor during any year of assessment (s 19(8)).
Remember
Section 19 does not apply to a debt benefit that is a bequest, a donation or a deemed donation
(if donations tax was payable) or a taxable employer-employee fringe benefit. It will also not
apply to certain debt benefits arising due to debt owing between companies in the same group.
475
What will the implications be if s 19 is applicable?

Although the scope of s 19 has been extended and some specific exclusions (debt between group
companies where one party is dormant and certain share issues in exchange for debt) have
been added (effective for years of assessment commencing on or after 1 January 2018), the tax
implications of the section were not affected. The discussion below will therefore apply to both a
reduction amount (for years of assessment commencing before 1 January 2018) as well as a debt
benefit arising from a debt owed due to a concession or compromise (for years of assessment com-
mencing on or after 1 January 2018). To simplify the discussion below, only the term ‘debt benefit’ will
be used (since this will also include a reduction amount).
Tax deductible expenses Î Debt benefit recouped

(ss 19(5) and 8(4)(a))
OR
Trading stock Î Debt benefit applied to reduce cost of trading stock
General rule (s 19(3)) and any excess of debt benefit recouped
(ss 19(4) and 8(4)(a))
OR
Allowance assets Î Debt benefit applied to reduce base cost of an asset
(par 12A) and any excess of debt benefit recouped (ss 19(6) and 8(4)(a))
(Also see schematic summary of general rule at end of 13.10.7)
Debt benefit used to fund other expenditure

If a debt benefit regarding a debt owed by a person arises and
l the amount of the debt is owed in respect of, or was used to fund expenditure other than expen-
diture incurred for
– trading stock (held and not disposed of at the time of the debt reduction), or
– an allowance asset,
the debt benefit must, to the extent that an allowance or deduction was allowed under this Act, be
deemed to be a recoupment in income (under s 8(4)(a)) in the year that the debt benefit arises
(s 19(5)).
Example 13.37. Debt benefit regarding a debt used to fund other expenditure
On 1 March 2022, Norush (Pty) Ltd owes a debt of R500 000. Norush (Pty) Ltd has used the debt
to fund ordinary operating expenses (for example salaries), all of which are tax deductible under
s 11(a). Norush (Pty) Ltd’s creditors discharges the R500 000 of debt, due to Norush (Pty) (Ltd)’s
inability to pay.
Calculate the tax implications for Norush (Pty) Ltd of the debt compromise for the year of assess-
ment ending on 31 December 2022.
SOLUTION
Year ending 31 December 2022
The debt benefit of R500 000 is not in respect of trading stock or allowance assets
and will therefore be treated as a recoupment of the deductions previously allowed
under s 11(a) and will have to be included in income, but limited to the previous
deductions allowed (s 19(5)).
Tax deductible expenditure (s 11(a))........................................................................... (R500 000)
Recoupment – debt benefit (s 19(5) read with s 8(4)(a)) ............................................. R500 000
476
Debt benefit used to fund trading stock

If a debt benefit arises on a debt owed by a person and
l the amount of the debt is owed in respect of, or was used to fund expenditure in respect of
trading stock
l that is held and not disposed of by the taxpayer at the time the debt benefit arises,
the debt benefit amount must be applied to reduce the deduction previously claimed for the trading
stock as either opening stock (s 22(2)), closing stock (s 22(1)) or the purchase price (s 11(a))
(s 19(3)).
The cost price reduction will therefore only apply to the extent that the borrowed funds were owed in
respect of, or were used in respect of trading stock still held and only to the extent that the trading
stock has a remaining cost price. The debt could therefore have been used to fund any expenditure
in respect of trading stock (for example, expenditure to fund improvement in production) and not only
the acquisition cost of the trading stock.
The amount by which the debt benefit amount exceeds the cost price of the applicable trading stock,
will be deemed to be a recoupment for purposes of s 8(4)(a) in the year that the debt benefit arises
(s 19(4)).
Example 13.38. Debt benefit regarding a debt used to fund trading stock
On 1 June 2022, Nocash (Pty) Ltd owes a debt of R500 000. Nocash (Pty) Ltd has trading stock
of R430 000, on that date, purchased during the year. Nocash (Pty) Ltd’s creditors discharge the
R500 000 of debt due to Nocash (Pty) (Ltd)’s inability to pay. Of the debt owing, R430 000 stems
from trading stock held and the other R70 000 relates to trading stock previously held.
Calculate the tax implications for Nocash (Pty) Ltd of the debt compromise for the year of
assessment ending on 31 December 2022.
SOLUTION
The amount of the debt benefit regarding the debt owing of R500 000 will first be
applied to reduce the cost price of the trading stock still held at the time of the
discharge of the debt. The deduction for the trading stock purchased under s 11(a) will
be reduced to Rnil. Therefore, R430 000 of the debt benefit is applied against the
purchase price of the stock still on hand at date of the discharge of the debt. The
trading stock of which the cost price was reduced to Rnil, will accordingly not have any
value for tax purposes if still on hand at year-end. Note that no reduction is made
against the R70 000 of trading stock already sold, since it is no longer part of trading
stock at the time of the discharge of the debt, as required under s 19(3).
Purchase of trading stock (s 11(a)) ............................................................................. (R430 000)
Debt benefit under s 19(3) ........................................................................................... R430 000
The remaining R70 000 of the debt benefit will be a deemed recoupment in income
under s 8(4)(a) (s 19(5) applicable since the trading stock is no longer held).
Recoupment (s 8(4)(a))................................................................................................ R70 000
Debt benefit used to fund allowance assets (applicable to all allowance assets for years of assessment
commencing before 1 January 2019 and to allowance assets not disposed of in a prior year of assess-
ment for years of assessment commencing on or after 1 January 2019)
If a debt owed by a person is reduced and
l the amount of the debt is owed in respect of, or was used to fund expenditure in respect of an
allowance asset
l that was not disposed of in a year of assessment prior to that in which that debt benefit arises,
the debt benefit must, to the extent that it exceeds
l the deductions or allowances that were claimed and granted in terms of the Act in respect of the
expenditure, plus
l the amount used in terms of par 12A of the Eighth Schedule (see chapter 17) to reduce the base
cost of the allowance asset to zero (base cost reduction)
be deemed to be a recoupment in income (under s 8(4)(a)) in the year that the debt benefit arises
(s 19(6)).
The debt could have been used to fund any expenditure in respect of the allowance asset and not
only the acquisition cost of the allowance asset.
477
Allowance asset means a capital asset in respect of which a deduction or allow-

Please note! ance is allowable in terms of the Act for purposes other than the determination of
any capital gain or loss (therefore assets on which allowances can be claimed
(defined in s 19(1)).
Remember
If a debt benefit relates to a debt to fund an allowance asset that was not disposed of in a year of
assessment prior to that in which that debt benefit arises, first apply the debt benefit to reduce
the base cost of the asset to Rnil (in terms of par 12A of the Eighth Schedule (see chapter 17)),
then recoup the remainder of the debt benefit under s 8(4)(a).
Example 13.39. Debt benefit regarding a debt used to fund an allowance asset (asset
still held at time of debt reduction)
On 1 June 2022, Nofuss (Pty) Ltd borrows R1 500 000 to acquire a new plant. Nofuss (Pty) Ltd
purchased the plant for a total cost of R1 450 000 and used the remaining R50 000 of debt to
fund tax-deductible administrative expenses. Nofuss (Pty) Ltd has claimed allowances of
R725 000 on the asset, at the stage when Nofuss (Pty) Ltd’s creditors discharge the R1 500 000
of debt, due to Nofuss (Pty) (Ltd)’s inability to pay. Nofuss (Pty) Ltd still held the plant at the date
on which the debt was discharged (i.e., within the same year of assessment).
Calculate the tax implications for Nofuss (Pty) (Ltd) of the debt benefit arising due to the debt
discharge for the year of assessment ending on 31 December 2022.
SOLUTION
The amount of the debt benefit of R1 500 000 was used to fund tax-deductible
expenses of R50 000 and the plant of R1 450 000. The amount of the debt benefit
of R50 000 is not in respect of trading stock or allowance assets and will therefore
be treated as a recoupment of the deductions previously allowed under s 11(a)
and will have to be included in income, but limited to the previous deductions
allowed (s 19(5)).
Recoupment under s 19(5) read with s 8(4)(a) ............................................................ R50 000
The remaining amount of the discharge of the debt (debt benefit) of R1 450 000
will first be applied against the base cost of the asset (in terms of par 12A of the
Eighth Schedule) which will be reduced to Rnil; the base cost being R1 450 000
less the allowances claimed of R725 000, thus a base cost reduction of R725 000.
The remaining debt benefit of R725 000 (R1 450 000 – R725 000 (debt benefit
applied against base cost of asset)) will be recouped in income (s 19(6)).
Note
The claiming of any further allowances on the plant will be prohibited under s 19(7)). It is sub-
mitted that if the plant is later disposed of for an amount of R1 200 000, no recoupment will be
realised (selling price will be limited to Rnil (as the debt relating to the purchase price was
discharged in full) less the tax value of Rnil (R1 450 000 – R725 000 (allowances claimed) –
R725 000 (debt benefit)). A taxable capital gain of R1 200 000 (proceeds of R1 200 000 less a
Rnil base cost (the base cost was reduced to Rnil when the discharge of the debt took effect))
will, however, be realised (par 12A of the Eighth Schedule (see chapter 17)).
478
Debt benefit used to fund allowance assets disposed of in a prior year of assessment (effective for
years of assessment commencing on or after 1 January 2019)
If a debt owed by a person is reduced and
l the amount of the debt is owed in respect of, or was used to fund expenditure in respect of an
allowance asset
l that was disposed of during a year of assessment prior to the year of assessment in which that
debt benefit arises, the debt benefit must, to the extent that
l the amount of a recoupment of deductions or allowances that would have applied if the debt
benefit was taken into account in the same year of assessment in which the actual disposal
occurred, exceeds
l the amount of the recoupment that was actually recovered during the year of assessment in
which the actual disposal occurred, but without taking the debt benefit into account,
will be deemed to be a recoupment in income (under s 8(4)(a)) in the year that the debt benefit arises
(s 19(6A)).
Remember
If a debt benefit relates to a debt used to fund an allowance asset that was disposed of during a
year of assessment prior to that in which that debt benefit arises, the difference between the
amount of the recoupment that would have applied if the debt benefit was taken into account
during the same year of assessment in which the allowance asset was disposed, and the amount
of the recoupment without having regard to the debt benefit, will qualify as a s 8(4)(a) recoup-
ment to be included in the debtor’s income (s 19(6A)). If, in the same scenario, by taking the
debt benefit into account, it results in a capital gain or capital loss that would be different from
the actual capital gain or capital loss realised during the year of assessment in which the asset
was disposed of, that difference needs to be treated as a capital gain in the hands of the debtor
during the year of assessment in which the debt benefit arises (par 12A of the Eighth Schedule –
see chapter 17).
If a debt benefit arises, the total amount of allowances and deductions allowable to the taxpayer may,
in future, not exceed an amount equal to the total expenditure incurred regarding an allowance asset
(the cost), reduced by the sum of
l the debt benefit, and
l the total of all deductions and allowances previously claimed (s 19(7)).
Example 13.40. Debt benefit regarding a debt used to fund an allowance asset (asset
disposed of in a prior year of assessment)
The information provided in the previous example was adapted to illustrate the difference in the
tax treatment of a debt reduction if an allowance asset is held at the time of the debt reduction
(previous example), or if it has been disposed of in a previous year of assessment (this example):
On 1 June 2021, Nofuss (Pty) Ltd borrows R1 500 000 to acquire a new plant. Nofuss (Pty) Ltd
purchased the plant for a total cost of R1 450 000 and used the remaining R50 000 of debt to
fund tax-deductible administrative expenses. Nofuss (Pty) Ltd has claimed allowances of
R725 000 on the asset when, on 31 December 2021, Nofuss (Pty) Ltd sold the plant for
R1 250 000.
On 30 June 2022 Nofuss (Pty) Ltd’s creditors discharge the R1 500 000 of debt due to Nofuss
(Pty) Ltd’s inability to pay.
Calculate the tax implications for Nofuss (Pty) Ltd of the debt benefit arising due to the debt
discharge for the year of assessment ending on 31 December 2022.
479
SOLUTION
The amount of the debt benefit of R1 500 000 was used to fund tax-deductible
expenses of R50 000 and the plant of R1 450 000. The amount of the debt benefit
of R50 000 is not in respect of trading stock or allowance assets and will therefore
be treated as a recoupment of the deductions previously allowed under s 11(a) and
will have to be included in income, but limited to the previous deductions allowed
(s 19(5)).
If the debt benefit was taken into account in the year that the allowance asset was
disposed of (2021), the remaining amount of the discharge of the debt (debt bene-
fit) of R1 450 000 would first be applied against the base cost of the asset (in terms
of par 12A of the Eighth Schedule) which will be reduced to Rnil; the base cost
being R1 450 000 less the allowances claimed of R725 000, thus a base cost
reduction of R725 000. The remaining debt benefit of R725 000 (R1 450 000 –
R725 000 (debt benefit applied against base cost of asset)) would then be recouped
in income, which would have amounted to a recoupment of R725 000 (if the debt
was discharged when the asset was still held). The actual recoupment, without
taking into account the debt benefit, on disposal of the asset in 2021 amounted to
R525 000 and would have been recouped under s 8(4)(a) (R1 250 000 (selling
price) – R725 000 (tax value of the asset)). In terms of s 19(6A), an amount of
R200 000, being the difference between the actual recoupment on disposal in
2021 (R525 000) and the recoupment if the debt benefit was taken into account in
the same year (2021) as the disposal of the asset (R725 000), will be taxed as a
deemed recoupment under ss 19(6A) and 8(4)(a).
Recoupment under s 19(6A) read with s 8(4)(a) ......................................................... R200 000
(For capital gains purposes, if the debt benefit was taken into account in the year
that the allowance asset was disposed of, the proceeds would equal the selling
price of R1 250 000 (note that the s 19(6) recoupment (R725 000) is not adjusted in
the proceeds calculation as this is a deemed recoupment in terms of s 19 and not
an actual recoupment for capital gains purposes (par (iii) of proviso to s 8(4)(a))
and the base cost would be Rnil (R1 450 000 (cost) less R725 000 (allowances
claimed) less R725 000 (base cost reduction under par 12A)), thus a capital gain of
R1 250 000 (par 12A). Actual capital gain (without the debt reduction) in the year of
disposal was Rnil, since proceeds were R725 000 (R1 250 000 (selling price) less
actual recoupments of R525 000) and the base cost was also R725 000 (R1 450 000
(cost) less R725 000 (allowances claimed)). The deemed capital gain under
par 12A(4) of the Eighth Schedule would therefore be R1 250 000, being the
difference between the capital gain if the debt benefit was taken into account in the
same year (R1 250 000) and the actual capital gain on disposal (Rnil) (see chap-
ter 17).)
The interaction between s 19 and par 12A of the Eighth Schedule (see chapter 17), as well as the
steps to be followed in the application of the debt benefit as a result of a concession or compromise
regarding a debt for years of assessment commencing before 1 January 2019 (see the 2019 edition
of Silke for a detailed discussion of the legislation relating to years of assessment commencing before
1 January 2018), can be illustrated as follows:
Section 19 Paragraph 12A
Tax deductible Trading stock: Allowance assets: Capital assets (not

expenses: allowance assets):
1. Debt benefit 1. Debt benefit
1. Debt benefit applied to reduce applied to reduce 1. Debt benefit
recouped under cost of trading base cost of applied to reduce
s 19(5) and stock (s 19(3)) allowance asset base cost
s 8(4)(a) 2. Excess of debt (par 12A) (par 12A)
benefit recouped 2. Excess of debt 2. Excess debt
under s 19(4) and benefit recouped benefit applied to
s 8(4)(a) under s 19(6) and reduce assessed
s 8(4)(a) capital loss
(par 12A)
3. Any excess of the
debt benefit left will
have no tax effect
480
The interaction between s 19 and par 12A of the Eighth Schedule (see chapter 17), as well as the steps to be
followed in the application of the debt benefit as a result of a concession or compromise regarding a debt for
years of assessment commencing on or after 1 January 2019, can be illustrated as follows:
Section 19 Paragraph 12A
Tax deductible Trading stock: Allowance assets: Capital assets (not

expenses and/or 1. Debt benefit l Asset still held allowance assets):
trading stock already applied to reduce during the year of
sold at the date that cost of trading assessment in l Asset still held
the debt benefit is stock (s 19(3)) which the debt during the year of
received: benefit arises: assessment in
2. Excess of debt which the debt
1. Debt benefit benefit recouped 1. Debt benefit
recouped under applied to reduce benefit arises:
under s 19(4) and
s 19(5) and s 8(4)(a) base cost of Debt benefit
s 8(4)(a) allowance asset applied to reduce
(par 12A) base cost (par 12A)
2. Excess of debt l Asset disposed of
benefit recouped in a year prior to
under s 19(6) and the year of assess-
s 8(4)(a) ment in which the
debt benefit arises:
l Asset disposed of
in a year prior to Difference between
the year of assess- the recalculated
ment in which the capital gain or loss
debt benefit arises: (taking into account
1. Difference between prior debt benefits)
the actual recoup- and actual capital
ment on disposal gain or loss on
and the recoup- disposal included
ment if the debt as capital gain in
benefit was taken year when debt
into account when benefit arises
calculating this (par 12A)
recoupment will be
taxed as a recoup-
ment under
ss 19(6A) and
8(4)(a).
2. Difference between
the recalculated
capital gain or loss
(taking into
account prior debt
benefits) and
actual capital gain
or loss on disposal
included as capital
gain in year when
debt benefit arises
(par 12A)
481
Interpretation Note No. 91 (issued on 21 October 2016) contains detailed

Please note! explanations and more than 40 examples that further clarify the tax implications
on the reduction of a debt, including the interaction between s 19 and par 12A of
the Eighth Schedule (see chapter 17).
13.11 Alienation, loss or destruction allowance (s 11(o))

When a taxpayer disposes of an asset on which allowances were previously granted for tax pur-
poses, there might be the possibility of claiming a s 11(o) allowance, if:
Proceeds (limited to original cost price) – Tax value = a negative amount.
When will s 11(o) be applicable?

This allowance will be available
l at the election of the taxpayer
l for qualifying depreciable assets
l used by him for the purposes of his trade
l that have been alienated, lost or destroyed
l during the year of assessment.
To alienate an asset means that ownership is transferred. The withdrawal of an asset from production
will not qualify as alienation since the taxpayer retains ownership. A depreciable asset that is donated
for purposes of trade will be an ‘alienated’ asset and will qualify for the allowance. If not donated for
trade, the allowance will be disallowed (s 23(g) – see chapter 6).
The meaning of the word ‘loss’ was considered in Joffe & Company (Pty) Ltd v CIR. It was stated that
the word signifies a deprivation suffered by the loser, usually involuntarily. In contrast, expenditure
usually refers to a voluntary payment of money. The New Shorter Oxford English Dictionary defines
the word ‘loss’ as ‘perdition, ruin, destruction, the state of fact being destroyed or ruined’. It will also
refer to the theft of an asset (although no proceeds are received, the s 11(o) allowance can be
claimed on the theft of an uninsured asset).
‘Destruction’ is defined in the New Shorter Oxford English Dictionary as
‘1. the action of destroying, demolition, devastation, slaughter,
2. the fact or condition of being destroyed: ruin.
3. a means of destroying; a cause of ruin.’
(Interpretation Note No. 60 (Issue 2) (issued on 29 September 2017))
Qualifying depreciable assets for the purposes of s 11(o):

l A ‘depreciable asset’ is discussed in 13.2.4.
l Qualifying depreciable assets are (s 11(o)(i)):
– machinery, plant, implements, utensils and articles that qualified for the
wear-and-tear allowance under s 11(e)
– machinery, implements, utensils and articles that qualified for the allowance
under s 11D (scientific or technological research and development)
– machinery, implements, utensils and articles that qualified for the allowance
Please note! under s 12B (farming and generation of renewable energy)
– machinery, plant, implements, utensils, articles, aircraft or ships that quali-
fied for the s 12C allowance
– rolling stock that qualified for the allowance under s 12DA
– plant and machinery of small business corporations that qualified for the
allowance under s 12E, and
– an environmental treatment and recycling asset that qualified for the allow-
ance under s 37B(2)(a)
provided that the expected useful life of the asset for tax purposes (deter-
mined from the date of original acquisition) did not exceed 10 years.
The s 11(o) allowance will not be available if the amount received or accrued on the alienation, loss
or destruction, was received from a connected person to the taxpayer (second proviso to s 11(o)).
482
Remember
l The s 11(o) allowance is only available on election of the taxpayer, if not elected, it will result
in a capital loss (under the Eighth Schedule).
l It is only applicable to qualifying depreciable assets with an expected useful life for normal
tax purposes that does not exceed ten years as determined from the date of original acquisi-
tion (and not the date brought into use). (A new manufacturing machine qualifying for the
s 12C allowance, will have an expected useful life of four years for tax purposes (40:20:20:20)
although it may in reality have an expected useful life of 12 years (Interpretation Note No. 60
(Issue 2)).)
l The s 11(o) allowance applies only to assets that are alienated, lost or destroyed, and is not
available if assets are taken out of production (i.e., mothballed).
l The allowance is not available if
– the asset has never been used
– the disposal did not take place in the year of assessment in which a claim for the allow-
ance was made, or
– if the asset was sold to a connected person in relation to the taxpayer.
What will the implications be if s 11(o) is applicable?
Allowance = Cost – (amount received/accrued plus allowances claimed)

General rule OR
Allowance = Tax value less proceeds
If s 11(o) is elected, a deduction from the income of a taxpayer will be allowed, it will be calculated as
follows and will be allowed (thus a revenue loss can be claimed) if the answer to the calculation is
positive:
The cost of the asset (see below)
EXCEEDS
The SUM of:

l the amount received or accrued from the alienation, loss or destruction (proceeds)
AND
l the allowances or deductions allowed or deemed to have been allowed in respect
of the asset in the current and any previous years of assessment.
The reference to the deduction of a ‘deemed allowance’ implies that if a taxpayer used an asset and
for some reason he could not claim an allowance (for example it was not used in his trade), the cost
is reduced by the deemed allowance, although no actual deduction for the allowance could be
claimed.
The cost of an asset for calculation of the s 11(o) allowance is
l for any machinery, implement, utensil or article, deemed to be
– the actual cost to the taxpayer to acquire that asset
Please note! (deemed to be the direct cost of the acquisition of the asset, including
the direct cost of its installation or erection, if acquired in an arm’s-length
transaction (proviso (bb) to s 11(o))
– plus moving cost (see 13.10.3).
483
The calculation of the allowance upon the alienation, loss or destruction of an asset may be illustrated
as follows:
Example 13.41. Basic calculation of a s 11(o) deduction

Loser Ltd originally purchased Machine A for business purposes for R800 000 as a replacement
for Machine B during 2017 (on which a recoupment of R200 000 was realised and which was
deferred under s 8(4)(e)). During the useful life of the machine, R20 000 was spent to move the
machine to another location. Section 11(e) allowances of R600 000 were claimed on the machine
until date of disposal. The machine was disposed of for R100 000.
Calculate the s 11(o) allowance available to Loser Ltd on Machine A.
SOLUTION
(i) Original cost of machine.................................................................................... R800 000
(ii) Add:
Expenditure incurred on moving the machine from one location to another ....... 20 000
Deemed cost ..................................................................................................... R820 000
Less:
(a) Allowances deducted in the current and previous years of
assessment ................................................................................ R600 000
(b) The amount received or accrued from the alienation, loss or
destruction of the asset .............................................................. 100 000
(700 000)
Section 11(o) allowance ............................................................. R120 000
Note
If the items (a) and (b) in the example exceed the sum of items (i) to (ii), it follows that a profit has
been made on the sale or disposal of the asset. To the extent to which this profit represents a
recoupment of allowances previously made, it is included in the taxpayer’s income as a taxable
recoupment in terms of s 8(4)(a), unless the recoupment is deferred in terms of s 8(4)(e) (see 13.10).
l A portion of the s 11(o) allowance must be disregarded if an asset was pre-

viously used for private purposes. The adjustment can be made by deter-
mining the market value of the asset at the time it is introduced into the busi-
ness and using this value as cost (Interpretation Note No. 60 (Issue 2)
(issued on 29 September 2017)).
l When calculating the capital gain or loss on an asset under the Eighth
Schedule, the s 11(o) allowance will be deducted from the base cost
(par 20(3)(a) of the Eighth Schedule – see chapter 17).
l If an asset, used partly for trading purposes and partly for private purposes,
Please note! is disposed of, the full s 11(o) allowance must be granted. The section does
not require that an asset must be used exclusively or mainly for the purposes
of trade. In practice, however, the full allowances for wear and tear or,
presumably, the s 12B or 12C allowances, and the full s 11(o) allowance, are
determined, and the estimated percentage applicable to the private use of
the asset is disallowed (under s 23(g)) (see example below).
l Sections 23A (the section limits the s 11(o) allowance to rental income
derived from ‘affected’ assets) and 23D (limitations relating to sale and
leaseback assets) will, if all the provisions apply, impose restrictions for the
lessor on the allowance available under s 11(o) (see 13.7.5 and 13.7.6).
484
Example 13.42. Section 11(o) allowance: Asset used partly for trade and partly for
private purposes
An asset costing R10 000 is used 50% for trading purposes and 50% for private (non-trading)
purposes. The total wear and tear is determined as follows:
2021 ................................................................................................................................ R2 000
2022 ................................................................................................................................ R1 600
End of year 2023 ............................................................................................................. R1 280
The asset is then disposed of for R3 000.
Calculate the s 11(o) allowance that will be allowed.
SOLUTION
The following is a method that may possibly be employed to calculate the allowances:
Wear and tear (s 11(e)):
2021 ...................................................................................................... R1 000 (50% of R2 000)
2022 ...................................................................................................... R800 (50% of R1 600)
2023 ...................................................................................................... R640 (50% of R1 280)
The total s 11(o) allowance would be R2 120 (R10 000 – (R4 880 (R2 000 + R1 600 + R1 280) +
R3 000 (selling price))) if the asset were used exclusively for trading purposes, but since the
asset is used 50% for private purposes, only 50% of R2 120 that is, R1 060, will be allowed as a
deduction.
An asset acquired for no consideration will not qualify for s 11(o) since the asset does not have a cost
13.11.1 Limitation of losses from disposal of certain assets (s 20B)

A s 11(o) allowance will be disregarded (not be allowed) if the full consideration for a disposal does
not accrue to a person in the current year of assessment (s 20B(1)). This could happen, for example,
where an asset is disposed of for an unquantified consideration (under s 24M – see 13.10). In some
instances, this disposal can trigger an initial loss for the transferor (although the total proceeds (when
received) will not result in a loss), as a part or the whole of the consideration will only become
quantifiable during a following year(s). These initial losses will then be deferred (s 20B(1)) until further
consideration is received in a following year.
The disregarded s 11(o) allowance will be deductible in a following year, to the extent that any
consideration received from that disposal is included in the taxpayer’s income in that following year
(s 20B(2)).
Any remaining s 11(o) allowance will be deductible in full if the taxpayer can prove that no further
consideration will accrue to him in respect of that disposal (s 20B(3)).
Example 13.43. Limitation of s 11(o) allowance

During the 2022 year of assessment, Helper Ltd (with a March year-end) sold a manufacturing
machine to Support (Pty) Ltd. The machine originally had a cost price of R500 000 and tax
allowances of R400 000 have been deducted for normal tax purposes on this machine. The terms
of the sale were a cash amount of R50 000 on date of sale and then 10% of the value of products
produced by the machine for the subsequent two years. Assume that the amounts eventually
received were R20 000 (2023) and R25 000 (2024).
Calculate the implications of the above transaction for Helper Ltd for the 2022, 2023 and 2024
years of assessment.
485
SOLUTION
Year ending 31 March 2022
Section 11(o) allowance (R500 000 – (R400 00 + R50 000) = R50 000, but the allow-
ance is disregarded under s 20B(1) as the full consideration has not yet accrued to
Helper Ltd. .................................................................................................................... –
Proceeds on sale realised are R20 000 for 2023, but this will not be included in
income. It will be set off against the disregarded s 11(o) allowance carried forward
from 2022 (s 20B(2)):
R50 000 (s 11(o) – 2022) – R20 000 (proceeds – 2023)
= R30 000 (balance of s 11(o) allowance to be carried forward to 2024). ................... –
Proceeds on sale realised are R25 000 for 2024, but this will not be included in
income. It will be set off against the balance of the disregarded s 11(o) allowance
carried forward from 2023 (s 20B(2)):
R30 000 (balance of s 11(o) allowance – 2023) – R25 000 (proceeds – 2024)
= R5 000 (balance of s 11(o) allowance).
This allowance will be allowed as a deduction from income in 2024, as the full con-
sideration has accrued to Helper Ltd during 2024 (s 20B(3)). ..................................... (5 000)
13.12 Summary
13.12.1 Comparison between ss 11(e), 12C and 13

The allowances that are claimed most often in the manufacturing environment are
l s 11(e) – wear-and-tear allowance (see 13.3.1)
l s 12C – movable assets used by manufacturers, for research and development or by hotel-
keepers, and ships, aircraft and assets used for the storage and packing of agricultural products
(see 13.3.3)
l s 13 – allowance on buildings and improvements (see 13.4.1).
Each of the above allowances has certain criteria that have to be met before it can be used.
The following table can be used for quick reference purposes:
Section 11(e) Section 12C Section 13

Type of l machinery, l machinery or plant l buildings (and certain
asset l plant, owned by the taxpayer improvements)
and used directly by the l used wholly/ mainly for a
l implements,
taxpayer or lessee in a process of manufactur-
l utensils and articles process of manufacture ing or research and
used by the taxpayer in his (or similar process) and development (or a pro-
trade (not buildings, only used for trade purposes cess which is similar in
movable assets) or improvements thereto nature) in the course of
his trade
l machinery or plant
owned by the taxpayer
and used under a sup-
ply agreement by a
components supplier in
the Automotive industry
(where grants under the
11th Schedule are re-
ceived) in a process of
manufacture and used
for trade purposes or
improvements thereto
continued
486
Section 11(e) Section 12C Section 13

l new or unused machin-
ery or plant owned by
the taxpayer and used
directly by the tax-payer
for purposes of re-
search and develop-
ment or improvements
thereto
l ships or aircraft
Allowance l owner of asset or pur- l owner of asset or pur- l owner
claimed chaser (under a sus- chaser (under a sus- l lessor
by pensive sale agree- pensive sale agree- l lessee
ment) ment)
l lessor if leased under a l lessor if leased under a
financial lease and used financial lease and
for trade purposes used directly in manu-
facturing process
Value of Includes: The LESSER of: Includes:
asset value at time of acquisition l the actual cost to the ‘cost’ = cost for taxpayer
(excluding input VAT if it can taxpayer, and (excluding input VAT if it
be claimed) l the cash cost in an can be claimed)
Plus: installation/erection arm’s-length transaction Less: initial allowance (if
costs (excluding input VAT if it applicable)
Plus: cost of foundation/sup- can be claimed) Less: s 13(3) recoupment (if
porting structure Plus: installation/erection chosen by taxpayer)
Plus: moving cost costs Less: s 11(g) allowance
Excludes: Plus: cost of foundation/ claimed
finance charges, value of skill supporting structure
and labour where the tax- Plus: moving cost
payer constructed the asset Excludes:
finance charges
Write-off Write-off periods according Starts when first BROUGHT Various allowance depend-
period to the list issued by the INTO USE ing on when erection started
Commissioner in a public New or unused on or after After 30 September 1999:
notice (Binding General 1/03/2002: 5%
Ruling No. 7 and Inter- 40%/20%/20%/20%
pretation Note No. 47) differ Ships/Aircraft/Second-hand:
for each type of asset 20% for five years
(small items < R7 000 write
off in full to R1)
Apportion- If only used for a part of the Do NOT apportion Do NOT apportion
ment year, apportion for the
period of the year that the
asset was used
Recoup- Recoupment of allowances previously grant- Recoupment of allowances previously grant-
ment / ed if sold for more than the tax value ed if sold for more than the tax value
s 11(o) Deductible s 11(o) allowance if sold for less NO s 11(o) allowance available if sold for
allowance than the tax value (but disallowed if to a less than the tax value
connected person)
487
13.13 Comprehensive examples
Example 13.44. Capital allowances

Matlapu Ltd (a manufacturer approved by the Commissioner) with a February year-end acquired
and brought the following assets into use:
Motor car on 1 October 2017 costing ............................................................................ R240 000
Machine A (second-hand) on 1 November 2016 costing .............................................. R960 000
Machine B (new and unused) on 1 February 2018 costing ........................................... R900 000
The company also erected a new factory, which was commenced on 1 March 2017 and
completed and brought into use on 31 January 2018, at a cost of R10 000 000 (excluding the
land, which cost R1 500 000).
Additional information:
(1) Machine A was destroyed by fire on 31 August 2018. R1 000 000 was received from the
insurance company.
(2) Machine B was sold on 31 October 2018. The proceeds from the sale amounted to R80 000.
(3) Machine C was acquired on 1 December 2018 to replace Machine A at a cost of R1 392 000.
(4) The motor car was destroyed on 31 January 2022 and realised R10 000.
(5) Machine C was sold on 31 August 2021, the proceeds from the sale amounting to R1 250 000.
(6) The factory premises were sold on 30 November 2025 for R11 500 000 (including R2 000 000
received for the sale of the land). Hired premises were occupied from that date.
Calculate the various allowances to which Matlapu Ltd is entitled on the various assets acquired
for the different years of assessment up to and including the year ending on 28 February 2026,
including any s 11(o) allowance or taxable recoupment (Ignore VAT). Assume that the motor car
qualifies for a five year write off period in terms of Interpretation Note No. 47. The plant qualifies
for the s 12C allowance and the premises qualify for a 5% annual allowance.
SOLUTION
MOTOR CAR
Original cost (1 October 2017) ................................................................................... R240 000
Less: 20% wear and tear 2018 tax year (5 months) .................................................. (20 000)
R220 000
Less: 20% wear and tear (2019 tax year) (on R240 000) ...................... R48 000
20% wear and tear (2020 tax year) (on R240 000) ...................... 48 000
20% wear and tear (2021 tax year) (on R240 000) ...................... 48 000
20% wear and tear (2022 tax year) (11 months) (on R240 000) .. 44 000
(188 000)
Income tax value 31 January 2022 ............................................................................. R32 000
Since the motor car was destroyed in the 2022 tax year, a s 11(o) allowance of R22 000 must be
granted, namely:
Original cost ................................................................................................................... R240 000
Less: Total amount of the wear-and-tear allowances previously granted R208 000
Proceeds of sale .............................................................................. 10 000
(218 000)
Alienation, loss or destruction allowance (s 11(o)) ........................................................ R22 000
Had the motor car been sold for R100 000, there would have been no alienation, loss or destruc-
tion allowance in terms of s 11(o) but there would have been a taxable recoupment of wear-and-
tear allowances previously granted in terms of s 8(4)(a) amounting to R68 000; that is:
Proceeds of sale 31 January 2022 ................................................................................ R100 000
Less: Income tax value at 31 January 2022................................................................... (32 000)
Taxable recoupment ...................................................................................................... R68 000
continued
488
The whole profit of R68 000 constitutes a taxable recoupment, since the wear-and-tear allow-
ances previously granted amount to R208 000. If the motor car had been sold for R250 000, the
recoupment would have been calculated as follows:
Proceeds........................................................................................................................ R250 000
Less: Income tax value .................................................................................................. (32 000)
Profit on sale .................................................................................................................. R218 000
The recoupment may not exceed R208 000, i.e., the amount of the wear-and-tear allowances
previously granted. The balance of the profit, R10 000, is a profit of a capital nature and will be
subject to income tax under the provisions of the Eighth Schedule as a capital gain.
Notes
(1) In the 2018 and 2022 years of assessment, the wear-and-tear allowance is proportionately
reduced, since the asset was used for only a portion of the year of assessment.
(2) In terms of s 11(e) a taxpayer is entitled to the wear-and-tear allowance up to the date of
sale of an asset. From a practical point of view, it is not always necessary to make the
allowance from the beginning of the year of assessment to the date it is destroyed, since to
do so will not result in any advantage to the taxpayer. If the calculation is made as in the
example above, resulting in an additional allowance, this will be offset by either a corres-
ponding reduction in the s 11(o) allowance or a corresponding increase in the taxable
recoupment. The wear-and-tear allowance should be claimed to the date of sale if a recoup-
ment arises that is not taxed in the year of sale by virtue of the provisions of s 8(4)(e).
MACHINE A
Original cost (1 November 2016) ................................................................................... R960 000
Less: Section 12C allowance (2017 tax year) (20% of R960 000) .......... R192 000
Section 12C allowance (2018 tax year) (20% of R960 000) .......... 192 000
(576 000)
Income tax value 31 August 2018 ................................................................................. R384 000
The s 12C 20% straight-line allowance is granted in full in the 2017, 2018 and 2019 years of
assessment, even though the machine was used for only part of the year in 2017 and 2019. Since
R1 000 000 was recovered from the insurance company, the s 12C allowances totalling R576 000
have been recouped, but if the taxpayer elects the provisions of par 65 or 66 of the Eighth
Schedule, s 8(4)(e) applies and the amount of R576 000 is not included in his income in the 2019
tax year. The recoupment is deferred and included in income in subsequent years in proportion
to the s 12C allowances applicable to Machine C, that is
2019 tax year (R576 000 × 40%) ................................................................................... R230 400
2020 tax year (R576 000 × 20%) ................................................................................... 115 200
2021 tax year (R576 000 × 20%) ................................................................................... 115 200
2022 tax year (R576 000 × 20%) ................................................................................... 115 200
The balance of R40 000 received from the insurance company is of a capital nature and is
subject to income tax under the Eighth Schedule as a capital gain.
MACHINE C
Original cost (1 December 2018) ................................................................................ R1 392 000
Less: Section 12C allowance (2019 tax year) (40% of R1 392 000) ....... R556 800
Section 12C allowance (2020 tax year) (20% of R1 392 000) ....... 278 400
Section 12C allowance (2021 tax year) (20% of R1 392 000) ....... 278 400
Section 12C allowance (2022 tax year) (20% of R1 392 000) ....... 278 400 (1 392 000)
Income tax value at 31 August 2021............................................................................ nil
Machine C was sold for R1 250 000; the taxable recoupment will therefore be:
Proceeds (limited to original cost) .............................................................................. 1 250 000
Less: Income tax value ................................................................................................ nil
1 250 000
MACHINE B
Original cost (1 February 2018) ..................................................................................... R900 000
Less: Section 12C allowance (2018 tax year) (40% of R900 000) .......... R360 000
(540 000)
Income tax value 31 October 2018 ................................................................................ R360 000
continued
489
The machine was sold for R80 000. The alienation, loss or destruction allowance under s 11(o) is
therefore calculated as follows:
Original cost ................................................................................................................... R900 000
Less: Depreciation allowed ..................................................................... R540 000
Add: Proceeds of sale ............................................................................ 80 000
(620 000)
Section 11(o) allowance................................................................................................. R280 000
The s 12C allowance is granted in full in the years of assessment in which the machine was
acquired and sold. Had the allowance not been granted in the year of sale, the result would have
been the same, since the s 11(o) allowance would then have been greater by the amount not
granted by way of the s 12C allowance.
If the machine had been sold for, say, R580 000, there would have been a taxable recoupment in
terms of s 8(4)(a), determined as follows:
Proceeds of sale ............................................................................................................ R580 000
Less: Income tax value .................................................................................................. (360 000)
Taxable recoupment ...................................................................................................... R220 000
FACTORY PREMISES
Original cost (first used 31 January 2018) ................................................................ R10 000 000
Less: 5% annual allowance (for each tax year 2018 to 2025) (nine years at
R50 000 a year) ........................................................................................................ (4 500 000)
Income tax value 30 November 2025 ....................................................................... R5 500 000
Less: Premises (excluding land) sold for .................................................................. (9 500 000)
Taxable recoupment (s 8(4)(a)) ................................................................................ R4 000 000
Notes
(1) The 5% annual allowance is a fixed allowance and is calculated on the original cost, not on
the diminishing balance of the cost.
(2) In the 2018 and 2026 years of assessment a full allowance is granted, even though the
premises were only used for one month and nine months respectively.
(3) The allowance is not given on the cost of the land.
(4) Since the taxpayer is not acquiring or erecting any new premises, the recoupment is tax-
able. Section 13(3) does not apply.
Example 13.45. Comprehensive example starting with profit before tax

Lekabe (Pty) Ltd is a company resident in South Africa. It designs and manufactures board
games for children and sells these board games to retailers nationwide. Its financial year ends
on the last day of December each year. Lekabe (Pty) Ltd has neither an assessed loss nor an
assessed capital loss to carry forward from its 2021 year of assessment. Lekabe (Pty) Ltd
applies IFRS 9 to its debt for financial reporting purposes.
The Statement of Profit or Loss and other Comprehensive Income of Lekabe (Pty) Ltd for the year
ended 31 December 2022 is set out below:
Notes R R
Sales 26 850 000
Less: Cost of sales (13 250 000)
Gross profit 13 600 000
Add: Sundry income
Profit on Machine A 432 500
14 032 500
Less: Expenditure 7 (5 493 250)
Bad debt 1 (25 000)
Impairment loss (IFRS 9 loss) adjustment for doubtful
debt (movement in allowance) 2 (95 000)
Rentals 3 (102 000)
Depreciation on computer 4 (50 000)
Depreciation on Machine A 5 (1 250 000)
Depreciation on factory building 6 (130 000)
Depreciation on Machine B 7 (22 500)
continued
490
Notes R R
Depreciation on other machinery and depreciable
assets – all fully written off for tax purposes (22 250)
Restraint of trade 8 (800 000)
Insurance premiums 9 (280 000)
Salaries 10 (2 500 000)
Provision for leave pay 11 (99 500)
Other tax-deductible administrative and marketing
expenses (117 000)
Profit before tax 8 539 250
Additional notes
(1) Bad debt written off of R25 000 consist of normal trade debtors. All outstanding debt
classified by Lekabe (Pty) Ltd as bad debt, previously included in the company’s income but
not allowed by SARS to be deducted during previous years of assessment, amounts to
R89 375 in total.
(2) During the previous year of assessment SARS allowed Lekabe (Pty) Ltd to claim R50 000 as
a doubtful debt allowance. At 31 December 2022, the outstanding normal trade debtors of
Lekabe (Pty) Ltd amounted to R3 800 000.
During the 2022 year of assessment a total impairment loss allowance (IFRS 9 loss allow-
ance) of R95 000 (it was Rnil for the 2021 year of assessment) was determined by Chronicle
Ltd in terms of IFRS 9. It consisted of R25 000 measured at an amount equal to the lifetime
expected credit loss and R70 000 measured at an amount equal to the 12-month expected
credit loss. Chronicle Ltd has never received any income from lease contracts.
(3) Since 1 April 2019, Lekabe (Pty) Ltd leased a delivery truck (with a cost price of R780 000)
from Naidoo Ltd, a non-connected company, for R25 000 per month in terms of a three-year
lease agreement. The agreement stated that Lekabe (Pty) Ltd will be permitted to continue
using the delivery truck at the end of the three-year period for a rental of R3 000 per month.
Lekabe (Pty) Ltd is allowed to write off the delivery truck over two years in terms of Interpre-
tation Note No. 47 constituting the remaining useful life from 1 April 2022), if applicable.
(4) On 18 November 2022 computer equipment was purchased for R255 000. Binding General
Ruling (Income Tax) No. 7 and Interpretation Note No. 47 allows for a three-year write-off
period on this computer equipment. The computer equipment was brought into use on
1 December 2022.
(5) Lekabe (Pty) Ltd ordered a manufacturing machine (Machine A) from a supplier in France for
̀250 000 on 1 September 2022 to use in the manufacturing process. Machine A was
shipped free on board (FOB) on 15 September 2022 and was delivered at Lekabe (Pty) Ltd’s
premises on 25 September 2022. The payment for the machine was made to the supplier on
15 September 2022. The import duties of R45 000 were paid on importation. The company
had to erect a supporting structure at a total cost of R27 500 to support the machine before it
was brought into use on 1 October 2022.
The following ruling exchange rates were applicable:
Date Spot rate ̀1 = R

1 September 2022 ̀1 = R17,75
15 September 2022 ̀1 = R17,70
25 September 2022 ̀1 = R17,68
1 October 2022 ̀1 = R17,60
31 December 2022 ̀1 = R16,70
(6) The current factory building was erected by Lekabe (Pty) Ltd at a cost of R6 500 000 and
brought into use on 1 June 2020.
(7) On 1 November 2022, a part of the factory was flooded during a heavy rainstorm and machine A
(see note 5 above) was irreparably damaged in the process. On 15 November 2022, an amount
of R3 568 000 was received from the insurance company. The production manager immediately
started looking for a replacement machine and purchased manufacturing machine B (second-
hand) for R2 550 000 on 1 December 2022. Machine B was immediately brought into use in the
manufacturing process.
(8) Lekabe (Pty) Ltd paid R800 000 to Ex Shezi, a former employee who left the employment of
Lekabe (Pty) Ltd, on 1 November 2022 as a restraint of trade on the condition that Ex Shezi
will not exercise a trade, profession or occupation in the manufacturing of board games for
the next five years.
continued
491
(9) Insurance premiums of R175 000 were incurred during the 2022 year of assessment. In
addition, Lekabe (Pty) Ltd paid insurance premiums of R105 000 covering the period
1 January 2023 to 31 August 2023 on 15 December 2022, since this early payment would
secure cheaper insurance.
(10) Salaries of R2 500 000 include directors’ salaries and fees. On 1 February 2022 Lekabe
(Pty) Ltd employed a learner, Shabangu, on a full-time basis at a wage of R800 per week.
(Shabangu was not previously employed by Lekabe (Pty) Ltd.) Lekabe (Pty) Ltd entered
into a 25-week, registered learnership agreement with Shabangu (who is in possession of
a qualification on the NQF level 5) in the course of its trade. The agreement commences
on 1 February 2022 and will be completed during August 2022. The learnership agree-
ment is registered with the relevant Sector Education and Training Authority (SETA).
Lekabe (Pty) Ltd has complied with all the requirements of the Skills Development Levies
Act. The wages paid to Shabangu and the levies paid to the relevant SETA are included in
the salaries amount.
(11) The leave pay provision was increased by R99 500 for the 2022 financial year. As at
31 December 2022 the balance on the leave pay provision amounted to R150 500. Actual
leave payments made, were all made on 28 February 2022 and have been expensed
directly to salaries.
Required
Calculate the normal tax liability of Lekabe (Pty) Ltd for its 2022 year of assessment. You can
ignore VAT. Your answer should start with the profit before tax of R8 539 250.
SUGGESTED SOLUTION
R R
Profit before tax 8 539 250
1 Bad debt (s 11(i)) Trade debtors written off will be deductible in
terms of s 11(i), no adjustment required .......... –
2 Doubtful debt Add back accounting impairment loss adjust-
(s 11(j)) ment for doubtful debt, not deductible ............ 95 000
Add back: R50 000 (2021)............................... 50 000
and deduct: The sum of:
{40% × (R25 000 (measured at an amount
equal to the lifetime-expected credit loss) +
R89 375 (not allowed under s 11(i))} + {25% ×
R70 000 (measured at an amount equal to the
12-month expected credit loss)} – 2022 doubt-
ful debt allowance (s 11(j)(i)) ............................ (63 250)
3 Delivery vehicle Rental payments until 31 March 2022: 3 ×
(s 11(a) and 8(5)) R25 000 (R75 000) plus rental payments from
1 April until 31 December 2022: 9 × R3 000
(R27 000) = R102 000 – deductible under
s 11(a) – no adjustment. –
Determination of the fair market value of the
delivery truck:
Cost to Naidoo Ltd ........................................... 780 000
Less: 20% depreciation on the reducing
balance method per full year (s 8(5)(bB)(i))
2020: ................................................................ (156 000)
624 000
2021: ................................................................ (124 800)
499 200
2022: ................................................................ (99 840)
Deemed fair market value ................................ 399 360
But there will be a s 8(5) recoupment: since
the annual rental of R36 000 (R3 000 × 12),
payable from 1 April 2022 is less than 10% of
the fair market value determined above (10%
× R399 360 = R39 936). The rental is therefore
deemed to be nominal and Lekabe (Pty) Ltd is
deemed to have acquired the delivery truck for
no consideration for purposes of s 8(5)(b).
(No s 11(e) allowance will be allowed since
Lekabe (Pty) Ltd is not the owner of the
vehicle.)
continued
492
R R
4 Computer
equipment – s 11(e) Add back accounting depreciation ................. 50 000
R255 000/3 × 1/12 (s 11(e) allowance) ............ (7 083)
5 Machine A imported Add back accounting depreciation on
– s 24I and 12C Machine A ........................................................ 1 250 000
Purchase price (s 12C) – capital:
(̀250 000 × R17,70 (s 25D)) = R4 425 000
Plus: R45 000 (import duties)
plus: R27 500 (foundation)
Total cost = R4 497 500 × 40% (s 12C
allowance)........................................................ (1 799 000)
No foreign exchange differences in terms of
s 24I since paid on transaction date.
6 Factory – s 13(1) Add back accounting depreciation ................. 130 000
Section 13(1) allowance: R6 500 000 × 5% ..... (325 000)
7 Machine A Add back accounting profit ............................. (432 500)
destroyed – s 12C, Machine A:
8(4)(e) and Purchase price = ........................................... 4 497 500
par 65 of the Less:
Eighth Schedule Wear and tear (s 12C):
40% × R4 497 500 (2022 note 5) ..................... (1 799 000)
Tax value.......................................................... 2 698 500
Proceeds.......................................................... 3 568 000

Tax value.......................................................... (2 698 500)
Recoupment .................................................... 869 500
But can elect par 65 of the Eighth Schedule
as proceeds are equal to or greater than base
cost (refer below) and defer recoupment in
terms of s 8(4)(e). –
Capital gains tax implications:
Proceeds.......................................................... 2 698 500
(R3 568 000 – recoupment of R869 500) .........
Less: Base cost ............................................... (2 698 500)
(R4 497 500 – s 12C of R1 799 000) ................
– –
Add back accounting depreciation ................. 22 500
R2 550 000 × 20% (Machine B: s 12C) ........... (510 000)
Therefore:
Section 8(4)(e) on Machine A:
R869 500 × 20% (same % as machine B) ....... 173 900
Depreciation on Add back depreciation – fully written off for
other assets tax .................................................................... 22 250
8 Restraint of trade Add back restraint of trade payment, capital
to Ex Shezi in nature ........................................................... 800 000
(s 11(cA))
The lesser of:
R266 667 (R800 000 / 3 years) or R160 000
(R800 000 / 5 years) will be deductible ........... (160 000)
9 Insurance premiums Insurance premiums for the 2022 year of
(s 11(a) and 23H) assessment, deductible under s 11(a) ............ –
Prepayment not deductible, s 23H, no benefit
received during 2022 year of assessment,
period of prepaid benefits is longer than six
months and the amount of the prepayment is
greater than R100 000. Add back ................... 105 000
continued
493
R R
10 Salaries and Salaries deductible under s 11(a) – no
learnership adjustment ....................................................... –
(s 11(a) and 12H)
Learnership allowance, s 12H(2)(a)(ii)
l Commencement allowance : R40 000 ×
25 / 52 ........................................................ (19 231)
l Completion allowance = R40 000
(< 24 months) ............................................. (40 000)
11 Leave pay provision Add back increase in leave pay provision, not
(s 23(e)) deductible (s 23(e)) ......................................... 99 500
Other tax deductible Deductible for tax purposes – no adjustment ..... –
expenses
TAXABLE INCOME 7 981 336
Tax payable At 28% ............................................................. 2 234 774
494
14 Trading stock
Jolani Wilcocks
Assisted by Leanie Groenewald

After studying this chapter you should be able to:
l value trading stock for taxation purposes in the following circumstances:
– normal trade activities
– trading stock acquired for no consideration
– trading stock distributed as a dividend in specie
– trading stock donated or applied for own use
l deal correctly with opening stock and closing stock in an income tax calculation
l understand the anti-avoidance provisions relating to trading stock
l calculate the deductions with regard to trading stock in respect of
– share dealers, and
– contractors
l apply s 9C to the disposal of shares deemed to be of a capital nature.
Contents
Page
14.1 Overview (s 22 and definition of ‘trading stock’ in s 1) .................................................. 495
14.2 Closing stock (s 22(1)) ................................................................................................... 497
14.3 Opening stock (s 22(2)).................................................................................................. 498
14.4 Cost price of trading stock (s 22(3)) .............................................................................. 499
14.5 Trading stock acquired for no consideration (s 22(4)) .................................................. 501
14.6 Goods taken from stock or distributed as a dividend in specie (s 22(8)) ..................... 502
14.7 Anti-avoidance provisions (s 23F) .................................................................................. 504
14.8 Contractors’ work in progress (s 22(2A) and 22(3A)) .................................................... 506
14.9 Securities lending arrangements and collateral arrangements
(s 22(4A), (4B) and (9)) .................................................................................................. 507
14.10 Deemed capital receipts from the disposal of shares (s 9C) ....................................... 508
14.11 Share dealers (ss 22, 22B and 40C) .............................................................................. 513
14.1 Overview (s 22 and definition of ‘trading stock’ in s 1)

Trading stock is an essential element of many businesses and, as a result, a basic understanding of
the tax treatment is important for many taxpayers. The principles used to calculate the deduction
available for tax purposes for trading stock are the same as calculating cost of sales for accounting.
Cost of purchases is added to opening stock after which closing stock is deducted. The cost of
purchases, the value in terms of IAS 2 for accounting purposes and the value in terms of the Income
Tax Act for tax purposes will be the same. Closing stock will, however, not be valued the same for
accounting (IAS 2) and tax (Income Tax Act) purposes (see 14.3):
Cost of sales:
l Opening stock (s 22(2) – 14.3) ................................................................................ (Rxx)
l Purchases (s 11(a)) ................................................................................................. (zzz)
l Closing stock (s 22(1) – 14.2) .................................................................................. yy
Total deduction from taxable income (taxation) or turnover/sales (accounting) ........... (Rxz)
Expenses incurred to acquire trading stock will be allowed as a deduction under the general deduc-
tion formula (s 11(a) – provided that all of the requirements of that provision have been met). Sec-
tion 22 contains the tax treatment of trading stock on hand at the beginning and end of the year of
assessment. Livestock and produce are not covered under s 22, but are dealt with under the provi-
sion relating to farmers (see chapter 22).
495
The proceeds from the sale of trading stock will fall within the gross income definition and will there-
fore be included in taxable income.
Below is a schematic overview of the sections covered in this chapter:
Trading stock (section 22) Goods taken

from stock
and applied
Cost price for another
determined purpose Î
under Cost of sales: Tax treatment: recoupment
s 22(3) (14.4) under s 22(8)
l Opening stock (s 22(2) – 14.3) ......... (Rxx)
l Purchases (s 11(a)) .......................... (zzz) (14.6)
Trading stock l Closing stock (s 22(1) – 14.2) ........... yy
acquired at no Total deduction from taxable income ..... (Rxz) Reduction of
cost Î include
debt under
at market value
s 19 (see
(s 22(4)) (14.5)
chapter 13)
Special valuation
Holding period of at
rules for contractors’ Anti-avoidance least three continu-
work in progress provisions in s 23F ous years before
(ss 22(2A) and (14.7) applied to disposal Î deemed
22(3A)) (14.8) schemes where capital of nature
taxpayers deduct (s 9C) (14.10)
purchases, but do
not include the stock
as closing stock
The following core concepts are covered in this chapter:

Trading stock (s 1)
l It includes
– anything produced, manufactured, constructed, assembled, purchased or in any other manner
acquired by a taxpayer to use in manufacturing, to be sold or exchanged by the taxpayer or on
the taxpayer’s behalf, or
– anything the proceeds from the disposal of which forms or will form part of the taxpayer’s gross
income, but not
• proceeds from the disposal of assets of a capital nature by a mine (par (j) of the gross
income definition in s 1) or an amount received under a key-man policy (par (m) of the
gross income definition in s 1)
• proceeds from the disposal of a plantation (covered in par 14(1) of the First Schedule) by a
farmer (see chapter 22), or
• a recovery or recoupment under s 8(4) included in terms of par (n) of the gross income
definition of s 1, or
– any consumable stores and spare parts that the taxpayer acquired that will be used in the
course of his trade.
l It excludes
– a foreign currency option contract, or
– a forward exchange contract (defined in s 24I(1) – see chapter 15).
Closing stock (s 22(1) – see 14.2)
This is trading stock that is held and not sold at the end of the year of assessment.
Opening stock (s 22(2) – see 14.3)
This is the trading stock held and not sold at the end of the year of assessment, and carried forward
to the following year.
Market value
Market value is not defined in relation to trading stock. It is, however, deemed to be the price that a
person would pay when acquiring an asset in terms of a cash transaction concluded at arm’s length
(also see par 1 of the Eighth Schedule where market value for purposes of capital gains means
market value as contemplated in par 31 – see chapter 17).
496
14.1–14.2 Chapter 14: Trading stock
It will be the best price at which an asset can be sold unconditionally for a cash consideration on the
valuation date, assuming
l a willing seller and buyer
l that, before the date of sale there had been a reasonable period for the proper marketing of the
interest and the sale to be concluded
l that no account is taken of any additional bid by a prospective purchaser with a special interest
l a sale either
– of the asset as a whole for use in its working place
– of the asset as a whole for removal from the premises of the seller at the expense of the pur-
chaser, or
– of individual items for removal from the premises of the seller at the expense of the purchaser,
and
l that both parties to the transaction had acted knowledgeably, prudently and without compulsion
Market value will generally exclude VAT, unless the taxpayer is not a registered VAT vendor (and can
therefore not claim back the VAT) or if the deduction of input tax is denied in terms of s 16(3) of the
VAT Act (refer chapter 31) (Interpretation Note No. 47 (Issue 5) (issued 9 February 2021)). The VAT
Act refers to the term ‘open market value’, which is deemed to be the consideration for a supply
(therefore the full selling price) and will include VAT.
14.2 Closing stock (s 22(1))

If trading stock is acquired or manufactured and then also sold in the same year, the taxpayer will
include the proceeds from the sale and deduct the cost of the trading stock in the same tax calcula-
tion. The income and related expenses are ‘matched’ within the same year. If the trading stock is not
sold in the same year it was acquired, the taxpayer will only deduct the cost for tax purposes without
including any amount in gross income. This will lead to a mismatch between the income and
expense. To address this problem, any person carrying on a trade must take the value of trading
stock held and not disposed of by him at the end of the year of assessment (closing stock) and add it
back to taxable income (s 22(1)), specifically brought into account as part of gross income (provi-
so (i) to s 22(1)(a)).
The value of the closing stock to be added to taxable income is the
l cost price to the taxpayer
less
l any amount by which the value of trading stock has reduced due to
– damage
– deterioration (wear and tear due to use)
– change in fashion
– decrease in market value, or
– any other reason listed in a public notice issued by the Commissioner.
When calculating the amount of the reduction in the value of closing stock, the fact
Please note! that some closing stock items exceed their cost price, should be ignored (provi-
so (ii) to s 22(1)(a)).
If closing stock is valued at less than cost, SARS must be informed of this in the taxpayer’s tax return,
together with reasons and an explanation of how the lower value was calculated. SARS will then
make a reasonable adjustment to the closing stock value if he finds the reasons supplied acceptable.
In CSARS v Volkswagen South Africa (Pty) Ltd (2018) it was held that closing stock should not be
valued at net realisable value (which takes into account future expenditure not yet incurred as this is
inconsistent with s 11(a) that requires expenditure to be actually incurred) for income tax purposes.
Cost price should be used as the ‘baseline’. It is only if the taxpayer can prove that the value of
trading stock was reduced due to one of the specific circumstances listed above and if the stock is
worth less than cost price, that SARS may adjust the closing stock value. In CSARS v Atlas Copco
South Africa (Pty) Ltd (2019) the court, as in the case of Volkswagen, held that the reduction in value
497
must be because of one of the specific circumstances listed above and must already have occurred
by year-end for a write down to be allowed. Applying the rules of accounting standards (IAS 2) in this
regard, is not allowed. All financial instruments (including shares) should be valued at cost for tax
purposes (even if the market value of a financial instrument held as trading stock is lower than the
cost at year-end).
Section 23F contains special anti-avoidance provisions relating to closing stock. These are discussed
in 14.7.
Example 14.1. Trading stock acquired but not sold in the same year
Assume the taxpayer purchased trading stock of R110 000 for cash and has not sold that stock
at year-end. What would the effect be on his taxable income for that year?
SOLUTION
The effect on his taxable income for that year will be:
Deduction in terms of s 11(a) for trading stock purchased. ........................................ (R110 000)
Add: closing stock (s 22(1)) ........................................................................................ 110 000
Effect on taxable income ............................................................................................. Rnil
Remember
l The value of closing stock is added to taxable income (specifically to gross income) to ‘bal-
ance’ the tax calculation.
l All financial instruments must be included in closing stock at cost.
l If instruments, interest rate agreements or option contracts are held as trading

stock, the taxpayer may elect that the provisions of s 24J do not apply and that
the instrument be included in closing stock at market value (in terms of
s 22(1)(b) read with s 24J(9) (see chapter 16)).
l If a small, medium or micro-sized enterprise (SMME) uses funding received
from a small business funding entity to finance the acquisition, manufacturing
or improvement of trading stock
Please note! – any deduction in terms of s 11(a) for the cost of the trading stock, or any
amount taken into account as closing stock (s 22(1)) or opening stock
(s 22(2))
– should first be reduced with the amount of the funding which was specif-
ically received from the small business funding entity to fund the trading
stock, before taking the remaining amount into account in the tax calcula-
tion (s 23O(2) – see chapter 19).
14.3 Opening stock (s 22(2))

Any trading stock that was not sold in the previous year and was still held at the beginning of the
current year (opening stock) must be deducted from taxable income (s 22(2)). The deductible
amount will be calculated as follows:
l If the trading stock was held at the end of the previous year and included in the taxpayer’s clos-
ing stock, the value of the opening stock will be that same amount (Year 1 closing stock value
equals Year 2 opening stock value).
l If the trading stock was not part of the taxpayer’s closing stock at the end of the previous year of
assessment, the value of the opening stock will be the cost price of the trading stock for the tax-
payer. This will happen if, for example, a taxpayer originally acquired an asset for investment
purposes and subsequently changed its intention and treated the asset as trading stock. The
cost price is deemed to be the market value of the trading stock on the date of the change in use
(s 22(3)(a)(ii) (see 14.4). For purposes of calculating a recoupment in terms of s 8(4)(k) (see
chapter 13), the asset is deemed to have been disposed of at the market value on the date of the
change in use to trading stock. For CGT purposes, the asset is also deemed to have been dis-
posed of and re-acquired at market value (par 12(2)(c) of the Eighth Schedule (see chapter 17)).
498
Example 14.2. Trading stock not included in closing stock at the end of the previous year
A taxpayer, who is a motor vehicle dealer, acquired a Ferrari for marketing purposes for
R2 400 000 (thus initially acquired as an asset of a capital nature and not trading stock). Due to
the number of speeding fines he received, he decided to sell the Ferrari at his dealership. The
Ferrari was still on hand at the end of the tax year in which the decision was made. Assuming
that the market value of the vehicle is R2 500 000, what would the effect be on his taxable in-
come for that year?
SOLUTION
The effect on his taxable income for that year will be:
Deduction in terms of opening stock for trading stock not included in closing
stock at the end of the previous year. ...................................................................... (R2 500 000)
Add: closing stock (s 22(1)) .................................................................................... 2 500 000
Effect on taxable income .......................................................................................... Rnil
Remember
Closing stock is an addition to taxable income, whereas opening stock is a deduction.
The Ernst Bester Trust v CSARS (70 SATC 151 (SCA)) court case (which dealt with mining of sand on
a farm) found that s 22 was not applicable to deposits of sand still in the ground. Sand not removed
could therefore not be seen as part of trading stock and as such could not be classified as opening
stock.
14.4 Cost price of trading stock (s 22(3))

The acquisition cost of trading stock may be deducted for income tax purposes. It is therefore import-
ant to know how this cost price should be determined.
The cost price of trading stock is
l the cost incurred by the taxpayer (in the current or any previous year of assessment), when
acquiring that trading stock
plus
l any further costs incurred by the taxpayer, in terms of IFRS (if the taxpayer is a company) in
getting the trading stock into its existing condition and location, but excluding any foreign
exchange differences made on the stock purchased (see par 4.13.2 of Interpretation Note No. 101
(issued 4 July 2018) for more detail and an example of the exclusion of a foreign exchange dif-
ference from the cost price of trading stock) (for foreign exchange, see chapter 15).
plus
l an amount that has been included in his income as a recoupment (in terms of s 8(5) – see chap-
ter 13) since it was used to reduce or to settle the purchase price of the trading stock that was
previously hired by the taxpayer (s 22(3)(a)(i) and (iA)).
The ‘further costs’ that are referred to are the costs that should be included in the
valuation of the trading stock in terms of IFRS (IAS 2 (Inventories)). The Explana-
tory Memorandum on the Income Tax Bill 1993 suggests that the cost price of
trading stock includes ‘the purchase price, import duties, sales tax, transport,
handling costs and other directly attributable costs of acquisition (less discounts,
Please note! rebates and subsidies on purchases)’. For a manufacturer, the ‘further costs’ to be
taken into account include fixed and variable production overheads such as
indirect materials, direct and indirect labour, depreciation and maintenance of
factory buildings, machinery and plant and the cost of factory management and
administration. Selling expenses, general administrative overheads, research and
development costs and other costs that ‘do not normally relate to getting the stock
in its present condition or location’ are excluded.
499
Take note of the following special valuation rules that might be applicable:
l If a taxpayer changes his intention and an asset of a capital nature (that would result in a capital
gain on disposal) becomes trading stock, the cost of the trading stock is deemed to be the mar-
ket value of that asset on the conversion date (par 12(2)(c) of the Eighth Schedule (see chap-
ter 17) and s 22(3)(a)(ii)).
Example 14.3. Cost price of trading stock
A taxpayer has collected and restored furniture as a hobby for the last few years. After pur-
chasing a suitable item of furniture, many hours were spent restoring it in her workshop. The
completed items were then kept on display in her home. On 1 March she decided to go into
business as an antique furniture dealer. She selected six pieces of furniture from her home and
moved these into her shop, from where they were sold. One of these, a dining room table, she
had inherited from her late grandmother. The table was in perfect condition when she had re-
ceived it and she did not have to do any further work on it before it was sold. At what cost would
these items be included in trading stock on hand on 1 March?
SOLUTION
The taxpayer’s intention in respect of the furniture changed from capital nature (kept on display
in her home) to trading stock (held to be sold in her shop). The cost of and the resultant deduc-
tion in respect of the six items of trading stock will be determined under s 22(3)(a)(ii) and will be
the market value on 1 March, the conversion date (par 12(2)(c) of the Eighth Schedule). Although
the table was acquired for no consideration (inherited), it was held as a capital asset before it
was converted to trading stock on 1 March and the cost will therefore also be determined under
s 22(3)(a)(ii) as market value.
l If a resident holds any shares directly in a Controlled Foreign Company (a CFC – see chapter 21),
the cost price includes
– an amount equal to the proportional amount of the net income (before capital gains are adjust-
ed by the inclusion rate of either 40% or 80%) of the CFC (or any other CFC in which that CFC
and the resident directly or indirectly have an interest) included in the taxpayer’s taxable income
under s 9D in any year
reduced by
– any foreign dividend, received from that CFC, which is exempt in terms of s 10B(2)(a) or (2)(c)
(s 10B covers the exemption of foreign dividends – see chapter 5) (s 22(3)(a)(iii)(aa)).
(Note that these rules will also apply to the cost price of shares of a CFC held directly by another CFC
(s 22(3)(a)(iii)(bb)).)
l If a reduction of debt occurs, the cost of trading stock might be reduced in certain circumstances
due to the provisions contained in s 19 (see chapter 13 for a detailed explanation and illustrative
examples of s 19).
l If an exempt government grant (under s 12P – see chapter 5) has been received to fund the
acquisition, creation or improvement of trading stock, or to reimburse the acquisition of trading
stock, the cost price of the trading stock will first be reduced by the amount of the grant. (Any
excess left of the grant will be recouped under s 8(4)(a) (see chapter 13)).
l If a small, medium or micro-sized enterprise (SMME) uses funding received from a small business
funding entity to finance the acquisition, manufacturing or improvement of trading stock
– any deduction in terms of s 11(a) for the cost of the stock, or any amount taken into account as
closing stock (s 22(1)) or opening stock (22(2))
– should first be reduced with the amount of the funding specifically received from the small
business funding entity to fund the trading stock, before taking the remaining amount into
account in the tax calculation (s 23O(2) – see chapter 19).
l If trading stock, livestock or produce (as contemplated in the First Schedule – see chapter 22) is
sold in a transaction between two spouses
– the spouse who sells the trading stock will be deemed to have sold it at its cost (which will be
the purchase price (s 11(a)) unless the trading stock was written off to a lower value (under
s 22(1)) (before any taxable capital gain is included) (s 9HB(3)), and
– the spouse acquiring the trading stock will be deemed to have acquired the asset at the same
date and cost (for purposes of a deduction under s 11(a) for the cost of the trading stock, or
any amount taken into account as closing stock (s 22(1)) or opening stock (s 22(2)) as the
spouse selling the trading stock (thus a roll-over relief will be provided (s 9HB(4)) (see chapter 17).
500
The roll-over relief in respect of the transfer of trading stock (under s 9HB) will be
unavailable if the asset is disposed of to a spouse who is not a resident, unless
Please note! the asset is an asset that remains in the tax net for non-residents, for example,
immovable property situated in South Africa or assets of a permanent establish-
ment in South Africa (s 9HB(5).
14.5 Trading stock acquired for no consideration (s 22(4))

If a person acquires trading stock for
l no consideration, or
l for a consideration that is not measurable in terms of money
l but excluding an in-kind government grant (a government grant received by the taxpayer, not in
money but in the form of goods that will form part of the taxpayer’s trading stock)
the cost price of that trading stock will be deemed to be its current market value (see 14.1) on the
date acquired (s 22(4)). Trading stock received under an exempt government grant will therefore not
be recorded for tax purposes at a deemed cost of the current market value but will have a Rnil value.
This is to disallow the deduction of the cost (at market value) of trading stock that was, in fact, funded
by an exempt government grant.
This subsection does not specifically state that the market value will be deductible and there is no
provision in the Act, other than s 40CA (see below), that permits a deduction in respect of trading
stock acquired for no consideration. In practice, and confirmed in the Eveready (Pty) Ltd v CSARS
court case, SARS does allow the market value of the trading stock at the date of acquisition as a
deduction. The Eveready case dealt with the issue of whether the taxpayer company (appellant) had
acquired trading stock for no consideration, which would, as a result, entitle the taxpayer to claim a
deduction for income tax purposes of the market value of the trading stock on the date of acquisition
(under s 22(4)). The deduction of the trading stock acquired for no consideration was never in dis-
pute by SARS; it was the amount or value to be attributed to the deduction that was in dispute, i.e.
l whether the trading stock was acquired for no consideration, which would lead to a deduction of
the market value of the trading stock (under s 22(4)), or
l whether the trading stock was acquired for a consideration, which would lead to a (considerably
lower) deduction of the cost price of the trading stock (under s 22(2)(b)).
In practice this will imply that any trading stock that was acquired for no consideration will be allowed
as a deduction at market value (as part of opening stock (s 22(2)(b)). If it is still on hand at the end of
the year of assessment, it will also be included in closing stock at the lesser of cost (which was
market value on acquisition) or market value (at year-end).
Section 40CA applies to the acquisition of trading stock in exchange for shares (see chapter 20). If
trading stock is acquired in exchange for shares, s 40CA(a) deems the amount of expenditure equal
to
l the market value of the shares immediately after the acquisition
plus
l any deemed capital gain determined under s 24BA(3)(a) (for acquisitions from 1 January 2020)
to be the value or cost price of the trading stock acquired. Market value of the trading stock acquired
(under s 22(4)) is therefore not used as cost price if trading stock is acquired in exchange for shares
issued by the company.
From 1 January 2022, s 40CA will also apply to trading stock acquired in an asset-for-share trans-
action (under s 42 (corporate roll-over relief)), a substitutive transaction (under s 43) or an amalgam-
ation transaction (under s 44) (see chapter 20 for a detailed discussion of these sections). Sec-
tion 40CA(b) deems the amount of expenditure equal to
l the deemed expenditure incurred when the asset was acquired (see chapter 20)
plus
l any deemed capital gain determined under s 24BA(3)(a)
to be the value or cost price of the trading stock acquired.
Before 1 January 2021, if trading stock is acquired in exchange for debt issued, s 40CA deems the
amount of expenditure incurred to be equal to that amount of debt. From 1 January 2021, if trading
stock is acquired in exchange for debt issued, the normal valuation rules (under s 22(4)) will apply.
501
Example 14.4. Trading stock acquired for no consideration

Trading stock with a market value of R50 000 is acquired by way of inheritance (but not inherited from
a spouse). If the trading stock is still on hand at the end of the year of assessment, what will the effect
be on taxable income?
SOLUTION
The effect on taxable income will be as follows:
Opening stock (s 22(2)(b) read with s 22(4)), deduction of trading stock not includ-
ed in closing stock at the end of the previous year. ....................................................... (50 000)
Closing stock (s 22(4), unless the market value is lower at the end of the year of
assessment, in which case a write-down may be made in terms of s 22(1)). ................ R50 000
Effect on taxable income .......................................................................................... Rnil
14.6 Goods taken from stock or distributed as a dividend in specie (s 22(8))

Trading stock is usually acquired to be sold for a profit. Should a taxpayer use the trading stock for
another purpose, it might result in a recoupment for tax purposes. This recoupment provision (con-
tained in s 22(8)) will not apply to livestock or produce used for farming purposes (proviso (c) to
s 22(8) – see chapter 22). This recoupment will be either at the cost price as determined in terms of
s 22(1) (ss 22(8)(a) and 22(8)(A)) or at market value at the date of the relevant event (ss 22(8)(b) and
22(8)(B)). The recoupment must be included in the taxpayer’s income for the year of assessment
during which the trading stock was applied, disposed of, distributed or ceased to be held as trading
stock. Should the taxpayer use or consume trading stock in the carrying on of trade, an amount equal
to the recoupment will be deemed to be expenditure incurred on the acquisition of such asset (provi-
so (a) to s 22(8)) and may therefore be allowed as a deduction. Note that the deduction (which could
be immediate if, for example, under ss 11(a) or 11(d), or it could take the form of an allowance over a
period if, for example, under s 11(e)) will only be allowed if the specific requirements of the relevant
deduction or allowance provision are met (Interpretation Note No. 65 (Issue 3) (issued 6 February
2017)).
The following is a list of events that will trigger a recoupment, including the specific value (either cost
price or market value) that will be recouped:
l Trading stock applied for the private or domestic use or consumption of the taxpayer (for ex-
ample a restaurant owner (a sole proprietor) using his restaurant for a family celebration and then
serving valuable bottles of wine that are part of his trading stock). The recoupment will be at the
cost price. If the cost price cannot readily be determined, the taxpayer will be deemed to have
recouped an amount equal to the market value of that trading stock (s 22(8)(A)).
Private or domestic use or consumption and certain donations (see below) are the
Please note! only events that will trigger a recoupment at cost; all the other events listed below
will trigger a recoupment at the market value.
l Trading stock used to make any donation (for example the donation of groceries (trading stock)
by a taxpayer to his church (but not the distribution of free samples of his trading stock for pro-
motional purposes to his customers)). The recoupment will be at the market value. However,
where a taxpayer qualifies for the s 18A deduction in respect of a donation of trading stock (see
chapter 7), the recoupment is deemed to be at an amount equal to the deduction granted to him
for that trading stock under s 11(a) (if the trading stock was purchased during the current year) or
s 22(2) (if it was on hand at the beginning of the year as opening stock) (s 22(8)(C)). The
recoupment (under s 22(8)(C)) will therefore be at cost price except if the trading stock donated
was written off to a lower value (s 22(1)(a)) in which case the recoupment would be at that lower
value. Thus, the recoupment at market value (under s 22(8)(B)) will not be applicable.
Unlike a deemed donation for donations tax purposes, if the donee gives any
Please note! consideration for the disposal, it will not be a donation for purposes of s 22(8)
502
14.6 Chapter 14: Trading stock
l Trading stock disposed of, other than in the ordinary course of his trade and for a consideration
less than the market value thereof (for example trading stock forming part of the sale of a going
concern). ‘Otherwise than in the ordinary course of trade’ can be tested by establishing whether
the disposal would surprise an ordinary businessman.
Remember
Before this provision can apply, the sale must also be for a consideration below market value.
The recoupment will be at the market value. The market value that is included in income may be
reduced by the consideration received by or accrued to the seller when selling the trading stock
for less than market value (proviso (b) to s 22(8)).
An arm’s length buyer of a business as a going concern will usually acquire trading stock at book
value and in these exceptional circumstances where such a large number of trading stock items
are sold together, book value would generally qualify as market value (Interpretation Note No. 65
(Issue 3)). Such a sale will not qualify to be below market value and no recoupment (under
s 22(8)) will be applicable.
l Trading stock distributed as a dividend in specie (on or after 21 June 1993) to any holder of
shares in that company (remember to also consider a disposal of trading stock to a holder of
shares for less than market value (Interpretation Note No. 65 (Issue 3)). This recoupment will be
at the market value.
l Trading stock applied for a purpose other than disposal in the ordinary course of the taxpayer’s
trade and under circumstances other than those referred to above. This will include trading stock
used for purposes of trade (for example cleaning products taken from stock and used to clean
the shop), or trading stock applied as an asset of a capital nature after it has been manufactured
by the taxpayer (par (jA) of the gross income definition will be applicable to these assets) (Inter-
pretation Note No. 65 (Issue 3)). This recoupment will be at the market value.
If trading stock, that is similar to any other asset manufactured, produced, con-
structed or assembled by the taxpayer, is subsequently applied as an asset of a
capital nature, for example for use in the business (under par (jA) of the definition
of ‘gross income’ in s 1), the provisions of this section (s 22(8)) will not apply
(although it falls within the ambit). These items that are similar to any other asset
manufactured, produced, constructed or assembled and subsequently used as
assets of a capital nature will, in terms of par (jA), continue to be treated as trading
stock for tax purposes (proviso (d) to s 22(8) and the definition of ‘trading stock’ in
Please note!
s 1). No capital allowances will be allowed to be claimed as a deduction on these
items used because par (jA) assets will be treated as trading stock and must form
part of the closing stock value if not sold by the end of a year of assessment. If a
par (jA) asset is sold for less than market value, the actual selling price (considera-
tion) will be subject to tax under par (jA) as part of gross income, whilst the remain-
ing difference between market value and the actual selling price will be included in
income (under s 22(8)(b)(ii)) (Interpretation Note No. 11 (Issue 4) (issued 6 Feb-
ruary 2017)).
l Trading stock no longer held as trading stock by the taxpayer (thus a change of use of the trad-
ing stock or shares held as trading stock in a company that is wound up, liquidated or deregis-
tered). This recoupment will be at the market value.
For CGT purposes, where there is a change in use of trading stock, the trading
Please note! stock is deemed to have been disposed of and re-acquired at the amount that
was recouped in terms of s 22(8), being the market value (par 12(3) of the Eighth
Schedule (see chapter 17)).
Remember
If s 22(8) is applicable to trading stock, a Value-Added Tax (VAT) change in use adjustment will
have to be made by a VAT vendor in terms of s 18(1) of the VAT Act, unless the taxpayer contin-
ues to use the goods for the making of taxable supplies (see chapter 31). If trading stock is
given as a fringe benefit to an employee, it will constitute a deemed supply in terms of s 18(3) of
the VAT Act and output tax will need to be accounted for (see chapter 31).
503
Example 14.5. Trading stock applied, disposed of or distributed

Calculate the effect of the following transactions on the taxable income of the taxpayer (indicate
only the effect of the application, disposal or distribution of the trading stock):
(a) Trading stock, which cost the taxpayer R15 000, is removed by him for private use. The
market value of the trading stock on the date it was used was R17 500.
(b) Trading stock, which cost the taxpayer R15 000, is consumed by the taxpayer for the pur-
poses of his trade. The market value of the trading stock on the date it was used was
R17 500.
(c) Trading stock, which cost the taxpayer R15 000, is distributed to the holder of shares as a
dividend in specie. The market value of the trading stock on the distribution date was
R17 500.
(d) Trading stock, which cost the taxpayer R15 000, is donated to a qualified PBO and a valid
s 18A receipt is obtained. The market value of the trading stock on the date of donation was
R17 500.
(e) Trading stock (a computer), which cost the taxpayer R15 000 to manufacture, is taken from
trading stock and will be used by the taxpayer as an asset in the finance department. The
market value of the trading stock on the date of conversion was R17 500.
(f) Trading stock (computers), which cost the taxpayer R15 000 to manufacture, is taken from
trading stock and will be given to the employees as gifts for their services rendered at the
Christmas party. The market value of the trading stock on the date of conversion was
R17 500.
SOLUTION
(a) Recoupment included in taxable income (s 22(8)(A)) ............................................ R15 000
(b) Recoupment included in taxable income (s 22(8)(B)) ............................................. R17 500
Deduction allowed (s 11(a)) (deemed expenditure under proviso (a) to s 22(8)) ... (R17 500)
(c) Recoupment included in taxable income (s 22(8)(B)) ............................................. R17 500
(d) Recoupment included in taxable income (s 22(8)(C)) ............................................. R15 000
(note that the taxpayer will also qualify for a s 18A deduction of 10% of his
taxable income, limited to the R15 000 donation of trading stock he made
(s 18A(3)(a)(ii))
(e) No recoupment under s 22(8), since par (jA) of the gross income definition will
be applicable when the trading stock is subsequently sold. Also, no capital al-
lowances will be allowed on the computer from the date used in the finance de-
partment up to the date of subsequent disposal. The trading stock, although
treated as an asset used in the business, will still be treated as trading stock for
tax purposes (proviso (d) of s 22(8) and the definition of ‘trading stock’ in s 1) ...... Rnil
(note that the R15 000 will also be included in closing stock (s 22(1)) if not sold
by year-end)
(f) Recoupment included in taxable income (s 22(8)(B)) ............................................. R17 500
Deduction allowed – salaries (s 11(a)) (deemed expenditure under proviso (a)
to s 22(8)):................................................................................................................ (R17 500)
14.7 Anti-avoidance provisions (s 23F)

Due to the fact that closing stock should be included in taxable income (specifically gross income)
(see 14.2), taxpayers invented various schemes whereby trading stock was acquired during the
current year, but remained undelivered at the end of the year (i.e. items purchased were neither held
nor sold at year-end), and therefore did not form part of closing stock (as described in s 22(1)). As a
result, the taxpayers deducted only the acquisition costs but did not include a ‘balancing amount’ in
gross income as closing stock. Section 23F introduced three anti-avoidance provisions to counter
these schemes.
The first anti-avoidance provision (s 23F(1)) was introduced to prevent a taxpayer from claiming a
deduction regarding this type of acquisition of trading stock by denying the deduction if the trading
stock was
l not disposed of by the taxpayer during the year (i.e. no proceeds were included in gross income
in terms of sales), and
l was not held by him at the end of the year (i.e. no amount is included in gross income in terms of
closing stock) (for example goods in transit).
504
The deduction for the trading stock acquired will only be allowed in the first year in which
l the stock is disposed of by him (i.e. proceeds in respect of the sale of that stock are included in
gross income), or
l the value of the stock is included in his closing stock (i.e. an amount is added to gross income as
closing stock), or
l he can show that the stock was
– neither disposed of by him during such year, nor
– held by him at year-end
due to it being lost. This will also be the case if the trading stock was destroyed or the purchase
thereof cancelled. The expenditure in respect of the acquisition of the stock is then deemed to
have been incurred to the extent that it has actually been paid by him. Therefore, the taxpayer
can, for example, claim a deduction for amounts actually paid in the year the stock is lost.
Remember
When establishing the transaction date, remember that free on board (FOB) as well as cost-
insurance-freight (CIF) means that ownership passes when loading on the ship, train, aeroplane,
truck, etc. This is important because the debt is only actually incurred (the transaction date) once
ownership of the underlying asset passes. Also remember that the s 11(a) deduction for the ac-
quisition of trading stock will be allowed once expenditure is actually incurred, and not only
when it is actually paid (also see chapter 6).
The second anti-avoidance provision (s 23F(2)) provides for the situation where
l a taxpayer has disposed of trading stock in the ordinary course of his trade for a consideration
that will not accrue to him in full during that year of assessment, and
l he could deduct the expenditure incurred on the acquisition of the trading stock under s 11(a)
during that or any previous year of assessment (therefore a deduction in terms of opening stock
or acquisition costs was claimed, but no ‘balancing’ addition to the gross income is made in the
form of proceeds from the sale of the trading stock).
Any deduction will be limited to the amount received or accrued from the disposal of that trading
stock during that year of assessment. An amount that is deductible as opening stock, for example,
shall be limited to the amount received or accrued during that year. Excess deductions will therefore
be disregarded during that year, but may be deducted from the income in a following year. The
deduction in the following years will again be limited to the amount which is received by or accrued
to that person in that subsequent year from that disposal (s 23F(2A)). If any disregarded deductions
still exist once no further proceeds will accrue, these remaining deductions may be claimed at that
time (s 23F(2B)).
Example 14.6. Deferral of acquisition deduction
A taxpayer sold trading stock for R500 000 on the last day of the year of assessment ending
February 2022. Half of the consideration will accrue to him on 28 February 2023, and the other
half will accrue on 29 February 2024. He purchased the trading stock on 28 February 2021 at a
cost of R300 000.
Calculate the effect of the above transactions on the taxable income of the taxpayer for the 2022,
2023 and 2024 years of assessment.
505
Silke: South African Income Tax 14.7ದ
SOLUTION
Gross income ................................................................................................................. Rnil
Less: Deduction for opening value of trading stock (s 22(2)) ........................................ (300 000)
Add: Deemed recoupment (s 23F(2)) ........................................................................... 300 000
Taxable income ...................................................................................................... Rnil
Gross income (50% × R500 000) ................................................................................... R250 000
Less: Deduction allowed by s 23F(2) ............................................................................. (250 000)
Taxable income ...................................................................................................... Rnil
Gross income (50% × R500 000) ................................................................................... R250 000
Less: Deduction allowed by s 23F(2) ............................................................................. (50 000)
Taxable income ...................................................................................................... R200 000
Note
The purchaser’s expenditure is accumulated over the time as and when the amounts become due
and payable, thus R0 (2022); R250 000 (2023) and the total expense of R300 000 (2024).
The third anti-avoidance provision (s 23F(3)) creates a deemed recoupment in the situation where a
taxpayer has disposed of a right or interest in trading stock in the ordinary course of his trade. The
transaction has the effect that his remaining right in the trading stock will not be included in closing
stock. Any expenditure in respect of the remaining right in trading stock (which was previously
allowed as a deduction under s 11(a) or was otherwise taken into account, for example, as opening
stock) is deemed to have been recovered or recouped (therefore added to taxable income). If, for
example, a taxpayer sells a copying machine as trading stock (with a cost price of R25 000) for
R50 000 and in the sales contract he stipulates that he will retain a 10% ownership interest in the
machine. There will be a recoupment of R2 500 (R25 000 × 10%) included in the taxpayer’s income
(in terms of s 23F(3)).
14.8 Contractors’ work in progress (s 22(2A) and 22(3A))

A building contractor is any person who carries on any construction, building, engineering or other
trade in the course of which improvements are effected by him to fixed property owned by any other
person. Improvements effected by a building contractor, as well as any materials delivered by the
contractor to the client’s fixed property (being property that is not owned by the contractor), will be
deemed to be trading stock held and not disposed of by him until the contract has been completed
(s 22(2A)).
A contract will be deemed to have been completed when the taxpayer has carried out all the obliga-
tions imposed upon him under the contract and has become entitled to claim payment of all amounts
due to him under the contract.
If the building contractor receives progress payments, the cost price of trading stock is the sum of
(a) the cost of material used by the contractor in effecting the improvements, and
(b) such further costs incurred by him that will, in terms of IFRS, be deemed to have been incurred
directly in connection with the contract (direct costs), and
(c) the portion of any other costs incurred by him in connection with the relevant contract and other
contracts that will, in accordance with IFRS, be regarded as having been incurred in connection
with the relevant contract (indirect costs)
less the following three items:
(d) any income received by or accrued to the taxpayer in respect of the contract
(e) any portion of an amount payable to the taxpayer under the contract that has been held from
payment as a retention, but limited to 15% of the total amount payable to him under the contract,
and
(f ) any of the costs identified in the first 3 points above ((a), (b) and (c)) that exceed that portion of
the contract price relating to the improvements actually effected by him.
The total deduction for the last three items ((d), (e) and (f)) may not exceed the sum of the costs iden-
tified in the first three items above ((a), (b) and (c)) (s 22(3A)).
In other words, the work in progress must first be costed under conventional and acceptable stand-
ards, and then it may be reduced by the income already brought into account on the contract, any
506
retention moneys not yet paid (up to 15% of the whole contract price) and any notional loss incurred
on the work completed so far. Finally, the sum of the deductions is limited to the sum of the costs
making up the work in progress.
A separate valuation is required for each contract.
In terms of IFRS 15 (Revenue from Contracts with Customers) that may be used to determine the
costs referred to in the second and third items above, three types of relevant costs are identified to
be included in the cost price of the trading stock:
l the costs that relate directly to a specific contract
l the costs that generate or enhance resources of the entity that will be used in satisfying perform-
ance obligations in the future, and
l the costs that are expected to be recovered.
Example 14.7. Contractors’ work in progress
A building contractor shows the following results for Contract A for the year ending on the last
day of February:
Income:
Work certified to date.............................................................................................. R300 000
Less: Retention (20%) ................................................................................................ (60 000)
Progress payments received ...................................................................................... R240 000
Expenses:
Materials ..................................................................................................................... R150 000
Labour ........................................................................................................................ 140 000
Overhead costs .......................................................................................................... 20 000
The total contract price is R500 000, and it is estimated that a loss of R15 000 will be made on
completion of the contract.
Calculate the value of work in progress to be included in closing stock at year-end.
SOLUTION
Total costs:
Materials ............................................................................................................... R150 000
Labour ...................................................................................................................... 140 000
Overhead costs ........................................................................................................ 20 000
R310 000
Less: Progress payments to date ............................................................ R240 000
Retention (limited to 15% of R500 000 = R75 000) ........................ 60 000
Loss to date (R300 000/500 000 × 15 000) ................................... 9 000
(309 000)
Closing stock ............................................................................................................... R1 000
(See chapter 12 for additional notes regarding future expenditure on contracts (s 24C).)
14.9 Securities lending arrangements and collateral arrangements (s 22(4A), (4B)

and (9))
A security lending arrangement (which is the type of transaction referred to in s 22(4A) and 22(9))
can schematically be explained as follows:
Borrower borrows
Lender lends Loan local securities or a Sale A third party
local securities local or foreign
buys the secur-
or a local or Government bond to
Identical securities or ities or the
foreign Govern- enable him to sell
the same bond are bond from the
ment bond to securities or a bond
returned to the lender borrower
borrower of the same kind to
within 12 months a third party
507
A collateral arrangement (which is the type of transaction referred to in s 22(4B) and 22(9)) is an
arrangement where one party (the transferor) delivers some form of property, in this case local shares
or a local or foreign Government-issued bond (held as trading stock), to another party (the trans-
feree). The parties agree that the transferee may use the shares or the bond, in the event of a default
by the transferor, to satisfy any outstanding obligations (or debt) of the transferor to the transferee. If
all obligations are met, identical shares or the same bond should be returned to the transferor within
24 months. Taking collateral is one of the principal ways participants in financial markets reduce their
credit risk.
Identical security is in respect of a listed security, as defined in the Securities

Transfer Tax Act (25 of 2007), that is the subject of a securities lending arrange-
ment:
l a security of the same class in the same company as that security, or
l any other security that is substituted for that listed security in terms of an
arrangement that is announced and released as a corporate action as contem-
plated in the JSE Limited Listings Requirements in the Stock Exchange News
Service (SENS) as defined in the JSE Limited Listing Requirements (s 1).
Identical share is in respect of
Please note!
l a share of the same class in the same company as that share, or
l any other share that is substituted for a listed share in terms of an arrangement
that is announced and released as a corporate action as contemplated in the
JSE Limited Listings Requirements in the Stock Exchange News Service
(SENS) as defined in the JSE Limited Listings Requirements or a corporate
action meant in the listings requirements of any other exchange, licenced under
the Financial Markets Act, that are substantially the same as the requirements
prescribed by the JSE Limited Listings Requirements, where that corporate ac-
tion complies with the applicable requirements of that exchange (s 1).
Both a lending arrangement (involving securities or a local or foreign Government-issued bond) and
a collateral arrangement (involving shares or a local or foreign Government-issued bond) entered into
between two taxpayers will not be classified as an acquisition of new shares, bonds or securities by
either the borrower or transferee or the lender or transferor (s 22(4A) and (4B)). It will therefore not be
seen as the acquisition of new trading stock, as it is a lending or collateral arrangement of identical
securities, identical shares or the same bond and not a sale. If a lending or collateral arrangement
should fall over the year-end of a taxpayer, the securities, shares or bonds in question will be
deemed to be closing stock of the lender or transferor and not the borrower or transferee (s 22(9)).
14.10 Deemed capital receipts from the disposal of shares (s 9C)

Section 9C provides that
l any amount received by or accrued to a taxpayer (other than a dividend or a foreign dividend), or
l any expenditure incurred
l in respect of an equity share
l shall be deemed to be of a capital nature
l if that share had, at the time of the receipt or accrual of that amount, or the incurral of the ex-
pense
l been held for a period (continuous) of at least three years (s 9C(2)).
Therefore, if an equity share fulfils all the requirements of s 9C, the disposal thereof will automatically
be deemed to be of a capital nature, even if held as trading stock and irrespective of whether a gain
or loss is made on disposal. Any expenditure incurred in relation to the equity share will, after the
three-year holding period, also be deemed to be of a capital nature and will not be deductible. If
shares are held in a partnership, the three-year holding period starts on the date of acquisition of the
fractional interest in the share, by the partner.
508
An equity share is any share in a company, excluding a share that, neither for
dividends nor for returns of capital, has any right to participate beyond a specified
amount in a distribution (s 1(1)).
If a right in terms of dividends, or return of capital, is unrestricted, the share will
qualify as an equity share.
The definition of equity share is expanded for purposes of s 9C(1) to include
l a participatory interest in a portfolio of a collective investment scheme in
securities (i.e. share portfolio, but excluding a Collective Investment Scheme in
property), and
l a portfolio of a hedge fund collective investment scheme
Please note!
but excluding a share which at any time prior to the disposal of that share was
l an interest in a share block company as defined in s 1 of the Share Blocks
Control Act (excluded since the right of use attaching to the share represents
an interest in immovable property and s 9C was never intended to apply to
land dealers)
l an unlisted foreign company (as the sale of foreign shares can in certain
instances (par 64B of the Eighth Schedule) already be exempt from tax if capi-
tal in nature), or
l a hybrid equity instrument as defined in s 8E (a share with both equity and
debt features, see chapter 16).
All listed shares on an exchange operated by the JSE Ltd (South African and foreign), private com-
pany shares, interests in close corporations and certain collective investment schemes will therefore
fall within the ambit of s 9C and the application of the section will therefore also affect share dealers
(see 14.11). Preference shares with limited dividend rights and rights to return of capital on liquida-
tion (non-participating preference shares) are not equity shares (Interpretation Note No. 43 (Issue 8)
(issued on 12 August 2021)).
Disposal is defined as
l a disposal as defined in par 1 of the Eighth Schedule, which means any event, act, forbearance
or operation of law envisaged in par 11 or treated as a disposal in terms of the Act (see chapter 7
for details) (s 9C(1)).
If equity shares are held as trading stock (see 14.11), s 9C may deem the shares (if held for at least
three continuous years) to be of a capital nature on disposal, therefore
l if a taxpayer disposes of equity shares, he must include in his income for that year (recoup) any
expenditure or loss incurred in relation to those shares that was allowed as a deduction from his
income under s 11 during that or any previous year of assessment (for example opening stock)
(s 9C(5)), and
l this implies that a deemed recoupment under s 22(8) should technically be included in income
(see 14.6). Since s 9C(7) makes it clear that the provisions of s 22(8) will not apply on the dispos-
al of an equity share held for a period exceeding three years, no recoupment under s 22(8) will
be applicable.
l Expenditure or losses previously allowed as deductions from the income of a

taxpayer, that has already been recouped under s 8(4)(a) (see chapter 13) or
under the provisions of s 19 (see chapter 13 – concession or compromise in
respect of a debt) will not be recouped again under the provisions of s 9C(5)
(proviso (a) to s 9C(5)).
Please note! l Expenditure in respect of equity shares held in a resident REIT (real estate
investment trust) or a controlled company of an REIT (an REIT subsidiary) (as
defined in s 25BB(1) – see chapter 19) will not be recouped again under the
provisions of s 9C(5). This exclusion will only be applicable to the expenditure
that was not taken into account as part of the cost price of the shares (either
as the cost of trading stock, opening or closing stock) (proviso (b) to s 9C(5)).
509
Example 14.8. Application of s 9C(7)

On 1 March 2018, Ostrich Ltd acquired 100 equity shares in Crocodile (Pty) Ltd for R150 000,
which were held as trading stock. On 1 March 2022, Ostrich Ltd distributed the 100 Crocodile
(Pty) Ltd shares as a dividend in specie when the market value was R300 000.
Calculate the normal tax implications for Ostrich Ltd in respect of the sale of the shares for the
year of assessment ending 28 February 2023.
SOLUTION
Opening stock (s 22(2)) ............................................................................................ (R150 000)
Add back: Adjustment under s 9C(5) ....................................................................... R150 000
Note: Due to the application of s 9C(7) there will be no recoupment of the market
value of the shares (of R300 000 in income) distributed as a dividend in specie
in terms of s 22(8)(b)(iii))
Capital gains implications on the sale of shares as s 9C deems the proceeds to
be of a capital nature as the shares were held for a continuous period of longer
than three years (held for four years):
Proceeds (R300 000) less base cost (R150 000) = R150 000 capital gain
Taxable capital gain included at an inclusion rate of 80% ....................................... R120 000
When a taxpayer has disposed of any shares of the same class in the same company that were
acquired by him on different dates, he will be deemed to have disposed of those shares held by him
for the longest period (FIFO method of valuation) (s 9C(6)). This provision only prescribes the deter-
mination of the holding period of the shares sold and not the valuation method of the shares, which
for capital gains tax purposes are prescribed by par 32 of the Eighth Schedule (identification rules –
see chapter 17).
A deemed disposal arises when a natural person or trust holds a listed security when it is delisted on
a South African exchange and then listed on a foreign exchange (s 9K – see chapter 20). For pur-
poses of s 9C(2), the security listed on a foreign exchange must be treated as one and the same
security as the delisted security.
The timing provisions contained in s 42 (asset-for-share transactions – see chapter 20), as part of the
corporate roll-over relief, do not apply for purposes of determining whether the share is an ‘equity
share’ as defined in s 9C. The equity shares acquired in terms of an asset-for-share transaction will
be acquired on the date of the transaction. However, if the asset disposed of in terms of an asset-for-
share transaction is an equity share, the timing provisions contained in s 42 are applicable for pur-
poses of s 9C. The new equity shares acquired in terms of the asset-for-share transaction will be
deemed to have been acquired on the date that the original equity shares (given up in exchange)
were originally acquired (s 42(2)(a)(ii)).
Example 14.9. Application of s 9C
Mr Mulaudzi is a share dealer. Four years ago, he acquired listed shares for a purchase price of
R15 000. He has decided to now sell these shares for R60 000.
Calculate all the tax implications for Mr Mulaudzi in respect of the year of the sale of the shares.
SOLUTION
Opening stock (s 22(2)) ............................................................................................ (R15 000)
Add back: Adjustment under s 9C(5) ....................................................................... R15 000
Capital gains tax implications on the sale of shares because s 9C deems the
proceeds to be of a capital nature as the shares were held for a continuous
period of longer than three years (held for four years):
Proceeds (R60 000) less base cost (R15 000) = R45 000 capital gain – R40 000
(the annual exclusion) = R5 000
Taxable capital gain included at an inclusion rate of 40% ....................................... R2 000
510
Remember
Section 9C does not provide absolute certainty as to whether the proceeds on a share are cap-
ital or revenue in nature on the sale of shares, since it is only applicable to shares held for a
period of at least three years. If a person sells his shares within three years of acquiring them,
they will not automatically be deemed to be of a revenue nature and fully taxable. He or she will
still be entitled to argue (and will bear the onus of proving) that the profits ought to be capital
and not revenue in nature in terms of s 102 of the Tax Administration Act.
When a company in which the taxpayer holds a share issues the taxpayer with another share in sub-
stitution for the original share because of
l a subdivision of shares, consolidation or any similar arrangement, or
l a conversion from a co-operative or a close corporation to a company (as provided for under
ss 40A or 40B)
the original share and the substitution share or shares will be deemed to be one and the same share
(taxpayers will thus not have to start a new time count for the period of shareholding) if
l the taxpayer’s participation rights and interests in the company remain unaltered, and
l no consideration whatsoever passes directly or indirectly from him to the company for the issue of
the substitution share (s 9C(8)).
The taxpayer’s combined period of ownership of both shares will establish whether or not the shares
concerned qualify as equity shares. Any shares paid for (for example rights issues made on shares)
will not qualify under the substitution rule. Such shares cannot qualify for the tax-free status bestowed
by s 9C, unless they are held for at least three years.
Please note! Capitalisation shares will be acquired on the date of issue at a cost of Rnil
(s 40C) and the holding period will run from that date.
Take note of the following special provisions contained in s 9C relating to specific types of trans-
actions:
l If taxpayers are involved in a securities lending arrangement (see 14.9) and identical securities
are returned by the borrower to the lender, they are deemed to be one and the same securities
in the hands of the lender. In other words, the transaction does not represent a disposal of the
securities by the lender for normal tax purposes, nor an acquisition of such securities by the bor-
rower (s 9C(4)). The same would apply to a collateral arrangement. In other words, the transac-
tion does not represent a disposal of the shares by the transferor for normal tax purposes, nor an
acquisition of such shares by the transferee (s 9C(4A)).
l In certain circumstances, a deduction is allowed for expenditure incurred in the acquisition of
shares in a venture capital company (under s 12J – see chapter 12). If these shares are sold with-
in five years, the amount of the deduction will have to be recouped in terms of s 8(4)(a). If an
amount is received or accrued in respect of the disposal of shares, or in respect of a return of
capital, in a venture capital company and the expenditure previously allowed as a deduction is
recouped in terms of s 8(4)(a), then s 9C(2) will only apply to the extent that the amount received
or accrued on disposal of the shares exceeds the expenditure incurred in acquiring the shares (if
held for at least three years) (s 9C(2A)). Once a venture capital share has been held for more
than five years (s 12J(9) – see chapter 12) the expenditure previously allowed as a deduction
(under s 12J(2)) will no longer be recouped (under s 8(4)(a)). Section 9C(2) will therefore apply to
venture capital shares held for more than five years (Interpretation Note No. 43 (Issue 8)). The
s 12J(2) deduction is only available to venture capital shares acquired until 30 June 2021
(s 12J(11)). Venture capital shares acquired after 30 June 2021 will therefore fall within the ambit of
s 9C if disposed of after it was held for at least three years.
511
Anti-avoidance measures applying to amounts received or accrued in respect of equity shares in

companies holding immovable property and bare dominium schemes
Section 9C will not apply (and the general principles laid down by the South African tax court will
determine the capital or revenue nature) to equity shares held in a company if at the time of the
receipt or accrual of the amount (excluding a dividend or a foreign dividend) in respect of those
shares, the taxpayer is a connected person (as defined in s 9C(1)) in relation to the company that
issued the shares, and
l more than 50% of the total value (the 50% calculation is made based on market value of the tainted
immovable property compared to market value of all assets (and not on the basis of net asset
value) – Interpretation Note No. 43 (Issue 8) of the company consists of immovable property held
directly or indirectly
– by a person that is not a connected person to the taxpayer, or
– for a period of at least three years immediately before the receipt or accrual (s 9C(3)(a)), or
l any other asset acquired within the three-year period before the receipt or accrual, encumbered
by a lease or a licence for which payments are directly or indirectly received by or accrued to a
person other than the company during the same three-year period (s 9C(3)(b)).
In the absence of this anti-avoidance measure (in s 9C(3)), a person could buy immovable property
and place it in a company where he holds the shares for at least three years. The shares could then
be disposed of and the amount received will then be deemed to be capital in nature. This measure
will also prevent the proceeds being deemed to be capital, where a return of capital or a foreign
return of capital is received or accrued under the specified circumstances after the equity shares
have been held for at least three years.
A connected person for purposes of s 9C(3), is a connected person as defined in s 1 (see chap-
ter 13), with the exception that a company will be treated as a connected person in relation to another
company in which it holds at least 20% or more of the equity shares or voting rights, notwithstanding
the fact that another holder of shares might hold the majority voting rights in such other company
(s 9C(1)).
Example 14.10. Application of s 9C anti-avoidance measures
Mrs Greeff acquired all the equity shares of Flatco (Pty) Ltd (a shelf company) in Year 1. In
Year 5, she provided Flatco (Pty) Ltd with a guarantee so that it could acquire a block of flats.
The bank provided Flatco (Pty) Ltd with a mortgage bond to finance the acquisition of the flats.
Six months after Flatco (Pty) Ltd acquired the flats, Mrs Greeff sold all the shares in Flatco (Pty) Ltd.
Discuss the tax implications for Mrs Greeff in respect of the sale of the shares.
SOLUTION
Mrs Greeff is a connected person (as defined in ss 1 and 9C(1)) to Flatco (Pty) Ltd. More than
50% of the market value of the shares held by Mrs Greeff in Flatco (Pty) Ltd is directly attribut-
able to immovable property. The immovable property is tainted because it has been held for
less than three years (s 9C(3)(a)). Section 9C(2) will not apply to Mrs Greeff when she disposes
of the shares in Flatco (Pty) Ltd although she has held the shares for longer than three years.
The capital or revenue nature of the amount derived on the disposal of the Flatco (Pty) Ltd
shares must be determined by applying the principles laid down by case law.
(Example adapted from Interpretation Note No. 43 (Issue 8))
The provisions of s 9C are not applicable to equity instruments qualifying under

ss 8B or 8C since these sections recognise gains realised on these shares as part
of remuneration (see chapter 10). (Note, however, that s 9C will apply to sub-
Please note!
sequent disposals of shares, once the provisions of ss 8B and 8C are no longer
applicable to the shares (if the five-year period for inclusion under s 8C has
elapsed or once a share has become unrestricted.)
512
14.11 Share dealers (ss 22, 22B and 40C)

Share dealers hold shares as trading stock; thus, buying and selling shares with the purpose of
earning profits in a profit-making scheme (speculation). A share dealer may hold certain shares as
assets of a capital nature, whilst other shares are held as trading stock (of which the proceeds will be
revenue in nature).
A share dealer will include the proceeds of the shares that are disposed of in gross income and will
claim the cost of the shares acquired as a deduction (remember that special rules exist for the de-
termination of the cost price of shares in a CFC (see 14.4 – s 22(3)(a)(iii)). In addition, holdings of
shares at the beginning and end of a year of assessment will be taken into account, respectively as
opening and closing stock in terms of s 22 when determining taxable income.
The cost of the shares will include
l the acquisition costs
l commissions paid to agents
l the cost of registration of shares in his name
l broker’s fees, and
l securities transfer tax paid on the acquisition of the shares.
Unlike other trading stock, the cost price of shares held as trading stock at the end of a year of assess-
ment may not be reduced on account of a decrease in market value or any other reason (s 22(1)). It
must be valued at cost, unless one of the following circumstances applies:
l If a company issues shares, share options or other rights for the issue of shares to a person for no
consideration, the expenditure actually incurred will be deemed to be Rnil. These shares or options
will therefore have no cost price (or base cost for capital gains purposes) (s 40C).
l If a company issues shares to a share dealer in exchange for an asset acquired from the share
dealer and the consideration is different from an arm’s length consideration, the value of the
shares obtained as trading stock will be determined according to the provisions of s 24BA (see
chapter 20).
Remember
l If instruments are held as trading stock, the taxpayer may elect that the provisions of s 24J do
not apply and that the instrument will be valued at market value (in terms of s 22(1)(b) read with
s 24J(9)).
l All financial instruments included in closing stock must be valued at cost (regardless of the
nature of the holder) (s 22(1)).
l A share held as trading stock and which fulfils the requirements of s 9C will automatically be
deemed to be capital in nature on disposal (this applies to both gains and losses – see 14.10).
A share dealer will still be exempt from tax on receipts and accruals of dividends (except dividends
arising on share buy-backs (s 10(1)(k)(i)) and certain foreign dividends). Any expenditure incurred in
carrying on a business of share dealing, for example bank charges, internet access charges, cost of
telephone calls and technical analysis software to manage the share portfolio, will be allowed as a
deduction in determining its taxable income. This expenditure will be allowable as having been
incurred in the production of income in the form of the proceeds on the disposal of shares constitut-
ing trading stock. It will usually not have been incurred in the production of the exempt dividend
income. If the expenditure was incurred in the production of exempt income, this expense will not be
allowed as a deduction in terms of s 11(a) as it would be prohibited by s 23(f ). Section 23(q) also
prohibits the deduction of expenditure incurred to produce foreign dividend income. Expenses will
also no longer be deductible after the shares were held for at least three years, since it is no longer in
the production of income from the start of Year 4 (s 23(f), since the proceeds on disposal will be
capital in nature in terms of s 9C (Interpretation Note No. 43 (Issue 8)).
Dividend-stripping schemes
In special circumstances (such as a dividend-stripping scheme), the expenditure incurred to acquire
the shares should be apportioned. In essence, a dividend-stripping operation occurs when a share
dealer buys shares in another target company as trading stock, causes that target company to de-
clare and distribute a tax-free dividend out of its undistributed profits, and then sells the shares. The
513
value of these shares is now depleted and they will be sold at a ‘loss’ representing the difference
between their cost and their selling price. The share dealer aims to receive
l dividends, which are exempt from tax, and
l proceeds for shares held by it as trading stock, which would be included in gross income.
The share dealer will consequently seek to deduct the cost of the shares and all other associated
costs from the proceeds included in gross income for tax purposes (the costs being more than the
proceeds, and therefore resulting in a loss).
If all goes as planned, there are two advantages in this type of operation, i.e.
l a loss to be set off against other income, and
l the effective receipt in the form of tax-free dividends of what would otherwise be the (additional)
taxable proceeds from the disposal of the shares.
An apportionment of the expenditure incurred by a share dealer on the acquisition and maintenance
of shares will be required when the shares are acquired in anticipation of the receipt of a liquidation
dividend. The expenditure is therefore incurred in the production of both taxable income (the portion
of the liquidation distribution that is not a dividend) and exempt income (dividends). The part of the
expenditure incurred in the production of the dividend or exempt portion of the liquidation distribution
will be disallowed as a deduction.
This principle was the subject in a variety of case law, with the most important case being CIR v
Nemojin (Pty) Ltd (1983 A). In this case the court prescribed a formula for the deduction of the expens-
es incurred to acquire the shares. The taxpayer company bought dormant companies with distri-
butable reserves at a discount as a service to those wishing to be rid of their companies. The tax-
payer then disposed of the companies as part of a classic dividend-stripping operation, first clearing
out their reserves by means of dividends exempt from normal tax. The taxpayer was carrying on the
trade of dealing in shares. The cost of the shares it bought was therefore not of a capital nature and
so complied with the non-capital requirement of s 11(a). It also complied with the requirements of
s 23(g) since it constituted moneys wholly or exclusively laid out or expended for the purposes of
trade, as was at that time required by s 23(g). But was the expenditure incurred in the production of
‘income’ as required by s 11(a) or was the expenditure in respect of amounts derived that did not
constitute ‘income’ (s 23(f ))?
The Appellate Division found that the expenditure was incurred with a dual purpose, and the expend-
iture had to be apportioned according to the following formula:
D
A = (B + C) ×
(D + E)
where
A = deductible expenses
B = general expenses relating to share dealing
C = total cost of acquisition of shares in companies subjected to dividend-stripping in the year of
assessment
D = total proceeds of the sale of such shares, and
E = total dividends received in respect of such shares.
Example 14.11. Dividend-stripping operation
Company Britsky is a share dealer and acquired the shares in Target Co in terms of a dividend-
stripping operation for R1 000 000. After declaring the cash available in Target Co as a dividend,
Company Britsky sold the remaining shell of Target Co for R200 000.
Prior to the dividend-stripping operation Target Co’s statement of financial position was as
follows:
Assets: R
Bank and cash...................................................................................... 1 000 000
1 000 000
Equity and liabilities:

Share capital......................................................................................... 200 000
Retained income (‘local’ reserves only) ................................................ 800 000
1 000 000
Separately indicate what the taxation consequences would be if it was not a dividend-stripping
operation and if it was a dividend-stripping operation.
514
SOLUTION R
If the transaction was not a dividend-stripping operation, the taxation
consequences would be:
Less: Deduction for purchases allowed by s 11(a) .............................. (1 000 000)
Add: Dividend received included in gross income .............................. 800 000
Less: Dividend exempt by s 10(1)(k) .................................................... (800 000) nil
Add: Sale of shares included in gross income ..................................... 200 000
(800 000)
However, the transaction is a dividend-stripping operation, and therefore the

purchase cost should be apportioned. The taxation consequences will be:
R
200 000
Less: Deduction for purchases 1 000 000 × (200 000)
200 000 + 800 000
Add: Dividend received included in gross income ........................... 800 000
Less: Dividend exempt by s 10(1)(k) ................................................. (800 000) nil
Add: Sale of shares included in gross income .................................. 200 000
nil
Dividends treated as income on disposal of certain shares (section 22B)

Section 22B extends the principles laid down in the CIR v Nemojin (Pty) Ltd (1983 A) court case. The
introduction of dividends tax (at a rate of 20% in the hands of the holder of shares (excluding resident
companies)) has given rise to the opportunity for company holders of shares when selling shares to
convert the proceeds to dividends. The dividends received will be exempt from tax and no capital
gains will be payable on the amount. The anti-avoidance dividend-stripping rules will also cover
cross-border dividends, including foreign company dividends to South African holders of shares and
domestic company dividends to holders of shares in foreign companies.
If a taxpayer that is a company holds shares in another company (the target company) and disposes
of any of those shares, the amount of any exempt dividend received by or accrued to the taxpayer for
any shares held by the taxpayer in the target company will be included in his income (s 22B(2)).
The inclusion of the exempt dividend in income will not be automatic but will only apply:
l to the extent that the exempt dividend qualifies as an extraordinary dividend
l if the company held a qualifying interest in the target company at any time during the 18 months
before the disposal, and
l if the shares were held as trading stock (immediately before disposing of it) (s 22B(2)).
The extraordinary dividend will be included in income
l in the year of assessment that the shares are disposed of, or
l if the dividend is received or accrues in a later year of assessment, in that later year (s 22B(2)).
The provisions of s 22B (dividends treated as income on the disposal of certain

shares held as trading stock by a share dealer) are mirrored with the provisions
contained in paras 19 and 43A of the Eighth Schedule (dividends treated as
proceeds on the disposal of certain shares held as capital investments) (see
chapters 17 and 20).
Please refer to chapter 20 where the following definitions (applicable to dividend-
stripping both in the context of shares disposed of as trading stock (s 22B(1)) and
Please note! shares disposed of as a capital investment (par 43A(1) of the Eighth Schedule))
and the application of s 22B and par 43A of the Eighth Schedule are explained in
more detail:
l deferral transaction
l exempt dividend
l extraordinary dividend
l preference share, and
515
Example 14.12. Exempt dividends treated as income on disposal of certain shares (s 22B)
Sharedealer Ltd owns 60% of the equity shares in Resident Ltd. (The market value of the 60%
shareholding was R3 200 000 18 months before the disposal of the shares – see below.) On
1 March 2021, Resident Ltd distributes a dividend (that will qualify for exemption from taxation
under s 10(1)(k)(i)) of R800 000 to Sharedealer Ltd. Sharedealer Ltd sells the 60% shareholding
in Resident Ltd to Purchaser Ltd on 30 September 2021, when the market value of the 60%
shareholding was R2 500 000 in terms of transaction that is not a ‘deferral transaction’ as de-
fined.
Calculate the tax implications for Sharedealer Ltd (whom you can assume held the shares as
trading stock) regarding the dividend received from Resident Ltd for the year of assessment
ending on 31 December 2022.
SOLUTION
Dividend received treated as income (Extraordinary dividend = Excess of
R800 000 over R480 000 (15% of the higher of R3 200 000 or R2 500 000))
(s 22B(1) and (2)) ..................................................................................................... R320 000
Remaining dividend received (R480 000 – excluded from the provisions of
s 22B(2) since it does not qualify as an extraordinary dividend (first 15% of the
higher of market value of the shares 18 months prior to disposal (R3 200 000) or
on the date of disposal (R2 500 000) (s 22B(1)) but included in gross income in
terms of special inclusion par (k)) ............................................................................ R480 000
Exempt: Section 10(1)(k)(i) ....................................................................................... (R480 000)
The dividend-stripping provisions of s 22B will not be applicable if a company,

holding shares as trading stock, disposes of these shares on or after 1 January
Please note! 2019 in terms of a ‘deferral transaction’ (defined in s 22B(1) as a transaction in
respect of which the roll-over relief provided under the corporate rules applies –
ss 41 to 47 – see chapter 20). The roll-over relief provisions will therefore take
preference over the dividend-stripping rules contained in s 22B.
516
15 Foreign exchange
Annelize Oosthuizen and Alta Koekemoer

l discuss how foreign currency amounts should be translated to rand for tax purposes
l discuss when and how foreign exchange differences should be calculated for tax
purposes
l calculate the foreign exchange differences that should be included in or deducted
from income
l determine how foreign exchange differences should be treated when assets are
purchased
l explain and calculate the tax treatment of foreign exchange differences on trans-
actions with connected persons and controlled foreign companies
l apply the provisions of ss 24I, 25D and par 43 of the Eighth Schedule in tax calcu-
lations.
Contents
Page
15.1 Overview ............................................................................................................................. 518
15.2 Translation of foreign currency amounts ............................................................................ 519
15.2.1 Definitions (s 1) ..................................................................................................... 519
15.2.2 General translation rule: (s 25D) .......................................................................... 520
15.2.3 Specific translation rule: Controlled foreign companies (s 9D) ........................... 522
15.2.4 Specific translation rule: Foreign tax rebates and deductions (s 6quat) ............. 522
15.3 Specific translation rule: Exchange differences on exchange items (s 24I)...................... 522
15.3.1 Step 1: Identify the exchange item and determine if s 24I applies (ss 24I(1)
and 24I(2)) ............................................................................................................ 523
15.3.2 Step 2: Determine the ruling exchange rates (s 24I(1)) ....................................... 526
15.3.3 Step 3: Calculate the foreign exchange differences (ss 24I(1) and 24I(4)) ........ 528
15.3.4 Step 4: Determine if the exchange difference should be deferred (ss 24I(7)
and 24I(10A))........................................................................................................ 531
15.3.4.1 Acquisition of assets (s 24I(7)) ............................................................. 531
15.3.4.2 Transactions between companies forming part of the same group
of companies and between connected persons (s 24I(10A)) .............. 534
15.4 Specific translation rule: Hedging instruments .................................................................. 537
15.4.1 Forward exchange contracts (s 24I(1)) ................................................................ 537
15.4.2 Foreign currency option contracts (s 24I(1)) ....................................................... 538
15.5 Specific translation rule: Affected contracts (s 24I(1)) ....................................................... 540
15.5.1 Affected forward exchange contracts (s 24I(1)) .................................................. 540
15.5.2 Affected foreign currency option contract (s 24I(1))............................................ 541
15.6 Sundry provisions ............................................................................................................... 542
15.6.1 Bad debts (s 24I(4)) ............................................................................................. 542
15.6.2 Anti-avoidance rule (s 24I(8)) ............................................................................... 543
15.6.3 Commencement or cessation of application of provisions of s 24I (s 24I(12)) ... 543
15.7 Specific translation rule: Disposal and acquisition of assets (par 43 of the
Eighth Schedule) ................................................................................................................ 543
15.8 Specific translation rules: Other (ss 6quat(4), 64N(4), 35A(4), 47J, 49H and 50H) .......... 547
15.9 Crypto assets ...................................................................................................................... 547
517
Page
15.10 Exchange Control Regulations ......................................................................................... 548
15.10.1 Individual investment allowances...................................................................... 548
15.10.2 Import payments................................................................................................ 548
15.10.3 Emigrants: Withdrawals from retirement annuity funds and preservation
funds .................................................................................................................. 548
15.11 Comprehensive example ................................................................................................. 549
15.1 Overview
Most taxpayers are influenced in some way or another by fluctuations in the exchange rates at which
the currencies of two countries are exchanged. The change in the value of currencies has specific
normal tax implications.
A taxpayer can enter into various transactions in a foreign currency (i.e., a currency other than rand).
In order to calculate the effect of the transactions on the taxable income of a person, the amounts of
the transactions must be translated to the same currency, namely rand, by applying the following
general principles:
l If gross income was received by or accrued to a person in a foreign currency or tax-deductible
expenditure was incurred in a foreign currency, such amounts should be translated to rand using
the general translation rules in s 25D.
l If expenditure was incurred for the acquisition of an asset, the cost or market value of the asset
must be translated to rand in order to calculate the capital allowances and/or recoupments by
using the general translation rules in s 25D.
l If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain
or loss must be calculated by applying the specific translation rules of par 43 of the Eighth
Schedule.
l If an asset that was acquired in rand is subsequently disposed of for a consideration denomin-
ated in a foreign currency, the capital gain or loss must be calculated by applying the specific
translation rules of par 43 of the Eighth Schedule.
l The exchange gains and losses arising on exchange items (i.e., unit of currency, foreign debt,
foreign exchange contract or a forward exchange contract) must be calculated and included in
or deducted from the income of a person by applying the specific translation rules of s 24I.
The different tax provisions and effects on taxable income are summarised in the following diagrams.
Diagram (a) illustrates the relevant provisions if income was received/accrued to in a foreign currency
or if an expense was paid/incurred in a foreign currency:
(a)
EXPENSE/INCOME EXCHANGE ITEM
S 25D S 24I
Deduct the expense or

include the income by Deduct the exchange
converting the amounts loss or include the
to rand exchange gain
(see par 15.2.2) (see par 15.3–15.6)
518
15.1–15.2 Chapter 15: Foreign exchange
Diagram (b) illustrates the relevant provisions if an asset was acquired and/or disposed of in a
foreign currency:
(b)
COST OF ASSET EXCHANGE ITEM
S 25D Par 43 S 24I
Claim capital Calculate the

allowances by Deduct the exchange
capital gain or capital
converting the loss or include the
loss on date of
cost to rand exchange gain
disposal of the asset
(see par 15.2.2) (see par 15.3–15.6)
(see par 15.7)
15.2 Translation of foreign currency amounts

In order to calculate the taxable income of a person, all the income and expenditure amounts must
be in the same currency, namely rand. If income was received in a foreign currency or an expense
was incurred in a foreign currency, such amounts must be translated to rand.
The South African Income Tax Act makes provision for two categories of rules regarding the transla-
tion of foreign currency amounts:
l the general translation rules (s 25D), and
l the specific translation rules (see 15.2.3 to 15.7).
There should always, firstly, be determined if a specific translation rule is applicable before the gen-
eral translation rules are considered.
Remember
l The translation rules relating to exchange gains and losses arising on exchange items are
determined by s 24I (see 15.3).
l The translation rules relating to capital gains and losses are determined by par 43 of the
Eighth Schedule (see 15.7).
15.2.1 Definitions (s 1)
The following definitions are important for the application of the translation of foreign exchange
amounts:
Average exchange rate
The average exchange rate in relation to a year of assessment is determined by using the closing
spot rates at the end of the daily or monthly intervals during the year of assessment. This average
exchange rate must be applied consistently during the year of assessment.
Spot rate
The appropriate quoted exchange rate at a specific time by any authorised dealer in foreign exchange
for the delivery of currency. An ‘authorised dealer’ is a bank registered with the Registrar of Banks
that is subsequently authorised to deal in foreign exchange.
In calculating the average exchange rate, a taxpayer must determine the closing rate at the end of
each day or month (average exchange rate definition in s 1). Whichever method the taxpayer chooses
to use, he will have to apply it consistently during that year of assessment.
Natural persons and non-trading trusts have the option to use the average exchange rate for the
relevant year of assessment or the spot rate to translate foreign currency transactions. By implication
companies cannot elect which rate to use. As per the provisions of s 25D(1), companies have to use
the spot rate (see 15.2.2).
519
Remember
The exchange rate can be expressed by either providing
(a) the rate per FC1 (e.g. $1:R7.60) (referred to as direct quotation), or
(b) the rate per R1 (e.g. R1:$0.1315) (referred to as indirect quotation).
If you have to convert $10 000 to rand by using the above exchange rates, the calculations will
be as follows:
(a) $10 000 × R7.60 = R76 000
(b) $10 000 / R0.1315 = R76 046 (the reason why (b) differs is because of the initial rounding of
the rate of R0.1315)
15.2.2 General translation rule (s 25D)

The general provision in the Act that deals with the translation of foreign exchange is s 25D. The
following methods for translation should be applied as a general rule:
With regard to Method of translation

Non-natural persons, including a trust l Determine the currency in which the income or expenditure
that carries on a trade (s 25D(1)) transaction occurred.
l Translate to rand using the spot rate on the date on which the
amount was so received or accrued or the expenditure was so
incurred.
Natural persons or trusts (other than a l Determine the currency in which the income or expenditure
trust that carries on a trade) (s 25D(3)) transaction occurred.
l Translate to rand by electing the spot rate OR the average
exchange rate for the applicable year of assessment.
A permanent establishment outside l Determine the taxable income in the functional currency
South Africa (s 25D(2)) (note 1) of the permanent establishment (note 2)/(note 3).
l Determine the rand value using the average exchange rate for
l If the permanent establishment is situated in the common
monetary area (i.e., Lesotho, Namibia and eSwatini) then this
method of translation (i.e., using the functional currency) is not
applicable (note 4).
A domestic treasury management com- l Determine the amounts received by or accrued to or the ex-
pany (s 25D(5) and 25D(7)) penditure incurred by the domestic treasury management
company in its functional currency (note 5).
An international shipping company l Determine the amounts received by or accrued to or the ex-
(s 25D(6) and 25D(7)) penditure incurred by the international shipping company in its
functional currency (note 6).
Note 1
‘Functional currency’ is defined in s 1 and distinguishes between the functional currency of a person
and the functional currency of a permanent establishment of a person.
l The functional currency in relation to a person means the currency of the primary economic
environment in which that person’s business operations are conducted (par (a) of the definition of
‘functional currency’).
l The functional currency in relation to a permanent establishment of a person means the currency
of the primary economic environment in which that permanent establishment’s business opera-
tions are conducted (par (b) of the definition of ‘functional currency’).
Factors that are considered when determining whether a currency is a functional currency include
the currency of financing activities, the currency in which sales prices are denominated and settled,
etc.
Note 2
A permanent establishment (as defined by the Organisation for Economic Co-operation and Devel-
opment (OECD)) is defined as a fixed place of business through which the business of the taxpayer
is carried on, for example a branch, factory or workshop.
520
15.2 Chapter 15: Foreign exchange
Note 3
According to s 25D(2A) the translation of taxable income of a permanent establishment outside South
Africa using the functional currency of that permanent establishment, will not be applicable to the
extent that
l the currency is not the functional currency of the permanent establishment, and
l the functional currency of the permanent establishment is the currency of a country with an infla-
tion rate of 100% or more throughout the whole of the relevant year of assessment.
If this is the case, s 25D(2) will not apply and the translation rules contained in s 25D(1) and 25D(3)
should be considered. The concept of experiencing unusually high rates of inflation is known as
hyperinflation or a hyperinflationary economy. Examples of countries that experienced hyperinflation are
Zimbabwe and Venezuela. International Financial Reporting Standards (IFRS) have a specific stand-
ard, IAS 29, that applies when an entity’s functional currency is that of a hyperinflationary economy.
Note 4
If the permanent establishment is located in the common monetary area, s 25D(2) is not applicable
and s 25D(1) or 25D(3) has to be applied. Countries in the common monetary area, i.e., Namibia,
eSwatini and Lesotho’s currencies are equal to the South African rand. This means that in the trans-
lation of a permanent establishment’s taxable income (located in the common monetary area)
l amounts denominated in rand are left in rand
l amounts denominated in the currency of Namibia, eSwatini or Lesotho are translated to South
African rand at a rate of 1:1, and
l any amounts denominated in any ‘other’ foreign currency (for example US dollars) must be trans-
lated using either s 25D(1) (in the case of a company or a trading trust) or s 25D(3) (in the case of
a natural person or a non-trading trust).
Note 5
South Africa’s domestic treasury management company regime allows listed companies on the JSE
to establish one subsidiary to manage the entire group’s treasury functions free from the exchange
control restrictions of the Reserve Bank. A domestic treasury management company is defined in s 1
as a company that has its place of effective management in the Republic and that is not subject to
exchange control regulations by virtue of being registered with the Department of Financial Surveil-
lance of the South African Reserve Bank. A domestic treasury management company, despite being
a South African resident for tax purposes, generally operates in a functional currency other than rand.
A domestic treasury management company will, however, still be taxed according to all other normal
tax principles.
Note 6
An international shipping company is defined in s 12Q as a resident company that holds shares in
one or more South African ships that are used for the international shipping of passengers or goods.
For a detailed discussion on international shipping companies, please see chapter 6.
Example 15.1. General translation rules
Permanent Ltd, a South African resident, trades in France and the business in France is consid-
ered to be a permanent establishment. During the current year of assessment Permanent Ltd
received Μ10 000 from its business in France. Assume an average exchange rate of Μ1 = R14
and a spot rate on the date on which the receipt took place of Μ1 = R12.
Resident Ltd, a South African resident, has a fixed deposit in a bank in the USA. During the current
year of assessment Resident Ltd received $5 000 interest from his investment. Assume that the
date of receipt is also the date of accrual. Assume an average exchange rate of $1 = R11 and spot
rate of $1 = R10 on the date on which the receipt took place.
Calculate the amount to be included in the gross income of:
(a) Permanent Ltd
(b) Resident Ltd
(c) Resident Ltd if it were a natural person (South African resident).
521
SOLUTION
(a) Because Permanent Ltd trades through a permanent establishment in France, its
income from the permanent establishment has to be translated in terms of
s 25D(2) from the functional currency of European Μ to South African rand using
the average exchange rate. The amount to be included in Permanent Ltd’s gross
income is calculated as follows:
Μ10 000 × R14 ..................................................................................................... R140 000
(b) Because Resident Ltd does not have a permanent establishment in the USA,
the amount of interest received will be translated in terms of s 25D(1) using the
spot rate. The amount to be included in Resident Ltd’s gross income is
$5 000 × R10 ..................................................................................................... R50 000
(c) If the fixed deposit was held by a natural person, s 25D(3) determines that the
person can choose to translate the amount of interest either using the average
exchange rate or the spot rate:
Average rate: $5 000 × R11 ............................................................................... R55 000
OR
Spot rate: $5 000 × R10 ............................................................................... R50 000
The natural person will probably choose the most beneficial method for tax purposes
– thus spot rate resulting in R50 000 being included.
In addition to these provisions, there are specific provisions which relate to gains and losses on foreign
exchange transactions, CFCs and rebates on foreign taxes. These specific provisions always have to
be considered first before the general translations rules (s 25D) are considered.
15.2.3 Specific translation rule: Controlled foreign companies (s 9D)

The rules governing the translation of a CFC’s net income or loss in terms of s 9D are contained in
chapter 21.
15.2.4 Specific translation rule: Foreign tax rebates and deductions (s 6quat)
The rules governing the translation of foreign taxes for purposes of s 6quat are discussed in chapter 21.
Remember
The general translation rules will be used unless a specific translation rule is applicable.
15.3 Specific translation rule: Exchange differences on exchange items (s 24I)

The exchange gains and losses arising on exchange items (i.e., foreign unit of currency, foreign
debt, foreign exchange contract or a forward exchange contract) should not be calculated by using
the general translation rules of s 25D. It must be calculated and included in or deducted from the
income of a person by applying the specific translation rules of s 24I.
The following must be included in or deducted from the income of any of the persons referred to
above when calculating their taxable income:
l any exchange difference arising regarding an exchange item held by that person
l any premium or like consideration received or paid by the person in respect of a foreign
currency option contract entered into or acquired by him (see 15.4.2).
The following four steps summarise the calculation of the exchange difference concerning exchange
items:
Step 1: Identify the exchange item and determine if s 24I applies (see 15.3.1).
Step 2: Determine the ruling exchange rates on the transaction date, realisation date and translation
date (see 15.3.2).
Step 3: Calculate the foreign exchange difference (gain or loss) by multiplying the amount in foreign
currency of the exchange item with the difference between the ruling exchange rates on the
different dates (see 15.3.3, 15.4 and 15.5).
Step 4: Determine if the exchange difference should be deferred and recognised in a later year of
assessment because the underlying asset was not yet brought into use or because it re-
lates to a loan between connected persons or a group of companies (see 15.3.4).
522
Remember
Section 24I(3) is the ‘general charging provision’ of s 24I.
l The consequence of this charging provision is that if a taxpayer has incurred a liability in
foreign exchange for the acquisition of, for example, trading stock, the exchange difference
arising on the date the liability is paid is included in, or deducted from, income in the deter-
mination of his taxable income for that year of assessment.
l The trading stock should, however, be translated in terms of s 25D and is deductible in terms of
the rules of the general deduction formula. Even if the taxpayer pays more for the trading stock at
a later stage because of exchange rate fluctuations, only the initial amount will be deductible
in terms of the general deduction formula. Exchange rate differences should be treated
according to s 24I.
l The underlying transaction will not necessarily be trading stock, but it could also be an asset,
other expenditure or even income from sales or income from services rendered. It is, how-
ever, important to remember that the underlying transaction should be treated in terms of
normal income tax rules.
l Only the foreign exchange gain or loss in respect of an ‘exchange item’ (debt, which can be
either a liability or an asset (like a foreign debtor or foreign bank account), FEC, FCOC and a
unit of foreign currency) is dealt with under s 24I. No foreign exchange gain or loss is recog-
nised in terms of s 24I relating to the underlying asset or expense. The conversion rules of
s 25D will apply for purposes of calculating any expense (for example a s 11(a) deduction or
capital allowances) and the rules of par 43 of the Eighth Schedule will apply for purposes of
calculating the capital gain or loss on disposal of the underlying asset.
l For accounting purposes (IFRS) the term ‘monetary item’ is used instead of ‘exchange item’
(IAS 21.8).
15.3.1 Step 1: Identify the exchange item and determine if s 24I applies (s 24I(1) and 24I(2))
An ‘exchange difference’ is the foreign exchange gain or foreign exchange loss in respect of an
exchange item during any year of assessment.
An ‘exchange item’ is defined is an amount in a foreign currency
l that is a unit of currency acquired and not disposed of by a person, or
l owing by or to a person in respect of a debt incurred by or payable to him, or
l owed by or to a person in respect of a ‘forward exchange contract’, or
l where a person has the right or contingent obligation to buy or sell in terms of a ‘foreign currency
option contract’.
Remember
Each of these exchange items exists independently of the other three. If trading stock is there-
fore purchased and the supplier is reflected as a creditor denominated in foreign currency, the
debt constitutes an exchange item. If a forward exchange contract is entered into to hedge the
debt, the forward exchange contract constitutes a separate exchange item. Accordingly, ex-
change differences will have to be computed in respect of both exchange items, namely the
debt and the forward exchange contract.
The following table describes the meaning of the four exchange items:
Exchange item Description
Unit of currency A unit in foreign currency, for example dollar notes and coins. Any
cash amount in foreign currency held by a person or held by another
person on his behalf is also included.
Debt ’Debt’ includes creditors and debtors where the debt is invoiced in a
foreign currency. It also includes loans received or granted in a
foreign currency as well as deposits in foreign bank accounts. Mon-
ey market instruments in a foreign currency, bonds in a foreign cur-
rency and traveller’s cheques are also included.
A forward exchange contract An agreement in terms of which a person agrees with another person
to exchange an amount of currency for another currency at some
future date at a specified exchange rate.
A foreign currency option contract An agreement in terms of which a person acquires or grants the right
to buy from or to sell to another person a certain amount of a nomi-
nated foreign currency on or before a future expiry date at a speci-
fied exchange rate.
523
Definition of ‘foreign currency’

An important component of the above exchange items is that the exchange item should be in a for-
eign currency. A ‘foreign currency’ in relation to any exchange item of a person is any currency that is
not local currency.
It is important to remember that an amount can be in a currency other than rand without qualifying as
a foreign currency (and therefore not be an exchange item as defined). This can be, for example, if
the local currency of debt due is dollar. The definition of ‘local currency’ is discussed below.
Definition of ‘local currency’

‘Local currency’ is
in relation to is
l an exchange item attributable to a permanent l the functional currency (note 1) of that permanent
establishment outside South Africa establishment (note 2)
l a resident (other than a headquarter company l the South African rand
(note 3), a domestic treasury management com-
pany and an international shipping company as
defined in s 12Q(1)) in respect of an exchange
item that is not attributable to a permanent estab-
lishment outside South Africa
l a non-resident in respect of an exchange item l the South African rand
that is attributable to a permanent establishment
in South Africa
l any headquarter company in respect of an ex- l the functional currency (note 1) of that head-
change item which is not attributable to a perma- quarter company (note 3)
nent establishment outside the Republic
l any domestic treasury management company in l the functional currency (note 1) of that domestic
respect of an exchange item which is not attribut- treasury management company (note 4)
able to a permanent establishment outside the
Republic
l any international shipping company (as defined l the functional currency (note 1) of that interna-
in s 12Q) in respect of an exchange item which is tional shipping company (note 5)
not attributable to a permanent establishment out-
side the Republic
Note 1: ‘Functional currency’ in relation to

l a person means the currency of the primary economic environment in which that per-
son’s business operations are conducted (par (a) of the definition of ‘functional currency’
in s 1), and
l a permanent establishment of a person means the currency of the primary economic
environment in which that permanent establishment’s business operations are conducted
(par (b) of the definition of ‘functional currency’ in s 1).
Note 2: If an exchange item is attributable to a permanent establishment of a person outside South
Africa and the other country (whose currency is used) has an inflation rate of 100% or more
throughout the current year of assessment, the functional currency will not be regarded as
the ‘local currency’.
Note 3: Refer to chapter 21 for a discussion of headquarter companies (s 9I).
Note 4: A domestic treasury management company means a company
l incorporated or deemed to be incorporated by or under any law in force in the Republic
l that has its place of effective management in the Republic, and
l that is not subject to exchange control restrictions by virtue of being registered with the
financial surveillance department of the South African Reserve Bank.
Note 5: Refer to chapter 6 for a discussion of s 12Q.
The exchange differences that arise on exchange items are not always taken into account in calculat-
ing the taxable income of all persons. The exchange gains and losses in respect of exchange items
should only be included in or deducted from the taxable income of the following persons:
524
Unit of currency
ANY COMPANY OR Debt

A TRADING TRUST
Foreign exchange contract
Foreign currency option contract
Foreign exchange contract

A NATURAL PERSON OR
A NON-TRADING TRUST
Foreign currency option contract
A NATURAL PERSON Unit of currency

(holding the exchange
items as trading stock)
Debt
If a natural person holds a single unit of foreign currency or a debt denominated

in foreign currency as trading stock, all the exchange items held by that person
will be subject to s 24I. Consequently, if the foreign unit of currency is held as
Please note! trading stock but the debt is held as a capital asset, both the unit of foreign
currency and the debt will be subject to s 24I. If, however, an FEC or FCOC is
held by the natural person in addition to a unit of foreign currency and/or debt
(neither which is held as trading stock), only the FEC and FCOC will be subject
to the provisions of s 24I.
All foreign currency gains and losses of a company, irrespective of whether the gains and losses
arise from trade or not should always be recognised.
The exchange gains and losses of an exchange item of a non-resident should only be taken into
account for normal tax purposes if the exchange items are attributable to the resident’s permanent
establishment in South Africa. If, however, a non-resident is a controlled foreign company, s 24I will
be applied for purposes of s 9D (proviso to s 24I(2)). Refer to chapter 21 for a discussion on con-
trolled foreign companies.
Example 15.2. Definition of an exchange item
A Ltd’s (a SA resident as defined) year of assessment ends on the last day of February. On
1 December 2021, the company purchased trading stock from a supplier in London for an
amount of £100 000 to be used by its foreign branch in London. The trading stock was delivered
at the company’s branch in London. The functional currency of the branch in London is £. The
debt was paid in full on 31 March 2022. All trading stock was sold by the end of February 2022.
Assume that the exchange rates on the relevant dates are as follows:
1 December 2021 : spot rate ......................................... £1 = R6,60
31 January 2022 : spot rate ......................................... £1 = R6,90
28 February 2022 : spot rate ......................................... £1 = R7,00
Discuss whether the debt of £100 000 is an exchange item on which exchange differences
should be calculated.
525
SOLUTION
The local currency of the outstanding debt payable to the supplier in London, which is attribut-
able to the branch in London, is £. This is because the branch is a permanent establishment in
London and the functional currency of the branch (the currency of the primary economic envi-
ronment in which the branch’s operations are conducted) is £. The debt of £100 000 is therefore
not an exchange item since the debt is in local currency and not in a foreign currency.
SARS will generally accept the functional currency used for financial accounting
Please note! purposes as the functional currency of a person if that functional currency was
determined in accordance with IAS 21.
15.3.2 Step 2: Determine the ruling exchange rates (s 24I(1))

In order to compute a foreign exchange difference (gain or loss), the relevant exchange item must be
multiplied by the difference between the ruling exchange rates on the different dates (the transaction
date, translation date and realisation date). The date of transaction, translation and realisation depends
on the type of exchange item.
1. Transaction date
The ‘transaction date’ of each of the four exchange items is as follows:
Exchange item Transaction date
A unit of foreign currency The date on which it was acquired
A debt owing by a person The date on which the debt was actually incurred
A debt owing to a person The date on which the amount payable under the debt accrued to
him, or on which the debt was acquired by him in any other manner
A forward exchange contract The date on which it was entered into
A foreign currency option contract The date on which it was entered into or acquired
Remember
When establishing the transaction date, remember that free on board (FOB) as well as cost
insurance freight (CIF) means that ownership passes when loading on the ship, train, aeroplane,
truck, etc. This is important because the debt is only actually incurred (the transaction date) once
ownership of the underlying asset passes. Trade terms, such as FOB, are known as Incoterms
and are published and updated by the International Chamber of Commerce. Incoterms are
intended to communicate the risks associated with the transportation and delivery of goods.
2. Translation date
The term ‘translate’ is defined as the restatement of an exchange item in the local currency at the end
of any year of assessment by applying the ruling exchange rate to such exchange item.
The translation date is therefore the last day of a year of assessment, on which date the exchange
items should be translated where the exchange item has not yet been realised.
3. Realisation date
This is the date on which the exchange item is realised.
Exchange item Realisation date

A debt in foreign currency The date
l when (and the extent to which) payment is received or made in
respect of such debt, or
continued
526
Exchange item Realisation date

l when (and the extent to which) the debt is settled or disposed of in
any other manner which includes:
– a change in the foreign currency in which the debt is denomi-
nated
– the waiver of a debt by the creditor
– the prescription of a debt
– the cession of a debt
– the sale of a debt, and
– the write-off of a debt.
A forward exchange contract The date on which payment is received or made in connection with
such forward exchange contract.
A foreign currency option contract The date
l on which payment is received or made for the right in terms of the
foreign currency option contract having been exercised
l when the foreign currency option contract expires without that
right having been exercised, or
l when the foreign currency option contract is disposed of.
A unit of foreign currency The date on which it is disposed of.
For accounting purposes, the three dates (transaction date, translation date and
Please note! realisation date) are in general respectively referred to as the transaction date,
reporting date and the settlement date.
The ruling exchange rates to be used on the different dates for each of the exchange items are set
out below:
Exchange item Transaction date Translation date Realisation date
Unit of foreign currency Spot rate Spot rate Spot rate
Debt Spot rate Spot rate Spot rate
Forward exchange con- Forward rate Market-related forward Spot rate
tract rate for remaining period
Affected forward Forward rate Forward rate Spot rate
exchange contract
Foreign currency option Nil rate Market value of option Market value of option
contract contract ÷ foreign cur- contract ÷ foreign cur-
(Note 1) rency specified in con- rency amount specified
tract in contract
Affected foreign curren- Nil rate Amount included or de- Market value of option
cy option contract ducted from income in contract ÷ foreign cur-
(Note 1) terms of s 24I(3)(b) ÷ rency amount specified
foreign currency amount in contract
specified in contract
Note 1:
The market value of a foreign currency option contract is determined according to the accounting
treatment of the contract:
l If a person determined the market value for accounting purposes which he applied consistently
during the valuation of all his foreign currency option contracts, the market value will be that
amount.
l The market value is the intrinsic value of the foreign currency option contract for any other person.
The intrinsic value in relation to a foreign currency option contract, is the value for the holder or writer
thereof, determined by applying the difference between
l the spot rate on translation date or the date on which the foreign currency option contract is real-
ised, and
l the option strike rate.
527
The option strike rate is the specified exchange rate as referred to in the definition of ‘foreign curren-
cy option contract’, thus the rate in the foreign currency option contract (s 24I(1)).
Note 2:
A special conversion rule applies when the spot rate is to be used on the transaction date or the date
on which the debt is realised. This rule states that
l if any consideration paid or incurred for the acquisition (or received or accrued for the disposal)
of the debt
l was determined by the application of a rate other than the spot rate on transaction date or realisa-
tion date
l then the spot rate is deemed to be the ‘acquisition rate’ or ‘disposal rate’ depending on the situa-
tion (proviso to the definition of ‘ruling exchange rate’ for a debt in s 24I(1)).
The rate used to convert an exchange item is determined by dividing the amount of the expense or
accrual with the foreign currency amount thereof. For example, the acquisition rate is determined by
dividing the acquisition costs by the foreign exchange amount which represents the costs. The dis-
posal rate is determined in the same manner by dividing the amount received by the foreign exchange
amount which represents the received amount (s 24I(1)).
l In practice the ruling exchange rate must be stated in the format of the
quantity of rand for every foreign currency unit and must be expressed to at
least the fourth decimal (for example $1 = R15,1894).
l The spot rate depends on the facts and circumstances of each case and
depends on whether foreign currency needs to be purchased or sold.
Whether the selling rate or the buying rate applies, is determined from the
perspective of the bank or other authorised dealer.
Please note!
l If foreign currency is needed in order to pay for an import or to settle debt in
a foreign currency, the bank will act as the seller of foreign currency. The
selling rate will be used in order to translate the rand amount to a foreign
currency amount.
l The buying rate will be used if goods are exported and foreign currency is
received from a foreign debtor. The bank will then act as the buyer of for-
eign currency in order to translate the foreign currency amount to rand.
Alternative rates
It is specifically provided that the Commissioner, having regard to the particular circumstances of a
taxpayer, may prescribe the application of an alternative rate to any of the prescribed rates for use by
a person in intended circumstances, if this alternative rate is used for the purposes of financial report-
ing pursuant to IFRS (proviso to the definition of ‘ruling exchange rate’ in s 24I(1)).
15.3.3 Step 3: Calculate the foreign exchange differences (ss 24I(1) and 24I(4))
An ‘exchange difference’ is the foreign exchange gain or foreign exchange loss in respect of an
exchange item during any year of assessment.
In order to compute a foreign exchange difference (gain or loss), the amount in foreign currency of
the exchange item must be multiplied by the difference between the ruling exchange rates on the
transaction date and
l the translation date (if the exchange item has not been settled at year-end), or
l the realisation date
by using the ruling exchange rates as specified in the definition of ‘ruling exchange rate’.
An exchange difference should be calculated on each exchange item for the year of assessment in
which such exchange item arose, as well as every subsequent year of assessment until and includ-
ing the year of assessment in which it is realised. The following combinations of dates on which
exchange differences should be calculated, are possible:
528
Transaction Realisation Translation Realisation Translation

date date date date date
Four possible situations may occur:
If the exchange item was: then the exchange difference =

1 acquired and realised during the foreign currency amount × (ruling exchange rate on transaction
current year of assessment date of the exchange item during the current year – ruling
exchange rate at which the exchange item is realised)
2 acquired but not realised during foreign currency amount × (ruling exchange rate on transaction
the current year of assessment date of the exchange item during the current year – ruling
exchange rate at which the exchange item is translated at the end
of the current year)
3 acquired in an earlier year of foreign currency amount × (ruling exchange rate at which the
assessment and realised during the exchange item was translated at the end of the immediately
current year of assessment preceding year – ruling exchange rate at which the exchange item
is realised during the current year)
4 acquired in an earlier year of foreign currency amount × (ruling exchange rate at which the
assessment but not realised during exchange item was translated at the end of the immediately
the current year of assessment preceding year – ruling exchange rate at which the exchange item
is translated at the end of the current year).
Example 15.3. Calculation of foreign exchange loss in terms of s 24I: Acquired

and realised during the current year of assessment
A Ltd’s year of assessment ends on the last day of February. On 1 December 2021, the com-
pany purchased trading stock from a supplier in another country for a foreign currency (FC)
amount of FC100 000. The debt was paid on 31 January 2022. All trading stock was sold by the
end of February 2022.
1 December 2021 : spot rate ......................................... FC1 = R6,60
31 January 2022 : spot rate ......................................... FC1 = R6,90
28 February 2022 : spot rate ......................................... FC1 = R7,00
Calculate the effect on the taxable income of A Ltd.
SOLUTION
Cost of stock [FC100 000 × 6,60 (spot rate)] – s 25D
Deduction – s 11(a)...................................................................................................... (R660 000)
Exchange difference (loss)
Debt: FC100 000 × (6.90 – 6,60) – s 24I .................................................................. (R30 000)
Total deduction in 2022 year of assessment ............................................................... (R690 000)
The only exchange item in the example is the foreign debt. Trading stock is not an exchange
item and therefore the cost is translated to rand by using the rules of s 25D and not s 24I. Since
all the trading stock was sold by the end of February 2022, the value of closing stock need not
be added back to taxable income (s 22).
529
Example 15.4. Calculation of foreign exchange loss in terms of s 24I: Acquired but not
realised during the current year of assessment/Acquired in an earlier year of assessment
but not realised during the current year of assessment/Acquired in an earlier year of
assessment and realised during the current year of assessment
A Ltd’s year of assessment ends on the last day of February. On 1 December 2021, the company
purchased trading stock from a supplier in another country for a foreign currency (FC) amount of
FC100 000. The debt was paid on 30 April 2023. All trading stock was sold by the end of
February 2022.
1 December 2021 : spot rate ......................................... FC1 = R6,60
30 April 2023 : spot rate ......................................... FC1 = R7,50
SOLUTION
Cost of stock [FC100 000 × 6,60 (spot rate)]
Deduction — s 11(a) .................................................................................................... (R660 000)
Debt: FC100 000 × (7,00 – 6,60) .............................................................................. (R40 000)
Exchange difference (gain)
Debt: FC100 000 × (6,80 – 7,00) ................................................................................. R20 000
Total inclusion in 2023 year of assessment ................................................................. R20 000
Debt: FC100 000 × (7,50 – 6,80) ................................................................................. (R70 000)
Total net deductions .................................................................................................... (R750 000)
Total net expenditure incurred by A Ltd ...................................................................... (R750 000)
The transaction date is 1 December 2021, the date of the purchase of the trading stock.
The translation date is 28 February 2022 and 28 February 2023, the end of the year of assess-
ment of A Ltd.
The realisation date is 30 April 2023, when the debt is settled.
At 28 February 2022 and 28 February 2023, the debt had not been settled. The exchange differ-
ences for these years of assessments are therefore calculated by multiplying the exchange item
(FC100 000) by the difference between the ruling exchange rate at the translation date
(28 February 2022) and the ruling exchange rate at the transaction date (1 December 2021) for
the 2022 year of assessment and by multiplying the exchange item (FC100 000) by the differ-
ence between the ruling exchange rate at the translation date (28 February 2023) and the ruling
exchange rate at the translation date of the previous year of assessment (28 February 2022) for
the 2023 year of assessment respectively.
The net amount deducted from taxable income (R750 000) equals the amount paid of FC100 000
at the spot rate of R7,50 on realisation date.
Example 15.5. Calculation of foreign exchange loss in terms of s 24I: Application of a rate
other than the spot rate on transaction date and realisation date
On 31 January 2021 ABC Bank Ltd purchased a debt of FC26 000 from a business for R165 000.
ABC Bank sold the same debt to XYZ Bank on 30 April 2021 for R174 000. The year-ends of both
banks are February. Assume the debt is held as a capital asset by ABC Bank.
31 January 2021 : spot rate ......................................... FC1 = R6,42
30 April 2021 : spot rate ......................................... FC1 = R6,53
Calculate the effect on the taxable income of ABC Bank.
530
SOLUTION
Cost incurred to acquire debt ......................................................................................... R165 000
Foreign currency amount paid to acquire debt .............................................................. FC26 000
Acquisition rate therefore (R165 000/FC26 000) ............................................................. R6,34615
Exchange difference (gain) to be included in taxable income
Debt: FC26 000 × (6,45 – 6,34615) ................................................................................ R2 700
Consideration received on disposal of debt ................................................................... R174 000
Foreign currency amount of the debt disposed of .......................................................... FC26 000
Disposal rate therefore (R174 000/FC26 000) ................................................................ R6,69231
Exchange difference (gain) to be included in taxable income
Debt: FC26 000 × (6,69231 – 6,45) ............................................................................. R6 300
Reconciliation
Amount paid on transaction date .................................................................................... R165 000
Amount received on realisation date .............................................................................. R174 000
Gain (R2 700 + R6 300) .................................................................................................. R9 000
ABC Bank paid R165 000 to acquire the loan which equates an average exchange rate of
R6,34615/FC. The actual acquisition rate therefore differs from the spot rate of R6,42 on the trans-
action date and it is therefore deemed that the spot rate on the transaction date (acquisition date)
is R6,34615 for purposes of calculating the exchange difference.
ABC Bank received R174 000 on the disposal of the loan which equates to an average exchange
rate of R6,69231/FC. The actual realisation rate therefore differs from the spot rate of R6,53 and it
is therefore deemed that the spot rate on the realisation date is R6,69231 for purposes of calcu-
lating the exchange difference.
Remember
l ‘Spot rate’ is defined in s 1 as the appropriate exchange rate quoted at a specific time by any
authorised dealer in foreign exchange for the delivery of currency.
l ‘Forward rate’ is defined in s 24I(1) as the rate specified in the forward exchange contract, in
other words the rate at which the parties agree to exchange an amount of currency for
another currency at some future date.
l Refer to 15.4 for examples dealing with hedging instruments (FECs and FCOCs).
15.3.4 Step 4: Determine if the exchange difference should be deferred (ss 24I(7) and
24I(10A))
In some cases, the exchange gains and losses are not immediately included in or deducted from the
taxable income but are deferred until the happening of a future event.
15.3.4.1 Acquisition of assets (s 24I(7))

An exchange difference that arises on foreign debt used by a person for
l the acquisition, installation, erection or construction of any machinery, plant, implement, utensil,
building or improvements to a building, or
l devising, developing, creation, production, acquisition or restoration of any invention, patent, design,
trade mark, copyright or other similar property or knowledge contemplated in s 11(gC)
must not be included in or deducted from the taxable income of a person if the underlying asset had
not yet been brought into use in that year of assessment.
The exchange differences that arise from the transaction date until the date that the asset is brought
into use, must be deferred. The accumulated exchange differences amount (that arose in the year(s)
of assessment before the asset was brought into use) must only be taken into account in the year of
assessment during which the asset is brought into use for the purposes of the person’s trade.
531
The same timing rule applies

l to an exchange difference arising from a forward exchange contract or a for-
eign currency option contract entered into in this situation, to the extent to
which it is entered into to serve as a hedge against a debt incurred or to be
Please note! incurred to be used in the manner envisaged, and
l to any premium or other consideration paid or payable for or under a foreign
currency option contract entered into or acquired in this situation, to the
extent to which it is entered into or obtained in order to serve as a hedge
against a debt incurred or to be incurred to be used in the manner
envisaged.
If the Commissioner is satisfied that

l the debt to be incurred will no longer be incurred
l the debt has not been used for the acquisition of the assets as stated above, or
l the asset, property or knowledge will no longer be brought into use for the purpose of the tax-
payer’s trade
the exchange difference or premium or other consideration may no longer be carried forward, but
must be brought into account in taxable income in that year of assessment (proviso to s 24I(7)).
Example 15.6. Acquisition of assets
A Ltd’s year of assessment ends on the last day of February. The company is a SA resident and
a registered VAT vendor making 100% taxable supplies. On 1 November 2021 the company
purchases a second-hand machine from a supplier in another country for a foreign currency (FC)
amount of FC100 000. The machine was shipped free on board (FOB) on 1 November 2021.
It was delivered at the company’s premises on 15 February 2022 and was brought into use on
1 April 2022.
A Ltd incurs the following costs in addition to the purchase price:
Freight and insurance........................................................................... R10 000
Import duty ........................................................................................... R45 000
Value-added tax ................................................................................... R57 120
The purchase consideration is settled in full on 31 May 2022. No FEC is entered into. A Ltd quali-
fies for a s 12C allowance of 20% per year because the machine is second-hand.
Assume that the spot rates on the relevant dates are as follows:
1 November 2021 ........................................................................... FC1 = R6,60
28 February 2022 ........................................................................... FC1 = R6,74
31 May 2022 ................................................................................... FC1 = R7,00
SOLUTION
Year of assessment ended 28 February 2022
Cost of machine
Purchase price (FC100 000 × 6,60)............................................................................. R660 000
Freight and insurance .................................................................................................. 10 000
Import duty................................................................................................................... 45 000
R715 000
Since the machine is brought into use only on 1 April 2022, the s 12C allowance of R143 000
(20% × R715 000) may be claimed for the first time in the 2023 year of assessment. The cost on
which the capital allowance is claimed does not include the VAT paid on importation of the
machine. This is because the taxpayer would have claimed the VAT paid back since the
machine is used for the making of taxable supplies (s 23C(1)).
Exchange difference
Since the machine is brought into use only on 1 April 2022, the exchange loss of R14 000
[FC100 000 × (6,74 – 6,60)] is not deductible in the 2022 year of assessment. The deduction is
therefore deferred to the year during which the machine is brought into use, namely, the 2023
year of assessment.
continued
532

Section 12C allowance (20% × R715 000) .................................................................. (R143 000)
Exchange difference
Deductible exchange difference in respect of 2023 tax year
[FC100 000 × (7,00 – 6,74)] ......................................................................................... (R26 000)
(deferred in terms of s 24I(7)(a))
[FC100 000 × (6,74 – 6,60)] ......................................................................................... (R14 000)
Total deduction in 2023 year of assessment
(R143 000 + R26 000 + R14 000) ................................................................................ (R183 000)
Example 15.7. Acquisition of assets financed by an interest-bearing loan

A Ltd’s year of assessment ends on the last day of August. On 1 June 2021 the company
borrows FC500 000 from a foreign bank. FC375 000 is used to purchase a new machine from a
supplier in another country for a foreign currency amount of FC375 000 and FC125 000 is used
to purchase trading stock on 1 June 2021. The entire supply is free on board (FOB) and the
machine is delivered at the company’s premises on 1 September 2021 and brought into use on
that same date.
The loan bears interest at 8% (simple interest which accrues and is paid every six months) and is
repayable on 30 November 2021. No FEC is entered into. A Ltd qualifies for a s 12C allowance of
40% in the first year, because the machine is new and unused.
Assume that the spot rates on the relevant dates are as follows:
1 June 2021 .................................................................................... FC1 = R6,60
31 August 2021 .............................................................................. FC1 = R6,74
30 November 2021 ......................................................................... FC1 = R7,00
Assume that the average rates were as follows:
1 June 2021 – 31 August 2021 ....................................................... FC1 = R6,65
1 September 2021 – 30 November 2021 ........................................ FC1 = R6,80
Calculate the exchange differences to be included in or deducted from the taxable income of
A Ltd for the 2021 and 2022 years of assessment.
SOLUTION
Year of assessment ended 31 August 2021
Exchange difference on capital portion of the outstanding loan
The exchange difference on the translation date of the loan is a loss of R70 000 [FC500 000 ×
(6,60 – 6,74)]. However, since the machine is brought into use only on 1 September 2021, the
exchange loss of R52 500 in respect of the part of the loan used to finance the acquisition of the
machine [R70 000 × FC375 000/FC500 000] (or FC375 000 × (R6,60 – R6,74)) is not deductible
in the 2021 year of assessment (s 24I(7)). The deduction is therefore deferred to the year during
which the machine is brought into use, namely, the 2022 year of assessment. The exchange loss
of R17 500 [R70 000 × FC125 000/ FC500 000] (or FC125 000 × (R6,60 – R6,74)) in respect of
the part of the loan used to finance the acquisition of the trading stock will be deductible in the
2021 year of assessment since the deferral provision does not apply to trading stock.
Deductible exchange difference in respect of 2021 tax year:
[R70 000 × FC125 000/FC500 000] .......................................................................... (R17 500)
Exchange difference on interest incurred on the loan on translation date (August
2021)
Trading stock: FC125 000 × 8% × 92/365 × (6,65 – 6,74)........................................ (R227)
Machine: FC375 000 × 8% × 92/365 × (6,65 – 6,74) = (R681)
However, as this machine is only brought into use during the 2022 year of
assessment, this exchange difference must be deferred until the 2022 year of
assessment (s 24I(7)) ............................................................................................... Rnil
Year of assessment ended 31 August 2022
Exchange difference on capital portion of the outstanding loan on realisation date
(November 2021)
FC500 000 × (7,00 – 6,74) ........................................................................................ (R130 000)
Deductible exchange difference in respect of 2021 tax year (deferred in terms
of s 24I(7)(a))
FC375 000 × (6,74 – 6,60)] ....................................................................................... (R52 500)
continued
533
Exchange difference on interest incurred on the loan on realisation date

(November 2021)
Interest accrued in the 2022 year of assessment (September–November):
FC500 000 × 8% × 91/365 × (6,80 – 7,00) (transaction date – realisation date)..... (R1 995)
(deferred in terms of s 24I(7)(a) in respect of the machine) .................................... (R681)
Exchange difference on interest that accrued in the 2021 year of assessment
(June–August) but that was paid in the 2022 year of assessment
FC500 000 × 8% × 92/365 × (6,74 – 7,00) (translation date – realisation date) ....... (R2 621)
Net tax result (–R17 500 – R227 – R130 000 – R52 500 – R1 995 –
R681 – R2 621) ........................................................................................................ (R205 524)
Interest reconciliation:
Interest paid FC500 000 × 8% × 183/365 × 7,00 .................................................. R140 384
Interest deductible (s 24J) (16 762 + 67 813) (note 1) .......................................... 84 575
Interest deductible (s 11A) (FC375 000 × 8% × 92/365 × R6,65) (note 2)............ 50 285
Exchange loss 2021 .............................................................................................. 227
Exchange loss 2022 (R1 995 + R681 +R2 621) .................................................... 5 297
R140 384
Note 1
This the part of the actual interest incurred that will be deductible in terms of s 24J in addition to
the exchange differences on the interest calculated above.
FC125 000 × 8% × 92/365 × R6,65 = R16 761 (June 2021 – August 2021)
FC500 000 × 8% × 91/365 × R6,80 = R67 814 (September 2021 – November 2021)
Note 2
Since the machine was only brought into use in the 2022 year of assessment, the s 24J interest
on the machine would not have been deductible in the 2021 year of assessment in terms of
s 24J. This is because the asset was not used in the production of income in the 2021 year of
assessment. However, this part of the interest will be deductible in the 2022 year of assessment
in terms of s 11A.
Note 3
Please note: Interest should be calculated on a day-to-day basis according to s 24J. It will, how-
ever, not be practical to calculate the exchange differences regarding the interest on a day-to-
day basis (even though if the Act is strictly followed, it should). The average exchange rate will
be accepted for accounting purposes in terms of IFRS in this case and therefore it is submitted
that the same treatment will be allowed for tax purposes from a practical point of view.
15.3.4.2 Transactions between companies forming part of the same group of companies and
between connected persons (s 24I(10A))
Exchange gains and losses in respect of a debt between companies that form part of the same
group of companies and between connected persons should be deferred if certain conditions are
met. The inclusion or deduction of exchange differences is then deferred until realisation of the ex-
change item or until the conditions for deferral no longer applies.
This exchange differences should be deferred if all of the following four requirements are met at the
end of the year of assessment:
1. The person who incurred the debt, or to whom the debt is payable, and the other party to the
contractual provisions of that exchange item
– form part of the same group of companies, or
– are connected persons in relation to each other.
2. No FEC or FCOC has been entered into by that person to serve as a hedge in respect of that
foreign debt incurred by or payable to the person (s 24I(10A)(i)).
Remember
If a FEC or a FCOC has been entered into by the person to serve as a hedge, the exchange
differences should not be deferred. This is the case even though the debt is between companies
forming part of the same group of companies or between connected persons.
534
3. Such exchange item (or any portion thereof) does not represent, for that person, a current asset,
or a current liability, for the purposes of financial reporting in accordance with the International
Financial Reporting Standards issued by the International Accounting Standards Board (IFRS)
(s 24I(10A)(a)(i)).
4. Such exchange item (or any portion thereof) is not directly or indirectly funded by any debt owed
to any person who
– is not part of the same group of companies as, or
– is not a connected person in relation to that person or the other party to the contractual provisions
of that exchange item (s 24I(10A)(a)(ii)).
IFRS CLASSIFICATION: CURRENT AND NON-CURRENT

In terms of IAS 1.66, an asset is classified as current if the entity meets one or
more of the following criteria in relation to the asset:
l it expects to realise the asset, or intends to sell or consume it, in its
normal operating cycle,
l it holds the asset primarily for the purpose of trading,
Please note! l it expects to realise the asset within twelve months after the reporting period, or
l the asset is an unrestricted cash or cash equivalent.
If the asset does not meet any of the above criteria, it is classified as non-current.
In terms of IAS 1.69, a liability is classified as current if the entity meets one or
more of the following criteria in relation to the liability:
l it expects to settle the liability in its normal operating cycle,
l it holds the liability primarily for the purpose of trading,
l the liability is due to be settled within twelve months after the reporting
period, or
l it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period
If the liability does not meet any of the above criteria, it is classified as non-
current.
Remember
l If the debt is current for purposes of financial accounting reporting, the exchange differences
should not be deferred. This is the case even though the debt is between companies forming
part of the same group of companies or between connected persons.
l If the debt is funded directly or indirectly by any debt owed to a person that is not part of the
same group of companies or that is not a connected person, the exchange differences
should not be deferred.
One of the requirements of this subsection is that the foreign debt (or any portion
thereof) should not represent for that person a current asset or a current liability
for the purposes of financial reporting pursuant to IFRS. The subsection will
therefore only defer exchange differences in respect of a long-term debt. How-
ever, in terms of IFRS, a portion of a long-term debt is recognised annually as a
current liability if the debt or part of the debt is repayable within 12 months after
year-end. It appears from the wording of the Act that the entire gain or loss should
Please note! therefore be recognised if any portion is moved to current assets or current
liabilities for purposes of IFRS. From the Explanatory Memorandum on the Tax-
ation Laws Amendment Bill, 2014 and the new Interpretation Note No. 101 it
appears that the intention was for s 24I(10A)(ii) to apply to the entire loan, pro-
vided a portion of the loan is classified as a long-term loan. This is, however, in
contradiction with the current wording of the Act. The current wording of the
provision may therefore have adverse cash flow implications as the tax on the
cumulative exchange differences over the duration of a loan may become payable
before the actual cash flow related to the loan realises.
If the exchange difference was deferred in a year of assessment (Year 1) and

l the deferral conditions are no longer met (the parties to the instrument are, for example, no longer
connected persons or no longer form part of the same group of companies) in respect of that
exchange item in a subsequent year of assessment (Year 2), or
l if the exchange item is realised
an amount in respect of that exchange item must be included in or deducted from the income of that
person in that subsequent year of assessment (Year 2), (or in the year of assessment during which
the exchange item is actually realised).
535
The amount to be included in or deducted from income shall be determined by multiplying that
exchange item by the difference between
l the ruling exchange rate on the last day of the year of assessment (Year 1) preceding that sub-
sequent year of assessment (Year 2), and
l the ruling exchange rate on transaction date.
Any amount of the exchange differences included in or deducted from the income of that person in
terms of s 24I (in respect of that exchange item for all years of assessment preceding that subse-
quent year of assessment during which the person was a party to the contractual provisions of the
exchange item) must furthermore be deducted from the exchange difference (s 24I(10A)(b)).
Example 15.8. Loan between connected companies (s 24I(10A))

H Ltd, a South African company, lends a foreign currency (FC) amount of FC200 000 to S Plc, a
foreign subsidiary, forming part of the same group of companies, on 1 August 2020. H Ltd’s year
of assessment ends on the last day of September every year. The loan is repaid on 30 June
2024.
1 August 2020 ................................................................................ FC1 = R6,60
30 September 2021 ........................................................................ FC1 = R7,00
30 September 2022 ........................................................................ FC1 = R7,10
30 September 2023 ........................................................................ FC1 = R6,90
30 June 2024 .................................................................................. FC1 = R6,95
The loan is not covered in terms of any forward exchange contract. Calculate the effect on the
taxable income of H Ltd.
SOLUTION
Years ended 30 September 2021 and 30 September 2022
Exchange differences
No exchange differences are included in or deducted from income.
Since the loan (the exchange item) was granted between companies forming part of the same
group of companies, s 24I(10A)(a) applies and no exchange differences will be taken into
account until the loan is repaid (realisation date) or until the companies no longer form part of the
same group of companies (provided that the companies are then also not connected persons).
Year ended 30 September 2023
Since the entire loan is going to be repaid on 30 June 2024, the entire loan will be classified as a
current asset for accounting purposes pursuant to IFRS at the year ended 30 September 2023.
All the requirements for deferral under s 24I(10A) will therefore no longer be met and the
exchange differences will no longer be deferred. The exchange difference will be calculated by
using the difference between the exchange rate on the last day of the preceding year of assessment
(i.e., the rate on 30 September 2022) and the exchange rate on transaction date (1 August 2020)
(s 24I(10A)(b)).
Exchange difference
FC 200 000 × (R7,10 – R6,60) = R100 000 gain to be included in the taxable income of H Ltd
(s 24I(10A)).
FC 200 000 × (R6,90 – R7,10) = (R40 000) loss to be deducted from the taxable income of H Ltd
(s 24I(3)).
Year ended 30 September 2024
Since the loan was realised on 30 June 2024, the exchange difference will be calculated by using
the difference between the exchange rate on the realisation date (i.e., 30 June 2024) and the
exchange rate on the previous translation date (30 September 2023).
Exchange difference
FC 200 000 × (R6,95 – R6,90) = R10 000 gain to be included in the taxable income of H Ltd.
The loan is an asset as defined for purposes of the Eighth Schedule and the expenditure of
FC200 000 was incurred in a foreign currency. The capital gain or capital loss on realisation
should be calculated by applying the provisions of par 43(1A).
Proceeds FC200 000 × R6,95 = R1 390 000
Base cost FC200 000 × R6,60 = R1 320 000
Capital gain (R1 390 000 – R1 320 000) = R70 000
continued
536
However, of the R70 000 capital gain, a foreign exchange gain of R100 000, foreign exchange
loss of R40 000 and a foreign exchange gain of R10 000 was already included in taxable income
in previous years as calculated above. Therefore, a capital gain of R0 (R70 000 – R100 000 +
R40 000 – R10 000) should be taken into account in terms of par 43(1A) of the Eighth Schedule
(see discussion under 15.7 below).
15.4 Specific translation rule: Hedging instruments

Hedging is the term generally used to refer to a person’s policies and practices to protect himself
against the adverse effects of the risks that arise from various transactions. A person can use certain
financial instruments (also referred to as derivatives) to eliminate the risks flowing from transactions
entered into in a foreign currency. Forward exchange contracts and foreign currency option contracts
are both classified as exchange items (see 15.3.1). Consequently, the exchange losses and gains on
these exchange items should be recognised for tax purposes.
Although forward exchange contracts and foreign option contracts are most often
used for hedging purposes, hedging is not a requirement for the application of
Please note! s 24I to such instruments. If the instruments were, therefore, acquired for other
purposes, s 24I will still apply to such instruments.
15.4.1 Forward exchange contracts (s 24I(1))

A forward exchange contract is defined as an agreement in terms of which one person agrees with
another to exchange an amount of currency for another currency at some future date at a specified
exchange rate.
In the South African economy, the volatility in currency exchange movements is a fairly general phe-
nomenon. By entering into an FEC, the risks associated with currency fluctuations are avoided. Nor-
mally, the taxpayer concludes an agreement with a bank, in which the bank undertakes to supply the
foreign exchange at a predetermined rate at a future date when the currency is required. Taxpayers
usually use FECs to hedge themselves against unfavourable exchange rate fluctuations, but they
may also be entered into for speculative reasons. Regardless of the reason for entering into FECs, for
tax purposes all FECs are treated in terms of s 24I.
The ruling exchange rate for an exchange item that is a forward exchange contract is
l on transaction date, the forward rate under the forward exchange contract
l on the date it is translated, the market-related forward rate available for the remaining period of
such forward exchange contract, and
l on the date it is realised, the spot rate on that date.
The market–related forward rate is the forward rate at which another FEC for the same amount of
foreign currency could be entered into on the last day of the specific year of assessment that would
expire on the same date as the original FEC. Refer to 15.3 for a discussion on the computation of
exchange differences in terms of s 24I of FECs.
Example 15.9. Foreign debt hedged by a matching FEC
purchases trading stock from a supplier in another country for a foreign currency amount of
FC100 000. A matching FEC is entered into to serve as a hedge in respect of the debt. The
forward rate is FC1 = R7,2000. The debt is paid on 30 April 2022. All trading stock was sold by
the end of February 2022.
1 December 2021 : spot rate ........................................................................... FC1 = R6,60
28 February 2022 : spot rate ........................................................................... FC1 = R7,00
30 April 2022 : spot rate ........................................................................... FC1 = R7,50
The market-related forward rate available for a two-month contract at 28 February 2022 (the
remaining period of the FEC) is FC1 = R7,3600.
537
SOLUTION
Deduction – s 11(a)...................................................................................................... (R660 000)
Exchange difference
Debt: FC100 000 × (7,00 – 6,60) (loss) .................................................................... (R40 000)
Forward exchange contract: FC100 000 × (7,36 – 7,20) (this is a foreign exchange
gain since the taxpayer currently would have paid more for the same FEC) .............. 16 000
Exchange difference
Debt: FC100 000 × (7,50 – 7,00) (loss) .................................................................... (R50 000)
Forward exchange contract: FC100 000 × (7,50 – 7,36).......................................... 14 000
Total deduction ............................................................................................................ (R720 000)
Total expenditure incurred (FC100 000 × 7,50) – (FC100 000 × (7,50 – 7,20)) ........... (R720 000)
15.4.2 Foreign currency option contracts (s 24I(1))

A foreign currency option contract (FCOC) is an agreement in terms of which any person acquires or
grants the right to buy from or to sell to any other person a certain amount of a nominated foreign
currency on or before a future expiry date at a specified exchange rate.
Taxpayers enter into FCOCs to hedge themselves against unfavourable exchange rate fluctuations.
FCOCs differ from FECs since, in terms of the FCOC, the taxpayer has an option whether to exercise
his right or not. The premium is normally the price that the taxpayer has to pay for the privilege of
having the right (there is therefore no obligation). The premium (namely the acquisition cost) relating
to the foreign currency option contract, is fully deductible in the year it was entered into.
It could also happen, however, that a taxpayer enters into FCOCs for speculative reasons. Regard-
less of the reason for entering into FCOCs, all FCOCs are treated in terms of s 24I.
Remember
Although performance under the contract is conditional upon the exercise of such an option, the
contract has a market value that changes in accordance with the quoted spot rates of foreign
currencies.
A foreign currency option contract represents an exchange item and exchange differences should
consequently be calculated on the translation date as well as the date of realisation.
The ruling exchange rate for an exchange item that is a foreign currency option contract is
l on transaction date: a nil rate
l on the date it is translated: the rate obtained by dividing the market value of such foreign curren-
cy option contract on that date by the foreign currency amount, as specified in the contract, and
l on the date it is realised: the rate obtained by dividing the market value of the foreign currency
option contract on that date by the foreign currency amount as specified in the contract. If the
contract is realised by its disposal, the rate to be used is the one that is obtained by dividing the
amount received or accrued as a result of the disposal of the contract by the foreign currency
amount as specified in the contract.
Remember
The transaction date of a foreign currency option contract is the date on which the contract was
entered into or the date on which it was acquired.
A foreign currency option contract is realised
l when payment is received or made in respect of the right in terms of such foreign currency
option contract having been exercised, or
l when such foreign currency option contract expires without such right having been exer-
cised, or
l when such foreign currency option contract is disposed of.
538
Similar to the exchange items discussed above, the Commissioner may, having regard to the particu-
lar circumstances of a taxpayer, prescribe an alternative exchange rate to be applied, provided this
alternative rate is used for the purposes of financial reporting pursuant to IFRS (proviso to the defini-
tion of ‘ruling exchange rate’ in s 24I(1)). Refer to 15.3 for a discussion on the computation of
exchange differences in terms of s 24I of FECs.
Remember
In the determination of the taxable income of any person derived from the carrying on of a trade
by him within South Africa, there must be included in or deducted from the income so derived
any premium or like consideration received by or paid by him in terms of a foreign currency
option contract entered into by him in the course of that trade.
Example 15.10. Foreign currency option contracts
A Ltd enters into an FCOC, which is not an affected contract, on 15 November 2021, in terms of
which it acquires the right to buy FC300 000 at a specified exchange rate of FC1 = R6,80. A
premium of R10 000 is also paid at the inception of the contract. The option is exercised on
31 March 2022. A Ltd’s year of assessment ends on the last day of December.
Assume that the relevant spot rates of exchange are as follows:
31 December 2021 ......................................................................... FC1 = R6,90
31 March 2022 ............................................................................... FC1 = R7,04
Calculate the effect on the taxable income of A Ltd in relation to the FCOC.
SOLUTION
Workings
(1) Ruling exchange rate on translation date
Market value of option contract ÷ foreign currency amount
[(R6,90 – R6,80) × 300 000] ÷ 300 000
= R0,10
Please note that an assumption has been made for purposes of this calculation that the market
value of the contract is the difference between the spot rate on 31 December 2021 and the rate
specified in the contract. It could also have been argued that the market value could have been
determined by means of another rate or method.
(2) Ruling exchange rate on realisation date
Market value of option contract ÷ foreign currency amount
[(R7,04 – R6,80) × 300 000] ÷ 300 000
= R0,24
Exchange difference
Gain: FC300 000 × (R0,10 less nil) (this is a foreign exchange gain since the spot
rate at year-end weakened and the taxpayer has to pay more (in proportion) for
the same type of FCOC if he would have entered it now) ....................................... R30 000
Less: Premium s 24I(3)(b)(ii) ........................................................................................... (10 000)
Net gain ....................................................................................................................... R20 000
Exchange difference
Gain: FC300 000 × (R0,24 less R0,10) ........................................................................... R42 000
Note
The total inclusion in taxable income amounts to R62 000 (R20 000 plus R42 000). This repre-
sents the profit realised by A Ltd: R72 000 [FC300 000 × (R7,04 less R6,80)] less the premium of
R10 000 = R62 000.
The contract will have a zero value if the holder would have generated a loss if he
had exercised his rights according to the contract on translation or realisation date.
Please note! In other words, if the spot rate on translation or realisation date is better than the
rate at which the option can be exercised, the holder will simply not exercise his
option. The only cost to the holder will then be the premium paid to acquire the
option.
539
15.5 Specific translation rule: Affected contracts (s 24I(1))

An affected contract is a forward exchange contract or a foreign currency option contract (see 15.4)
to the extent that such forward exchange or foreign currency option contract has been entered into
by a person during any year of assessment to serve as a hedge in respect of
l a debt which has not yet been incurred by the person during the year of assessment, or
l an amount payable in respect of a debt which has not yet accrued during that current year of
assessment.
In addition, the debt is to be used to acquire any asset or to finance any expenses or will arise from
the sale of any asset or the supply of any service.
15.5.1 Affected forward exchange contract (s 24I(1))

In order to qualify as an affected forward exchange contract, the debt could also arise from the sale
of any asset or the supply of any services. These activities should, however, be in consequence of an
agreement entered into prior to the end of the year of assessment in the ordinary course of the per-
son’s trade.
Remember
Where a forward exchange contract has been entered into to hedge a debt, the contract and the
debt constitute two separate exchange items. Exchange differences will therefore have to be
determined in relation to both items at the translation and realisation dates.
Most of the time, a taxpayer will enter into a forward exchange contract to serve as a hedge against
future obligations in a foreign currency. Where the future obligation is not in existence at the year-
end, an exchange difference arises in relation to the forward exchange contract, which is not covered
by a matching exchange difference in relation to the future obligation.
To avoid this potential adverse tax effect at year-end (the translation date), the ruling exchange rate
for an affected contract at transaction date as well as the date of translation is the forward rate in
terms of the contract. As a result, no foreign exchange differences arise at the date of translation.
Ruling exchange rate: affected forward exchange contract
The ruling exchange rate for an exchange item that is an affected contract is therefore
l on transaction date, the forward rate under the forward exchange contract
l on the date it is translated, the forward rate under the forward exchange contract, and
l on the date it is realised, the spot rate on that date (definition of ‘ruling exchange rate’ in s 24I(1)).
The Commissioner may, having regard to the particular circumstances of a taxpayer, prescribe an
alternative exchange rate to be applied, provided this alternative rate is used for the purposes of
financial reporting pursuant to IFRS (proviso to the definition of ‘ruling exchange rate’ in s 24I(1)).
Example 15.11. Affected forward exchange contract entered as a hedge against debt not
yet incurred at year-end
entered an agreement to purchase trading stock on 31 March 2022 from a supplier in another
country for a foreign currency amount of FC100 000. A five-month – FEC is entered into on
1 December 2021 in expectation of the future transaction. The forward rate is FC1 = R7,20. On
31 March 2022 the transaction goes ahead according to the contract and trading stock of
FC100 000 is acquired on credit. The debt is paid on 30 April 2022. All trading stock was sold by
the end of February 2023.
1 December 2021 : spot rate ........................................................................... FC1 = R6,60
28 February 2022 : spot rate ........................................................................... FC1 = R7,00
28 February 2022 : FEC rate for a two-month contract ................................... FC1 = R7,23
31 March 2022 : spot rate ........................................................................... FC1 = R7,50
30 April 2022 : spot rate ........................................................................... FC1 = R7,60
540
SOLUTION
Cost of stock
No deduction in terms of s 11(a) since debt not yet incurred...................................... Rnil
Exchange difference
Debt: No deduction since debt not yet incurred .......................................................... Rnil
Affected forward exchange contract: FC100 000 × (7,20 – 7,20) ............................... nil
Total deduction in 2022 year of assessment ............................................................... Rnil
Deduction – s 11(a)...................................................................................................... (R750 000)
Exchange difference
Debt: FC100 000 × (7,60 – 7,50) (loss)........................................................................ (R10 000)
Forward exchange contract: FC100 000 × (7,60 – 7,20) (gain) ................................... 40 000
Note
The total deduction is equal to the total amount incurred under the FEC contract for the FC100 000
purchased (FC100 000 × R7.20).
15.5.2 Affected foreign currency option contract (s 24I(1))

A foreign currency option contract can also be an ‘affected contract’ (see 15.4). It sometimes hap-
pens that a taxpayer enters into a FCOC to hedge future liabilities in foreign exchange. In order to
calculate the foreign exchange differences on translation date as well as the date of realisation, the
amount of foreign currency of the affected foreign currency option contract should be multiplied by
the difference between the current exchange rates.
The ruling exchange rate for an affected foreign currency option contract is as follows:
l on transaction date: a nil rate
l on the date it is translated: the rate obtained by dividing any amount included or deducted, as
the case may be, in respect of any premium or like consideration received or paid, by the foreign
currency amount, as specified in the affected contract, and
l on the date it is realised: the rate obtained by dividing the market value of the foreign currency
option contract on that date by the foreign currency amount as specified in the contract. If the
contract is realised by its disposal, the rate to be used is the one that is obtained by dividing the
amount received or accrued as a result of the disposal of the contract by the foreign currency
amount as specified in the contract (s 24I(1)).
Example 15.12. Affected foreign currency option contracts

A Ltd enters into an FCOC, which is an affected contract, on 15 November 2021, in terms of
which it acquires the right to buy FC300 000 at a specified exchange rate of FC1 = R6,80. A
premium of R10 000 is also paid at the inception of the contract. The option is exercised on
31 March 2022. A Ltd’s year of assessment ends on the last day of December.
Assume that the relevant spot rates of exchange are as follows:
31 December 2021 ......................................................................... FC1 = R6,90
31 March 2022 ............................................................................... FC1 = R7,04
Calculate the effect on the taxable income of A Ltd in relation to the FCOC.
541
Silke: South African Income Tax 15.5ದ
SOLUTION
The ruling exchange rate on translation date is R0,033333, obtained by dividing the premium of
R10 000 by the amount specified in the contract, i.e., FC300 000. The exchange differences are
as follows:
Exchange difference
Gain: FC300 000 × (R0,033333 less nil) ......................................................................... R10 000
Less: Premium ................................................................................................................ (10 000)
Net gain .......................................................................................................................... Rnil
Exchange difference
Gain: FC300 000 × (R0,24 less R0,033333) ................................................................... R62 000
Note
The total inclusion in taxable income again amounts to R62 000, but the inclusion is deferred until
the year of assessment during which the option is exercised.
15.6 Sundry provisions
15.6.1 Bad debt (s 24I(4))

Any exchange gain or exchange loss that was recognised in the current or any previous year of
assessment regarding a debt owing to a person, has to be deducted (in the case of an exchange
gain previously recognised) or added back (in the case of an exchange loss previously recognised)
from the taxable income of the person to the extent that, upon final realisation, the debt has become
bad. This provision also applies to debt owing to a person that is disposed at a loss due to a decline
in the market value of that exchange item. An example of this is a foreign bond that is sold at a price
less than the price that was paid for it due to the changes in the prevailing interest rate.
Example 15.13. Calculation of recoupments in respect of foreign exchange differences

previously recognised
A Ltd’s year of assessment ends on the last day of February. On 1 November 2021, the company
sold trading stock to a client in another country for a foreign currency (FC) amount of FC90 000.
The customer was liquidated and A Ltd wrote off the full selling price as bad debt on 28 February
2022. A Ltd received a payment of 50 cents in the FC from the liquidator of the customer on
10 May 2022.
1 November 2021 : spot rate ......................................... FC1 = R6,60
10 May 2022 : spot rate ......................................... FC1 = R7,00
SOLUTION
Selling price of stock [FC90 000 × 6,60 (spot rate)]
Sales – gross income (s 1)........................................................................................... R594 000
Exchange difference on debt owing to A Ltd (gain)
Debt due to A Ltd: FC90 000 × (6.90 – 6,60) ............................................................... R27 000
Bad debts written off (FC90 000 × 6,90) – s 11(i) ........................................................ (594 000)
Exchange gain previously recognised deducted – s 11I(i) (note 1) ............................ (27 000)
Total inclusion in 2022 year of assessment ................................................................. Rnil
continued
542

Although the debt recovered is R315 000 (FC90 000 × 0,50 × R7), if it is translated at the spot
rate on the date of accrual, the amount of the recoupment included in taxable income cannot
exceed the amount written off. The recoupment is therefore limited to the amount previously writ-
ten off as follows:
Section 8(4)(a) recoupment (R621 000 (R594 000 + R27 000) × 0,5) – consisting
of original debt of R297 000 (R594 000/2) .................................................................. R297 000
Section 8(4)(a) recoupment – consisting of half of the exchange difference of
R13 500 (R27 000/2) (note 1) ....................................................................................... R13 500
Section 24I gain on realisation (FC45 000 × (7.00 – 6.90)) .......................................... R4 500
Note 1
Section 24I(4) is subject to s 11. The deduction for the amount written off is claimed under s 11(i)
since it relates to an amount that was previously included in income. Since s 11(i) applies,
s 24I(4) is not applicable. If the amount written off did not qualify for a deduction under s 11(i)
(for an example if it was a loan granted to an employee), s 24I(4) would have been applicable.
15.6.2 Anti-avoidance rule (s 24I(8))

A foreign exchange loss sustained on a transaction entered into by a person, or any premium or
other consideration paid for or under a foreign currency option contract entered into or acquired by
him, will not be allowed as a deduction from his income under the provisions of s 24I(3), if the trans-
action was entered into or the foreign currency option contract was entered into or acquired solely or
mainly to enjoy a reduction in tax by way of a deduction from income.
15.6.3 Commencement or cessation of application of provisions of s 24I (s 24I(12))

When a person holds any exchange item and the provisions of s 24I become applicable to that per-
son at any time during a year of assessment, that exchange item shall be deemed to have been
acquired at that time for the purposes of s 24I (s 24I(12)(a)). The provisions of s 24I would become
applicable, for example, to a natural person if he commenced holding a debt as trading stock.
Similarly, when a person holds any exchange item and the provisions of s 24I cease to apply to that
person at any time during a year of assessment, that exchange item shall be deemed to have been
realised at that time for the purposes of s 24I (s 24I(12)(b)).
Remember
If a natural person holds a single unit of foreign currency or a debt denominated in foreign cur-
rency as trading stock, all the exchange items held by that person will be subject to s 24I. Con-
sequently, if a foreign unit of currency is held as trading stock but the debt is held as a capital
asset, both the unit of foreign currency and the debt will then be subject to s 24I. The transaction
date of the debt will then be deemed to be the same date that the unit of currency was acquired
as trading stock for purposes of calculating the exchange differences (s 24I(12)(b)).
15.7 Specific translation rule: Disposal and acquisition of assets

(par 43 of the Eighth Schedule)
When dealing with assets acquired or disposed of in foreign currency, it is necessary to determine
the capital gain or loss in rand. This is needed in order to calculate the taxable capital gain that
should be included in the taxable income of a person (s 26A).
If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain or
loss must be calculated by applying the specific translation rules of par 43 of the Eighth Schedule.
The same specific translation rules apply if an asset was acquired in rand and is subsequently dis-
posed of for a foreign currency.
The capital gain or capital loss calculated by using par 43 in respect of an exchange item, must only
be taken into account in terms of par 43 to the extent to which it exceeds the amounts determined in
respect of that exchange item under s 24I. Since par 43 applies to an ‘asset’ as defined in par 1 of
the Eighth Schedule, foreign currency bank notes and coins are not subject to par 43 since currency
543
is excluded from the definition of ‘asset’. Paragraph 43 will, however, apply to debt denominated in a
foreign currency (such as bank accounts, treasury bonds and loans) since it is included in the defin-
ition of ‘asset’. This means that any foreign currency gain or loss on the repayment or discounting of
debt owed in a foreign currency should be calculated and should only be taken into account to the
extent that the exchange gain or loss was not yet taken into account in terms of s 24I.
Remember
The translation rules relating to exchange gains and losses arising on exchange items are deter-
mined by s 24I (see 15.3).
The translation rules relating to capital gains and losses are determined by par 43 of the Eighth
Schedule (see 15.7).
Paragraph 43 provides
l the rules for converting the various components making up the capital gain or loss into rand
(expenditure, proceeds and where applicable, market value)
l the timing of the conversion, and
l the appropriate exchange rate to be used.
These rules also affect the manner in which pre-valuation date assets are to be treated (including the
way in which the loss-limitation rules in paras 26 and 27 are to be applied (refer to chapter 17)).
Paragraph 43 makes reference to a number of defined terms, some of which are defined in s 1 whilst
others are defined in par 43(7):
Provision Term Meaning
Paragraph 43(7) ‘foreign currency’ Any ‘currency other than local currency’.
Paragraph 43(7) ‘local currency’ l In relation to a permanent establishment of a person, the func-
tional currency of that permanent establishment (excluding any
currency of a country in the common monetary area)
l In relation to a headquarter company, the functional currency of
that headquarter company
l In relation to a domestic treasury management company, in
respect of amounts that are not attributable to a permanent
establishment outside the Republic, the functional currency of
that domestic treasury management company, or
l In relation to an international shipping company defined in
s 12Q, in respect of amounts that are not attributable to a per-
manent establishment outside the Republic, the functional cur-
rency of that international shipping company
l In all other cases, the currency of South Africa.
Section 1 ‘average Determined in relation to a year of assessment by using the closing
exchange rate’ spot rates over the selected interval (365 days or 12 months).
Section 1 ‘spot rate’ The appropriate quoted exchange rate at a specific time by any
authorised dealer in foreign exchange for the delivery of currency.
The following table provides a summary of the provisions in paras 43(1) and (1A):
Par 43 Where applicable? Translation method Effect
(1) For natural persons and non-trading Determine capital gain or loss CGT is only calcu-
trusts where both base cost and on disposal in foreign currency, lated on the real gain/
proceeds are denominated in the and translate that capital gain loss and not on the
same foreign currency or loss into rand by applying the foreign currency gain/
average exchange rate for the loss.
year of assessment in which
that asset was disposed of or
by applying the spot rate on the
date of disposal of that asset.
continued
544
Par 43 Where applicable? Translation method Effect

(1A) Applies in all other instances where Translate base cost (par 20 CGT is calculated on
par 43(1) does not apply, i.e., expenditure) into local currency the real gain/loss and
l for natural persons and non-trad- at spot rate on the date expend- on the foreign cur-
ing trusts where iture was incurred or average rency gain/loss.
– base cost is denominated in rate in the year expenditure was
local currency and proceeds incurred.
in a foreign currency;
– base cost is denominated in a
foreign currency and pro-
ceeds in a local currency;
–
base cost is denominated in Translate proceeds into local
one foreign currency and pro- currency at spot rate on date of
ceeds in another foreign cur- disposal or average rate in the
rency; year of disposal.
l for companies and trading trusts
where base cost and/or proceeds
are denominated in a foreign
currency (whether the same or
different currencies).
Example 15.14. The application of paras 43(1) and 43(1A) for different persons
A person acquires an asset for a base cost of US$100 000 in a year of assessment when the
average exchange rate is R7 to the dollar, and then eventually disposes of the asset for
US$120 000 in a year of assessment when the average exchange rate is R9 to the dollar.
Determine the capital gain or loss in terms of par 43 if the person is
1. a natural person, and
2. a company.
SOLUTION
1. The person is a natural person:
Paragraph 43(1) applies as the person is a natural person and both base cost and proceeds
are denominated in the same foreign currency. To determine a natural person’s capital gain
in terms of par 43(1), one would first have to determine the capital gain in dollars and then
translate this gain into rand either at the average exchange rate for the year of assessment of
disposal of the asset or at spot rate on the date of disposal of that asset. The capital gain
expressed in dollars would be US$20 000 (proceeds of US$100 000 less base cost of
US$120 000). The rand equivalent of the capital gain at the average exchange rate of R9 to
the dollar for the year of assessment of disposal would be R180 000 (US$20 000 × R9/US$).
His capital gain would, therefore, be R180 000.
His total gain (which includes his foreign currency gain) amounts to R380 000 ((US$120 000
× 9) – (US$100 000 × 7)). Only R180 000 of this gain is taxed in terms of par 43(1). The bal-
ance of this gain, namely R200 000 (R380 000 less R180 000), results from the devaluation of
the rand against the dollar (US$100 000 × (9 – 7)) and is not taxed in terms of par 43(1).
2. The person is a company
Paragraph 43(1A) applies as the person is a company and therefore par 43(1) cannot be
applicable. In terms of par 43(1A), the total gain of R380 000 (proceeds of R1 080 000
(US$120 000 × R9/US$) less base cost of R700 000 (US$100 000 × R7/US$)) is taxed. In
this instance the capital gain is calculated on both the real gain of R180 000 and on the for-
eign currency gain of R200 000. Although the taxpayer has a choice to translate into local
currency either at spot rate or average rate, only the average rates were provided in this
question.
Example 15.15. Base cost (expenditure) is denominated in one currency; proceeds

in a different currency in the case of a natural person
A natural person acquires an asset for £75 000 (pounds sterling) in a year of assessment when
the average exchange rate is R12 to the pound. He later disposes of the asset for R1 100 000.
Determine the capital gain or loss in terms of par 43 of the natural person.
545
SOLUTION
To determine the capital gain or loss on disposal par 43(1) cannot be used as base cost and
proceeds are not denominated in the same foreign currency (a requirement of par 43(1)). He
must therefore use par 43(1A). He must first translate the expenditure into rand (using either the
average exchange rate for the year of assessment when the expenditure was incurred or spot
rate on the date expenditure was incurred). This results in a base cost expressed in rand of
R900 000 (using average rate). His capital gain is then R200 000 (R1 100 000 – R900 000).
Although the taxpayer has a choice to translate into local currency either at spot rate or average
rate, only the average rates were provided in this question and therefore used. It seems that
there is no requirement to use the same method for converting both base cost and proceeds.
The taxpayer can therefore use spot rate to convert base cost and average rate to convert pro-
ceeds or the other way around.
Please note that if the taxpayer in this example was a company (or trading trust), the capital gain
would have been calculated in the same manner because par 43(1A) would have been applic-
able regardless of the currency of the proceeds and base cost.
Under par 43(1A) circumstances, the taxpayer has a choice to translate into local
currency using either the spot rate or average rate. This seems to contradict s 25D
whereby a company or trading trust may only translate income and expenditure
into local currency using the spot rate. From the explanatory memorandum of the
2013 Tax Laws Amendment Act it seems that the intention of the legislator was to
simplify the calculation for natural persons and non-trading trusts where the asset
is acquired and disposed of in the same foreign currency. Paragraph 43(1A) was
Please note!
provided as alternative in all other situations, in other words also where the tax-
payer is a company or trading trust. It is unclear whether the legislator intended to
provide for this option under par 43(1A) in the case of companies or trading trusts.
It nonetheless seems from the letter of the Act that this option is currently available
to all companies and trading trusts for purposes of calculating the capital gain
when disposing of non-monetary assets in a foreign currency.
Where a person is deemed to have disposed of an asset and the asset was acquired in a foreign
currency, the amount of the proceeds is deemed to be in the same currency as the currency in which
the asset was actually acquired (base cost) (par 43(5)). Sections 9HA, 25 and paras 12, 38 and 40
deal with such deemed disposals. Another example of such a situation is s 9H that deems a person
who ceases to be a South African resident to have disposed of all his or her assets on the day before
ceasing to be a resident at market value. These assets also include par 2(2) assets that consist of
direct or indirect interests of at least 20% in an entity if 80% of the market value of the interest in that
entity is attributable to South African immovable property. If, in such a case, the base cost was deter-
mined in a foreign currency, for example US dollar, the amount of the proceeds is deemed to be in
the same currency as the currency in which the asset was originally acquired, i.e., US dollar. In terms
of s 9H, that person is deemed to have immediately reacquired the assets at market value. The cur-
rency in which the asset was actually acquired will also be the currency of reacquisition, i.e., US
dollar in the example used (par 43(5)). Paragraph 43(5) determines, furthermore, that where another
person acquires the asset in terms of ss 9HA, 25 and paras 12, 38 and 40, the expenditure is
deemed to be incurred in the same currency.
Where a person has adopted the market value as the valuation date value of any asset contemplated
in par 43, that market value must be translated to rand by applying the spot rate on the valuation date
for purposes of par 43(1A) (par 43(6)).
546
15.8 Specific translation rules: Other (ss 6quat(4), 64N(4), 35A(4), 47J, 49H and
50H)
The Act contains specific translation rules for rebates of certain foreign taxes paid. Refer to the fol-
lowing chapters for a discussion of specific translation rules relating to specific transactions:
Transaction Chapter
Foreign tax credits in s 6quat(4)) 21.6.3
Foreign tax credit pertaining to dividends (s 64N(4)) 19.3.4
Translation rule for withholding of amounts from payments to non-resident sellers of 21.5.2.2
immovable property (s 35A(4))
Foreign entertainers and sport persons (s 47J) 21.5.2.3
Withholding tax on royalties (s 49H) 21.5.2.4
Withholding tax on interest (s 50H) 21.5.2.5
It is also important to consider the following VAT consequences of transactions in a foreign currency
since it became more prevalent with foreign electronic service providers operating in South Africa:
l The exchange rate that should be used when issuing tax invoices/debit/credit notes must be
issued in the currency of the Republic. The vendor may also reflect the consideration in a foreign
currency together with the relevant exchange rate.
l In BGR (VAT) 11, the Commissioner allows vendors to use one of the following options to deter-
mine the output tax when the consideration for a standard-rated supply is in a foreign currency:
– daily exchange rate on the date of the supply
– daily exchange rate on the last day of the month preceding the time of supply
– the monthly average rate for the month preceding the month during which the time of supply
occurs.
l The SA Reserve Bank, Bloomberg and European Central Bank are acceptable sources of the
exchange rates.
15.9 Crypto assets

A crypto asset (such as Bitcoin) is an Internet-based digital currency that is not an official South
African tender and is therefore not regarded by SARS as currency for income tax purposes. SARS
issued a media statement on 6 April 2018 stating that cryptocurrencies are assets of an intangible
nature and should be dealt with within the current tax framework. There are no VAT consequences for
cryptocurrency since it is a financial instrument which is an exempt supply.
A crypto assets can be acquired through the following transactions:
1. Mining where a ‘miner’ is awarded with newly created cryptocurrency coins by solving complex
computer algorithms. The crypto asset (coin) is held as trading stock that can then either be ex-
changed for local currency or can be used to pay for the acquisition of goods or services.
2. Local currency can be exchanged for cryptocurrency (crypto asses) by using cryptocurrency
exchanges or through private transactions.
3. Goods and services can be acquired in exchange for cryptocurrencies.
Normal rules and existing principles laid down by case law should be used to determine whether the
proceeds from the disposal of crypto assets are revenue or capital in nature:
l If the taxpayer trades in crypto assets (similar to a share dealer trading in shares), the crypto
assets will be treated as trading stock. The proceeds on disposal thereof will be gross income. Ex-
penses associated with crypto assets can be claimed as a tax deduction if the requirements of
s 11(a) are complied with (i.e., it was incurred in the production of income and for purposes of
trade). Section 22 dealing with trading stock will apply to such crypto assets (refer to chapter 14).
l If the crypto assets are held as capital assets, capital gains tax will be payable on disposal of
such crypto assets and the cost of acquisition will form part of the base cost thereof (refer to
chapter 17). If the crypto asset is acquired and/or disposed of in a foreign currency, the capital
gain or capital loss will be determined by applying the rules of paragraph 43 of the Eighth
Schedule (see 15.7 above).
547
Silke: South African Income Tax ದ
The onus is on the taxpayer to declare all crypto asset-related taxable income in the year in which
it accrues or is received. If a natural person trades in crypto assets and consequently realises an
assessed loss, the assessed loss might be ring-fenced according to s 20A. This is because the
acquisition or disposal of any crypto asset is specifically listed as a suspect trade for purposes of
the ring-fencing provisions of section 20A (refer to chapter 7).
15.10 Exchange Control Regulations

The South African Exchange Control Regulations were promulgated in 1961 and are legal provisions
that limit the extent to which South African residents may transfer funds offshore. The Exchange
Control Regulations are administered by the Department of Financial Surveillance (FinSurv) of the
South African Reserve Bank. If a South African resident wishes to transfer funds abroad, such trans-
fer has to be done through an Authorised Dealer (usually a bank) that reports the transaction to
FinSurv.
15.10.1 Individual investment allowances

South African residents are permitted to transfer money offshore in the form of the following two
allowances:
1. Single discretionary allowance (limited to R1 million per calendar year)
Requirements:
l only available to South African residents over the age of 18 years. (Individuals under the age of
18 years do not have a single discretionary allowance, but may avail of a foreign travel allowance
of up to R200 000 per calendar year)
l may be used for any legal purpose abroad (including investments, travel and funding of educa-
tion)
l does not require any specific documentary evidence to be submitted (except if used for foreign
travel purposes, then a valid passenger ticket for air, bus, rail or ship must be presented to the
authorised dealer).
2. Foreign capital allowance (limited to R10 million per calendar year)
Requirements:
l only available to South African residents over the age of 18 years who are taxpayers in good
standing
l available for offshore investments in addition to the single discretionary allowance referred to
above
l requires a tax clearance certificate from SARS to confirm that the person’s tax affairs are in order.
Any offshore transfer of allowances may only be done with approval from FinSurv.
15.10.2 Import payments

South African residents who import goods from abroad, must effect payment for such goods via an
Authorised Dealer. The importer must present the commercial invoice from the overseas supplier and
the customs documentation to the Authorised Dealer as evidence of the import.
However, individuals with locally issued credit and/or debit cards are permitted to make foreign
currency payments for small transactions (for example imports over the Internet) by means of such
credit and/or debit cards. Such payments are limited to R50 000 per transaction.
15.10.3 Emigrants: Withdrawals from retirement annuity funds and preservation funds
Retirement annuity funds and preservation funds generally do not permit members to withdraw lump
sums from such funds prior to reaching the age of retirement (usually the age of 55).
An exception to this rule existed prior to 1 March 2021 that permitted lump sum withdrawals from
retirement annuity funds and preservation funds if the member emigrated from South Africa and such
emigration was recognised by the South African Reserve Bank for exchange control purposes (gen-
erally known as ‘financial emigration’).
548
15.10ದ Chapter 15: Foreign exchange
From 1 March 2021, lump sum withdrawals from retirement annuity funds and preservation funds are
permitted where a fund member ceases to be a resident for tax purposes and remains a non-resident
for at least three consecutive tax years. The concept of ‘financial emigration’ for Exchange Control
Regulations purposes has been phased out and the tax residency of the member determines eligibility
to withdraw lump sums prior to the age of retirement.
Lump sum withdrawals (prior to attaining the age of retirement) are subject to normal tax in accord-
ance with the retirement lump sum withdrawal benefit table (refer to chapter 9).

A Ltd’s year of assessment ends on the last day of February. On 1 January 2021 the company
purchases a new manufacturing machine on credit from a supplier in another country for a
foreign currency (FC) amount of FC250 000. The supply is shipped free-on-board (FOB) on
1 January 2021 and the machine is delivered at the company’s premises on 15 January 2021
and brought into use on 5 March 2021.
The purchase consideration is settled in full on 31 May 2022.
A 17-month FEC is entered into on 1 January 2021 to serve as a hedge in respect of the debt on
which date the forward rate is FC1 = R6,65.
A Ltd qualifies for a s 12C allowance of 40% on the new manufacturing machine purchased.
The spot rates on the relevant dates are as follows:
1 January 2021 ............................................................................... FC1 = R6,63
15 January 2021 ............................................................................. FC1 = R6,65
28 February 2021 ........................................................................... FC1 = R6,60
5 March 2021 ................................................................................. FC1 = R7,00
28 February 2022 ........................................................................... FC1 = R7,10
31 May 2022 ................................................................................... FC1 = R6,90
The market-related forward rates are as follows:
l for a 15-month contract at 28 February 2021 (the remaining period of the FEC) is FC1 = R6,70
l for a 15-month contract at 5 March 2021 (the remaining period of the FEC) is FC1 = R6,67
l for a three-month contract at 28 February 2022 (the remaining period of the FEC) is FC1 =
R6,50.
Calculate the effect on the taxable income of A Ltd for the 2021, 2022 and 2023 years of assess-
ments.
SOLUTION
Cost of machine
Purchase price (FC250 000 × R6,63) – no deduction in terms of s 11(a) since
capital in nature ........................................................................................................... R1 657 500
Since the machine is brought into use only on 5 March 2021, the s 12C capital allowance may be
claimed for the first time in the 2022 year of assessment.
Exchange difference on translation date (28 February 2022)
Since the machine is brought into use only on 5 March 2021, the exchange gain of R7 500
[FC250 000 × (6,60 – 6,63)] on the outstanding debt as well as the gain of R12 500 on the FEC
[FC250 000 × (6,70 – 6,65)] is not taxable in the 2021 year of assessment. The inclusion is there-
fore deferred to the year during which the machine is brought into use, namely, the 2022 year of
assessment (s 24I(7)(a)).
continued
549

Section 12C allowance (40% × R1 657 500) ............................................................... (R663 000)
Exchange difference on translation date (28 February 2022)
Debt: Deductible exchange difference (loss) in respect of 2022 tax year
[FC250 000 × (7,10 – 6,60)] ......................................................................................... (R125 000)
Debt: Taxable exchange difference (gain) in respect of 2021 tax year
[FC250 000 × (6,60 – 6,63)] ......................................................................................... 7 500
FEC: Deductible exchange difference (loss) in respect of 2022 tax year
[FC250 000 × (6.50 – 6,70)] ......................................................................................... (50 000)
FEC: Taxable exchange difference (gain) in respect of 2021 tax year
[FC250 000 × (6,70 – 6,65)] ......................................................................................... 12 500
Total net deduction in 2022 year of assessment
– R663 000 – R125 000 + R7 500 – R50 000 + R12 500 ............................................. (R818 000)
Section 12C allowance (20% × R1 657 500) ............................................................... (R331 500)
Exchange difference on realisation date (31 May 2022)
Debt: Taxable exchange difference (gain) in respect of 2023 tax year
[FC250 000 × (6,90 – 7,10)] ......................................................................................... R50 000
FEC: Taxable exchange difference (gain) in respect of 2023 tax year
[FC250 000 × (6,90 – 6,50)] ......................................................................................... 100 000
Total net deduction in 2023 year of assessment ....................................................... (R181 500)
550
16 Investment and funding instruments
Pieter van der Zwan

l determine whether a financial arrangement is an instrument and calculate the
interest in terms of s 24J
l determine whether interest received by a taxpayer is subject to tax
l determine whether a taxpayer is entitled to deduct interest incurred
l identify interest limitations that may be applicable to interest incurred by a taxpayer
and calculate the limitations
l identify sharia compliant financing arrangements and calculate the tax implications
of these arrangements
l identify the tax implications of loans that do not bear interest or bears interest at a
low interest rate
l explain and calculate the tax implications of equity instruments held by investors
l explain and calculate the tax implications of equity instruments for issuers
l identify equity instruments that are hybrid equity instruments or third-party backed
shares and describe the implications of this classification of the instrument
l identify debt instruments that are hybrid debt instruments or bear hybrid interest
and describe the implications of this classification of the instrument or interest
l identify derivative instruments and determine the tax implications of these instru-
ments for the parties involved.
Contents
Page
16.1 Introduction ....................................................................................................................... 552
16.2 Debt instruments ............................................................................................................... 553
16.2.1 Common principles that apply to lenders and borrowers (s 24J(1))................ 553
16.2.1.1 Application of s 24J ........................................................................ 553
16.2.1.2 Meaning of interest ......................................................................... 554
16.2.1.3 Timing provisions of s 24J: Yield to maturity method ..................... 555
16.2.1.4 Timing provisions of s 24J: Alternative methods ............................ 563
16.2.1.5 Transfer or disposal of instruments (s 24J(4) and 24J(4A)) ........... 564
16.2.2 Lender perspective: Taxability of interest received or accrued (s 24J(3)) ...... 566
16.2.3 Borrower perspective: Deductibility of interest incurred (s 24J(2)).................. 567
16.2.3.1 Interest must be incurred in the production of income .................. 567
16.2.3.2 Interest must be incurred in carrying on a trade ............................ 568
16.2.3.3 Interest incurred on loans to acquire shares .................................. 569
16.2.3.4 Interest incurred on debt to acquire shares in a controlled
company (s 24O) ............................................................................ 569
16.2.3.5 Interest incurred on loans to pay dividends ................................... 571
16.2.4 Limitation of interest deductions ....................................................................... 572
16.2.4.1 Interest paid to persons not subject to tax (s 23M) ........................ 572
16.2.4.2 Debt used in acquisition and reorganisation transactions
(s 23N)............................................................................................. 576
16.2.5 Sharia-compliant financing arrangements (s 24JA) ......................................... 579
16.2.5.1 Mudaraba ........................................................................................ 579
16.2.5.2 Murabaha ........................................................................................ 580
16.2.5.3 Diminishing musharaka................................................................... 580
16.2.5.4 Sukuk............................................................................................... 580
551
Page
16.2.6 Interest-free or low interest debt ....................................................................... 581
16.3 Equity instruments ............................................................................................................ 585
16.3.1 Investor perspective ......................................................................................... 586
16.3.2 Investee perspective......................................................................................... 586
16.4 Hybrid instruments ............................................................................................................ 586
16.4.1 Equity instruments with debt characteristics (ss 8E and 8EA) ........................ 586
16.4.1.1 Hybrid equity instruments (s 8E)..................................................... 588
16.4.1.2 Third-party backed shares (s 8EA) ................................................. 590
16.4.2 Debt instruments with equity characteristics (ss 8F and 8FA) ........................ 593
16.4.2.1 Hybrid debt instruments (s 8F) ....................................................... 594
16.4.2.2 Hybrid interest (s 8FA) .................................................................... 595
16.5 Derivative instruments ...................................................................................................... 596
16.5.1 Interest rate agreements (s 24K) ...................................................................... 597
16.5.2 Option contracts (s 24L) ................................................................................... 598
16.6 Financial institutions and authorised users (ss 24JB and 11(jA)) .................................... 599
16.1 Introduction
Taxpayers are often party to financial instruments. The parties’ purpose and objectives determine the
terms of the instruments:
l A taxpayer may hold a financial instrument as an investment. This investment can be in the form
of a debt instrument that provides the taxpayer, as lender, with a steady stream of interest income
to compensate the taxpayer for the time value of the funds advanced and the risk that the
borrower may not be able to repay the amounts when due (credit risk). Lenders typically rank
before owners at liquidation. Alternatively, an investor can invest in shares to hold an ownership
interest to participate in profits of a business, but also be exposed to its risks. The terms of
instruments that are negotiated for the specific needs of an investor often fall between the
categories of a pure debt or pure equity instrument. Financial instruments are also held for
speculative purposes or to hedge financial exposures.
l On the other hand, a taxpayer may issue a financial instrument to obtain funding. External funding
can be in the form of debt or by issuing equity instruments. Debt instruments do not dilute
existing ownership but place an obligation upon the borrower to repay the debt and interest on it,
whether the borrower is in a financial position to do so or not. Equity funding dilutes existing
ownership when a new owner is introduced. As the new owner is exposed to the risks of the
business being funded, there is no obligation on the entity to make payments when it is not in a
position to do so. The new owner would, however, share in the profits to a greater extent when the
business performs well. There are also many variations of instruments tailored to the needs of the
borrower that fall between pure debt and pure equity instruments.
This chapter explains the tax implications of financial instruments according to the following structure:
Investment Funding
Debt instruments (16.2) Lender implications (16.2.2) Borrower implications (16.2.3 to 16.2.5)
Equity instruments (16.3) Investor implications (16.3.1) Investee implications (16.3.1)
Hybrid instruments (16.4) Hybrid equity (16.4.1 and 16.4.2) and hybrid debt (16.4.3 and 16.4.4)
instruments
Derivative instruments
(16.5)
552
16.1–16.2 Chapter 16: Investment and funding instruments
Remember
The instruments discussed in this chapter may be denominated in foreign currencies. Chapter 15
deals with the tax implications of these instruments in more detail.
In most instances transactions that involve the instruments discussed in this chapter will be
financial services that are exempt from VAT. Fees charged in relation to transactions in relation to
the instrument may attract VAT. The VAT implications of financial services are discussed in
chapter 31.
16.2 Debt instruments

A debt instrument normally comes into existence when a lender advances an amount to a borrower.
The borrower is obliged to repay the amount advanced as well as an interest on this amount to the
lender. The initial advance of the capital amount of the debt does not have any tax implications for
the borrower or the lender since an immediate right to repayment (lender) and the receipt by an
obligation to make repayment (borrower) accompanies the outflow (see Genn & Co (Pty) Ltd v CIR).
The next sections consider the tax implications of interest in respect of debt instruments.
16.2.1 Common principles that apply to lenders and borrowers (s 24J(1))

Section 24J regulates the timing of the accrual and incurral of interest. This provision applies to both
the lender and the borrower. In broad terms, this provision spreads the accrual or incurral of interest
(including any once-off component thereof, such as a premium or discount) over the period or term of
the instrument by compounding the interest over fixed accrual periods using a predetermined rate.
This rate is the ‘yield to maturity’.
It also governs the inclusion of interest accrued in a taxpayer’s gross income and the deduction of
interest incurred from a borrower’s income.
Section 24J uses specific terminology to refer to the borrower and lender. It
refers to a ‘holder’ and ‘issuer’ of an instrument.
l The holder holds the right to receive payment. This is the person who is
entitled to receive any interest or amounts in terms of an income instrument
Please note! (for example, a person who advanced a loan to another (lender/creditor) or
invested in bonds (investor)).
l The issuer issues the right to payment to the holder. The person who is liable
to pay interest or amounts in terms of an instrument (for example, a person
(borrower/debtor) who borrows money from another).
16.2.1.1 Application of s 24J

Section 24J applies to instruments. An instrument is
l any interest-bearing arrangement or debt
l the acquisition or disposal of any right to receive interest or the obligation to pay interest in terms
of any other interest-bearing arrangement, or
l a repurchase or resale agreement (definition of ‘instrument’ in s 24J(1)).
The definition of ‘instrument’ excludes lease agreements and policies issued by

insurers, as defined in s 29A. Sale and leaseback arrangements, where the
Please note! receipts and accruals of one of the parties are not taxed, are subject to the anti-
avoidance rules in s 23G. These arrangements are viewed as financing trans-
actions for tax purposes and are instruments to which s 24J applies.
The Act does not define the concepts of an interest-bearing arrangement or debt. The ordinary
meaning of debt is a duty or obligation to pay an amount of money (or goods or services) to another
party under an agreement. An arrangement or debt should bear interest, as discussed below,
to be an instrument for purposes of s 24J.
553
Despite the fact that an arrangement may be an instrument as defined, s 24J

does not apply to an instrument if the holder of that instrument has a right to
require the redemption of the instrument at any time while it holds the instrument
and the instrument does not provide for the payment of any deferred interest
(s 24J(12)). This means that s 24J does not apply to instruments repayable on
Please note!
demand, such as a money market savings account that allows the depositor to
withdraw funds at any time. The nature of these instruments makes it difficult to
determine a meaningful yield to maturity rate to be applied in terms of the timing
provisions of s 24J. Any amount paid or received in respect of these instruments
is taken into account in taxable income in accordance with the normal principles
governing the timing of accruals or incurral of expenditure as discussed in chap-
ters 3 and 6.
16.2.1.2 Meaning of interest

‘Interest’ includes
l the gross amount of any interest or similar finance charges, discount or premium payable or
receivable in terms of or in respect of a financial arrangement
l amounts payable by a borrower to a lender in terms of a lending arrangement. A ‘lending
arrangement’ is an arrangement in terms of which A (the lender) lends B (the borrower) instru-
ments and B undertakes to return instruments of the same kind and of the same or equivalent
quantity and quality
l the absolute value of the difference between all amounts receivable and payable by a person in
terms of a sale and leaseback arrangement as contemplated in s 23G over the full term of that
arrangement (definition of ‘interest’ in s 24J(1)).
The ordinary meaning of the term ‘interest’ must be considered given the circular reference to it in the
definition. Interest generally refers to an amount paid for using another person’s money. The reason
for the payment should be closely linked to the use of another person’s funds.
The interest can be cash or otherwise (s 24J(10)). It can also be
l calculated at a fixed or variable rate, or
l is payable or receivable as a lump sum or in unequal instalments during the term of the financial
arrangement (definition of interest in s 24J(1)).
Discounts and premiums, both payable and receivable, are interest and taxed accordingly as
forming part of the overall yield of an instrument. Since these items are interest for purposes of s 24J,
it is not necessary to determine whether a premium or discount is of a capital nature. The interest
inclusion and deduction provisions of s 24J (see 16.2.2 and 16.2.3) apply irrespective of whether the
amounts in question are of capital nature.
Remember
The ‘finance charge’ element of a suspensive sale agreement is interest. Suspensive sale agree-
ments are used to finance the acquisition, installation, erection or construction of any machinery,
plant, aircraft, implement, utensil, article or livestock. As a suspensive sale agreement is an
interest-bearing arrangement, it qualifies as an ‘instrument’ for the purposes of s 24J.
The reference to finance charges similar to interest casts the net wide for the application of s 24J.
Some doubt however exists as to whether ‘similar finance charges’ include transactions costs (for
example, fees to arrange the instrument). The definition of interest previously referred to interest and
related finance charges. Despite not specifically dealing with the meaning of the phrase ‘related
finance charges’ in the context of s 24J, the court suggested in C: SARS v South African Custodial
Services (Pty) Ltd that certain fees incurred in relation to an instrument were related finance charges
for purposes of the repealed s 11(bA). This provided support for the view that these amounts were
interest. This view may, however, no longer be relevant after the amendment of the phrase ‘related
finance charges’ to ‘similar finance charges’.
554
16.2 Chapter 16: Investment and funding instruments
16.2.1.3 Timing provisions of s 24J: Yield to maturity method

Interest accrued or incurred in a specific period is determined by applying a yield to maturity rate
that must be applied to the balance of an instrument. The provision uses a number of terms, each
with its own definition in s 24J(1), to achieve this outcome. We consider the methodology and the
terms used (in bold below) next.
Methodology
Determine total interest charge over instrument’s term and express as a yield to maturity rate that
discounts total payments on instrument to initial transaction amount.
Allocate total interest charge to accrual periods over the term of the instrument:
Accrual period 1 Accrual period 2 Accrual period 3 Accrual period n

...
Accrual amount (in plain terms, the interest allocated to each accrual period) =
Adjusted initial amount (equivalent of the balance of the instrument for tax purposes) × yield to maturity
rate (%) (above)
The interest allocated to each accrual period that falls in, or partly in, a year of assessment is treated
as having accrued or been incurred in respect of that instrument during the particular year of
assessment.
Where s 24J applies, the actual interest receipts and interest payments (all
amounts that are interest as explained in 16.2.1.2) are excluded from ‘gross
Please note! income’ and ‘deductions’ (s 11) respectively. These amounts will be included or
deducted from taxable income in terms of s 24J based on the yield to maturity
(or alternative) method (s 24J(5)).
Term
The term of an instrument is the period that starts on the date that a person becomes a party to an
instrument and that ends on the date of redemption of that instrument. A person may become a party
to an instrument when it is initially issued or subsequently if the instrument is acquired from another
person. An instrument is redeemed when the liability to pay all amounts in terms of an instrument is
discharged. This happens when the instrument is settled or transferred to another person (definitions
of ‘redemption’ and ‘term’ in s 24J(1)).
If the terms of the instrument specify a redemption date and this date is not
subject to change, whether as a result of any fixed or contingent right of the
holder of that instrument or otherwise, that date is the date of redemption. If no
Please note! redemption date is specified or if the redemption date specified is subject to
change, the date of redemption will be the date on which, on a balance of
probabilities, the liability to pay all amounts in terms of that instrument is likely to
be discharged (definition of ‘date of redemption’ in s 24J(1)).
Accrual period
The accrual periods in relation to an instrument depend on the terms of the instrument. In particular,
these periods depend on whether the terms of the instrument require that regular payments be made
at specific intervals of the same duration, no longer than 12 months each, throughout the term of the
instrument or not.
555
If an instrument requires regular payments to be made at intervals of equal length (no longer than
12 months), the period from one regular payment to the next will be an accrual period. As an
example, if a loan requires monthly repayment of instalments by the borrower, each month will be an
accrual period. Similarly, where a loan requires quarterly payment of instalments, each quarter will be
an accrual period.
If the terms of the instrument do not require regular payments to be made at intervals of equal length
or the interval between such payments exceeds 12 months, the taxpayer must elect periods of no
longer than 12 months to be used as accrual periods and apply this consistently over the term of the
instrument. An example of such an instrument, would be where a bond is issued at a discount and
does not require any repayment by the issuer for a period of 3 years. In such a case, each party to
the bond must elect periods that it will treat as accrual periods.
Remember
l It is not necessary for the holder and issuer to elect the same accrual period.
l The adopted accrual period must be applied consistently throughout the term of the instrument.
Accrual amount
The ‘accrual amount’ is the amount that is determined when the yield to maturity is applied to the
adjusted initial amount for an accrual period. In language that may be more familiar to accountants,
this amount is calculated as the opening balance of the instrument (adjusted initial amount) multiplied
by the interest rate (yield to maturity rate). If expressed as a formula, the accrual amount in respect of
a particular accrual period is:
A=B×C
where:
A = the accrual amount,
B = the yield to maturity, and
C = the adjusted initial amount.
The accrual amount must be adjusted in certain circumstances: (provisos to the definition of ‘accrual
amount’)
l When a year of assessment starts or ends during an accrual period, the accrual amount is to be
apportioned on a day-to-day basis over the term of the accrual period. If an accrual period falls
partly within a year of assessment and partly in another year of assessment, the accrual amount
must be apportioned to each year of assessment on the basis of the number of days in each of
the years of assessment.
l When an instrument is transferred during an accrual period, the accrual amount must be similarly
apportioned to the portion of the accrual period during which the taxpayer was a party to the
instrument prior to the transfer.
l When interest variations occur as a result of amounts received or payments made other than at
the end of an accrual period, the variations must be taken into account by adjusting the accrual
amount.
Initial amount and adjusted initial amount

The terms ‘initial amount’ and ‘adjusted initial amount’ reflect the balance of the instrument at com-
mencement and at the start of each accrual period respectively.
The ‘initial amount’ is the issue price or transfer price of an instrument. This is normally determined
with reference to the market value of the consideration given or received by the taxpayer for the issue
or acquisition of the instrument. This value must be determined on the date that the instrument is
issued or transferred.
The adjusted initial amount refers to the initial amount of the instrument, increased by all accrual
amounts (determined in the manner described above) and reduced by the amount of actual repay-
ments made in respect of the instrument. In the case of the holder of an instrument, this amount is
also increased by further payments made to the issuer after acquisition of the instrument. Conversely,
in the case of the issuer, the adjusted initial amount is increased by further payments received from
the holder after the instrument was initially issued. In many ways, the calculation of the adjusted initial
amount can be compared with the calculation of the carrying amount of the instrument for accounting
purposes.
556
The formula to calculate the ‘adjusted initial amount’ can be summarised as:
At the beginning of the first accrual period:
Holder Issuer
Transaction value ......................................................................................... Initial amount Initial amount
Plus: Accrual amount for the first accrual period (interest) .......................... xxx xxx
Plus: Any amounts paid by the holder during accrual period ...................... xxx
Plus: Any amounts received by the issuer during accrual period ................ xxx
Less: Any payments received by the holder during the accrual period ....... (xxx)
Less: Any payments made by the issuer during the accrual period ............ (xxx)
Adjusted initial amount at the start of the second accrual period .................. xxx xxx
Plus: Accrual amount for the second accrual period (interest) .................... xxx xxx
Plus: Any amounts paid by the holder during accrual period ...................... xxx
Plus: Any amounts received by the issuer during accrual period ................ xxx
Less: Any payments received by the holder during the accrual period ....... (xxx)
Less: Any payments made by the issuer during the accrual period ............ (xxx)
Adjusted initial amount at the start of the third accrual period ...................... xxx xxx
(The same calculation is performed for each accrual period until the instrument is redeemed or transferred.)
In the context of s 24J, and specifically the above formula, payments or amounts
Please note! also refer to amounts given or received in forms other than cash (s 24J(10)).
An anti-avoidance rule exists in the context of the issuer of an instrument to prevent the artificial
distortion of the interest. The adjusted initial amount must be reduced by any payment that the issuer
(or any party connected to the issuer) makes to another person with the purpose, or probable effect,
of that other person making a payment directly or indirectly to the holder or a connected person to
the holder. The balance of the instrument in the hands of the holder must be reduced by such
indirect payments made to the holder. The definition of ‘yield to maturity’ similarly requires these
payments to be taken into account to determine the yield to maturity rate at which the interest
incurred by the issuer is calculated. This proviso prevents the adjusted initial amount, on which the
interest deemed to be incurred by the issuer is based, from remaining artificially inflated while it has
in reality been settled. The deductible interest amount is essentially determined with reference to the
interest on the net amount borrowed by the group of related persons in terms of the scheme.
Yield to maturity
This term refers to the compounded rate, determined per accrual period, that discounts all amounts
payable or receivable in terms of an instrument back to its initial amount. Put differently, this is the
rate at which the present value of all amounts payable or receivable in terms of an instrument will be
equal to its initial amount. If the yield to maturity results in negative interest, it must be treated as zero.
The yield to maturity rate for an instrument that does not bear interest at a fixed rate is the variable
rate applicable on the date that the rate is calculated. If this variable rate changes, the yield to
maturity must be redetermined.
If the terms of the instrument (for example the term or payment terms) change, the yield to maturity
must also be redetermined.
Remember
Use a financial calculator or spreadsheet application to determine the yield to maturity rate:
l The initial amount of the instrument represents the present value (PV) or initial cash flow
(CF0).
l If regular and consistent payments are made in respect of the instrument, these amounts
represent the instalment (PMT). The number of periods over which these payments are
made represent the period (n). If payments are not made regularly, or the amounts of
payments are not the same, the cash-flow functions must be used.
l The final repayment represents the future value (FV) of the instrument. If cash-flow functions
are used, this will represent the final cash flow.
l The yield to maturity is then calculated by determining the effective interest rate (i), or internal
rate of return (IRR) if the cash-flow functions are used.
557
Practical application of the yield to maturity method

The application of the yield to maturity method can be daunting when one considers the technical
definitions discussed above. The following stepped approach can simplify this:
Step 1: Determine whether s 24J applies: It applies only to an ‘instrument’ (for the issuer) or to an
‘income instrument’ (for the holder) (see 16.2.2 below for the meaning of the term ‘income
instrument’), as defined in s 24J(1).
Step 2: Determine all amounts payable or receivable in terms of any instrument in relation to a
holder or an issuer, as the case may be, during the term of the instrument. These amounts
include amounts that represent interest as well as capital in respect of the instrument.
Step 3: Calculate the yield to maturity: The calculation is to be done with a financial calculator or
using a spreadsheet, unless the rate is given (in an exam context).
Step 4: Determine the initial amount: the amount paid or received for the instrument (issue price or
transfer price).
Step 5: Calculate the accrual amount for the first accrual period: do this by using the formula:
A = B × C. Remember to apportion the amount if the accrual period does not commence or
end on the same day as the start or the end of the year of assessment.
Step 6: Calculate the adjusted initial amount. The amount calculated represents ‘C’ in the formula:
A = B × C.
Step 7: Calculate the accrual amount for the second accrual period using the formula: A = B × C.
Remember to apportion the amount if the accrual period does not commence or end on the
same day as the start or the end of the year of assessment.
Step 8: Repeat steps 6 and 7 for the rest of the accrual periods until the end of the term of the
instrument.
Step 9: Reconciliation. The total of the accrual amounts should be equal to the total interest (see
diagram at the start of 16.1.2.3) in respect of the instrument.
Example 16.1. Yield to maturity method: Basic calculation

Anja Ltd enters into an agreement on 1 January 2022 whereby it acquires an interest-bearing
instrument with a face value of R100 000 at a discount of 10%. As Anja Ltd holds the right to
payment, it is the holder of the instrument. The instrument has a maturity date of 31 Decem-
ber 2023, when an amount of R130 000 will be repaid. Anja Ltd's financial year ends on
31 December.
Determine the interest accrual amount for each accrual period by applying the yield to maturity
method prescribed in s 24J.
SOLUTION
Step 1. Determine whether s 24J applies
The interest-bearing instrument meets the definition of an instrument. It is furthermore an ‘income
instrument’ as defined, as it was acquired by the company.
Step 2. Determine the projected cash flows
The cash flows under the agreement are as follows:
Month Cash flow
1 January 2022 (R90 000)
31 December 2023 ..................................................................................................... 130 000
Interest income ........................................................................................................... R40 000
Step 3. Calculate the yield to maturity
The yield to maturity of the instrument is 20,18504%.
(Financial calculator input: PV = -R90 000; PMT = 0; FV = R130 000; n = 2)
Step 4. Determine the initial amount
The initial amount is R90 000, i.e., the amount paid to acquire the income instrument.
continued
558
Step 5. Calculate the accrual amount for the first accrual period
As the instrument does not require any payments to be made at regular intervals not exceeding
12 months, a period not exceeding 12 months must be elected by the holder as the accrual period.
For purposes of this example, it is assumed that Anja Ltd elected the accrual period to be from
1 January to 31 December of each calendar year. This first accrual period is therefore from
1 January 2022 to 31 December 2022.
Using the formula: Accrual amount (A) = yield to maturity (B) u adjusted initial amount (C)
Accrual amount = R90 000 u 0,2018504
= R18 166,54 (interest to be included in gross income in terms of s 24J(3))
(Adjusted initial amount = R90 000 because there are no accrual amounts in respect of previous
accrual periods.)
Step 6. Calculate the adjusted initial amount
Adjusted initial amount is R90 000 + R18 166,54 – Rnil (no payments were received during this
accrual period) = R108 166,54
Step 7. Calculate the accrual amount for the second accrual period: 1 January 2023 to 31 December
2023
Using the formula: Accrual amount = yield to maturity u adjusted initial amount
Accrual amount = R108 166,54 u 0,2018504
= R21 833,46 (interest to be included in gross income in terms of s 24J(3))
Step 8. Calculate the portion of the accrual amounts deemed to accrue in each year of assessment
Since the accrual periods coincide with Anja Ltd’s years of assessment (both being the calendar
year from 1 January to 31 December) no apportionment is necessary in this example.
Step 9: Reconciliation – The accrual amounts for the two accrual periods (R18 166,54 and
R21 833,46) total R40 000 which is the amount of interest income from the income instrument.
Example 16.2. Yield to maturity method: Discount and zero-coupon bond
A taxpayer entered into an agreement on 1 October 2022 whereby it issued a zero-coupon bond
with a face value of R1 000 000 at a discount of 40%. The bond has a maturity date of 30 Sep-
tember 2025. The taxpayer’s financial year ends on the last day of February. The cash flows
under the agreement are as follows:
Month Cash flow
1 October 2022 ........................................................................................................... R600 000
30 September 2023 .................................................................................................... nil
30 September 2024 .................................................................................................... nil
30 September 2025 .................................................................................................... (1 000 000)
Interest expense incurred by the issuer ...................................................................... R400 000
Determine the interest accrual amount for each accrual period by applying the yield to maturity
method prescribed in s 24J.
SOLUTION
As the instrument does not require payments to be made at regular intervals not exceeding
12 months, a period not exceeding 12 months must be elected by the holder as the accrual
period. For purposes of this example, it is assumed that the taxpayer elected the accrual period
to be from 1 October to 30 September of each calendar year.
The yield to maturity, for an annual accrual period, is 18,56311% per accrual period.
(Financial calculator input: PV = R600 000; PMT = Rnil; FV = -R1 000 000; n =3)
The incurral of R400 000 interest by the taxpayer is deemed to have been incurred on a com-
pounding accrual basis in accordance with s 24J(2) as follows:
Using the formula: Accrual amount (A) = yield to maturity (B) u adjusted initial amount (C)
Adjusted initial amount = R600 000. (There are no accrual amounts in respect of previous
accrual periods.)
Accrual amount for the 2023 year of assessment
151
= R600 000 u 0,1856311 u days
365
= R46 077 (interest to be considered for deduction in terms of s 24J(2))
continued
559

Since the accrual period of the bond is from 1 October to 30 September, the accrual amount for
the 2024 year of assessment is determined in relation to the portion of two accrual periods falling
within the year of assessment (namely, from 1 March 2023 to 30 September 2023 and from
1 October 2023 to 29 February 2024). The accrual amounts in relation to each accrual period are
apportioned on a day-to-day basis over the accrual period. Since the adjusted initial amount
relates to an accrual period, it will differ for the two accrual periods which fall into the year of
assessment in question. Therefore, the adjusted initial amount for the portion of the first accrual
period remains R600 000 and for the second accrual period will equal R600 000 plus the accrual
amount in previous accrual periods (1 October 2022 to 30 September 2023).
214 152
= (R111 379 × ) (R132 054 [(600 000 + 111 379 – Rnil) × 0,1856311] × )
365 366
= R65 301 R54 842
214 151
= (R132 054 × days) (R156 567 [(711 379 + 132 054) × 0,1856311] × )
366 365
= R77 211 R64 772
214
= R156 567 × days
365
Total deemed interest incurred by the issuer equals the sum of the accrual amounts:
= R46 077 R120 143 R141 983 R91 796
= R399 999 (difference of R1 due to rounding)
The above examples illustrate the calculation of the accrual amount for accrual periods. Once the
accrual amounts have been determined for the accrual periods in a particular year of assessment,
these accrual amounts must be apportioned to determine the amount accrued or incurred for that
year of assessment.
Example 16.3. Yield to maturity method: Redemption at premium
A taxpayer acquired an instrument with a face value of R1 000 000, a term of three years and a
six-monthly coupon of 6%, at a discount of R400 000 on 1 October 2022. The coupon dates,
upon which interest is receivable, are 31 March and 30 September. The financial instrument will
be redeemed at a premium of 2% on 30 September 2025. The taxpayer’s financial year ends
February. The cash flows under the agreement are as follows:
Month Cash flow
1 October 2022 ........................................................................................................... (R600 000)
31 March 2023 ............................................................................................................ 60 000
30 September 2023 .................................................................................................... 60 000
31 March 2024 ............................................................................................................ 60 000
30 September 2024 .................................................................................................... 60 000
31 March 2025 ............................................................................................................ 60 000
30 September 2025 .................................................................................................... 1 080 000
Total interest deemed to be accrued .......................................................................... R780 000
Calculate the interest accruing during each year of assessment.
560
SOLUTION
The yield to maturity, for a six-monthly accrual period is 17,50653% per accrual period.
(Financial calculator input: PV = -600 000; PMT = 60 000; FV = R1 020 000; n = 3 × 2 = 6)
In terms of s 24J(3), the accrual by the taxpayer of R780 000 in respect of the income instrument
is calculated as the sum of all accrual amounts in relation to all accrual periods falling within the
taxpayer’s year of assessment. The accrual is determined, not on a receipts basis, which is
dependent upon actual cash flows, but rather on an accrual basis as set out below.
Using the formula: Accrual amount = yield to maturity u adjusted initial amount
Adjusted initial amount = R600 000 (there are no accrual amounts in respect of previous accrual
periods)
151
Accrual for the 2023 year of assessment = R600 000 × 0,1750653 × days
182
Deemed accrual = R87 148 (interest to be included in gross income in terms of s 24J(3))
Since the accrual periods of the financial instrument are from 1 October to 31 March and from
1 April to 30 September, the accrual amount for the 2024 year of assessment is determined in
relation to the portion of three accrual periods falling within the year of assessment (namely, from
1 March to 31 March 2023, from 1 April to 30 September 2023 and from 1 October 2023 to
29 February 2024). The accrual amounts in relation to each accrual period are apportioned on a
day-to-day basis over the accrual period. Since the adjusted initial amount relates to an accrual
period, it will differ for the three accrual periods which fall into the year of assessment in
question. Thus, the adjusted initial amount for the portion of the first accrual period ending on
31 March 2023 remains R600 000 and the accrual amount is
31
R600 000 u 0,1750653 × days
182
= R17 891
For the second accrual period, ending on 30 September 2023, the adjusted initial amount will
equal R600 000 plus the accrual amount in previous accrual periods (1 October 2022 to
31 March 2023), less any payments receivable:
= R600 000 (R87 148 R17 891) – R60 000
= R600 000 R105 039 – R60 000
= R645 039
Accrual for the accrual period ending on 30 September 2023:
= R645 039 u 0,1750653
= R112 924
Accrual for the portion of the accrual period that ends on 31 March 2024, up to the end of the
year of assessment (29 February 2024):
152
(R645 039 R112 924 – R60 000) × 0,1750653 × days
183
152
= R697 963 × 0,1750653 × days
183
= R101 490
Deemed accrual for the year
= R17 891 R112 924 R101 490
= R232 305 (interest to be included in gross
income in terms of s 24J(3))
Adjusted
Portion of accrual periods Calculation of adjusted initial amount
initial amount
1 March to 31 March 2024 R697 963 R645 039 R112 924 – R60 000
1 April to 30 September 2024 R760 152 R697 963 (R101 377 R20 812) – R60 000
1 October 2024 to R833 228 R760 152 R133 076 – R60 000
28 February 2025
Accrual for the 2025 year of assessment
= (R697 963 × 0,1750653 × 31/183) (R760 152 × 0,1750653) (R833 228 × 0,1750653 × 151/182)
Deemed accrual for the year = R20 699 R133 076 R121 023
= R274 798
continued
561

Adjusted
Portion of accrual periods Calculation of adjusted initial amount
initial amount
1 March to 31 March 2025 R833 228 R760 152 R133 076 – R60 000
1 April to 30 September 2025 R919 097 R833 228 (R121 159 R24 710) – R60 000
Accrual for the 2026 year of assessment

= (R833 228 × 0,1750653 × 31/182) (R919 097 × 0,1750653)
= R24 846 + R160 902
= R185 748 (interest to be included in gross income in terms of s 24J(3))
Total interest accrued in terms of s 24J(3)
= R87 148 R232 305 R274 798 R185 748
= R779 999 (difference of R1 due to rounding)
Example 16.4. Yield to maturity method: Repayment in instalments

A taxpayer is currently experiencing cash-flow difficulties. In order to restore the taxpayer’s cash-
flow position, the taxpayer requires funding to purchase a new asset. The cost of the asset
is R69 280. The taxpayer has entered into negotiations with an investor who is willing to take up a
bond issued by the taxpayer with the following terms:
l The bond will be issued for an amount of R69 280 on 1 October 2022.
l It does not bear any interest at a coupon rate on the outstanding amount. This will give the
taxpayer an opportunity to restore its cash-flow position without the burden of having to
service the interest obligation in respect of the bond on an annual basis.
l The outstanding amount will be settled in two instalments of R60 000 each. The first will be
made on 30 September 2025 and the second on 30 September 2027.
The taxpayer has a 30 September financial year-end.
Calculate the interest incurred for purposes of s 24J during each year of assessment that the
instrument is issued.
SOLUTION
Despite the fact that the bond does not bear interest at a coupon rate, the premium at settlement
is interest for purposes of s 24J (definition of ‘interest’ in s 24J(1)). This bond is therefore an
instrument and within the scope of s 24J.
In terms of s 24J(2), the interest incurred by the taxpayer is calculated as the sum of all accrual
amounts in relation to all accrual periods falling within the taxpayer’s year of assessment. The
accrual is determined using the yield to maturity method for each accrual period. The formula is:
Accrual amount = yield to maturity u adjusted initial amount
As the bond does not bear interest on a regular basis, a period not exceeding 12 months must
be used as the accrual period. For purposes of this example, the 12 month period from
1 October to 30 September will be used.
The yield to maturity is calculated using the cash-flow functions on a financial calculator. The
relevant cash flows are:
Cash flow 0 (1 October 2022) ..................................................................................... R69 280
Cash flow 1 (30 September 2023) .............................................................................. Rnil
Cash flow 3 (30 September 2025) .............................................................................. (R60 000)
Cash flow 5 (30 September 2027) .............................................................................. (R60 000)
These cash flows result in a rate of return (which is the yield to maturity for purposes of s 24J) of
15,000678% p.a.
Adjusted initial amount = R69 280 (there are no accrual amounts in respect of previous accrual
periods)
Accrual for the 2023 year of assessment = R69 280 u 0,15000976
Deemed accrual = R10 393 (interest to be considered for deduction in terms of s 24J(2))
continued
562

The adjusted initial amount will equal R69 280 plus the accrual amount in previous accrual
periods (1 October 2022 to 30 September 2023), less amounts payable (if any):
= R69 280 (R10 393) – Rnil
= R79 673
Accrual for the accrual period ending on 30 September 2024
= R79 673 × 0,15000678
= R69 280 (R10 393+ R11 951) – Rnil
= R91 624
= R91 624 u 0,15000678
= R69 280 (R10 393 + R11 951 + R13 744) – R60 000
= R45 368
= R45 368 × 0,15000678
= R69 280 + (R10 393 + R11 951 + R13 744 + R6 806) – R60 000
= R52 174
= R52 174 × 0,15000678
As a final check, the adjusted initial amount once the final payment has been made is calculated
as follows:
R69 280 + (R10 393 + R11 951 + R13 744 + R6 806 + R7 826) – R120 000 = Rnil
Note that the methodology followed to determine the yield to maturity and accrual amount for
each of the accrual periods will be similar to that followed in this example in the case of
l instruments that bear interest at a stated coupon rate where repayment of capital takes place
during the term, as opposed to at the end of the term of the instrument, or
l instruments that bear interest that is either not payable at regular intervals or where the
interest rate does not remain constant throughout the term of the instrument (i.e., initially at
5% p.a. but increases to 10% p.a. at some stage during the term of the instrument).
16.2.1.4 Timing provisions of s 24J: Alternative methods

Taxpayers are allowed to determine the amount of interest incurred or accrued using an alternative
method rather than the yield to maturity method. The alternative method entails that interest is deter-
mined in accordance with IFRS for a class of instruments. The timing of the accrual or incurral of the
interest determined in terms of this method must be substantially similar to the result that would have
been achieved if the yield to maturity method had been applied. If a taxpayer wishes to apply an
alternative method, it must do so for all instruments in a specific class of instruments, and this needs
to be done consistently for all such instruments for all financial reporting purposes. The alignment
between tax and accounting greatly simplifies tax compliance by avoiding two sets of independent
calculations, especially for larger taxpayers with multiple debt instruments.
563
Remember
Practically, the application of the alternative method would mean that the amount of interest, as
determined in accordance with IFRS 9, the accounting standard that applies to financial instru-
ments, is used as the amount of interest incurred or accrued for purposes of s 24J.
This standard requires instruments to be measured at amortised cost using the effective interest
rate method. In most instances, the results of the effective interest rate method and the yield to
maturity method should not differ significantly, if it differs at all.
16.2.1.5 Transfer or disposal of instruments (s 24J(4) and 24J(4A))

In addition to governing the timing of the accrual or incurral of interest, s 24J contains rules to
determine a gain or loss upon transfer or disposal of an instrument. These rules ensure that the effect
of the timing rules, as discussed above, is taken into account when an instrument is transferred or
disposed of. This is necessary because the amounts taken into account for tax purposes may differ
from the actual payments made and/or amounts already due in terms of an instrument.
A gain or loss must be calculated if an instrument is redeemed or disposed of (transferred) prior to or
on its maturity. This gain or loss should reflect the difference between the actual net cash flows
(including the cash flow from the redemption or transfer) in respect of the instrument and the accrual
amounts taken into account in the taxpayer’s taxable income. This amount is deemed to have been
incurred by (adjusted loss) or to have accrued to (adjusted gain) the taxpayer in the year of
assessment in which the transfer or redemption occurs (s 24J(4)).
An instrument is redeemed when the full liability to pay amounts in terms of the
instrument is discharged (definition of ‘redemption’ in s 24J(1)).
Please note! A transfer of an instrument refers to the transfer, sale, assignment or disposal of
the instrument in any other manner by the holder or the issuer (definition of
‘transfer’ in s 24J(1)). It also includes the acquisition of an instrument by the holder
or issuer thereof.
The calculation of the adjusted gain or loss on transfer or redemption of an instrument is summarised
in the diagram below:
Holder, in relation to an income instrument Issuer, in relation to an instrument
Alternative method Alternative method Alternative method Alternative method

not applied: applied: not applied: applied:
Adjusted gain or loss Adjusted gain or loss Adjusted gain or loss Adjusted gain or loss
is the difference is the difference is the difference is the difference
between: between: between: between:
(adjusted initial (initial amount + (adjusted initial (initial amount and
amounts + accrual amounts determined amount + accrual amounts determined
amount + payments using the alternative amounts + payments using the alternative
made) (during the method + payments received) (during the method + payments
accrual period of made) (during the accrual period of received) (during the
transfer or period from transfer or period from
redemption) acquisition until redemption) acquisition until
and transfer or and transfer or
redemption) redemption)
(transfer price or (transfer price or
redemption payment and redemption payment and
+ payments received) (transfer price or + payments made) (transfer price or
(during the accrual redemption payment + (during the accrual redemption payment
period of transfer or payments received) period of transfer or + payments made)
redemption) (during the period from redemption) (during the period from
acquisition until acquisition until
transfer or redemption) transfer or redemption)
564
Where an adjusted loss arises on the transfer or redemption of an income instrument, this loss may
consist of two elements, namely
l interest accrued in terms of s 24J(3), but never received by the taxpayer, and
l a portion of the original acquisition price or issue price forfeited.
If, in the case of a holder of an income instrument, the adjusted loss includes an amount that
represents an accrual amount (or an amount determined in accordance with an alternative method)
that was previously included in the holder’s income in any year of assessment, this amount must be
allowed as a deduction from the holder’s income in the year of transfer or redemption (s 24J(4A)(a)).
In the absence of this rule, the interest accrued would have been taxed, but will never actually be
received by the holder of the instrument. The deduction reverses the income previously taken into
account, but that was never actually received (much like the bad debt rules of s 11(i)).
The converse applies to an issuer that incurred interest in terms of s 24J(2), but will not actually pay
this interest. If, in the case of an issuer, the adjusted gain includes an amount that represents an
accrual amount (or amount determined in accordance with an alternative method) that was allowed
as a deduction from the issuer’s income in any year of assessment, the amount must be included in
the issuer’s income in the year of transfer or redemption. In the absence of this rule, the interest
incurred would have been deducted, but will never actually be paid by the issuer of the instrument.
The amount included in income reverses the deduction previously claimed in respect of the accrued
interest that will not be paid (much like an ordinary recoupment in terms of s 8(4)). The inclusion in
income is not required where the amount has already been recouped in terms of s 19 (see chapter 13)
when the debt is the subject to a concession or compromise (s 24J(4A)(b)).
A recoupment can also arise in the hands of a taxpayer in respect of interest or

related finance charges incurred in respect of a financial arrangement when that
taxpayer transfers the financial arrangement, including the obligation to pay the
interest or related finance charges, to another person. The portion of the obligation
Please note! for the interest that remains unpaid at the date of transfer results in a recoupment in
the hands of the transferor (s 8(4)(l)). It is submitted that, in the case of an instru-
ment, the provisions of s 24J(4A)(b), as discussed above, will apply. The recoup-
ment in terms of s 8(4)(l) would arguably only apply where interest has been
incurred in terms of an arrangement that is not an instrument and to which s 24J
does not apply.
Section 24J does not prescribe the tax implications of the calculated gain or loss on transfer. The
normal requirements of the Act, including the provisions relating to capital, revenue and source must
still be considered to establish whether and how the gain or loss is taken into account in determining
the taxpayer’s taxable income.
Example 16.5. Yield to maturity method: Adjusted gain or loss on transfer
An investor in financial instruments acquires a government bond for an amount of R188 317 on
1 December 2021. The bond bears interest at a coupon rate of 11,5% per annum payable six-
monthly and matures at a nominal value of R200 000 on 31 May 2025. The holder sells the bond
on 12 August 2022 for an amount of R185 776. The holder’s financial year ends on 30 June.
The cash flows under the agreement are as follows:
Date Cash flow
1 December 2021 ....................................................................................................... (R188 317)
31 May 2022 (11.5% × R200 000 × 6/12) ................................................................... 11 500
30 November 2022 ..................................................................................................... 11 500
31 May 2023 ............................................................................................................... 11 500
30 November 2023 ..................................................................................................... 11 500
31 May 2024 ............................................................................................................... 11 500
30 November 2024 ..................................................................................................... 11 500
31 May 2025 ............................................................................................................... 211 500
R92 183
A yield to maturity of 6,82740%, applying a six-monthly accrual period, is applicable to the instru-
ment. (Financial calculator input: PV = -188 317; PMT = 11 500; FV = 200 000; n = 7)
continued
565

Interest accrued
30
= (R188 317 × 6,8274%) + (R189 674 (R188 317 + R12 857 – R11 500) × 6,8274% × )
183
= R12 857 R2 123
= R14 980
Year of assessment ended 30 June 2023 (1 July 2022 to 12 August 2022)
Interest accrued
43
= R189 674 × 6,8274% × days
183
= R3 043
= (R189 674 + R2 123 + R3 043) – R185 776
= R9 064 (note (1))
Reconciliation
Cash flow
Acquisition price (1 December 2021) ......................................................................... (R188 317)
Coupon (31 May 2022) ............................................................................................... 11 500
Selling price (12 August 2022) ................................................................................... 185 776
Net cash receipt ......................................................................................................... R8 959
Income tax treatment
Interest accrued (2022 tax year) ................................................................................. R14 980
Interest accrued (2023 tax year) ................................................................................. 3 043
Section 24J(4A)(a) deduction (note (1)) ..................................................................... (6 523)
Balance of adjusted loss on transfer (note (2)) ........................................................... (2 541)
R8 959
Notes
(1) Included in the adjusted loss on transfer of R9 064 is an amount of R6 523 (R194 840
(adjusted initial amount on date of sale) less R188 317 (acquisition price)), which represented
taxable income (interest) in the current and previous year of assessment which has not yet
been received in cash. Section 24J(4A) allows this amount to be deducted from the income
of the taxpayer.
(2) The balance of the adjusted loss on transfer, amounting to R2 541 (R9 064 less R6 523), will
be dealt with in terms of the normal provisions of the Act. Since we are dealing with an
investor in financial instruments, this loss will be of a capital nature and not deductible
under s 11(a). The provisions of the Eighth Schedule would however be applicable if an
asset is disposed of. (If it was a dealer, the loss may have been deductible under s 11(a).)
(This example has been adapted from the Explanatory Memorandum on the Income Tax Bill, 1996)
16.2.2 Lender perspective: Taxability of interest received or accrued (s 24J(3))

The lender is the holder of an instrument for purposes of s 24J. Given the complexity of the method-
ology prescribed by s 24J, certain holders of instruments do not have to apply this provision. The
holder must only apply s 24J if the instrument is an income instrument. In the case of a company,
which should have the capacity to perform the complex calculations required by s 24J, all instru-
ments are income instruments. In the case of any other person (for example, natural persons), an
instrument is only an income instrument is if was issued or acquired at a discount or premium, or
bears deferred interest, and is expected to have a term that exceeds 12 months. A natural person
who invests in a debt instrument that only bears interest at a specified rate will therefore not be
required to apply the provisions of s 24J to determine the timing of the accrual of such interest.
‘Deferred interest’ is broadly defined and encompasses

l any interest which is calculated by applying a constant interest rate for the
term of the instrument, but which is not payable or receivable within one year
Please note! from the date of commencement of the ‘accrual period’ as defined, and
l any interest payable or receivable which is not calculated by applying a con-
stant interest rate throughout the term of the instrument.
Any interest rate that is linked to a recognised base rate or index by applying a
constant factor (for example prime rate plus 1%) is regarded as a constant rate.
566
The holder of an income instrument must include the following amounts of interest in its gross income
l amounts determined using the yield to maturity method (see 16.2.1.3) for accrual periods in the
l amounts determined using an alternative method (see 16.2.1.4) (s 24J(3)).
The holder must include these amounts of interest in its gross income, irrespective of whether the
accrual or receipt is of a capital nature.
Remember
Not all interest included in the gross income of a taxpayer is subject to normal tax. The following
exemptions may apply:
l Interest that accrues to a natural person (or the deceased or insolvent estate of a natural
person) in respect of a tax-free investment is exempt from normal tax (s 12T(2)).
l A portion of interest from a South African source that accrues to a natural person (or a
deceased estate) may be exempt. In the case of a taxpayer who is, or would have been, at
least 65 years of age on the last day of the year of assessment, an amount of R34 500 is
exempt. In the case of all other natural persons, an exemption of R23 800 applies
(s 10(1)(i)). These thresholds apply for 2021 and are generally adjusted annually.
l Interest received by or accrued to certain non-residents may be exempt from normal tax
(s 10(1)(h)), except if this interest is part of an annuity (s 10(2)). This interest could be
subject to the withholding tax on interest (ss 50A to 50H – see chapter 21).
16.2.3 Borrower perspective: Deductibility of interest incurred (s 24J(2))

The borrower is referred to as the issuer of the instrument for purposes of s 24J.
The issuer of an instrument is entitled to deduct interest (determined using the yield to maturity
method or alternative method, as discussed in 16.2.1.3 and 16.2.1.4) from income derived by the
issuer from carrying on any trade, provided that such interest is incurred in the production of the
income (s 24J(2)). It is not necessary to consider whether the interest incurred is of a capital nature.
The requirement that interest must be incurred in the production of the income from carrying on the
trade is similar to that of the general deduction formula, as discussed in chapter 6. The same consid-
erations discussed in that chapter also apply to interest expenditure. The courts have specifically
considered the application of these requirements in the context of interest. SARS issued practice and
interpretation notes in this regard. The legislature has also included specific provisions dealing with
the deductibility of interest into the Act.
16.2.3.1 Interest must be incurred in the production of income

Whether interest is incurred in the production of income requires an enquiry into the purpose of the
expenditure.
Interest paid on moneys borrowed to purchase assets that produce amounts that are exempt from
tax (in terms of s 10) is not deductible. Interest will therefore not be deductible if, for example, it is
paid on an amount borrowed to fund the purchase of shares that produce exempt dividends (see
chapter 6).
An exception exists for interest incurred to fund the acquisition of a controlling

Please note!
interest in a company (s 24O). This exception is considered in 16.2.3.4.
If the purpose for which money is borrowed excludes any possibility of earning income, any interest
incurred on the borrowed money may not be deducted. For example, should a company borrow
money at interest and lend it to a related entity without charging interest, it will not be allowed to claim
the interest it pays as a deduction, for the simple reason that the money borrowed would not earn any
income. Such interest will probably also not be incurred for the purposes of carrying on a trade.
In many instances, the closeness of the connection between the borrowed funds and the income-
earning activities may be less clear. In Producer v COT (1948 SR) the taxpayer borrowed money to
apply in the ordinary course of business. The taxpayer, however, also held shares that did not
produce income. The Commissioner disallowed a portion of the interest incurred based on the value
567
of these shares relative to the taxpayer’s total assets. The court found that the taxpayer borrowed the
funds in the normal course of business, and not for the specific purpose of buying shares. The
purpose of the borrowing is the critical factor that determines whether the interest is incurred in the
production of income.
In Financier v COT (1950 SR), a taxpayer carried on business as a moneylender and also made
some investments in shares of companies. It borrowed a sum of money at interest for the general
purposes of its business. Certain investments produced no income. The portion of the interest paid
that related to these non-productive investments was disallowed as a deduction by the tax author-
ities. The test applied by the court was to determine whether the money on which the liability for
interest was incurred was borrowed for the purpose of producing income, rather than to consider the
actual effect. The onus is on the taxpayer to show that the money was borrowed for a purpose that
permits the deduction of interest. In this case, the taxpayer failed to prove that it did not borrow the
funds to, at least partially, make investments that did not produce income.
In CIR v Standard Bank of SA Ltd (1985 A), the court confirmed that the purpose of the borrowing is
the vital enquiry. In this case, the bank had, in general and like any other bank, borrowed money at a
low interest rate (by accepting deposits) and lent it out at a higher rate. The bank, however, used a
certain portion of the interest-earning money it borrowed to acquire shares. The shares earned non-
taxable dividends. The tax authorities denied a portion of the bank’s interest deduction since it did
not produce taxable income. The court held that the taxpayer’s immediate purpose was to obtain
floating capital. The connection between a certain proportion of the interest it paid and the dividends
it received was not sufficiently close to warrant the conclusion that the interest was incurred in the
production of the dividends or was an expenditure incurred in earning an amount not constituting
income. The deduction could therefore not be prohibited by s 23(f).
The purpose of a replacement loan should be determined with reference to the loan that it replaces.
In CIR v Sunnyside Centre (Pty) Ltd (1993 T), the taxpayer applied a portion of an amount borrowed
to repay an existing debt that was used to finance income-producing properties. To the extent that
the loan raised was used to repay this debt, the court held that the interest attached to the new loan
remained deductible based on the purpose for which the old loan was incurred. The Tax Court
applied a similar view in ITC 1827 (70 SATC 81) where the taxpayer applied funds borrowed from a
bank (initially on an overdraft facility that was subsequently replaced by a medium-term loan) to settle
loans owing to the directors. These loans from the directors arose when the taxpayer acquired the
business as a going concern. The directors called for repayment of the initial loans due to personal
financial difficulties that some of them experienced. The court held that the reason why the creditor
(director) called for repayment of the loan is of no consequence. The deductibility of the expenditure
incurred in respect of the new loan (from the bank) should be determined with reference to the
purpose for which the old loans (from the directors) were raised.
Taxpayers often borrow money for trade purposes using their private assets as security. The fact that
the pledged or mortgaged asset is a private asset does not deprive the taxpayer of the right to claim
the interest paid as an allowable deduction; the sole test is the purpose for which the loan was
raised. For example, if a taxpayer mortgages his private residence and invests the money in his
business, the interest paid will be allowed as a deduction since the purpose of the loan was for trade
purposes. However, if he mortgages business or trading assets in order to acquire private assets that
are not productive of income (for example a private residence or motor car), the interest will not be
allowed as a deduction since the purpose of the loan was not for the production of income.
Where interest is incurred for a dual purpose (i.e., a portion of the interest is incurred in the
production of income and a portion not), it is necessary to apportion the interest to determine the
deduction (see chapter 6).
16.2.3.2 Interest must be incurred in carrying on a trade

If a taxpayer borrows money to on-lend the funds and earns interest income from this or earns
interest on surplus borrowed funds, these activities may not necessarily be a trade (see chapter 6). In
practice SARS accepts that if capital is borrowed to on-lend, such a transaction results in trade
income and the expenditure is, therefore, allowable. On this basis it allows interest incurred to earn
interest income as a deduction. The same practice applies to interest incurred in respect of surplus
funds that are invested. The Commissioner’s practice is set out in Practice Note No. 31. This states:
While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds
invested does not carry on a trade and that any expenditure incurred in the production of such interest
cannot be allowed as a deduction, it is nevertheless the practice of Inland Revenue [now SARS] to allow
568
expenditure incurred in the production of interest to the extent that it does not exceed such income. This
practice will also be applied in cases where funds are borrowed at a certain rate of interest and invested at
a lower rate. Although, strictly in terms of the law, there is no justification for the deduction, this practice has
developed over the years and will be followed by Inland Revenue [now SARS].
Where a taxpayer borrows money to fund the commencement of a trade, it may incur interest prior to
carrying on the trade. The provisions relating to pre-trade expenditure (s 11A – see chapter 6) apply
to expenditure or losses that would have been allowed as a deduction in terms of s 24J. Once trade
commences, interest expenditure incurred will be deductible under the provisions of s 24J.
16.2.3.3 Interest incurred on loans to acquire shares

Generally, interest paid on an amount borrowed to acquire shares cannot be deducted. The purpose
of the expenditure is to obtain shares that produce exempt dividend income.
The test of the purpose for which the money is borrowed was stressed in the case of CIR v Shapiro
(1928 NPD). In this case, a taxpayer borrowed certain moneys on which he had to pay interest
annually to pay for shares in a company from which he derived salary and commission. He claimed
that the interest should be allowed as a deduction against the salary and commission received by
him from the company. The court held that the salary and commission were not produced by his
shareholding in the company but by the exercise of his duties in his office as manager. Conse-
quently, the interest paid on the money borrowed to buy the shares did not produce his income. The
shares themselves produced exempt dividend income.
It is interesting to compare this case with CIR v Drakensberg Garden Hotel (Pty) Ltd (1960 A). In this
case, a company (Company A) borrowed money to acquire the shares of another company
(Company B). Company B owned the property rented by Company A, which Company A used to
generate business profits from operating a hotel at the premises. The shares were acquired to obtain
absolute control of hired premises from which it derived business profits, thereby ensuring
continuance of its income. The court held that the income from which to deduct the interest was not
the dividend income flowing from the shareholding (which was exempt income) but the other income
derived from its business. In this instance the closeness of the connection between the payment of
interest and the production of the taxpayer’s income was sufficient to warrant its deduction.
It must follow from the principle established in the Drakensberg Garden Hotel case that the interest
paid on the money borrowed to acquire the shares may be properly deductible from that income, if
the taxpayer’s purpose in buying shares was something other than to receive dividends in respect of
those shares. This is determined on the facts and circumstances of each case. The burden of
proving the purpose of the expenditure rests with the taxpayer and may be a difficult one to dis-
charge where the funds were used to acquire shares (s 102(1)(b) of the Tax Administration Act).
16.2.3.4 Interest incurred on debt to acquire shares in a controlled company (s 24O)

A person can either acquire a business by acquiring the business’ assets as a going concern or by
acquiring the shares of a company that owns and operates the business. In practice, the latter is an
equity transaction, while the former is an asset acquisition. Interest incurred on a loan used to fund an
asset acquisition of a business is deductible, while interest incurred to acquire the shares of the
company that houses the business is generally not deductible. To make interest incurred in respect
of transactions that involved the acquisition of shares deductible, taxpayers structured the funding in
various manners, some of which amounted to aggressive tax planning. During 2013, the National
Treasury introduced s 24O to avoid the need for such structuring. This provision deems interest
incurred in respect of debts used to acquire certain shares to meet the deductibility requirements.
A company qualifies for an interest deduction under s 24O if it issues, assumes or uses debt to
acquire a controlling interest, directly or indirectly, in an operating company in terms of an acquisition
transaction. Section 24O defines the terms ‘operating company’ and ‘acquisition transaction’. The
provisions also apply to debt issued, assumed or used to substitute debt that was previously issued
for this purpose.
An acquisition transaction is one that meets all the following requirements:
l a company (acquirer company) acquires an equity share(s) in another company (target com-
pany) from a person that does not form part of the same group of companies as the acquirer
company
569
l the target company is:

– an operating company on the date that the equity shares are acquired, or
– a controlling group company in relation to a company that is an operating company on the
date that the equity shares are acquired and that forms part of the same group of companies,
for purposes of s 41, as the target company
l as a result of this transaction, the acquirer is a controlling group company in relation to the target
company at the end of the day of the transaction and these companies form part of the same
group of companies as contemplated in s 41 (definition of ‘acquisition transaction’ in s 24O(1)).
Remember
A controlling group company is a company that directly holds at least 70% of the equity shares
in a controlled group company (see chapter 20). A group of companies as defined in s 41(1)
excludes certain companies that are not be fully taxable in South Africa (see chapter 20).
An operating company is a company of which at least 80% of the aggregate receipts and accruals of
the company during a year of assessment is income
l that is derived from carrying on a business continuously, and
l this business provides goods or renders services for consideration (definition of ‘operating com-
pany’ in s 24O(1)).
If a debt is used to fund the acquisition of an equity share, which is a qualifying interest in an
operating company, in terms of an acquisition transaction (or to re-finance a debt incurred for this
purpose), the interest incurred in respect of that debt must be deemed to have been
l incurred in the production of income of the company, and
l laid out by the company for purposes of trade (s 24O(2)).
This deduction is only available to the extent that the interest relates to a period during which the
company held the equity share of the target company that it acquired (s 24O(2)(i)).
Remember
The deduction of interest allowed under s 24O may be limited by s 23N (refer to 16.2.4.2). This
limitation prevents taxpayers from abusing the concession made available in terms of s 24O.
The qualifying interest requirement involves that s 24O effectively looks through the shares acquired
to determine whether the interest would have been deductible had the business of the company, as
opposed to the shares, been acquired. This determination as to whether the equity shares represent
a qualifying interest must be done annually on one of the following measurement dates:
l if the equity shares are held at the end of the year of assessment, the last day of that year, or
l if the equity shares were disposed of during the year, the date of disposal (s 24O(2)(ii)).
An equity share of a target company that is an operating company is a qualifying interest if the com-
pany qualified as an operating company in its latest year of assessment that ended prior to or on the
relevant measurement date (s 24O(3)(a)).
If shares are acquired in a target company that is not an operating company, the equity share is a
qualifying interest to the extent that its value is derived from an equity share(s) that the target com-
pany holds in a company(s)
l in relation which the target company is the controlling group company
l that forms part of the same group of companies as the target company, as contemplated in s 41,
and
l that qualified as an operating company in its latest year of assessment that ended prior to or on
the relevant measurement date (s 24O(3)(b)).
If the target company’s shares derive more than 90% of their value from equity shares held in such
operating companies, the full interest expense will be allowed as a deduction as if the target com-
pany itself was an operating company (proviso to s 24O(3)(b)(ii)).
570
If an acquirer company acquired equity shares in a target company that was a

controlling group company in relation to an operating company (original target
company) and subsequently acquires the equity shares of that operating company
in terms of an unbundling transaction (s 46) or liquidation distribution (s 47), the
Please note! acquirer company must treat these shares in the operating company as they were
acquired in an acquisition transaction (s 24O(5)(i)). In addition, these shares must
be treated as a qualifying interest in an operating company to the extent that the
value of the equity shares in the original target company was derived from these
shares (s 24O(5)(ii))
Example 16.6. Interest incurred in respect of a loan to purchase shares
Festival Ltd carries on an event management business. It arranges events, for example weddings,
and earns income from these activities.
An opportunity arose for Festival Ltd to purchase all the issued shares of Catering (Pty) Ltd for an
amount of R10 million. Catering (Pty) Ltd provides catering services and has a well-established
customer base, including being a preferred supplier to a number of government entities. In order
to ensure that all customer relations, vendor numbers and data on the procurement systems of its
customers remain intact, Festival Ltd’s management decided that Catering (Pty) Ltd will continue
to conduct business in the existing legal entity rather than to transfer its business to Festival Ltd.
Catering (Pty) Ltd earns 95% of its cash inflows from its catering activities and 5% from short-term
investments of excess cash generated by the business.
Festival Ltd borrowed funds to acquire the shareholding of Catering (Pty) Ltd from its existing
shareholders. The loan bears interest at a rate of 10% per annum.
Discuss the deductibility of the interest incurred by Festival Ltd in respect of the loan to purchase
the shares of Catering (Pty) Ltd.
SOLUTION
The interest incurred in respect of the loan is incurred in the production of dividends from
Catering (Pty) Ltd. These dividends are exempt income in the hands of Festival Ltd. In addi-
tion, it is questionable whether the fact that Festival Ltd holds the shares in Catering (Pty) Ltd is
a trade that it carries on. As the interest is arguably not incurred for purposes of carrying on a
trade or in the production of income, it would probably not be deductible in the hands of
Festival Ltd (s 24J(2)).
Festival Ltd acquires 100% of the issued shares of Catering (Pty) Ltd and therefore becomes
its controlling group company (definition of ‘group of companies’ in s 1(1)). Catering (Pty) Ltd
carries on business by continuously selling goods (food) and rendering related services. It
derives 95% of its receipts or accruals from these activities. This company is therefore an oper-
ating company. The shares acquired represent a qualifying interest in an operating company.
Provided that Festival Ltd held the Catering (Pty) Ltd shares during a particular year of assess-
ment, the interest incurred by Festival Ltd will be deemed to be incurred for purposes of carry-
ing on a trade and in the production of income (s 24O(2)). This interest can be deducted by
Festival Ltd from its income derived from its event management business.
The amount of the deduction may, however, be limited in terms of s 23N. This limitation is illus-
trated in Example 16.8. below.
Note
If Festival Ltd was an investment holding company that only derived income in the form of divi-
dends from other investments, it may have been in a position where, despite being allowed to
deduct the interest incurred, it would have had no income to deduct it against. This illustrates
that the concession in s 24O only benefits a borrower when it has other sources of income
against which the interest can be deducted.
16.2.3.5 Interest incurred on loans to pay dividends

Interest payable on money borrowed for purposes of enabling a company to pay a dividend is not
deductible (ITC 678 (1949)). Interest incurred on a loan account that arises from the declaration of a
dividend that remains outstanding is similarly not deductible (CIR v G Brollo Properties (Pty) Ltd and
Ticktin Timbers CC v CIR). The position may be different if the company has surplus funds available
and chooses to declare a dividend but retain the funds for purposes of the company’s business
activities. The resulting loan account can, in some circumstances, be viewed as funding obtained by
the company for purposes of its trade. This was the case in C: SARS v Scribante Construction (Pty)
Ltd where sufficient cash reserves were available to pay the dividend declared but the funds were
571
retained for purposes justified by the business of the taxpayer. In a similar case, C: SARS v BP South
Africa (Pty) Ltd, the taxpayer declared a dividend to and simultaneously borrowed funds from its
British holding company. The taxpayer presented evidence that it needed the borrowing to fund its
operational and capital expenditure in the subsequent year, rather than to fund the dividend. It
succeeded in demonstrating that it could have declared the dividend without incurring the loan since
the company had sufficient cash available. The interest on this borrowing was held to be deductible.
Interest incurred in respect of a loan to fund a share buyback, which is also a dividend for tax
purposes (see 16.3.1), is similarly not deductible (Natal Laeveld Boerdery BK v KBI).
16.2.4 Limitation of interest deductions

Deductible interest payments pose a risk to the tax base if excessive or actually represent disguised
dividend payments. The deduction reduces the taxable income of the payer while the taxable income
of the recipient increases. If the recipient is not taxed or is taxed at a reduced rate (for example in
terms of the withholding tax on interest at 15%), this can have the effect of eroding the overall tax
base in South Africa.
The legislature introduced limitations on the amount of interest that may be deducted. The introduc-
tion of such limitations is a global phenomenon. The OECD and G20 recommended limitations on the
deductibility of interest (Action Plan 4) as part of its Base Erosion and Profit Shifting project.
Sections 23M and 23N contain the interest deduction limitations in the Act. Both of these limitations
apply to interest, as defined in s 24J(1). If the limitation applies, the interest may not be fully deduct-
ible despite the fact that all the requirements for deduction (see 16.2.3) are met. These limitations
apply in addition to other provisions that could disallow a deduction of interest, for example transfer
pricing adjustments in terms of s 31 (see chapter 21). We discuss each limitation in more detail next.
16.2.4.1 Interest paid to persons not subject to tax (s 23M)

The risk of base erosion, as described above, materialises when a deduction is granted in respect of
interest paid to a person who is not subject to tax on the interest received. Recipients who are not
subject to tax on the interest received include persons whose receipts and accruals are exempt from
tax, for example foreign persons in whose hands the interest is exempt from South African taxation
(see 16.2.2) and also pension funds (see chapter 5). Section 23M addresses this risk. It limits the
amount of deductible interest where that interest is paid to certain persons who are not subject to tax.
Scope of s 23M
The limitation provisions of s 23M apply when all the following requirements are met:
l The interest is incurred by a debtor that is subject to tax in South Africa on its taxable income.
The debtors to whom s 23M applies are persons who are residents or non-residents that have
permanent establishments in South Africa to which a debt-claim is effectively connected (defin-
ition of ‘debtor’ in s 23M(1)).
l There is a risk for profit shifting through inflated levels of funding and/or interest. It is unlikely that
profits will be shifted by paying inflated interest to unconnected persons. This risk exists between
persons that form part of the same economic unit. These persons may be indifferent as to where
the profits ultimately accrue. Section 23M therefore only applies if the above debtor is in a con-
trolling relationship with the creditor. It also applies to a back-to-back loan where the creditor
obtained funding from a person that is in a controlling relationship with the debtor to advance a
debt to the debtor (s 23M(2)(a) and (b)).
A controlling relationship is a relationship where a person directly or indirectly

holds at least 50% of the equity shares in a company or where at least 50% of the
voting rights in a company is exercisable by a person (definition of ‘controlling
relationship’ in s 23M(1)).
Please note! It is important to note that not all connected persons (see chapter 12) in relation to
a company would be in a controlling relationship with that company for purposes
of s 23M. The threshold for a controlling relationship in s 23M is higher than the
threshold for persons to be connected in relation to each other (but lower than the
70% group company test).
572
If a creditor with whom the debtor is in a controlling relationship financed the debt with funding
that it obtained from a foreign bank, which is not in a controlling relationship with the debtor, the
debt is excluded from s 23M. This scenario arises if the creditor merely acts as a conduit for the
funding obtained from a bank, in which case the debtor essentially obtained the funding from the
unconnected foreign bank, rather than the creditor. This exemption however only applies if the
creditor does not charge interest on the loan at a rate exceeding the ‘official rate of interest’ (as
defined in s 1) plus 100 basis points (s 23M(6)).
l The interest incurred by the debtor is not taxed in South Africa in the hands of the recipient during
the year of assessment in which it is incurred. Section 23M applies if the interest is not subject to
tax in the hands of the person to whom it accrues and is also not included in the net income of a
controlled foreign company (CFC) (s 9D) for a foreign tax year that commenced or ended in the
year of assessment (s 23M(2)(i))
Remember
Tax is defined in s 1 as any tax or a penalty imposed in terms of the Act. This arguably also
refers to the withholding tax on interest that is imposed in terms of Part IVB of Chapter II of the
Act (see chapter 21). Interest accrued to a person is therefore not subject to tax, as contem-
plated in s 23M(2)(i), if it is not subject to normal tax or the withholding tax on interest.
Interest received from a South African source by a non-resident can be exempt from normal tax
in terms of s 10(1)(h) as well as the withholding tax on interest if a double tax agreement does
not allow South Africa to impose this tax.
An example of such interest would be interest received from a South African source by a
resident of the United Kingdom, where this person does not have a permanent establishment in
South Africa to which the debt-claim in respect of which the interest paid is effectively connected
(see Article 11(1) of the double tax agreement between South Africa and the United Kingdom).
l The interest should not have been disallowed under another limitation provision. Section 23M does
not apply to interest that was already disallowed under s 23N (see 16.2.4.2) (s 23M(2)(ii)). This
requirement implies that, where both ss 23M and 23N apply to the same interest, s 23N should
be applied first (s 23M(5)).
Certain property-owning companies issued linked units to pension funds, provident funds, REITs and
insurers. The deduction of the interest incurred in respect of these linked units may potentially be
limited in terms of s 23M. A transitional exclusion from the application of s 23M exists for linked units
that were issued before 1 January 2013 until the introduction of legislation to regulate unlisted REITs
(s 23M(6)(b)). It is currently envisaged that this exclusion will be deleted from 1 January 2023 and
onwards.
Limitation of interest deduction

Once it has been established that the limitations in s 23M apply to interest incurred, the next step is
to calculate the limitation on the interest deduction. The maximum interest deduction that is accept-
able to the legislature is based on a formula:
Interest deduction allowed = X + (A% × Y) – Z
X = Interest received by or accrued to the debtor.
A = A percentage calculated using the following formula:
40 × [(average repurchase (repo) rate + 400 basis points)/10]
This percentage may not exceed 60%.
Y = The adjusted taxable income (see below) of the debtor. This amount is a proxy for the debtor’s
earnings before interest, tax, depreciation and amortisation (EBITDA), calculated using tax
amounts.
573
The adjusted taxable income of the debtor is calculated as follows (definition of

‘adjusted taxable income’ in s 23M(1)):
Taxable income before applying s 23M ...................................................................... xxx
Adjust for interest
Less: any interest received or accrued that forms part of taxable income ................ (xxx)
Plus: any interest incurred that has been allowed as a deduction from income ....... xxx
Adjust for amounts relating to assets
Plus: amounts allowed as deductions in respect of capital assets............................ xxx
Less: amounts recovered or recouped in respect of allowances of capital assets ... (xxx)
Less: amounts included in income in respect of CFCs (s 9D(2)) ............................... (xxx)
Plus: assessed losses and balance of assessed losses set-off against income....... xxx
Adjusted taxable income .............................................................................................. xxx
Z = Interest incurred by the debtor in respect of debt to which s 23M does not apply, excluding interest in
respect of which the deduction is disallowed in terms of s 23N.
Any interest in excess of the limitation is carried forward to the next year of assessment. This interest
is deemed to be interest incurred in that year of assessment (s 23M(4)). Its deductibility must be
assessed in light of the interest deduction limitation in terms of s 23M that applies to that year of
assessment. There is no expiry period on the carrying forward of these interest amounts.
Example 16.7. Limitation of interest deduction under s 23M
Perfect Fit Ltd is a South African resident company that is a subsidiary of Ultimate Fit Plc, a
United Kingdom (UK)-based company (which is also a UK resident for tax purposes) that holds
60% of the shares of Perfect Fit Ltd. Perfect Fit Ltd requires funding to expand its current
operations due to an increasing demand for its product. A loan of R5 000 000 is advanced to
Perfect Fit Ltd by Ultimate Fit Plc on 1 January 2022. Ultimate Fit Plc does not have any
operations or activities in South Africa and both companies have a 31 December year-end.
The loan of R5 000 000 was advanced at an interest rate of 10% p.a. The repurchase rate (as
defined in s 1) for the 2022 year of assessment was 5,5% p.a.
Perfect Fit Ltd earned total interest income of R350 000 (exclusive of any interest earned from
any connected person) and incurred a total interest expense of R390 000 (excluding interest
incurred on loan from Ultimate Fit Plc) during the 2022 year of assessment. Perfect Fit Ltd also
deducted allowances of R100 000 in respect of manufacturing machinery under s 12C.
The company’s taxable income, after taking into account all interest income, interest expenses
and allowances, amounted to R450 000.
South Africa and the UK entered into a double taxation agreement. Article 11(1) states that South
Africa may not impose any tax on interest income earned by UK residents from a South African
source.
You may assume that the interest incurred by Perfect Fit Ltd is not subject to s 23N.
Calculate the deduction in respect of interest paid to Ultimate Fit Plc by Perfect Fit Ltd for its
SOLUTION
As Perfect Fit Ltd uses the loan to expand its operations, the interest is incurred in the production
of income and for purposes of carrying on its trade. The interest incurred (as determined in
accordance with s 24J) should therefore be deductible in the hands of Perfect Fit Ltd (s 24J(2)).
Ultimate Fit Plc (creditor) and Perfect Fit Ltd (debtor) are in a controlling relationship since
Ultimate Fit Plc holds 60% of the equity shares and voting rights in Perfect Fit Ltd.
Ultimate Fit Ltd does not have a permanent establishment in South Africa; therefore, all interest
income that accrues to Ultimate Fit Plc from a South African source on the loan advanced to
Perfect Fit Ltd will be exempt in terms of s 10(1)(h). In addition, the withholding tax on the interest
will be reduced to Rnil in terms of Art 11(1) of the double taxation agreement between South
Africa and the UK.
continued
574
The provisions of s 23M apply to the interest incurred by Perfect Fit Ltd on the loan from Ultimate
Fit Plc as
l the interest is incurred on a debt owing to a creditor in a controlling relationship with a debtor,
and
l the interest accrued to the foreign creditor will not be subject to South African tax.
The amount of the interest deduction under s 24J(2) must therefore be limited (s 23M(2)).
The limitation on the interest deduction is calculated as follows:
Interest subject to limitation (only the interest incurred in respect of the loan which meets the
requirements of s 23M(2)): R5 000 000 × 10% = R500 000
Deduction limited by s 23M(3) is as follows:
Limit = X + (A% × Y) – Z = R184 200
X = R350 000 (interest income)
Y = The adjusted taxable income is calculated as follows (s 23M(1)):
Taxable income ............................................................................................ R450 000
Interest received or accrued to Perfect Fit Ltd ............................................. (350 000)
Deductible interest incurred by Perfect Fit Ltd............................................. 890 000
Allowances deducted in respect of capital assets....................................... 100 000
Adjusted taxable income.............................................................................. R1 090 000
A = 40 × [(5,5 + 4)/10] = 38%
Z = 390 000 (interest incurred in respect of debts not subject to s 23M)
The interest permissible as a deduction in respect of the loan from Ultimate Fit Plc is therefore
Interest deductible in respect of the loan from Ultimate Fit Plc (s 24J(2))
before application of the limitation ......................................................................... R500 000
Limitation (deductible interest – s 23M(3))............................................................. 374 200
Interest received or accrued to Perfect Fit Ltd ...................................................... 350 000
Plus: 38% of the adjusted taxable income (R1 090 000 × 38%) ............................ 414 200
Less: Interest incurred in respect of loans other than the loan from
Ultimate Fit Plc ............................................................................................. (390 000)
Interest exceeding the limit .................................................................................... R125 800

Interest deduction (s 24J read with s 23M)............................................................ (R374 200)
The interest of R125 800 that was incurred during the 2022 year of assessment and that is not
deductible, will be carried forward to the 2023 year of assessment to be considered for deduc-
tion in that year (s 23M(4)).
It should be kept in mind that the provisions of s 23M do not take precedence over or replace the
provisions of s 31 (see chapter 21). The National Treasury holds the view that the transfer pricing
rules should be applied before considering the interest limitation. The interest limitation
provisions apply to interest that already passed the arm’s length test. Should Perfect Fit Ltd be
thinly capitalised, the deductibility of the interest incurred must be limited to the interest that
would have been incurred on the loan that an independent person dealing at arm’s length would
have advanced to it. Similarly, an adjustment may be required under s 31(2) if the interest
charged by Ultimate Fit Plc (10% per year) exceeds the interest that an independent person
dealing at arm’s length would have charged Perfect Fit Ltd. The limitation in s 23M is then
applied to the remaining deductible interest after these adjustments.
575
The National Treasury intends to reduce the corporate tax rate in future. Such a
rate reduction, however, requires a broader tax base. The interest deduction
limitation rules in s 23M are one of the sources for this broader base. The 2021
Taxation Laws Amendment Act contains several amendments to s 23M that will
only come into operation on the date on which the rate of tax is first reduced after
announcement by the Minister of Finance in the annual National Budget. The
National Treasury’s comments in the draft response document to the 2021 Tax-
ation Laws Amendment Bill, especially those relating to amendments that affect
assessed losses, suggest that the corporate tax rate may not be reduced in 2022.
This, however, remains to be confirmed in the 2022 annual National Budget.
The deferred amendments to s 23M make the following substantial changes from
the current provision, as discussed above:
l The variable rate formula that is currently applied to the adjusted taxable
income to determine the interest deduction limitation is replaced by a fixed
rate of 30%.
l The definition of controlling relationship in s 23M(1) is broadened to, firstly,
widen the range of persons to be considered and, secondly, to expand the
rights to consider from voting rights only to also include shareholding and par-
ticipation rights.
l The scope of s 23M is similarly broadened to cover intra-group back-to-back
loans that previously created an easy avoidance mechanism to escape s 23M
under the pre-existing rules. Section 23M will include interest incurred in
Please note! respect of debt owed to creditors that form part of the same group of com-
panies as the debtor (based on a more than 50% threshold) (s 23M(2)(c)) and
through back-to-back loans via multiple parties who are in controlling relation-
ships with the debtor (s 23M(2)(d)).
l Interest, for purposes of s 23M, is defined in s 23M(1) in wider terms than only
interest as contemplated in s 24J. It also includes amounts accrued or incur-
red under interest rate agreements (s 24K), the finance cost element of fi-
nance leases under IFRS 16, exchange gains or losses to be taken into
account in terms of s 24I(3) and 24I(10A) as well as amounts deemed to be
interest in terms of the provisions that deal with Sharia-compliant financing
arrangements (s 24JA). An amount that is deemed to be a dividend in specie
in terms of ss 8F and 8FA is excluded.
l The amended version of s 23M will similarly apply to interest that was not sub-
ject to tax in South Africa. In addition, if the interest is subject to tax at a with-
holding tax rate less than 15% (such as 5% or 10%), a part of that interest will
be considered to not be subject to tax and therefore also be subject to the
interest deduction limitation (proviso to s 23M(2)).
16.2.4.2 Debt used in acquisition and reorganisation transactions (s 23N)

As discussed in 16.2.3, interest incurred in respect of debts used for certain purposes is not deduct-
ible, such as a purchase of shares outside of s 24O. A deduction for such interest can, however, be
achieved if the debt is incurred to fund a transfer of assets or income-generating assets between
related persons. The transfer of assets or businesses can be facilitated in a manner that benefits from
roll-over relief if it takes place within a group of companies, typically using ss 45 or 47 (see
chapter 20). The proceeds from the internal transfer of the assets are applied for the purpose for
which interest would otherwise not be deductible, while the debt raised is used to fund the intra-
group acquisition of assets in respect of which interest can be deducted. Since the internal transfer
does not have immediate tax consequences, the parties may attempt to inflate the consideration for
the asset, which could in turn result in a deduction of interest in respect of the inflated funding
obtained for this consideration.
Section 23N reduces the risk to the tax base from the use of excessive debt arising from such trans-
actions.
Remember
The debt contemplated in the above discussion may be obtained from a person with whom the
debtor is in a controlling relationship. The provisions of ss 23M and 23N can therefore apply to
the interest in respect of the same debt. In that instance, the provisions of s 23N are applied first
(s 23M(5)). The limitation of s 23M may still apply in respect of the portion of the interest for
which the deduction was not disallowed in terms of s 23N.
576
Scope of s 23N
The limitations in s 23N apply to interest incurred by an acquiring company in respect of debts used
to fund two types of transactions. It also applies to debts used to redeem, refinance or settle the
debts previously used for these purposes.
Firstly, the limitations apply to reorganisation transactions (s 23N(2)(a) and (b)), which are defined as
l intra-group transactions to which s 45 applies, or
l liquidation distributions to which s 47 applies.
Both these roll-over relief provisions can be used to transfer assets to an acquirer, while the acquirer
obtains or assumes a debt for such acquisition, without an immediate tax implication. These
reorganisation transactions can therefore, amongst others, be used to enter into an arrangement to
fund the acquisition of shares in an indirect manner.
Secondly, the limitations also apply to acquisition transactions (s 23N(2)(c) and (d)). These refer to
transactions in which an acquiring company acquires an equity share in a company that is an
operating company or a controlling company in relation to an operating company, as contemplated in
s 24O (see 16.2.3.4), and the company must become the controlling group company in relation to
this acquired company at the end of the day of the transaction (definition of ‘acquisition transaction’
in s 23N(1)). The same limitations that apply to indirect share acquisitions therefore also apply to the
interest deduction granted in respect of direct share acquisitions.
The following terms are used in s 23N to describe the parties to the transaction:
l The term ‘acquiring company’ is used in the context of s 23N to refer to the
company that acquires the asset(s) in terms of a reorganisation transaction or
Please note! the company that acquires the equity shares in a s 24O acquisition trans-
action.
l The term ‘acquired company’ refers to the company that transfers the assets in
a reorganisation transaction or of which the equity shares are acquired in a
s 24O acquisition transaction.
Similarly to s 23M, s 23N may apply to linked units issued by property owning companies to pension
funds, provident funds, REITs and insurers. A transitional exclusion from the application of s 23N for
linked units issued before 1 January 2013 has been provided until legislation to regulate unlisted
REITs is introduced (s 23N(5)).
Limitation of interest deduction

Interest incurred in respect of debt that is within the scope of s 23N is subject to the limitation in the
year of assessment in which the reorganisation or acquisition transaction is entered into as well as
the following five years of assessment (s 23N(3)). A formula determines the maximum interest deduc-
tion:
Interest deduction allowed = X + (A% × Y) – Z
X = Interest received by or accrued to the acquiring company.
A = A percentage calculated using the following formula:
40 × [(average repurchase (repo) rate + 400 basis points)/10]
This percentage may not exceed 60%.
Y = The highest amount of the adjusted taxable income of the acquiring company determined for the
following years of assessment:
l the year in which the acquisition or reorganisation was entered into
l the year preceding the year in which the acquisition or reorganisation was entered into, or
l the year in which the interest is incurred by the acquiring company (i.e., current year).
This amount is a proxy for the acquiring company’s EBITDA calculated using tax amounts.
Unlike s 23M, the adjusted taxable income also reflects the company’s additional borrowing
capability based on immovable property owned.
577
The adjusted taxable income of the acquiring company is calculated as follows:

(definition of ‘adjusted taxable income’ in s 23N(1)):
Taxable income before applying s 23N ....................................................................... xxx
Adjust for interest
Less: any interest received or accrued that forms part of taxable income ................ (xxx)
Plus: any interest incurred that has been allowed as a deduction from income ....... xxx
Adjust for amounts relating to assets
Plus: amounts allowed as deductions in respect of capital assets............................ xxx
Less: amounts recovered or recouped in respect of allowances of capital assets ... (xxx)
Plus: 75% of receipts and accruals derived from letting of any immovable property xxx
Less: amounts included in income in respect of CFCs (s 9D(2)) ............................... (xxx)
Plus: assessed losses and balance of assessed losses set-off against income....... xxx
Adjusted taxable income xxx
Z = Interest incurred by the acquiring company in respect of debts to which s 23N does not apply.
Interest in excess of the limitation is lost for deduction purposes. Section 23N does not make pro-
vision for the carrying forward of disallowed interest. Since the interest deductions in excess of the
limitation amount are forfeited, the limitation does not apply until the debt is fully settled, but only for a
limited number of years of assessment (six).
Example 16.8. Limitation of interest in respect of reorganisation and acquisition
transactions
Superrite (Pty) Ltd (Superrite), a retail store, acquired the assets of another group company in
terms of an intra-group transaction (s 45) on 1 July 2021. In order to fund the acquisition,
Superrite borrowed R80 000 000 from a bank at a fixed interest rate of 8%. No repayments were
made in respect of the capital balance on this loan between the 2021 and 2023 years of
assessment. The following applies in respect of Superrite’s 2021, 2022 and 2023 years of
assessment that ended on 30 June of each year:
2021 2022 2023
Taxable income 5 000 000 6 000 000 7 000 000
Interest received on a loan to a subsidiary company
included in taxable income 100 000 100 000 100 000
Interest incurred in respect of an overdraft facility at a
bank included in taxable income 400 000 300 000 380 000
Rent received from the leasing of a property included
in taxable income 1 400 000 1 500 000 1 600 000
Average repurchase rate for the year 5% 5,5% 6%
Calculate the amount of interest incurred by Superrite on the reorganisation transaction that may
be claimed as a deduction during its 2023 year of assessment.
578
SOLUTION
The adjusted taxable income to be used for the years of assessment relevant to determining
the limitation of the interest deduction in terms of s 23N are as follows:
Year Year of
preceding transaction Current
transaction
(2021) (2022) (2023)
Taxable income ............................................................ 5 000 000 6 000 000 7 000 000
Less: Interest received ................................................. (100 000) (100 000) (100 000)
Plus: Interest incurred (in respect of reorganisation
transaction and in respect of overdraft facility)... 6 800 000 6 700 000 6 780 000
Plus: 75% of the receipts or accruals derived from
the letting of any immovable property ................ 1 050 000 1 125 000 1 200 000
Adjusted taxable income for relevant year ................... 12 750 000 13 725 000 14 880 000
Highest adjusted taxable income (Y) ........................... 14 880 000
Calculated percentage (A) (40 × (6+4)/10) .................. 40%
Interest limitation
Interest received (X) ..................................................... 100 000
Calculated percentage (A) × adjusted taxable
income (Y) ................................................................. 5 952 000
Less: Interest incurred in respect of other debt (Z) ...... (380 000)
Interest deductible in respect of bank loan to fund
assets acquired from group company .......................... 5 672 000
16.2.5 Sharia-compliant financing arrangements (s 24JA)

Islamic finance refers to financial transactions and instruments that comply with Sharia or Islamic law.
These finance arrangements are also referred to as sharia arrangements. They reflect certain specific
principles prescribed by Sharia law, including that no interest may be charged. This affects the form
of sharia arrangements. Taxpayers who enter into these arrangements do not have the same freedom
and control over their financial investment options and may not enjoy the same tax benefits that are
available for traditional Western finance options. In some instances, the tax implications that would
follow the form of the transaction could be a hindrance to the transaction. The National Treasury indi-
cated that it is questionable whether transactions with the same substance (i.e., Islamic finance com-
pared to its Western counterparts) should be treated differently from a tax perspective. On this basis,
s 24JA deals with the tax implications of sharia-compliant financing arrangements.
Section 24JA currently deals with four types of sharia-compliant financing arrangements. It deems
the elements of the arrangement that are equivalent to financing elements to be interest for purposes
of s 24J, and therefore to be treated similarly to other financing arrangements. It also deems that
certain tax implications that arise from the legal form of the arrangement, for example the disposal of
certain assets, not to occur.
The scope of s 24JA is limited to sharia arrangements that are open for participation by members of
the general public and that are presented as compliant with sharia law (definition of ‘sharia arrange-
ment’ in s 24JA(1)). The application of s 24JA is generally limited to products involving banks and
listed companies. The exception is sukuk, which involves an arrangement between the government,
certain public entities or listed companies and a trust.
The amounts that are deemed to be interest in respect of the sharia-compliant

financing arrangements in s 24JA are deemed to be interest as contemplated in
Please note! par (a) of the definition of interest in s 24J(1). The de minimis exemptions and
requirement to withhold tax from certain interest payments apply to these
amounts in the same way that these rules would apply to any other interest.
16.2.5.1 Mudaraba
Mudaraba is a sharia arrangement between a bank and its client in terms of which funds are
deposited with the bank by the client. The bank in turn deposits the funds in other sharia arrange-
ments. The anticipated return that the client earns on its deposit depends on the amount deposited
and the duration for which the funds are deposited. The bank and the client share the return earned
from the sharia arrangements in which the funds have been deposited in an agreed manner. The
579
client, however, also bears the risk of loss in respect of the sharia arrangements in which the bank
deposits the funds (definition of ‘mudaraba’ in s 24JA(1)).
This product can be compared to a partnership arrangement, while the return is roughly comparable
to interest on the funds deposited. This type of sharia arrangement is used as an investment or trans-
actional account offered by banks, usually to retail investors.
Any amount received by or accrued to the client in terms of a mudaraba is deemed to be interest for
purposes of s 24J (s 24JA(2)).
16.2.5.2 Murabaha
Murabaha is a sharia arrangement between a financier and a client. Either the financier or the client
must be a bank or a listed company. The financier acquires an asset from a third party (seller of the
asset) for the benefit of the client on terms and conditions agreed between the financier and client.
The client acquires the asset from the financier within 180 days from the date that the financier
acquires it. The client agrees to pay the financier an amount that exceeds the price at which the
financier acquired the asset. The amount payable by the client is calculated with reference to the
amount paid for the asset by the financier as well as the duration of the sharia arrangement. The total
amount payable by the client may not exceed an amount agreed by the parties when the arrange-
ment is entered into. This amount payable by the client to the financier must be the only amount that
the financier receives or that accrues to it (definition of ‘murabaha’ in s 24JA(1)). This product fulfils a
similar role as short-term asset financing in Western financing.
The murabaha is deemed to be an instrument for purposes of s 24J (s 24JA(3)(c)). The amount paid
by the financier to acquire the asset is deemed to be the issue price of this instrument (s 24JA(3)(e)).
The mark-up added by the financier is treated as interest (premium) for purposes of s 24J
(s 24JA(3)(d)).
The acquisition of the asset by the financier and the subsequent disposal of it to the client should be
disregarded (s 24JA(3)(a)). The client is deemed to have acquired the asset when the financier
acquired it. In addition, the client is deemed to have acquired the asset at the amount paid for its
acquisition by the financier (s 24JA(3)(b)).
16.2.5.3 Diminishing musharaka

Diminishing musharaka involves a sharia arrangement between a bank and a client. The parties
jointly acquire an asset from a third party (seller of the asset) or the bank acquires an interest in the
client’s asset. The client acquires the bank’s interest in the assets after the acquisition thereof by the
bank. The amount payable by the client for this acquisition will be paid over time as agreed between
the client and the bank (definition of ‘diminishing musharaka’ in s 24JA(1)).
If the bank and the client acquire an asset jointly, the client is deemed to have acquired the bank’s
interest in the asset for the amount paid by the bank at the time when the seller divested its interest in
the asset (s 24JA(5)(a)). If the client disposed of an interest in its asset to the bank, the disposal is
deemed not to have occurred (s 24JA(5)(b)). The difference between the total instalment payable by
the client to the bank and the price paid by the bank to acquire its interest in the asset is deemed to
be interest for purposes of s 24J (s 24JA(6)).
16.2.5.4 Sukuk
Sukuk is a sharia arrangement where the South African government, any public entity listed in Sched-
ule 2 to the PFMA or a listed company (seller) disposes of an interest in an asset to a trust. The
disposal is subject to an agreement in terms of which the seller undertakes to reacquire the interest in
the asset from the trust on a future date. The reacquisition will take place at the cost paid by the trust
to the seller when the trust acquired the asset (definition of ‘sukuk’ in s 24JA(1)). This arrangement
equates to a form of Islamic government bond or bond issued by a listed company.
The trust is deemed not to have acquired the asset from the seller (s 24JA(7)(a)). Similarly, the seller
is deemed not the have disposed of or reacquired the asset (s 24JA(7)(b)). Any consideration paid
by the seller for the use of the asset held by the trust is deemed to be interest (s 24JA(7)(c)).
The value-added tax implications of sharia arrangements are contained in s 8A of

Please note! the Value-Added Tax Act (see chapter 31) and the transfer duty implications in
s 8A of the Transfer Duty Act (chapter 28).
580
16.2.6 Interest-free or low interest debt

Persons may lend funds to counterparties without charging interest. It is typically persons who are
related and do not necessarily deal with one another at arm’s length who enter into these arrange-
ments. The reasons for not charging interest may include commercial ones, for example that the
counterparty requires funding but does not have the ability to pay interest (often the case for start-up
funding or assistance to related persons in financial distress) or merely administrative convenience.
There could, however, also be tax reasons to not charge interest. These include:
l Interest charged is taxed in the hands of the recipient, but may not be deductible in the hands of
the payer. This is the case if the payer uses the borrowed funds for purposes other than carrying
on a trade or in the production of income, for example, when debt is used to purchase dividend-
yielding shares. A similar outcome occurs if the borrower funds the acquisition of unproductive
assets with the loan, for example a trust that borrows funds to acquire a holiday home. The same
problem arises when a shareholder borrows funds from a company, where the shareholder uses
the money to fund private expenditure.
l In a cross-border context, a group may aim to keep its taxable income in South Africa as low as
possible. It achieves this if it does not charge interest on funds made available to connected per-
sons outside of South Africa. If interest were to be charged at arm’s length rates, the interest
moves profits from the payer (that may be located in a low tax jurisdiction) to South Africa where
such profits will be taxed.
l Some debts arise when taxpayers transfer assets to trusts that are connected persons. As
explained in chapter 24, one of the objectives of estate planning is to freeze the value of the
estate that will be subject to estate duty when the taxpayer passes away. If interest accrues to the
taxpayer, this increases the amount of the loan. This increase in turn increases the value of the
estate of the taxpayer, which is contrary to the planning undertaken. Any yields generated by the
loaned funds that would otherwise accrue to the taxpayer will probably accrue in an estate plan-
ning vehicle, such as a trust, or in the hands of another related person, for example the tax-
payer’s spouse or children, as a result of the fact that no interest is payable to the planner.
l Unrelated parties may agree to exchange or obtain a benefit other than in the form of cash in a
commercial transaction. This could be the case where an employer assists an employee by
advancing a loan to the employee without charging interest or by charging interest at a rate lower
than the market-related rate of interest. As was illustrated in C:SARS v Brummeria Renaissance
(Pty) Ltd and Others, taxpayers may structure transactions as barter transactions involving
interest-free or low interest loans under the false impression that the absence of cash would
mean that the transaction will not attract tax.
The Act contains a number of anti-avoidance rules to counter the above tax effects of interest-free
loans. These anti-avoidance rules are all discussed in detail elsewhere in this publication. In brief,
these rules are:
l Gross income includes amounts received in cash or otherwise. The benefit of using another
person’s money without paying interest on it has a commercial value. It was held in C:SARS v
Brummeria Renaissance (Pty) Ltd and Others that this benefit represents an amount. When a
taxpayer derives such an amount, it needs to consider whether the amount should be included in
its gross income or not. This includes, amongst others, an assessment whether the amount is of a
capital nature or not. SARS expresses the view in Interpretation Note No. 58 that if the benefit of
using funds without paying interest on it accrues to a taxpayer in exchange for the taxpayer
having to provide something in return (quid pro quo), the amount is arguably not of a capital
nature. If this benefit, however, accrues to the taxpayer fortuitously and without the taxpayer
designedly working for it, a compelling argument may exist that the amount is of a capital nature
(CIR v Pick ’n Pay Employee Share Purchase Trust) (see chapter 3 for a detailed discussion of
the inclusion of amounts in gross income).
l The benefit of interest-free or low interest debt advanced by an employer to an employee is
specifically included in the employee’s gross income as a fringe benefit. Chapter 8 explains this
inclusion.
l In a cross-border context, the transfer pricing rules discussed in chapter 21 apply. They require a
resident taxpayer who made funds available to a connected person who is not a resident to
include the amount of interest that would have been charged between persons dealing at arm’s
length in its taxable income. There are no domestic transfer pricing rules that require a similar
adjustment for interest in respect of loans between two South African residents.
581
l Value can implicitly be extracted from a company by making funds available to shareholders on
an interest-free loan rather than by declaring a dividend, which would attract dividends tax at a
rate of 20%. If a company makes a loan that does not bear interest at a rate equal to the official
rate of interest to certain connected persons, this results in a deemed dividend for dividends tax
purposes (s 64E(4)). Chapter 19 explains this.
l If a taxpayer advances funds to another person to acquire income-producing assets, the amount
of interest charged will affect the net income (profits) that the other person derives from the asset.
If the other person pays interest in respect of the loan, this reduces the profits derived by the
person from the asset. The interest amount will be income for the lender. However, if the other
person does not pay interest in respect of the loan, this results in a greater amount of profit
remaining in its hands, with no amount accruing to the lender. The amount of income in respect of
which the respective persons are subject to tax may therefore potentially be manipulated if no
interest is charged, or interest is charged at a low interest rate, in respect of such a debt. This
may be particularly beneficial if the profits from an asset accrue to a person who is subject to tax
at a relatively low rate of tax (for example, a minor child who does not have any other taxable
income). The attribution rules in s 7 attribute this income to the person to whom it would have
accrued had it not been for a donation, settlement or other disposition (i.e., lender). Similar attri-
bution rules exist for purposes of capital gains tax. The courts have held that this is a continuous
donation or other disposition for purposes of s 7 where a person advances an interest-free or low-
interest-bearing loan to another person (CIR v Berold and C:SARS v Woulidge). This principle is
confirmed in par 73 of the Eighth Schedule. Chapter 24 explains the attribution rules.
l The mere fact that a loan does not bear interest does not necessarily give rise to donations tax.
Donations tax is imposed on the disposal of property under a donation by a resident. The oppor-
tunity to charge interest on a loan is not property that is disposed of. The position may however
be different if a right to receive interest has been established and is subsequently waived.
Loans advanced by natural persons to trusts that are connected persons in relation to the natural
person, or certain companies of which the shares are held or in respect of which voting rights can
be exercised by such a trust, give rise to a deemed donation (s 7C; see chapters 24 and 26).
This deemed donation counters the artificial freezing of the value of a natural person’s estate for
estate duty purposes.
The common law and National Credit Act contain in duplum rules that protect
borrowers from exploitation by lenders by determining that the balance of unpaid
interest cannot exceed the unpaid capital debt owing by the borrower. These
rules do not apply in the above instances, where an amount of interest that would
have been charged at a specified rate must be determined for tax purposes
(s 7D(a)). If these rules applied to the determination of the amount to which anti-
Please note! avoidance rules apply, this could have provided taxpayers with an opportunity to
distort the quantification of the amount to which such rules apply.
Furthermore, where the amount of interest that would have accrued or been
incurred at a specified rate must be determined in terms of a provision of the
Income Tax Act, this interest must be calculated as simple interest on a daily
basis (s 7D(b)).
Example 16.9. Interest-free loans to employees
Summer Ltd advanced a loan of R350 000 to an employee, Thabo Nkosi, to help him finance the
purchase of his first car. The amount is repayable over a period of 5 years. The loan was
advanced to Thabo as part of Summer Ltd’s subsidised employee loan scheme in terms of which
employees may elect to structure a portion of their remuneration as low-interest financing. The
loan bears interest at a rate of 5% per annum.
Discuss the tax consequences of the above loan. You may assume that the repurchase rate is
7% per annum.
582
SOLUTION
Summer extended an interest-free loan to an employee. This is a fringe benefit (par 2(f ) of the
Seventh Schedule). The cash equivalent amount of the fringe benefit is the difference between
the actual interest paid (at a rate of 5% per annum) and the interest calculated by using the
official rate of interest on the outstanding loan (par 11(1) of the Seventh Schedule). The official
rate of interest is determined as the repurchase rate of 7% plus 100 basis points (1%) (definition
of ‘official rate of interest’ in s 1). As the loan amount exceeds R3 000 and the debt was not used
to fund Thabo Nkosi’s studies, the value of the fringe benefit will not be deemed to be nil.
The loan amount (R350 000) is not a fringe benefit; only the difference in interest as this is the
benefit derived by the employee.
Example 16.10. Interest-free loans to a company’s shareholders

Autumn Ltd advanced a loan of R800 000 to Samuel Long, a South African tax resident, who
holds 30% of Autumn Ltd’s issued shares. No terms have been agreed in respect of the loan. The
loan does not bear any interest. Samuel is not employed by the company and has not conducted
any business with the company. Autumn Ltd’s financial year ends on 31 December.
7% per annum.
SOLUTION
Autumn Ltd extended an interest-free loan to Samuel Long, a shareholder, by virtue of his shares
owned. It appears as if the loan is intended to be a prepayment of dividends, which are payable
in respect of shares held in the company. Samuel is a natural person who is a South African tax
resident and is a connected person (he holds more than 20% of the shares of Autumn Ltd) in
relation to the company. This loan gives rise to a deemed dividend (s 64E(4)).
The amount of the deemed dividend is determined as the difference between the interest that
should have been charged at the official rate of interest (in this case 8% per annum) and the
actual interest paid (nil) (s 64E(4)(d)). If the loan was outstanding for the full year of assessment
ending 31 December, the deemed dividend would have amounted to R64 000 (R800 000 × 8%).
The dividend is deemed to have been paid on the last day of Autumn Ltd’s year of assessment
(s 64E(4)(c)). The dividend is deemed to be a dividend in specie, which means that Autumn Ltd is
liable for the dividends tax at 20% in respect of the dividend (s 64E(4)(b)(i)).
It is important to note that the balance of the loan (R800 000) does not give rise to a dividend. The
benefit derived by the shareholder is only based on the interest that he would have paid had he
been required to pay interest on the outstanding loan. This differs from the deemed dividend rules
that applied in terms of the STC regime. If Autumn Ltd were to declare a dividend of R800 000 to
Samuel and extinguish the amount owing by him to the company to settle the dividend, the
amount of R800 000 will be subject to dividends tax.
Example 16.11. Interest-free loans to a trust

Sarah Peters sold a rental earning property to the Winter Trust. She advanced an interest-free
loan of R4 000 000 to the Winter Trust to acquire the property. The Winter Trust is a discretionary
trust in respect of both capital and income distributions. Sarah and her daughter, Tara (aged 14),
are the beneficiaries of the trust. The trust derived R600 000 of rental income from the property.
The trustees made a discretionary distribution of R400 000 of this rental income to Tara. You may
assume that had Sarah charged market-related interest in respect of the loan, the interest would
have amounted to R350 000.
7% per annum.
583
SOLUTION
The sale of the property by Sarah Peters for consideration is not a donation. No donations tax is
payable on the disposal of the proposal in this manner. Sarah Peters (natural person) advanced
a loan to a trust that is connected in relation to Sarah as she and her relative (daughter) are
beneficiaries of the trust (par (a)(ii) of the definition of ‘connected person’ in s 1(1)). As a result, a
donation is deemed to be made by her to the trust annually (s 7C(1)). The deemed donation is
equal to the difference between the interest that should have been charged at the official rate of
interest (in this case 8% per annum) and the actual interest charged (nil) (s 7C(3)(a)). This
donation is deemed to be made on the last day of the Winter Trust’s year of assessment (the last
day of February). Donations tax is imposed on the donation at a rate of 20%. Assuming that the
loan has been outstanding for the full year of assessment, the deemed donation will be R320 000
(R4 000 000 × 8%)).
In addition to the above donations tax, the anti-avoidance rules in s 7 may apply. It has been
held in CIR v Berold and C:SARS v Woulidge that a low interest rate loan is another disposition,
as contemplated in s 7.
Any income received by Tara, a minor child of Sarah, by reason of a disposition by Sarah will be
deemed to have been received by or accrued to Sarah (s 7(3)). In order to do this attribution of
income to Sarah, it must be established which portion of the distribution made to Tara would not
have been made had Sarah charged market-related interest to the Winter Trust. No specific
method for making this determination was provided in the above cases. As a result, the determin-
ation should be made based on the circumstances of each case. It is submitted that had interest
been payable in respect of two-thirds of the rental income (R600 000 total rental income of which
R400 000 was distributed to Tara), Tara would arguably only have received rental income of
R166 667 (R400 000 – R350 000 (market-related interest) × (R400 000/R600 000)). An amount of
R233 333 (R400 000 – R166 667) of the rental income distributed to Tara will be deemed to have
accrued to Sarah (s 7(3)).
The R200 000 rental income that remains undistributed in the Winter Trust is subject to the condi-
tion that the trustees exercise their discretion. The portion of this amount that is received by the
Winter Trust by reason of a disposition by Sarah will similarly be attributed to Sarah (s 7(5)). On a
similar basis as the calculation performed in respect of the amount distributed to Tara, the Winter
Trust would arguably only have received rental income of R83 333 (R200 000 – R350 000 (mar-
ket-related interest) × (R200 000/R600 000)). An amount of R116 667 (R200 000 – R83 333) of
the rental income retained in the Winter Trust subject to a condition will be deemed to have
accrued to Sarah (s 7(5)).
Example 16.12. Interest-free loans to a foreign connected person

Spring Ltd, a resident company, entered into a joint venture with Dawn Plc, a foreign company.
The parties formed a new company, Dusk Plc, also a foreign company, through which the joint
venture will be operated. Spring Ltd and Dawn Plc each hold 50% of the equity shares and voting
rights in Dusk Plc. Spring Ltd advanced an interest-free loan of R10 000 000 to Dusk Plc to fund
its operations during the start-up phase of the business. A bench-marking study performed indi-
cated that a third-party financier would have charged Dusk Plc interest at a rate of 15% per
annum if it advanced funds to it on a similar basis to the loan that Spring Ltd advanced to Dusk Plc.
7% per annum.
SOLUTION
As Spring Ltd holds more than 20% of the equity shares of Dusk Plc, these companies are
connected persons in relation to each other (par (d)(v) of the definition of ‘connected person’ in
s 1(1) read with s 31(4)). The loan is advanced by Spring Ltd (resident) to Dusk Plc (not a
resident) on terms that are different from the terms that third parties would have agreed to. This is
an affected transaction as contemplated in s 31(1). Due to the fact that Spring Ltd does not derive
any income to be included in its taxable income, which consequently results in a lower taxable
income than when it had charged interest, Spring Ltd obtains a tax benefit from this term of the
loan. The result is that Spring Ltd should determine its taxable income as if the loan had been
advanced to Dusk Plc on the same terms that persons dealing at arm’s length would have agreed
to (i.e., charged interest at a rate of 15% per annum to Dusk Plc) (s 31(2)) (primary adjustment).
In addition, the adjustment amount will be treated as a deemed dividend in specie paid by Spring
Ltd (s 31(3)(i)) (secondary adjustment).
584
Example 16.13. Interest-free loans in exchange for another benefit

Thunder Ltd requires money to fund the construction of residential properties that it intended
renting out. Thunder Ltd entered into an arrangement with the prospective occupants in terms of
which the occupant will advance funds to Thunder Ltd to construct the properties. These loans
do not bear interest. The occupants are entitled to occupy the properties without paying rent as
long as they do not charge Thunder Ltd any interest. The cumulative balance of loans advanced
to Thunder Ltd in this manner amounted to R1 000 000 per unit. If Thunder Ltd borrowed funds from
a third party, without this arrangement, it would have paid interest at a rate of 10% per annum in
respect of the loan. Thunder Ltd would have been able to earn rental income of R90 000 per annum
had it rented the units out to persons without entering into this arrangement.
7% per annum.
SOLUTION
The arrangement entered into between Thunder Ltd and the occupants of the residential units
resemble the arrangement dealt with in C:SARS v Brummeria Renaissance (Pty) Ltd and Others.
The benefit derived by Thunder Ltd from using the resident’s funds without paying interest is an
amount. The amount is arguably the interest that Thunder Ltd would have been required to pay
had interest been charged (R100 000 (R1 000 000 × 10%)). As Thunder Ltd is required to make
the unit available to the resident without charging rent while the loan remains outstanding sug-
gests that this amount is derived from a scheme of profit-making. The amount should therefore
be included in Thunder Ltd’s gross income.
The occupant similarly enjoys the benefit of using the unit without an obligation to pay rent to the
owner. The occupant does not enjoy this benefit on a fortuitous basis, but rather on the basis of
the interest-free loan advanced to Thunder Ltd. The occupant should arguably also include the
amount attached to the rental-free use of the property in his or her gross income.
Example 16.14. Interest-free loan by a parent to a subsidiary

Lightning Ltd acquired 40% of the equity shares issued by Sunshine Ltd, a company that experi-
enced financial difficulties. Following the acquisition, Lightning extended an interest-free loan to
Sunshine Ltd. Lightning Ltd advanced the loan to assist Sunshine Ltd in restoring a profitable
business position, as this would benefit Lightning Ltd in the long term through an increase in the
value of the shareholding in Sunshine Ltd.
7% per annum.
SOLUTION
Similarly to the position of Thunder Ltd in Example 16.12., an amount accrues to Sunshine Ltd in
the form of having the use of Lightning Ltd’s funds without having to pay interest. Sunshine Ltd’s
position can, however, be distinguished from Thunder Ltd’s position as this benefit accrues to
Sunshine Ltd fortuitously and without Sunshine Ltd having to provide something in exchange for
the benefit. This amount that accrues to Sunshine Ltd will arguably be of a capital nature and
therefore not included in its gross income. It should be noted that the deemed dividend rules do
not apply because the implicit benefit is between companies (dividends tax would not have
applied between companies had a cash dividend been paid between them).
16.3 Equity instruments

The alternative to debt is that funding is obtained in exchange for ownership (equity funding). The
fundamental difference between debt and equity funding lies in the exposure to the risks of the
funded project or entity and the resultant returns that the funder may become entitled to. Pure equity
funding does not oblige the funded entity to make any compulsory repayments of either capital or
dividends. The investor is exposed to the risk of ownership in the funded project or entity. If this entity
performs well, the investor shares in this performance in the form of dividends. If, however, the
funded entity does not perform well, the investor is at risk of not receiving any yield and possibly
losing its capital investment. In the case of liquidation of a company, equity investors rank behind
creditors to participate in the distribution of assets of the company. Equity funding is normally raised
in the form of shares issued by a company to investors.
585
From a tax perspective, a share is defined as any unit into which the proprietary interest in a com-
pany is divided (definition of ‘share’ in s 1). This definition is wide enough to include ordinary shares,
preference shares and any other class of share that a company may issue, as long as the share
represents a proprietary interest in the company. In some cases, the Act distinguishes between
equity shares and shares that are not equity shares. This distinction is mostly relevant in cases where
relief is provided when acquiring ownership in a company (for example for purposes of the roll-over
provisions in ss 41 to 47 (see chapter 20) or in the context of anti-avoidance legislation (such as
ss 8E and 8EA) (see 16.4). Chapter 20 considers this distinction in more detail.
16.3.1 Investor perspective

The intention and purpose for which an investor acquires shares determine the tax implications of
those shares in the hands of the person. If the investor acquires the shares for the purpose of selling
them, the shares may be trading stock (see chapter 14) and the proceeds received on disposal
would in that case be included in the taxpayer’s gross income (see chapter 3). The investor may
however acquire the shares with the intention to hold it as a long-term investment. In this case, the
proceeds on the sale of the shares would generally be of a capital nature and not be included in the
taxpayer’s gross income. The disposal of the shares will have capital gains tax implications (see
chapter 17). As discussed in chapter 3, the determination of the nature of an investment in shares
depends on the facts and circumstances of each case and has been the subject of many cases
before the courts in the past. Section 9C (see chapter 14) removes some of the uncertainty and
judgement involved in this regard. It deems the proceeds in respect of certain shares that were held
for at least three years to be of a capital nature.
An investor earns a return or yield on its investment in shares in the form of dividends. Dividends
received from South African companies are generally exempt in terms of s 10(1)(k)(i) and are
therefore not income (see chapter 5). These dividends may be subject to dividends tax at a rate of
20% (see chapter 19).
16.3.2 Investee perspective

From the perspective of a company that obtains funding by issuing its own shares, a share issue
generally has no tax implications. The amount received is of a capital nature and is treated as not
arising from a disposal for capital gains tax purposes (par 11(2)(b) of the Eighth Schedule) (see
chapter 17). This amount is included in the company’s contributed tax capital (see chapter 19).
In recent years, a number of anti-avoidance provisions, such as s 24BA (see chapter 20), that may
have an effect for the company if shares are not issued on arm’s length terms were introduced.
16.4 Hybrid instruments

In some circumstances, the tax treatment of either a debt instrument or an equity instrument may be
beneficial to taxpayers. For example, where funds are borrowed for a purpose that does not qualify
for an interest deduction (such as acquiring shares), it may be more beneficial for the investor to
receive dividends that could qualify for exemption, rather than taxable interest. Similarly, a taxpayer
may prefer debt funding, which renders an interest deduction in South Africa, if a related recipient is
not subject to tax on the yield received or taxed at a lower rate. These considerations are particularly
relevant in a cross-border context that involves entities in jurisdictions with different tax rates.
The Act contains a number of anti-avoidance provisions to curb the use of instruments with a legal
form that achieves a favourable tax treatment, while the substance of the terms of the instrument
differs from this form. Sections 8E and 8EA apply to equity instruments (shares) with substantial debt
features. Sections 8F and 8FA target debt instruments with characteristics that resemble equity
instruments. These provisions align the tax treatment with the substance of the instrument as
opposed to its legal form.
16.4.1 Equity instruments with debt characteristics (ss 8E and 8EA)

Section 8E deals with hybrid equity instruments, while s 8EA deals with third-party backed shares.
Both provisions target equity instruments that have debt features.
The implications of an instrument being classified as a hybrid equity instrument or a third-party
backed share are similar. The benefit that a taxpayer obtains by disguising a debt instrument in the
legal form of an equity instrument is that the yield (dividends) would be exempt. To counteract this,
any dividend or foreign dividend received by or that accrues to a person in respect of such a hybrid
586
equity instrument or third-party backed share is deemed to be income received or accrued to the
recipient (s 8E(2) and s 8EA(2)). The amount loses its nature as a dividend, and, therefore, the
amount also loses the possibility to qualify for the dividend exemptions. This treatment is similar to
interest, although the amounts are not deemed to be interest. Both provisions only affect the charac-
terisation of the amount in the hands of the recipient. The amount is still treated as a dividend in the
hands of the payer and does not qualify for any deduction.
The provisions of these two sections have a number of definitions in common.
The first common definition is that of a preference share. A share is not necessarily a preference
share for purposes of these provisions based on the label given to the share in a company’s
memorandum of incorporation or the description of the class of shares. The definition includes all
forms of shares (both equity shares and other shares) that exhibit characteristics not normally asso-
ciated with (ordinary) equity ownership. A share is a preference share if it is
l not an equity share, or
l an equity share, where the amount of any dividend or foreign dividend is based on or determined
with reference to a specified rate of interest or the time value of money (definition of ‘preference
share’ in s 8EA(1)).
Remember
An equity share (defined in s 1) means any share in a company, other than any share that,
neither in respect of dividends nor returns of capital, carries any right to participation beyond a
specified amount in distribution.
Certain of these preference shares are outside the scope of the provisions if the funds from issuing
the preferences shares are applied for a qualifying purpose. This exclusion makes it possible to
acquire equity shares in active operating companies without triggering the anti-avoidance rules. This
is important for, amongst others, funding used in empowerment transactions (or to fund share acqui-
sitions of operating companies given that South Africa does not allow the deduction of interest for
debt used to acquire shares (unlike some other jurisdictions). The definition of qualifying purpose
extends to preference shares issued to settle, redeem or re-finance other funding used for the pur-
poses of acquiring equity shares in active operating companies.
Funds derived from issuing preference shares will be used for a qualifying purpose when the funds
are applied for any of the following purposes:
l The direct or indirect acquisition of an equity share by any person in a company that is an
operating company at the time when any dividend or foreign dividend is received in respect of
the preference share. This share may, however, not be acquired from another company that
forms part of the same group of companies as the acquirer (par (a) of the definition of ‘qualifying
purpose’ in s 8EA(1)).
An operating company means:

l any company that carries on business continuously, and in the course or
furtherance of the business provides goods or services for consideration or
carries on exploration for natural resources
Please note! l any company that is a controlling group company in relation to the above-
mentioned company, or
l any listed company (definition of ‘operating company’ in s 8EA(1)).
It should be noted that this definition of an operating company differs from the
definition in s 24O. The definition in s 8EA is arguably a wider definition than the
definition in s 24O.
l The direct or indirect acquisition of or redemption of another preference share (original prefer-
ence shares) if that other preference share was used for a qualifying purpose as contemplated in
this definition. This is only a qualifying purpose if the amount that the issuer of the preference
shares (substitutive shares) receives when it issues the shares does not exceed the outstanding
amount of the other preference shares (original shares), including accrued dividends or foreign
dividends, that are acquired or redeemed (par (c) of the definition of ‘qualifying purpose’ in
s 8EA(1)).
l Payment of dividends or foreign dividends in respect of another preference share was used for a
qualifying purpose as contemplated in this definition (par (d) of the definition of ‘qualifying
purpose’ in s 8EA(1)).
587
l The partial or full settlement by any person of any debt incurred for a purpose that would have
been a qualifying purpose (see three items above), had the debt been preference shares issued
or the re-financing of such a debt (par (b) of the definition of ‘qualifying purpose’ in s 8EA(1)).
Section 8E originally only applied to shares, including preference shares. Section 8EA only applied to
preference shares. A number of schemes were devised to circumvent the application of these provi-
sions by interposing instruments or arrangements that involve rights that derive their value from a
share or preference share, as the case may be, between the investor and the share or preference
share. This meant that the anti-avoidance provisions did not apply because the recipients received
the dividend or foreign dividends in respect of such rights, rather than in respect of the shares or
preference shares. To counter this structuring opportunity, the term ‘equity instrument’ was intro-
duced into both provisions. An equity instrument refers to a right or interest of which the value is
determined directly or indirectly with reference to a share or preference share, as the case may be,
or from amounts derived from such shares.
16.4.1.1 Hybrid equity instruments (s 8E)
Section 8E uses a combination of the following commercial characteristics of debt instruments to
classify a share or equity instrument as a hybrid equity instrument:
l a borrower is, or may be, obliged to make repayments in respect of debt
l debt generally ranks before equity upon liquidation, and
l a lender (investor) would normally be compensated for the funds advanced in terms of a debt
instrument with a return based on an interest rate or the time value of money.
The following shares or rights are hybrid equity instruments:
Redeemable shares that are not equity shares (par (a) of the definition of ‘hybrid equity instrument’
s 8E(1))
Shares that are not equity shares are hybrid equity instruments if
l the issuer of the share is obliged to redeem the share or to distribute an amount that is a return of
the issue price of the share (in whole or in part), or
l the holder of the share may exercise an option in terms of which the issuer must redeem that
share or distribute an amount that is a return of the issue price of the share (in whole or in part)
within a period of three years from the date of issue. In other words, the non-equity shares have com-
mercial features similar to debt if there is a forced repurchase (term limit) that is similar to a
repayment of the capital initially received.
The date of issue of a share refers to any of the following dates:

l the date when the share is issued
l any date after the shares have been issued on which the company that issued
the shares undertakes the obligation to redeem the share in whole or in part,
or
l any date after the shares have been issued that the holder obtains the right to
Please note! require redemption of the share in whole or in part.
The mere fact that a particular holder acquired the share, and therefore also any
redemption right attached to it, does not give rise to a date of issue being estab-
lished for purposes of s 8E.
The date of issue plays an important role in determining whether a share is a
hybrid equity instrument. This is the reference date from which the three years
within which the presence of certain redemption rights or obligations must be
assessed. The potential classification of a share as a hybrid equity instrument
must be re-assessed whenever an event that establishes a date of issue occurs.
Equity shares with redemption features (par (b) of the definition of ‘hybrid equity instrument’ s 8E(1))
An equity share could be a hybrid equity instrument based on a combination of its redemption
features and dividends rights. An equity share is a hybrid equity instrument if it meets both the
following requirements:
l it has any of the following redemption features:
– the issuer of the share is obliged to redeem the share or to distribute an amount that is a return
of the issue price of the share (in whole or in part) within three years from the date of issue
– the holder of the share may exercise an option in terms of which the issuer must redeem that
share or distribute an amount that is a return of the issue price of the share (in whole or in part)
within three years from the date of issue, or
588
– no redemption rights exist but at the date of issue of the share, the existence of the company
issuing the share is to be terminated within three years or is likely to be terminated within three
years, considering all the facts at the time. The distribution on cancellation of the shares upon
liquidation of such a company will, for all practical purposes, be equivalent to a redemption
feature.
l it has any of the following dividend rights:
– the share does not rank pari passu (on the same basis) as far as participation in dividends or
foreign dividends is concerned with all other equity shares in the capital of the company. If the
equity shares of the company consist of a number of classes, the share should not rank pari
passu with at least one of the equity share classes
– any dividend or foreign dividend on the share must be calculated directly or indirectly with
reference to a specified rate of interest or the time value of money.
Remember
Arrangements that would have qualified as hybrid equity instruments had the prescribed period
in s 8E been 10 years are reportable arrangements in the public notice issued under s 35(4) of
the Tax Administration Act. Paragraphs (a) and (b) of the definition of hybrid equity instrument,
as discussed above, contain prescribed periods.
Preference shares secured by interest-bearing instruments (par (c) of the definition of ‘hybrid equity
instrument’ s 8E(1))
Any preference share secured by a financial instrument or that is subject to an arrangement which
involves a financial instrument that may not be disposed of is classified as a hybrid equity instrument.
The investor’s risk exposure is so closely connected to this financial instrument that its characteristics
will reflect in those of the preference share.
In this context, a financial instrument refers to

l an interest-bearing arrangement, or
Please note!
l a financial arrangement based on or determined with reference to a specified
rate of interest or the time value of money.
An exception exists for preference shares that meet the above requirements but were issued for a
qualifying purpose. Such preference shares are not hybrid equity instruments.
Equity instruments deriving their value from hybrid equity instruments (paras (d) and (e) of the
definition of ‘hybrid equity instrument’ s 8E(1))
An equity instrument, as discussed above, that derives its value from any of the above three types of
shares is a hybrid equity instrument. Equity instruments that derive their value from amounts from
such shares are also hybrid equity instruments. In addition, where an equity instrument derives its
value from shares and that equity instrument is subject to a right or arrangement that would have
been a right or arrangement that caused the shares to be classified as hybrid equity instruments had
it attached to them, the equity instrument is classified as a hybrid equity instrument.
Example 16.15. Hybrid equity instrument
Sunshine Ltd requires funding to purchase 26% of the equity shares of Cloud Ltd. The purchase
price of the shares is R2 500 000. Sunshine Ltd has the following options of financing the invest-
ment in the shares of Cloud Ltd:
l Imali Ltd lends R2 500 000 to Sunshine Ltd. The loan will bear interest at a rate of 10% per
annum. This amount is repayable after 5 years. The shares in Cloud Ltd will serve as security
for the loan.
l Imali Ltd subscribes for preference shares issued by Sunshine Ltd for an amount of
R2 500 000. The preference shares bear cumulative preference dividends at a rate of 8% per
annum and are redeemable after 5 years. Sunshine may not sell the shares in Cloud Ltd until
all obligations in respect of the preference shares have been settled.
In both cases, Sunshine Ltd will use the dividends received from Cloud Ltd to make repayments
of capital and interest or preference dividends to Imali Ltd.
What are the tax implications of the respective funding options for Sunshine Ltd and Imali Ltd?
589
SOLUTION
Imali Ltd lends the funds to Sunshine Ltd
Sunshine Ltd
The interest incurred in respect of the loan will not qualify for a deduction in terms of s 24J(2) as it
is incurred for purposes of acquiring shares that produce exempt income. The provisions of
s 24O do not apply to the interest as Sunshine Ltd does not acquire a sufficient shareholding to
become the controlling company in relation to Cloud Ltd.
Imali Ltd
The interest received by Imali Ltd will be included in its gross income. This interest, after the
deduction of expenditure incurred to produce the income, will be subject to income tax at a rate
of 28% in the hands of Imali Ltd.
Imali Ltd subscribes for preference shares issued to it by Sunshine Ltd
Sunshine Ltd
No deduction is available in respect of the preference dividends paid to Imali Ltd.
Imali Ltd
The dividends received by Imali Ltd will be included in its gross income (par (k) of the definition of
‘gross income’). The dividends received will be exempt and will therefore not be income
(s 10(1)(k)(i)). As Imali Ltd is a resident company, the dividends paid to it by Sunshine Ltd are
exempt from dividends tax (s 64F(1)(a)). This tax treatment may be more favourable for Imali Ltd
compared to the taxable interest in the case of the loan discussed above.
As the preference shares have a number of characteristics of a debt instrument (fixed repayment
term and yield), it should be considered whether the preference shares are hybrid equity
instruments:
l The preference shares are not entitled to receive dividends or returns of capital beyond a
specified amount. As a result, the preference shares are not equity shares. No portion of the
preference shares is redeemable within 3 years. In addition, no portion of the issue price of
the preference shares must be distributed within this period. Paragraph (b) of the definition of
hybrid equity instrument does not apply as the shares are not equity shares.
l The Cloud Ltd shares are not financial instruments (interest-bearing arrangements or financial
arrangements determined with reference to a specified rate of interest or the time value of
money). The fact that these shares may not be disposed of by Sunshine Ltd until its obliga-
tions in terms of the preference shares have been settled does not cause the preference
shares to be classified as hybrid equity instruments in terms of par (c) of the definition of
hybrid equity instrument.
l Lastly, from the information available, the preference shares do not derive their value from
instruments that could be classified as hybrid equity instruments (paras (d) and (e) of the
definition of hybrid equity instrument).
Although the preference shares are not hybrid equity instruments, the parties must report the
arrangement to SARS as the preference shares would have been hybrid equity shares had the
period in par (a) of the definition of hybrid equity instrument been 10 years (in terms of the public
notice under s 35(2) of the Tax Administration Act).
Note
If Sunshine Ltd was obliged or Imali Ltd entitled to request Sunshine Ltd to redeem any part of the
preference shares within 3 years from the date of issue, the preference shares would have been
hybrid equity instruments. If this was the case, the dividends received by Imali Ltd would have
been income. As it no longer represents dividends received, it would not have qualified for the
exemption available to dividends received (s 10(1)(k)(i)). The tax treatment of the amounts
received by Imali Ltd would have been similar to its position had it received interest in terms of
the loan-funding option discussed above.
16.4.1.2 Third-party backed shares (s 8EA)

Section 8EA applies to third-party backed shares. A third-party backed share is a preference share
or equity instrument (both concepts discussed above)
l in respect of which the holder may exercise an enforcement right
l because any dividend (or foreign dividend) or return of capital (or foreign return of capital) in
respect of that share or instrument was not received or did not accrue to the person entitled to it
(definition of ‘third-party backed share’ in s 8EA(1)).
The principle that underpins the concept of an enforcement right is that a third party directly or
indirectly guarantees dividends or returns of capital to be paid to the holder of the share (or equity
instrument). Such a guarantee provides the holder with exposure that is very similar to debt, where
590
repayments must be made by the borrower. An enforcement right means a right, whether fixed or
contingent, that the holder of a share or equity instrument (or a connected person to the holder) has
to require any person, other than the issuer of the share or equity instrument, (third party) to
l acquire the share (or equity instrument) from the holder
l make any payment in respect of the shares (or equity instrument) in terms of a guarantee,
indemnity or similar arrangement, or
l procure, facilitate or assist with above-mentioned acquisition or payments (definition of enforce-
ment right in s 8EA(1)).
If the funds raised by issuing the shares are used for a qualifying purpose, certain exemptions from
s 8EA may apply. If this is the case, enforcement rights that are exercisable persons listed below
must be disregarded for purposes of establishing whether the shares are third-party backed shares.
This approach to exclude shares from the scope of s 8EA is illustrated by the following flow chart:
Did the company use the funds derived by issuing the

preference shares for a qualifying purpose?
Yes No
Does any enforcement right, other than against Does any enforcement right exist in relation to
persons listed as excluded, exist in relation to the the preference share?
preference share?
No
No Yes Yes
Third-party backed share to which s 8EA applies
The share is not a third-party backed share
The persons against whom enforcement rights should be disregarded (provided that the funds
derived from the preference shares were used for a qualifying purpose) are (s 8EA(3))
l the operating company to which the qualifying purpose relates (i.e., the company of which the
equity shares were acquired)
l the company that issued the preference shares if those preference shares were issued for any
qualifying purpose
l any other person who directly or indirectly holds at least 20% of the equity shares in
– the operating company to which the qualifying purpose relates
– the issuer of the preference shares if those preference shares were issued for any qualifying
purpose
l any company that forms part of the same group of companies as
– the operating company to which the qualifying purpose relates
– the issuer of the preference shares if those preference shares were issued for any qualifying
purpose
– the other person referred to above who directly or indirectly holds at least 20% in any of the
above two persons
l any natural person
l any organisation that is a non-profit company (as defined in s 1 of the Companies Act), or a trust
or association of persons, if
– all of the activities of that organisation are carried on in a non-profit manner, and
– none of the activities of that organisation are intended to directly or indirectly promote the
economic self-interest of any fiduciary or employee of that organisation, other than by way of
reasonable remuneration payable to that fiduciary or employee, or
l any person who holds equity shares in an issuer of a preference share that was issued for a
qualifying purpose, if the enforcement right exercisable against that person is limited to any rights
in and claims against that issuer that are held by that person.
591
Example 16.16. Third-party backed shares
Amanzi Ltd is a resident company that sells water-processing equipment to mining businesses.
Amanzi Ltd does not currently have black ownership and found that it is no longer a preferred
supplier for a number of important customers. Amazi Ltd contemplates a transaction in terms of
which Imigodi (Pty) Ltd, a black-owned company, will acquire a 26% equity shareholding in
Amanzi Ltd at a purchase price of R2 500 000.
Imigodi (Pty) Ltd will issue preference shares to Imali Ltd to raise an amount of R2 500 000 that
will be used to purchase the Amanzi Ltd shares. The preference shares will have a right to
cumulative preference dividends determined at a rate of 8% per annum. The preference shares
will be redeemed after 5 years.
Imali Ltd requires that Amanzi Ltd, Umfula Ltd (a company that held all the shares of Amanzi Ltd
before the transaction) as well as the shareholders of Imigodi Ltd, who are all natural persons,
provide surety for the payment of preference dividends and the redemption of the preference
shares. In addition, Imali Ltd also required that Imigodi (Pty) Ltd take out credit insurance in
favour of Imali Ltd from a third-party insurer in respect of the redemption of the preference shares
in 5 years’ time.
What are the tax implications of the funding arrangement for Imigodi Ltd and Imali Ltd?
SOLUTION
Imigodi Ltd
No deduction is available in respect of the preference dividends paid to Imali Ltd.
Imali Ltd
As the preference shares have a number of characteristics of a debt instrument (fixed repayment
term and yield), it should be considered whether the shares are hybrid equity instruments. The
terms of the preference shares are similar to those discussed in Example 16.9. For the same
reasons as set out in that example, the shares would not be classified as hybrid equity
instruments.
The fact that a number of persons have provided surety to Imali Ltd for the payment of both the
preference dividends and redemption of the preference shares may cause these preference
shares to be third-party backed shares.
As the preference shares are not equity shares (see Example 16.9 for discussion in this regard),
these shares are ‘preference shares’ as defined in s 8EA.
The preference shares are used to acquire equity shares in Amanzi Ltd. Amanzi Ltd is an
operating company, as defined in s 8EA(1), because it sells goods to mining companies. The
preference share funding will therefore be used by Imigodi (Pty) Ltd for a qualifying purpose, as
defined in s 8EA(1).
The surety for the payment of dividends and the redemption of the preference shares provided
by the persons will result in Imali Ltd having an enforcement right against Amanzi, Umfula and
the shareholders of Imigodi (Pty) Ltd. However, the following agreements must be disregarded
for purposes of determining whether any enforcement rights are exercisable in respect of the
preference shares (s 8EA(3)(a)(i)):
l the rights against Amanzi Ltd, as the operating company to which the qualifying purpose
relates (s 8EA(3)(b)(i))
l the rights against Umfula Ltd, as a person that holds at least 20% of the equity shares of
Amanzi Ltd, or as a company that forms part of the same group of companies as Amanzi Ltd
(s 8EA(3)(b)(iii)(aa) or s 8EA(b)(iv)(aa))
l the rights against the shareholders of Imigodi (Pty) Ltd, as persons that hold at least 20% of
the equity shares of Imigodi (Pty) Ltd, or natural persons (s 8EA(3)(b)(iii)(bb) or s 8EA(b)(v)).
The credit guarantee taken out from a third-party insurer in favour of Imali Ltd will also be an
enforcement right that Imali Ltd holds in respect of the payment of the capital redemption amount
of the preference shares. As the third-party insurer is not a person listed in s 8EA(3), this arrange-
ment cannot be disregarded for purposes of determining whether an enforcement right exists in
respect of the preference shares. The enforcement right held by Imali Ltd against the third-party
insurer results in the preference shares being classified as third-party backed shares.
The dividends received by Imali Ltd will be income. It qualifies for the exemption available to
dividends received (s 10(1)(k)(i)). The tax treatment of the amounts received by Imali Ltd will be
similar to the tax implications had it received interest in respect of a loan.
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16.4.2 Debt instruments with equity characteristics (ss 8F and 8FA)

Sections 8F and 8FA are anti-avoidance provisions that deal with debt instruments that have equity
features. Section 8F considers the terms of the debt instrument to assess whether the anti-avoidance
rule applies, while s 8FA considers the nature of the yield on the instrument. If s 8F applies, the
instrument is classified as a hybrid debt instrument. If s 8FA applies, the yield (interest) is classified
as hybrid interest.
The tax implications of interest paid in respect of a hybrid debt instrument and hybrid interest are
similar. Taxpayers may have a preference for debt, and therefore attempt to disguise equity instru-
ments in the legal form of debt instruments, to benefit from an interest deduction. Both provisions
apply to interest, as defined in s 24J (see 16.2.1.2). If the anti-avoidance provisions of ss 8F and 8FA
apply, the interest is not deductible (ss 8F(2)(b) and 8FA(2)(b)). This neutralises the tax benefit
obtained by structuring the instrument as debt. The interest is deemed to be a dividend in specie
paid by the company on the last day of its year of assessment during which the interest was incurred.
This interest is deemed to be a dividend paid in respect of a share to the recipient and may therefore
attract dividends tax at a rate of 20% (ss 8F(2)(a) and 8FA(2)(a)). This dividend could qualify for the
exemptions from dividends tax, depending on the nature of the beneficial owner (see chapter 19).
These amounts are not subject to the withholding tax on interest when paid to a foreign person
(definition of interest in s 50A). The interest is, lastly, deemed to be a dividend in specie that accrues
to the recipient thereof on the last day of the year of assessment of the company (ss 8F(2)(c) and
8FA(2)(c)). This dividend may qualify for the exemptions available for dividends received by or
accrued to the recipient (s 10(1)(k)(i)). Prior to the introduction of ss 8F(2)(c) and 8FA(2)(c) in 2021,
conflicting interpretations existed on the treatment of the amounts in the hands of the recipient. These
provisions appear to clarify, rather than amend, the policy.
The design of these provisions was amended significantly from 24 February 2016
to prevent taxpayers from structuring debt instruments in a manner to fall within
the scope of s 8F. This was particularly problematic where the issuer was not
subject to tax in South Africa and inbound interest was reclassified into dividends.
In these circumstances, s 8F did not achieve its purposes of denying an interest
deduction in respect of such a hybrid debt instrument but provided the recipient
with a dividend that could qualify for various exemptions. These rules also are in
rough accordance with the anti-hybrid rules proposed by the OECD.
Please note! These provisions now apply to interest-bearing arrangements or debt issued by
l a resident company
l a foreign company where the interest is attributable to a permanent establish-
ment in South Africa, and
l a controlled foreign company if the interest incurred must be taken into
account in determining the net income of that controlled foreign company.
(definition of ‘instrument’ in s 8F(1))
Sections 8F and 8FA share a number of exclusions where neither of the provisions apply. These
exclusions are
l a debt owed by a small business corporation (see chapter 19)
l an instrument that is a tier 1 or tier 2 capital instrument referred to in the regulations issued in
terms of s 90 of the Banks Act (contained in Government Notice No. R.1029 published in Govern-
ment Gazette No. 35950 of 12 December 2012) issued by a bank (as defined in the Banks Act) or
a controlling company in relation to that bank (thus relief is provided for regulated bank capital)
l an instrument of any class that is subject to the approval contemplated in s 23(a)(i) of the Short-
term Insurance Act or s 24(a)(i) of the Long-term Insurance Act (thus relief is provided for regu-
lated insurer capital)
l linked units in a certain company that are held by a long-term insurer (as defined in the Long-
term Insurance Act), a pension fund, provident fund, REIT (see chapter 19) or short-term insurer
(as defined in the Short-term Insurance Act) if those linked units were acquired before 1 January
2013. This is a temporary exclusion until legislation to regulate unlisted real estate investment trusts
(REITs) is introduced (ss 8F(3)(d) and 8FA(3)(d)). It is currently envisaged that these provisions will
be deleted from 1 January 2023 onwards, and
593
l an instrument that is a third-party backed instrument. A third-party backed instrument is an instru-

ment in respect of which an enforcement right is exercisable when any amount in terms of this
instrument is not received by or does not accrue to the person entitled to this. This exclusion
ensures that the re-characterisation rules in respect of third-party backed shares (see 16.4.1.2)
apply to third-party backed instruments, even if the taxpayer attempts to structure the instrument
to fall within s 8F and retain dividend treatment of the yield to avoid the application of s 8EA.
16.4.2.1 Hybrid debt instruments (s 8F)

Only an instrument in terms of which a company owes an amount to another person can be a hybrid
debt instrument. Instruments with the following terms are classified as hybrid debt instruments:
Conversion or exchange for shares (par (a) of the definition of ‘hybrid debt instrument’ in s 8F(1))
If the company is entitled or obliged to either
l convert the instrument (or part thereof) in any year of assessment to shares, or
l exchange the instrument (of part thereof) in any year of assessment for shares.
The instrument is, however, not classified as a hybrid debt instrument if the market value of the
shares must be equal to the amount owed in terms of the instrument when the conversion or
exchange takes place. This will be the case if the number of shares is determined in a manner that
the market value of the shares must be equal to the outstanding amount on the conversion date. This
can be contrasted to a situation where a fixed number of shares is issued, irrespective of the market
value of the shares in relation to the outstanding amount. The former scenario does not result in the
classification of the instrument as a hybrid debt instrument while the latter does.
Deferral of an obligation to pay based on solvency (par (b) of the definition of ‘hybrid debt instrument’
in s 8F(1))
If the obligation to pay an amount owed in respect of the instrument on a date or dates falling within
the year of assessment was deferred because the obligation is conditional upon the market value of
the company’s assets not being less than the liabilities of the company, this amount is a hybrid debt
instrument. This condition should have already resulted in the deferral of an amount for it to trigger
classification as a hybrid debt instrument, as opposed to the possibility of a future deferral.
Companies with insolvent balance sheets are often required to subordinate certain
related party debts to be considered going concerns for financial reporting
purposes. As a result, the debt is not repayable while the company remains in the
insolvent position. A subordination agreement would nornally result in the debt or
Please note! part thereof being classified as a hybrid debt instrument. However, where a
registered auditor has certified that an instrument is a hybrid debt instrument
solely because the payment of amounts has been deferred as a result of this
condition, s 8F does not apply to this instrument (s 8F(3)(f)).
No obligation to repay within 30 years (par (c) of the definition of ‘hybrid debt instrument’ in s 8F(1))
Where a company owes an amount to a connected person in relation to that company and is not
obliged to fully discharge all liability to pay amounts in respect of the instrument within 30 years from
its date of issue, the instrument is a hybrid debt instrument. The date of issue from which the 30-year
period must be determined is the date on which the liability comes into existence. This is the only
element of the definition of hybrid debt instrument that requires that the arrangement must be
between a company and a person connected in relation to such a company.
This provision does not apply to instruments that are repayable on demand. An instrument that can
be converted to or exchanged for another financial instrument (except for a share) must be con-
sidered together with such other financial instrument for purposes of assessing whether it is a hybrid
debt instrument. It is therefore not possible to avoid classifying an instrument as a hybrid debt instru-
ment by merely providing for its replacement prior to the expiry of the 30-year period.
594
Example 16.17. Hybrid debt instruments

Jawbreakers Ltd is a South African resident company with a 31 March year-end and it specialises
in producing some of the biggest jawbreakers. Due to increasing demand, Jawbreakers Ltd is
looking to expand operations but does not have sufficient reserves available to do so. Jaw-
breakers Ltd plans to issue debentures to Jellybean Ltd (an unrelated third party that also has a
31 March year-end) that may be converted into ordinary shares of Jawbreakers Ltd in order to
obtain this funding. This instrument gives Jawbreakers Ltd the flexibility of being able to settle the
debentures should it have funds available, or to capitalise the loan by converting it into shares if it
wishes to do so.
If the debentures are converted into ordinary shares, it will be at a ratio of 1:1 (irrespective of the
value of the shares at the time of conversion). The debentures will be issued on 1 April 2021 at
face value of R1 000 000. The coupon rate on these debentures is 8% p.a. Interest is payable
annually in arrears starting on 31 March 2022. You may assume that for the 2021 year of
assessment interest, as defined in s 24J(1), incurred amounted to R30 326.
The taxable income before taking into account the above arrangement was R390 000 for
Jawbreakers Ltd and R550 000 for Jellybean Ltd.
Discuss, supported by calculations, the tax implications of the convertible debentures for each of
the companies for the 2022 year of assessment.
SOLUTION
Classification of convertible debentures issued:
The convertible debentures are instruments as defined (s 8F(1)) as this is an interest-bearing
arrangement and these instruments were issued by a resident company.
As the company (Jawbreakers Ltd) is entitled to convert these instruments into shares, the
instruments meet the definition of hybrid debt instruments in s 8F(1). (Note that if the instruments
were convertible at the option of the holder (as opposed to the company), or convertible for a
number of shares determined with reference to the market value of the shares in relation to the
amount owed in terms of the instrument, the instruments would not have been classified as
hybrid debt instruments (par (a) of the definition of ‘hybrid debt instrument’)).
As a result of being classified as hybrid debt instruments, the interest incurred by Jawbreakers
Ltd would be deemed to be a dividend in specie declared and paid on the last day of the year of
assessment in terms of s 8F(2)(a). This deemed dividend may be subject to dividends tax at a
rate of 20%. As Jawbreakers Ltd is a resident company, the dividend in specie would be exempt
from dividends tax in terms of s 64FA(1)(a), provided that Jellybean Ltd has submitted a
declaration and undertaking to Jawbreakers Ltd as required by that section. In addition, any
interest payable by Jawbreakers Ltd would not be allowed as a deduction in terms of s 24J
(s 8F(2)(b)).
The effect of this arrangement on the taxable income for the 2022 year of assessment of the two
entities can be illustrated as follows:
Jawbreakers Ltd Jellybean Ltd
R R
Taxable income ............................................................................ 390 000 550 000
Deemed dividend paid (s 8F(2)(b)) – no deduction allowed ........ –
Deemed dividend accrues to Jellybean Ltd in terms of
s 8F(2)(a)) ..................................................................................... 30 326
Dividend exemption: s 10(1)(k)(i) ................................................. (30 326)
390 000 550 000
16.4.2.2 Hybrid interest (s 8FA)

The characteristics of the yield in respect of a debt owed by a company in terms of an instrument
determine whether an amount is hybrid interest. The yield is hybrid interest if:
Interest not based on a rate of interest or time value of money (par (a) of the definition of ‘hybrid
interest’ in s 8FA(1))
Any interest that is not determined with reference to
l a specified rate of interest, or
l the time value of money
is hybrid interest.
An example of interest that is hybrid interest is a return on a debt instrument that is determined as a
percentage of profits of the issuer.
595
Incremental interest linked to profitability (par (b) of the definition of ‘hybrid interest’ in s 8FA(1))
Interest that is determined with reference to an increased interest rate linked to an increase in the
profitability of the company is hybrid interest. The amount of such hybrid interest is determined as the
interest calculated at the increased rate less the lowest rate of interest that applied in respect of the
instrument during the current year of assessment and preceding five years of assessment.
Example 16.18. Hybrid interest
Footsy (Pty) Ltd is a resident company with a 28 February year-end. The company manu-
factures and sells shoes. BigFoot Ltd, a company that is a tax resident in Bermuda, owns all the
shares issued by Footsy (Pty) Ltd. BigFoot Ltd advanced a loan of R50 000 000 to
Footsy (Pty) Ltd on 1 March 2021. The loan agreement is repayable on demand. While the loan
is outstanding, Footsy (Pty) Ltd will be required to pay BigFoot Ltd interest amounting to 90% of
Footsy (Pty) Ltd’s profit before tax.
For the year ending February 2022, Footsy (Pty) Ltd realised a profit before tax of R5 000 000 for
the year.
Discuss and calculate the tax implications of the interest on the loan for the year of assessment
for Footsy (Pty) Ltd and BigFoot Ltd.
SOLUTION
Interest in respect of the loan is not determined with reference to the time value of money or a
specified rate of interest. The interest in respect of the loan increases as Footsy (Pty) Ltd’s profit
increases. The interest is therefore classified as hybrid interest (definition of ‘hybrid interest’ in
s 8FA(1)).
The interest for the year amounting to R4 500 000 (R5 000 000 × 90%) is hybrid interest. The
interest will be deemed to be a dividend in specie declared and paid on the last day of the year
of assessment (s 8FA(2)(a)). This deemed dividend will be subject to dividend tax at a rate of
20%. South Africa has not entered into a double tax agreement with Bermuda that could reduce
this rate. As this is a dividend in specie, Footsy (Pty) Ltd will be liable for dividends tax of
R20 000 (R100 000 × 20%).
The interest received by or accrued to BigFoot Ltd will be deemed to be a dividend in specie that
accrues on the last day of the year of assessment. The dividends will be deemed to be from a
South African source as Footsy (Pty) Ltd is a resident company (s 9(2)(a)). The dividends will be
included in its gross income (par (k) of the definition of ‘gross income’ in s 1). This amount would,
however, be exempt (s 10(1)(k)(i)).
Footsy BigFoot
(Pty) Ltd Ltd
R R
Deemed dividend paid (s 8FA(2)(b) – no deduction allowed ........... –
Deemed dividend accrues to BigFoot Ltd (s 8F(2)(a)) ..................... 4 500 000
Dividend exemption (s 10(1)(k)(i)) .................................................... (4 500 000)
Effect on taxable income .................................................................. – –
Dividends tax at 20% in respect of dividend in specie (s 8FA(2)(a))
(R4 500 000 × 20%) .......................................................................... 900 000
Note
This example illustrates how the provisions of s 8FA curb schemes aimed at reducing the South
African tax base by structuring an instrument with equity features (profit-sharing risk) as a loan to
achieve a tax deduction of the interest. In the absence of the anti-avoidance provisions of s 8FA,
it may have been possible to shift a significant amount of taxable profits to a low tax jurisdiction
in the form of an interest payment. It should however be noted that in a cross-border context, the
transfer pricing rules, as discussed in chapter 21, may also have countered this tax planning.
16.5 Derivative instruments

Taxpayers use derivative instruments as part of their funding and investment strategies. These instru-
ments are often held to hedging exposures to financial risks (for example the risk of changes in
interest rates) or for speculative purposes.
The Act only contains a few provisions that specifically deal with the taxation of derivative instru-
ments. These provisions include ss 24K and 24L. These provisions merely govern the timing of the
accrual or incurral of amounts in terms of derivative instruments. Derivative instruments that are
based on exchange rate and have foreign currency underlying items, for example forward exchange
596
contracts, are subject to the provisions of s 24I (chapter 15 explains this in detail). In the absence of
specific provisions that deal with the tax treatment of these instruments, the definition of gross income
must be considered to determine whether amounts received or accrued in respect of these instru-
ments must be included in a person’s taxable income (see chapter 3). Where amounts are paid in
terms of these instruments, the general deduction formula in s 11(a) read with s 23 governs the
deductibility of the amount (see chapter 6). These instruments may be assets for purposes of the
Eighth Schedule, in which case the disposal thereof may have capital gains tax implications (see
chapter 17).
16.5.1 Interest rate agreements (s 24K)

Section 24K governs the accrual and incurral of amounts in respect of interest rate agreements (for
example, interest rate swaps). An interest rate agreement is an agreement in terms of which a person
l acquires the right to receive an amount (par (a) of the definition of ‘interest rate agreement’ in
s 24K(1))
– calculated at a rate of interest to a notional principal amount, or
– calculated with reference to the difference between any combination of interest rates to a
notional principal amount, or
– that is fixed as consideration in terms of an agreement where the obligation is imposed to pay
any other amount calculated at a specified rate of interest or an amount equal to the difference
between the fixed amount and amount calculated at a specified rate of interest.
l becomes liable to pay an amount (par (b) of the definition of ‘interest rate agreement’ in s 24K(1))
– calculated at a rate of interest to a notional principal amount, or
– calculated with reference to the difference between any combination of interest rates to a
notional principal amount, or
– that is fixed as consideration in terms of an agreement where the obligation is imposed to pay
any other amount calculated at a specified rate of interest or an amount equal to the difference
between the fixed amount and amount calculated at a specified rate of interest.
An example of an interest rate agreement is a fixed-for-floating interest rate swap agreement where a
taxpayer would be liable to make payments of fixed amounts (interest determined at a fixed rate) on a
notional capital amount in exchange for the right to receive amounts determined at a variable interest
rate on a same notional capital amount. Taxpayers typically enter these agreements to hedge them-
selves against an exposure to a floating interest rate obligation in terms of a loan agreement.
The purpose of s 24K is to determine the timing of the accrual or incurral of amounts in respect of
interest rate agreements. Its provisions do not interfere with general tax principles, for example the
source principle or the nature of amounts (capital or revenue) accrued or incurred in respect of such
agreements would continue to apply. The amounts contemplated in the above definition are deemed
to have been incurred by or accrued to a taxpayer on a day-to-day basis (s 24K(1)). This approach to
the timing of the accrual or incurral of interest amounts is similar to the timing provisions in s 24J in
many respects (see 16.2.1.3 above). Where the amount in respect of the interest rate agreement is
determined with reference to a variable rate, the accrual or incurral amount must be determined
using the variable rate applicable on the date that the amount is calculated (s 24K(3)).
597
Example 16.19. Interest rate swap

Follet Ltd obtains a loan on 1 October 2022 for R10m, repayable on 31 March 2023. The loan
bears interest of prime + 2%, payable in arrears. The prime rate on 1 October 2022 is 15%. The
financial director of Follet Ltd has a concern that the prime rate may increase dramatically over
the period of the loan. He therefore arranges for the company to enter into an interest-rate swap
agreement with a bank as a hedge.
The agreement provides that the bank will pay Follet Ltd interest on a notional amount of
R10 million at prime, while Follet Ltd will pay the bank interest on a notional amount of R10 million
at 15%.
The prime rate increased from 15% to 18% on 1 November 2022 and then remained unchanged
throughout the period of the loan and the interest rate agreement.
The financial year of Follet Ltd ends on the last day of February.
On 31 March 2023, in accordance with the interest rate agreement: R127 397 + R749 589
Follet Ltd receives an amount of
(R10m × 15% × 31/365 days) + (R10m × 18% × 152/365 days) ................................ R876 986
Less: Follet Ltd pays an amount of (R10m × 15% × 183/365 days) .......................... (752 054)
Net receipt of Follet Ltd................................................................................................ R124 931
The portion of the R124 931 to be taken into account in the calculation of the taxable income of
Follet Ltd for the year of assessment ended 28 February 2023 is R98 630, calculated as follows:
Amount receivable by Follet Ltd
(R10m × 15% × 31/365) + (R10m × 18% × 121/365).................................................. R724 109
Less: Amount payable by Follet Ltd (R10m × 15% × 152/365 days) ......................... (624 657)
Net accrual at 28 February 2023 ................................................................................. R99 452
The balance of R25 479 will be taken into account in the 2024 year of assessment.
Remember
Section 23H limits the deductions allowed for certain expenditure. It does not apply to amounts
paid in respect of interest-rate agreements to which s 24K applies (s 23H(1) (see chapter 6)).
16.5.2 Option contracts (s 24L)

Section 24L of the Act deals with the incurral and accrual of premiums or like considerations in
respect of an option contract. It also applies to consideration paid to acquire an option contract.
An option contract is defined in s 24L(1) as an agreement that has the effect that a person acquires
the option
l to buy or sell a certain quantity of corporal or incorporeal things to or from another person on or
before a specified date at a prearranged price, or
l that an amount of money will be paid to or received from another person before or on a future
date depending on the whether the value of an asset, index, currency, interest rate or other factor
changes in a certain manner in relation to a prearranged value on or before such future date.
The first requirement relates to an option to acquire the underlying item while the second refers to an
option contract that is settled on a net basis without exchange of the underlying item.
This definition specifically excludes a foreign currency option contract, which is dealt with under s 24I
(see chapter 15).
Similarly to s 24K, this provision does not interfere with the general principles governing the source or
capital or revenue nature of the relevant amounts. It only deals with the timing of the incurral or
accrual of the relevant amounts. It, furthermore, does not specify what the tax implications of exer-
cising the right or settling the option contract are. Any premium, or like consideration, or consid-
eration to acquire an option is deemed to be incurred by the payer on a day-to-day basis during the
original term of the option contract (s 24L(2)). This timing rule does not apply to option contracts held
by a person as trading stock. The tax treatment of option contracts held as trading stock will therefore
be governed by general principles (proviso (ii) to s 24L(2)).
If the option contract is exercised, terminated or disposed of before the end of its original term, the
total of any unclaimed portion of the premium or consideration, attributable to the period from the
date of exercise, termination or disposal until the end of the original term of the option contract, will
598
be deemed to be incurred on that earlier date (proviso (i) to s 24L(2)). The section provides that, if
the unclaimed amount includes an amount representing the ‘intrinsic value’ in relation to the option
contract, such value will also be deemed to be incurred by the person concerned on the date of the
exercise, termination or disposal of the option contract, in other words, the earlier date (proviso (iii) to
s 24L(2)). The intrinsic amount is the difference between
l the market price or value of an asset, index, currency, rate of interest or any other factor, as
provided for in the option contract, on the date of acquisition of an option contract, and
l the prearranged price or value of an asset, index, currency, rate of interest or any other factor, as
provided for in the option contract (s 24L(1)).
Any premium or like consideration received or receivable by a person in terms of an option contract,
other than an amount of a capital nature, is deemed to have accrued to the person on a day-to-day
basis during the term of the option contract (s 24L(3)). When the option contract is exercised, termin-
ated or disposed of at an earlier date, the unclaimed portion of the premium or like consideration,
attributable to the period from the date of exercise, termination or disposal until the end of the original
term of the option contract, will be deemed to have accrued to the person on such earlier date.
Example 16.20. Option contracts
Mr Option pays an amount of R1 000 on 1 December 2021 in terms of an option contract that
entitles him to buy a certain number of widgets at an agreed price at any time before 28 Febru-
ary 2023. He exercises the option and acquires the widgets on 31 August 2022.
What is the amount deemed to be incurred during the 2022 and 2023 years of assessment?
SOLUTION
Number of days from the commencement of the option contract until the end of the current year
(1 December 2021 until 28 February 2022) = 90
Number of days in option contract (1 December 2021 until 28 February 2023) = 455
Therefore, the portion of R1 000 deemed to be incurred in the current year is 90/455 × R1 000 =
R197,8
Number of days from the commencement of the current year until date of the exercise of the
option contract (1 March 2022 until 31 August 2022) = 184
Amount deemed to be incurred in the current year prior to exercise of the option contract:
184/455 × R1 000 = R404,39
Amount deemed to be incurred on the date of exercise of the option contract (earlier date):
Number of days from the date of exercise of the option contract until the end of the original term
(from 1 September 2022 to 28 February 2023) = 181
Amount deemed to be incurred on the date of exercise: 181/455 × R1 000 = R397,8 OR
unclaimed amount: R1 000 – R197,8 – R404,4 = R397,8
Total amount deemed to be incurred in current year: R404,4 + R397,8 = R802,2
Therefore total amount deemed to be incurred:
Year ended 28 February 2022 ..................................................................................... R197,8
Year ended 28 February 2023 ..................................................................................... R802,2
Total amount deemed to be incurred ............................................................. R1 000,00
16.6 Financial institutions and authorised users (ss 24JB and 11(jA))
The tax and accounting treatment of financial instruments diverged significantly as the International
Financial Reporting Standards (IFRS) developed towards fair value measurement of liquid financial
instruments. This results in mark-to-market adjustments in profit or loss for accounting purposes. As a
result of the differences between the tax and accounting treatment, accounting profits have become
less useful as a benchmark for SARS to assess tax risk. Entities that enter into large volumes of trans-
actions that involve such financial instruments make numerous adjustments between information
presented for financial reporting purposes and information required for tax purposes. This requires
complex systems and resulted in inaccuracies.
599
From 2014, s 24JB was introduced to simplify the determination of the taxable income of financial
instruments for certain entities with high volumes of these instruments. Section 24JB applies to
covered persons. A covered person is (definition of ‘covered person’ in s 24JB(1))
l any authorised user, as defined in s 1 of the Financial Markets Act, that is a company (i.e.,
brokers that are members of the JSE), excluding companies of which the principal trading
activities are the activities of a treasury operation
l the South African Reserve Bank
l any bank, branch, branch of a bank or controlling company as defined in s 1 of the Banks Act (for
example local banks, local branches of foreign banks, foreign branches of local banks and
controlling companies in respect of banks)
l certain companies or trusts that form part of a banking group (as defined in s 1 of the Banks Act).
Insurance companies and certain subsidiaries that are more than 50% owned by insurers are
excluded.
Taxpayers that are within the scope of this provision must include or deduct amounts recognised in
profit or loss in their income for financial instruments that are measured at fair value in profit or loss
for accounting purposes (s 24JB(2)). There are exceptions for amounts where this treatment would
interfere with the established tax system, for example dividends or foreign dividends received in
respect of such instruments (s 24JB(2)(a) and (b)), or is susceptible to misuse where this treatment
would result in a deduction for dividends distributed (s 24JB(2)(c)) Amounts are taken into account
on this basis for purposes of determining a taxpayer’s taxable income, are disregarded when they
are actually received or incurred (s 24JB(3)).
For years of assessment commencing on or after 1 January 2018, the alignment between the
accounting and tax was further increased by the introduction of a specific deduction for doubtful
debts for certain covered persons (s 11(jA)). This provision applies to banks, branches and branches
of banks as defined in s 1 of the Banks Act as well as companies and trusts that are covered
persons, as indicated above, on the basis that they form part of a banking group. Controlling
companies, as defined in the Banks Act, are however excluded.
These covered persons are entitled to the following deductions for doubtful debts:
l 25% of the impairment allowance determined in accordance with IFRS 9 in respect of debts other
than those that fall into one of the two categories described below.
l 40% of the impairment allowance determined for debts for which the impairment allowance is
measured in a manner that reflects lifetime expected credit losses in terms of IFRS 9, but that do
not fall into the default category below. This 40% allowance includes debts for which the credit
risk has increased significantly since initial recognition.
l 85% of the impairment allowance relating to amounts in default, as determined by applying the
criteria set out in paras (a)(ii) to (vi) and (b) of the definition of ‘default’ in Regulation 67 of the
regulations issued in terms of s 90 of the Banks Act to the credit exposure, including retail
exposure.
The allowance deducted in a year of assessment must be included in the income of the person to
whom it was granted in the following year of assessment (like the allowance for basic doubtful debts
under s 11(j)).
600
17 Capital gains tax (CGT)
Alta Koekemoer

l explain the scope of CGT
l determine the persons liable for CGT
l explain the difference between how residents and non-residents are subject to CGT
l list the four building blocks and explain how these building blocks are applied in
the CGT calculation
l calculate a person’s taxable capital gain or assessed capital loss for the year of
assessment
l determine how CGT is calculated on assets held on valuation date and disposed
of after valuation date
l understand the rules for determining the market value of assets for CGT
l know which capital gains and losses must be disregarded, rolled over, attributed
or limited
l understand the CGT consequences of certain events for various entities and per-
sons, such as partnerships, trusts, insolvent and deceased estates
l understand the CGT consequences at the death of an individual
l recognise the various CGT anti-avoidance rules
l recalculate a person’s taxable capital gain or assessed capital loss where certain
events occurred in previous years of assessment, and
l apply the final steps in the CGT calculation required to include the taxable capital
gain in the taxable income for the year of assessment.
Contents
Page
17.1 Overview ........................................................................................................................... 603
17.2 The scope of CGT ............................................................................................................. 604
17.3 Persons liable for CGT (par 2) .......................................................................................... 605
17.3.1 Residents (par 2(1)(a))...................................................................................... 606
17.3.2 Non-residents (par 2(1)(b) and par 2(2)).......................................................... 606
17.3.3 Withholding tax applicable to the disposal of immovable property in South
Africa by non-residents (s 35A) ........................................................................ 607
17.4 The basic rules of CGT ..................................................................................................... 608
17.5 Determination of taxable capital gain and assessed capital losses (paras 3 to 10) ....... 609
17.6 The definition of ‘asset’ (par 1) ......................................................................................... 612
17.7 Disposals (paras 11, 12 and 13) ...................................................................................... 613
17.7.1 Disposal events (par 11(1)) .............................................................................. 614
17.7.2 Non-disposals (par 11(2)) ................................................................................. 614
17.7.3 Deemed disposals (par 12 and ss 9H and 9K) ................................................ 615
17.7.4 Time of disposal (par 13) .................................................................................. 621
17.7.5 Disposals by spouses married in community of property (par 14) ................. 623
17.8 Base cost .......................................................................................................................... 623
17.8.1 Qualifying expenditure included in base cost (par 20(1))................................ 623
17.8.2 Qualifying expenditure excluded from base cost (par 20(2) and s 23C) ........ 628
17.8.3 Reduction of base cost (par 20(3)) ................................................................... 628
17.8.4 Concession or compromise in respect of debt (par 12A) ................................ 629
17.8.4.1 Is there a debt benefit? (the definitions of ‘debt’ and ‘debt
benefit’ in par 12A(1)) ..................................................................... 629
601
Page
17.8.4.2
Is the debt benefit specifically excluded from the provisions of
par 12A? (par 12A(6)) ..................................................................... 630
17.8.4.3 What was the purpose of the debt (what was the debt used for)?
(paras 12A(2) to 12A(5)) ................................................................. 631
17.8.4.4 The interaction between the provisions of par 12A (reducing
base cost when debt is reduced) and par 20(3) (reducing base
cost when the underlying expenditure is reduced) ........................ 638
17.8.5 Cancellation of contracts (par 20(4)) ................................................................ 639
17.8.6 Limitation of expenditure (par 21) ..................................................................... 640
17.8.7 Donations tax paid by donor or donee (par 22 read with par 20(1)(c)(vii)
and (viii)) ........................................................................................................... 640
17.8.8 Immigrants (par 24) .......................................................................................... 641
17.8.9 Determining base cost of pre-valuation date assets (paras 25 to 27) ............. 642
17.8.10 Valuation date value in respect of s 24J interest-bearing instruments
(par 28).............................................................................................................. 647
17.8.11 Market value of assets on valuation date (par 29) ........................................... 647
17.8.12 Time-apportionment base (TAB) cost (par 30) ................................................. 647
17.8.13 Market value of assets (par 31) ........................................................................ 654
17.8.14 Identical assets (par 32) ................................................................................... 655
17.8.15 Part disposals (par 33)...................................................................................... 657
17.8.16 Debt substitution (par 34) ................................................................................. 659
17.9 Proceeds ........................................................................................................................... 660
17.9.1 Amounts excluded from the definition of ‘proceeds’ (par 35(3))...................... 660
17.9.2 Disposal of certain debt claims (par 35A) ........................................................ 661
17.9.3 Incurred and accrued amounts not quantified (s 24M) .................................... 661
17.9.4 Disposal of assets for unaccrued amounts of proceeds (par 39A) ................. 661
17.9.5 Disposals and donations not at arm’s length or to a connected person
(par 38).............................................................................................................. 662
17.10 Exclusions, roll-overs, attributions and limitations ............................................................ 663
17.10.1 Primary residence exclusion (paras 44 to 51A)................................................ 663
17.10.1.1 Important definitions (par 44).......................................................... 664
17.10.1.2 Apportionment of exclusion if interest is held by more than one
person (par 45(2)) ........................................................................... 665
17.10.1.3 Apportionment of capital gain or loss (paras 46 to 50) .................. 666
17.10.1.4 Relief where a primary residence is transferred from a company,
close corporation or trust (paras 51 to 51A) ................................... 670
17.10.2 Other exclusions (paras 52 to 64E and s 12Q) ................................................ 670
17.10.3 Roll-overs (paras 65 to 67D) ............................................................................. 676
17.10.3.1 Involuntary disposals (par 65) ........................................................ 677
17.10.3.2 Reinvestment in replacement assets (par 66) ................................ 679
17.10.3.3 Transfer of assets between spouses (s 9HB) ................................. 682
17.10.3.4 Other roll-overs (paras 65B, 67B, 67C and 67D) ........................... 683
17.10.4 Attribution of capital gains (paras 68 to 73) ..................................................... 683
17.10.5 Limitation of losses (paras 15 to 19, 37, 39 and 56) ........................................ 686
17.10.5.1 Certain personal-use aircraft, boats, rights and interests
(par 15) ............................................................................................ 686
17.10.5.2 Intangible assets acquired prior to the valuation date
(1 October 2001) (par 16) ............................................................... 687
17.10.5.3 Forfeited deposits (par 17).............................................................. 687
17.10.5.4 Options (par 18) .............................................................................. 687
17.10.5.5 Shares disposed of at a capital loss (par 19) ................................ 687
17.10.5.6 Interest in a company holding certain personal-use aircraft,
boats, rights and interests (par 37) ................................................. 689
17.10.5.7 Assets disposed of to a connected person (par 39) ...................... 689
17.10.5.8 Debt owed by a connected person (par 56) .................................. 690
602
17.1 Chapter 17: Capital gains tax (CGT)
Page
17.11 CGT for different entities or persons................................................................................. 691
17.11.1 Companies (paras 74 to 77) ............................................................................. 691
17.11.2 Trusts (paras 80 to 82) ...................................................................................... 691
17.11.3 Insolvent estates (par 83) ................................................................................ 691
17.11.4 The deceased and the deceased estate (ss 9HA and 25) .............................. 691
17.11.5 Partnerships (par 36) ........................................................................................ 691
17.12 Miscellaneous anti-avoidance rules and other special rules ........................................... 691
17.12.1 Value-shifting arrangements (par 23) ............................................................... 691
17.12.2 Reacquired financial instruments (par 42) ....................................................... 691
17.12.3 Pre-sale dividends treated as proceeds (par 43A) .......................................... 691
17.12.4 Leasehold improvements.................................................................................. 692
17.12.5 Transactions in foreign currency (par 43) and cryptocurrency........................ 693
17.12.6 Base cost of assets of controlled foreign companies (par 43B) ...................... 694
17.12.7 Foreign currency assets and liabilities (paras 84 to 96) .................................. 694
17.13 Final step in the CGT calculation and changes to capital gains or losses in
subsequent years ............................................................................................................. 694
17.13.1 Further capital gains or losses in the case of post-valuation date assets in
terms of paras 3(b)(i), (ii) and 4(b)(i), (ii) .......................................................... 695
17.13.2 Redetermination of pre-valuation date assets in terms of paras 25(2)
and (3)(iii) and (4)(iii) ........................................................................................ 695
17.1 Overview
Capital gains tax (CGT) was introduced into our South African tax legislation on 1 October 2001. Prior
to this date, any profits on the sale of capital assets were not subject to tax. The introduction of CGT
in 2001 changed this and taxpayers that now dispose of assets need to consider the possible CGT
implications of the capital gain or loss arising from the disposal. In order for a capital gain or loss to
be calculated, four building blocks have to be determined (an asset, the disposal of the asset during
the year of assessment, the base cost of the asset and the proceeds on the disposal of the asset).
The disposal of an asset by a taxpayer will ultimately result in either a taxable capital gain or an
assessed capital loss. The taxable capital gain of a person in a year of assessment is included in his
taxable income and is therefore subject to normal tax. Any assessed capital loss cannot be set off
against taxable income and has to be carried forward to the next year of assessment.
CGT is not a separate tax, like donations tax or estate duty. As CGT is regarded as a tax on income,
it is incorporated into the Income Tax Act. The CGT consequences of the disposal of assets are
determined under the Eighth Schedule to the Act. Section 26A forms the link between the Act and the
Eighth Schedule by including taxable capital gains in taxable income.
Remember
Taxable capital gains are subject to normal tax. CGT is not a separate tax.
References in this chapter to the Schedule are references to the Eighth Schedule, while references to
paragraphs are references to paragraphs of the Eighth Schedule. The following figure illustrates how
CGT is dealt with in this chapter:
603
Calculation of taxable
Scope of CGT (17.2)
capital gain or
assessed capital loss
(17.5)
Asset Disposal
Consider exclusions,
(17.6) (17.7) roll-overs, attributions
Basic rules: and limitations (17.10)
Building blocks
(17.4)
Base cost Proceeds Consider the different

(17.8) (17.9) entities and special
rules (17.11 & 17.12)
Persons liable (17.3)
Final steps (17.13)
17.2 The scope of CGT

While the Eighth Schedule deals with capital gains and losses on the disposal of assets, there is no
section in the legislation that prescribes whether a gain is capital or revenue in nature, except for
s 9C that deals with certain share disposals (refer to chapter 14) and par 14 of the First Schedule that
deals with the disposal of a plantation by a farmer (refer to chapter 22).
To determine whether the disposal of an asset will result in a capital gain, it first has to be determined
whether the proceeds from the disposal are revenue or capital in nature by applying the relevant
principles established in South African case law. If the proceeds from the disposal are regarded as
revenue in nature, it will be included in gross income in the framework for the calculation of taxable
income and will not be regarded as proceeds for the purposes of the calculation of a capital gain or
loss.
l Proceeds that are taken into account for normal tax purposes as gross
income are specifically excluded from the proceeds that are used to calculate
a capital gain or loss for CGT purposes.
Please note!
l Any expenditure allowed as a deduction for normal tax purposes is excluded
in a similar way from the base cost that is used to calculate a capital gain or
loss for CGT purposes.
As a general rule, the principal Act takes precedence over the Eighth Schedule. Whatever is included
in gross income should not be taxed under the Eighth Schedule. The same applies to expenditure
incurred – any amount claimed as a deduction for tax purposes cannot be included in base cost.
This brings one to the golden rule: all gains must either be dealt with under the principal Act or under
the Eighth Schedule.
The following diagram illustrates the effect of this golden rule:
Proceeds from Provisions Calculation of gain where asset is
Include in taxable income
disposal applicable sold
Revenue in nature Principal Act Include proceeds (or recoupment) The amount is included
in gross income. in gross income.
Deduct expenditure or allowance
in terms of the principal Act.
Capital in nature Eighth Schedule Calculate proceeds (exclude any Apply inclusion rate to the
gross income amounts). amount and include only
Deduct base cost (exclude any that portion in taxable in-
deduction allowed in terms of the come using the provisions
principal Act). of the Eighth Schedule.
604
17.2–17.3 Chapter 17: Capital gains tax (CGT)
The following example illustrates the way a gain should be treated in terms of both the principal Act
and the Eighth Schedule when an asset is sold:
Example 17.1. Treatment of a gain when an asset is sold
Kunene (Pty) Ltd purchased a second-hand manufacturing machine for R500 000 (excluding
VAT) on 1 November 2021 and brought it into use in a process of manufacture on that date.
Kunene’s year-end is 31 December. In May 2022 the machine was sold for R650 000 (excluding
VAT) and not replaced. The machine was used in a process of manufacture until May 2022. No
other assets have been disposed of during the year ended 31 December 2022. Kunene (Pty) Ltd
had no assessed capital loss for the year ended 31 December 2021.
Assume that Kunene’s taxable income for the year ended 31 December 2022, before taking the
above information into account, is R1,2 million.
Calculate the taxable income of Kunene (Pty) Ltd for the year of assessment ended 31 December
2022. Indicate how the transactions concerning the machine affect other taxable income,
showing the net effect of the principal Act separate from the net effect of the Eighth Schedule.
SOLUTION
Calculation of taxable income:
Other taxable income ............................................................................... R1 200 000
Net effect of principal Act (excluding Eighth Schedule) on taxable
income:
Less: Section 12C allowance (R500 000 × 20%) .................................... (R100 000)
Plus: Section 8(4)(a) recoupment
(R650 000 limited to R500 000 less R300 000 tax value) .............. 200 000 100 000
Net effect of Eighth Schedule on taxable income:

Calculate proceeds (exclude any income taxed in terms of the
principal Act):
Selling price .............................................................................................. 650 000
Less: Section 8(4)(a) recoupment ............................................................ (200 000)
R450 000
Calculate base cost (exclude any deduction allowed in terms of the
principal Act):
Cost price ................................................................................................. R500 000
Less: Section 12C allowances (R100 000 (2021) + R100 000 (2022)) ..... (200 000)
R300 000
Net capital gain:
Proceeds................................................................................................... R450 000
Less: Base cost ........................................................................................ (300 000)
R150 000
Taxable capital gain (@ 80% inclusion rate for companies) included in
taxable income ......................................................................................... R120 000 120 000
Taxable income ........................................................................................ R1 420 000
When considering the scope of CGT, it is also important to consider that the Eighth Schedule only
applies to the disposal of assets on or after 1 October 2001 (also referred to as ‘the valuation date’).
Because the Eighth Schedule only applies to the disposal of assets on or after ‘the valuation date’,
the valuation date value of pre-valuation date assets needs to be determined in order to exclude the
portion of the capital gain that relates to the period before 1 October 2001. The calculation of the
valuation date value is discussed in 17.8.9.
17.3 Persons liable for CGT (par 2)

The Eighth Schedule refers to a person rather than a taxpayer, which means that every person is sub-
ject to the CGT rules contained in the Eighth Schedule, whether that person is chargeable with tax
and required by the Act to furnish a return, or not. A person includes natural persons and persons
other than natural persons like companies, trusts, etc.
605
Both residents and non-residents are subject to the provisions of the Eighth Schedule.
When dealing with any tax consequences (including capital gains tax) of non-
residents, regard should firstly be given to the provisions of any double taxation
Please note! agreements between South Africa and the non-resident’s country of residence.
Section 108 of the Act provides that where a double taxation agreement is
applicable, it supersedes the provisions of the Act.
17.3.1 Residents (par 2(1)(a))

South Africa has a residence-based tax system, which means that residents are taxed on their world-
wide income, irrespective of where their income was earned. CGT works on the same principle, in
that residents pay tax on capital gains resulting from the disposal of assets situated anywhere in the
world, irrespective of the type of asset it is or where in the world it is located.
17.3.2 Non-residents (par 2(1)(b) and par 2(2))

Contrary to the rules for residents, non-residents are only subject to CGT in South Africa on the
disposal of the following assets:
l immovable (fixed) property situated in South Africa
l any interest or right to or in immovable property situated in South Africa, and
l any assets (movable or immovable) that are effectively connected with a permanent establish-
ment of that non-resident in South Africa.
A permanent establishment is defined in the OECD Model Tax Convention as ‘a

Please note! fixed place of business through which the business of an enterprise is wholly or
partly carried on’. This can include, for example, a branch or a factory of a non-
resident situated in South Africa.
Non-residents are not only subject to CGT on the disposal of physical immovable property situated in
South Africa, but also on the disposal of any ‘interest’ in immovable property that is situated in South
Africa.
An ‘interest’ in immovable property situated in South Africa includes
l equity shares held in a company
l the ownership or right to ownership of any other entity (including a trust), or
l a vested interest in the assets of a trust.
This means that if a non-resident disposes of his interest in immovable property (for example equity
shares in a company – see meaning of ‘interest’ above), and
l 80% or more of the market value of his interest at the time of its disposal is directly or indirectly
attributable to immovable property situated in South Africa (whether held as trading stock or not)
or any interest or right to or in such immovable property, and
l the non-resident (together with his connected persons, if applicable), directly or indirectly, holds
at least 20% of the interest*,
then the resulting gain that the non-resident makes on the disposal of the interest will be subject to
CGT.
* This 20% rule does not apply where the interest is held in a vested trust.
l Immovable property includes rights to variable or fixed payments as consider-

ation for the working of, or the right to work mineral deposits, sources and
other natural resources in South Africa.
l It is not clear whether the company referred to in par 2(2) must be incorpor-
ated in South Africa. From the wording, it appears that this provision applies to
Please note! both South African and foreign companies. Also note that the interest can be
held indirectly. This provision may therefore be extremely difficult to administer
in practice.
l Section 9J deems any direct or indirect interest of a non-resident person in
immovable property situated in South Africa as South African source assets,
even if the interest is held for revenue purposes as trading stock. The disposal
of such an interest by the non-resident could therefore trigger normal tax.
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Example 17.2. Non-residents and CGT

A resident of Nigeria (a natural person) owns 30% of a Nigerian company. The Nigerian com-
pany holds
l property in Nigeria with a market value of the equivalent of R1 million, and also
l 50% of the shares in a South African company that only owns property in South Africa with a
market value of R10 million.
Assume that the natural person and Nigerian company are both non-residents for South African
income tax purposes and that they intend to dispose of their interests.
(a) Determine whether the Nigerian company will be subject to CGT in South Africa if it dis-
poses of its interest in the South African company.
(b) Determine whether the Nigerian resident (the natural person) will be subject to CGT in South
Africa if he disposes of his interest in the Nigerian company.
SOLUTION (a)
If the Nigerian company disposes of its interest in the South African company:
l The Nigerian company (a non-resident) owns equity shares in a company (the South African
company).
l 80% or more of the market value of its interest in the company relates to immovable property
in South Africa (the South African company only owns property in South Africa, i.e., 100% of
R5 million).
l The Nigerian company holds at least 20% of the interest in the South African company (it
owns 50% of the equity shares).
As all the requirements for an ‘interest in immovable property’ situated in South Africa are met,
the Nigerian company will be subject to CGT in South Africa if it disposes of its interest in the
South African company.
SOLUTION (b)
If the Nigerian resident (the natural person) disposes of his interest in the Nigerian company:
l The Nigerian resident (a non-resident) owns equity shares in a company (the Nigerian company).
l 80% or more of the market value of his interest in the Nigerian company relates to immov-
able property in South Africa. The Nigerian company owns property in Nigeria worth
R1 million and 50% of the shares in the South African company that owns only immovable
property in South Africa worth R5 million (50% × R10 million). The total value of the assets of
the Nigerian company is therefore R6 million. Of this R6 million, R5 million is attributable to
immovable property in South Africa (the interest in the South African company). R5 million/
R6 million = 83%, which exceeds the 80% required.
l The Nigerian resident holds at least 20% of the interest in the Nigerian company (he owns
30% of the equity shares).
As all the requirements for an ‘interest in immovable property’ situated in South Africa are met,
the Nigerian resident will therefore also be subject to CGT in South Africa if he disposes of his
interest in the Nigerian company.
Remember
The worldwide assets of residents fall within the South African CGT net. For non-residents, only
immovable property situated in South Africa, an interest or right to or in immovable property
situated in South Africa and any assets effectively connected with a permanent establishment in
South Africa fall within the South African CGT net.
17.3.3 Withholding tax applicable to the disposal of immovable property in South Africa by
non-residents (s 35A)
As mentioned in 17.3.2, non-residents in South Africa are subject to CGT when they dispose of
immovable property situated in South Africa. This includes an interest in immovable property situated
in South Africa.
In order to facilitate the collection of this normal tax on capital gains from the non-resident, s 35A of
the Act was introduced. Section 35A provides that a certain percentage of the proceeds from the
disposal of immovable property in South Africa by a non-resident (the seller) must be withheld by the
purchaser and paid over to SARS.
607
The obligation to withhold the following amounts from the amount payable by him to the seller rests
on the purchaser:
l 7,5% of the amount payable if the seller is a natural person
l 10% of the amount payable if the seller is a company, or
l 15% of the amount payable if the seller is a trust.
The purchaser must complete a declaration (form NR02) and a third-period payment advice in the
name of the seller (form IRP6(3)). Both these forms can be obtained from www.sars.gov.za. These
forms must then be submitted, together with the payment of the amount withheld, to SARS within
14 days (if the purchaser is a resident) or 28 days (if the purchaser is a non-resident).
These withholding tax provisions, however, do not apply if the amounts payable by the purchaser to
the seller in respect of the acquisition of the property in total do not exceed R2 million. See
chapter 21 for a detailed discussion of s 35A. Withholding tax on immovable property in terms of
s 35A is not a final tax, but should rather be seen as a prepayment of the normal tax on the capital
gain of the non-resident seller.
Example 17.3. Withholding of tax from non-resident individual
Marco, a non-resident, sells a South African residential property to Thabo, a South African
resident, for R10 million. The date of the sale is 10 June of the current year of assessment. Thabo
pays the R10 million using R800 000 of his cash savings and R9,2 million by means of a mort-
gage bond.
Determine whether the buyer (Thabo) must withhold any tax from the selling price of R10 million
in terms of s 35A.
SOLUTION
Thabo must withhold R750 000 (7,5% of R10 million) from the amount paid to Marco. Marco will
only receive R9,25 million of the selling price. The R750 000 must be paid over to SARS within
14 days after 10 June.
The R750 000 withheld in terms of s 35A is a prepaid tax in respect of Marco’s liability for normal
tax for the current year of assessment. The s 35A withholding tax is therefore not a final tax.
Marco (the non-resident) still needs to submit an income tax return to SARS.
17.4 The basic rules of CGT

Capital gains that are taxed are those derived on assets that are disposed of on or after 1 October
2001 (the date CGT was introduced).
l Where assets were acquired before 1 October 2001, the increase in the value of the asset up to
1 October 2001 is excluded for CGT purposes. CGT is only levied on the increase on or after
1 October 2001.
l Where assets were acquired on or after 1 October 2001, the full increase in the value of the asset
is included for CGT purposes.
In order to calculate a capital gain or loss, four elements have to be determined:
(1) There has to be an asset. The definition is wide enough to include virtually any asset.
(2) There must have been a disposal of the asset during the year of assessment. A disposal is the
event that triggers CGT, which includes deemed disposals.
(3) The base cost of the asset must be determined. In general terms, the base cost of an asset
includes the following:
l acquisition cost
l improvement cost
l direct cost in respect of the acquisition and disposal of the asset.
(4) The proceeds on disposal of the asset must be determined (normally referred to as the selling
price of the asset).
608
Remember
These four elements (asset, disposal, base cost and proceeds) are considered to be the four
building blocks of CGT. All four elements are required to calculate a capital gain or loss. These
four building blocks are defined in par 1 of the Eighth Schedule.
17.5 Determination of taxable capital gain and assessed capital losses

(paras 3 to 10)
If a disposal or deemed disposal of an asset occurred during the year of assessment, the capital
gain or loss should be calculated using the following formula:
Proceeds LESS Base cost EQUALS Capital gain/loss
The following flowchart illustrates the process of determining the taxable capital gain to be included
in taxable income:
Income Tax Act Eighth Schedule

Gross income .............................. xxx Disposal or deemed disposal of asset
Less: Exempt income .................. (xx)
Income ........................................ xxx Proceeds less base cost
Less: Deductions ....................... (xx)
Plus: Taxable capital gain ........... xxx Capital gain Capital loss
Less: s 11F deduction ................ (xx)
Less: s 18A donations (Apply exclusion/roll-overs)
deduction .................................... (xx)
= Taxable income ....................... xxx (Apply attributions/limitations)
Apply rates of tax ........................ xxx
Less: Rebates ............................. (xx) Sum of all capital gains and losses
= Normal tax liability .................... xxx
Reduce by annual exclusion
(Only natural persons and special trusts)
Aggregate capital gain Aggregate capital loss
Deduct previous assessed capital loss
Net capital gain Assessed capital loss
@ Inclusion rate Carried forward
Taxable capital gain
The following terms in the flowchart can be further explained as follows:

Capital gains or losses (paras 3 and 4)
l Where the proceeds exceed the base cost of the asset, a capital gain is calculated.
– Various capital gains must be disregarded or excluded (see 17.10.1 to 17.10.2).
– Certain capital gains may be rolled over. The recognition of these gains is delayed for CGT
purposes until a future event (see 17.10.3).
– Certain gains resulting from a donation can be attributed to the donor (see 17.10.4).
l Where the base cost exceeds the proceeds of the asset, a capital loss is calculated.
– Various capital losses must be disregarded or limited (see 17.10.5).
609
A capital gain or loss is determined separately in respect of each asset disposal

Please note!
during a particular year of assessment.
Certain events could require that a capital gain or loss that was calculated on the disposal of an
asset in a previous year of assessment, will have to be redetermined in the current year of assess-
ment, for example where contracts are cancelled (see 17.8.5 and 17.13.1).
Sum of all capital gains and losses
Once the capital gains or losses for each asset that is disposed of during a year of assessment are
calculated, all the capital gains and losses are added together (aggregated or totalled).
Annual exclusion (par 5)
Natural persons and special trusts are entitled to an annual exclusion of R40 000 against the sum of
all capital gains and losses. The annual exclusion is increased to an amount of R300 000 during the
year of assessment in which the taxpayer dies. There is no annual exclusion available to companies
and ordinary trusts.
A ‘special trust’, as defined in par (a) of the definition in s 1(1) of the Act, is an entity that is created
solely for the benefit of a person or persons (provided that they are relatives) with a disability as
defined. The disability must prevent them from earning sufficient income for their maintenance or
from managing their own financial affairs.
Not all special trusts qualify for the annual exclusion. A ‘special trust’, as defined in par (b) of the
definition in s 1(1) of the Act, includes a testamentary trust with at least the youngest beneficiary
younger than 18 years of age. This type of trust is not considered a special trust for CGT purposes
and will not qualify for the annual exclusion or any of the special provisions in the Eighth Schedule
available to par (a) special trusts. The only exception to this is the CGT inclusion rate of 40% that is
available to both special trusts as defined (see below for further information regarding the CGT
inclusion rate).
Remember
Paragraph 10 determines the inclusion rate of a special trust (which includes both paras (a) and
(b) of the definition) at 40% BUT the rest of Eighth Schedule only refers to a special trust as
contemplated in par (a) of the definition of the Act.
Apart from a special trust, there is no annual exclusion available to legal persons such as
companies and trusts.
The unused annual exclusion available to natural persons and special trusts cannot be carried for-
ward to a following year of assessment. For example, if an individual realises a capital gain of R5 000
in a specific year, then no taxable capital gain would be included in his taxable income for that year
of assessment. This will result in the ‘unused’ balance of the annual exclusion of R35 000 (R40 000 –
R5 000) being ‘lost’ as it cannot be carried forward to the following year.
Aggregate capital gain or loss (paras 6 and 7)
An aggregate capital gain or loss is the sum of a person’s capital gains and losses for the year (i.e.,
the total of all capital gains and losses), less the annual exclusion for the year (applicable only to
natural persons and special trusts). It should be noted that a capital loss is also reduced by the
annual exclusion. For example, if an individual realises a capital loss of R5 000 in a specific year,
there will be no assessed capital loss for that year of assessment, and also no capital loss to carry
forward to the following year of assessment.
Remember
The annual exclusion not only reduces a natural person or special trust’s total capital gains, but
also reduces total capital losses (if applicable).
Net capital gain or assessed capital loss (paras 8 and 9)

A person’s net capital gain or assessed capital loss for the year of assessment is the
l aggregate capital gain or loss for the current year
l less the assessed capital loss brought forward from the previous year.
If there is an assessed capital loss in the current year, it cannot be deducted from a person’s taxable
income. It is carried forward to the following year of assessment. The assessed capital loss is carried
forward regardless of whether the person (which includes a company) is carrying on a trade in a
following year of assessment or not.
610
If a person has a net capital gain in the current year, it must be multiplied by the applicable inclusion
rate, and the result included in the taxable income for that year.
If a person has an assessed capital loss, it must not be multiplied by the inclusion rate. Instead, the
full assessed capital loss is carried forward to the following year of assessment.
Taxable capital gain (par 10)

The inclusion rates of net capital gains into the normal income tax calculation are as follows (par 10):
Natural persons and special trusts ..................................................................................................... 40%

An insurer’s individual policyholder fund ............................................................................................ 40%
An insurer’s untaxed policyholder fund .............................................................................................. 0%
An insurer’s company policyholder fund and a risk policy fund ......................................................... 80%
Companies, close corporations, ordinary trusts, cooperatives and other incorporated and
unincorporated bodies ........................................................................................................................ 80%
A partnership is not a separate taxable entity, therefore the capital gains realised by a partnership will
be brought into account proportionately in relation to each partner at the applicable inclusion rate.
Public benefit organisations (PBOs) and other entities that are exempt from normal income tax are in
most circumstances also exempt from CGT (see 17.10.2).
Since a person’s taxable capital gain is added to other taxable income and subject to normal tax, the
effective maximum rates of tax payable on capital gains in the 2022 year of assessment are as follows.
(Please note that the effective maximum rate for companies, close corporations and other bodies
decreases to 21,6% when the tax rate is reduced to 27% with effect for tax years commencing on or
after 1 April 2022.)
Natural persons and special trusts (assuming the person is taxed at the
maximum marginal rate) ............................................................................................ 40% × 45% = 18%
Ordinary trusts ........................................................................................................... 80% × 45% = 36%
Companies, close corporations and other bodies ..................................................... 80% × 28% = 22,4%
Inclusion in taxable income

Once a person’s taxable capital gain has been determined, it is included in his taxable income in
terms of s 26A of the Act. The taxable capital gain may have an impact on the s 18A deduction for
donations to qualifying PBOs that limits the deductible amount to 10% of the taxpayer’s taxable
income. The taxable capital gain increases the s 18A limitation (refer to chapters 7 and 12 for further
information on s 18A).
The taxable capital gain may also have an impact on the s 11F deduction for retirement fund con-
tributions as it is taken into account when calculating the 27,5% limitation in respect of taxable
income (refer to chapter 7 for further information on s 11F).
Once the amount to be included in taxable income has been determined, the normal rates of tax are
applied to taxable income to determine the normal tax payable. The capital gain is therefore subject
to normal income tax.
Where the taxpayer has an assessed loss (not an assessed capital loss), the taxable capital gain will
reduce the assessed loss provided it is locally derived. Section 20 of the Act prevents the set off of a
foreign assessed loss against any amount derived from carrying on any trade in South Africa. It also
prevents a foreign assessed loss from being set off against a taxable capital gain, whether derived in
South Africa or not.
Example 17.4. Determination of taxable capital gain

Kabelo Zonke realises a capital gain of R60 000 on the sale of his holiday home, and a capital
loss of R10 000 on the sale of shares in his investment portfolio. He also earned other taxable
income of R200 000 during the same year of assessment. In the previous year of assessment, he
had an assessed capital loss of R4 000.
Determine Kabelo’s taxable capital gain and taxable income for the year.
611
SOLUTION
Calculation of taxable capital gain:
Capital gain on the sale of his holiday home ............................................................... 60 000
Capital loss on the sale of shares ................................................................................ (10 000)
Sum of capital gains and losses ................................................................................... 50 000
Less: Annual exclusion ................................................................................................ (40 000)
Aggregate capital gain ............................................................................................... 10 000
Less: Assessed capital loss (previous year) ................................................................ (4 000)
Net capital gain ............................................................................................................ 6 000
Taxable capital gain (@ 40%) ...................................................................................... 2 400
Other taxable income ................................................................................................... 200 000
Taxable capital gain..................................................................................................... 2 400
Taxable income............................................................................................................ 202 400
Example 17.5. Determination of assessed capital loss

Assume the same facts as in Example 17.4, except that Kabelo Zonke now realises a capital loss
of R110 000 on the sale of shares in his investment portfolio.
Determine Kabelo’s assessed capital loss and taxable income for the year.
SOLUTION
Capital gain on the sale of his holiday home ............................................................... 60 000
Capital loss on the sale of shares ................................................................................ (110 000)
Sum of capital gains and losses ................................................................................... (50 000)
Less: Annual exclusion ................................................................................................ 40 000
Aggregate capital loss ................................................................................................ (10 000)
Less: Assessed capital loss (previous year) ................................................................ (4 000)
Assessed capital loss .................................................................................................. (14 000)
Other taxable income ................................................................................................... 200 000
Assessed capital loss (cannot be set-off and is carried forward) ................................ nil
Taxable income............................................................................................................ 200 000
Note
Please note that the annual exclusion reduces the capital loss, and not the assessed capital
loss. Therefore, the capital loss is reduced with the annual exclusion in Year 1. Thereafter the
assessed capital loss of R14 000 is carried forward each year until an aggregate capital gain
arises. The assessed capital loss can then be set off against the aggregate capital gain.
As mentioned in 17.4, in order for a capital gain or loss to be calculated, all four building blocks have
to be determined:
(1) There has to be an asset (see 17.6).
(2) There must have been a disposal or a deemed disposal of the asset during the year of assess-
ment (see 17.7).
(3) The asset must have a base cost (see 17.8).
(4) There must be proceeds on the disposal of the asset (see 17.9).
Let us start off by looking at the first building block, an asset.
17.6 The definition of ‘asset’ (par 1)

There has to be an asset before a CGT event can take place. This is the first building block of CGT
(see 17.4).
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The definition of an ‘asset’ in par 1
Property of any nature, whether

l movable or immovable A right or an interest of
and any nature to or in such
l corporeal or incorporeal
property.
This excludes any currency, but in-
cludes any coin made mainly from gold
or platinum.
The definition above includes both non-capital assets (for example trading stock) and capital assets
(for example land and buildings).
Remember
When dealing with non-capital assets (for example trading stock), the following needs to be
kept in mind:
l Any amount already taken into account for income tax purposes will be excluded from
proceeds and base cost (refer to 17.2).
l When trading stock is acquired, the acquisition cost is claimed as a deduction in the
calculation of taxable income in terms of the general deduction formula. Trading stock will
therefore have a base cost of Rnil (acquisition costs less deduction allowed for normal tax
purposes).
l When trading stock is disposed of, the resultant proceeds are included in gross income.
Proceeds for CGT purposes will therefore also be Rnil (proceeds less amount already
taxed for normal tax purposes).
l The result of these exclusions will be a CGT effect of Rnil on the disposal of non-capital
assets (like trading stock) as the proceeds and base cost have already been taken into
account for normal income tax purposes.
The definition of an asset is wide enough to include virtually any asset. This includes immovable pro-
perty, listed or unlisted shares, gold coins, machinery, plant, vehicles, aircraft and trading stock.
Intellectual property, such as trademarks, copyright and goodwill are also included. Any debit loan
(whether interest bearing or not), fixed deposits, as well as outstanding debtors also fall within the
definition of an ‘asset’.
A deposit of cash with a bank does not constitute currency and it is not excluded
Please note! from the definition of an asset. The asset is the right to claim the amount deposited
from the bank.
Rights that can be disposed of or turned into money (for example personal rights) are also con-
sidered assets for CGT purposes, for example land claims (see 17.10.2).
*
Remember
l The definition of an asset excludes currency, but includes coins that are made mainly of
gold or platinum. It also includes any crypto asset, such as Bitcoin since SARS does not
regard cryptocurrencies as a currency for purposes of the Act.
l Krugerrands, for example, will be considered to be an asset.
l Where cash is donated, there would be no capital gains tax as cash is not an asset
(currency is excluded). Donations tax would, however, need to be considered.
17.7 Disposals (paras 11, 12 and 13)

For a transaction to be subject to CGT it must either qualify as a disposal or as a deemed disposal
(second building block of CGT – see 17.4). Disposals, as well as specific events that are deemed not
to be disposals, are listed in par 11, while events that are deemed disposals are listed in par 12.
Paragraph 13 deals with the timing of disposals. It is important to determine whether a transaction is
a disposal or not, as CGT is not levied on non-disposals.
613
17.7.1 Disposal events (par 11(1))

A disposal arises when there is an event, act, forbearance or operation of law that results in the
creation, variation, transfer or extinction of an asset and includes the following occurrences:
Par 11(1) Disposal event
(a) Sale, donation, expropriation, conversion, granting, cession, exchange or any other alienation
or transfer of ownership of an asset.
(b) Forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release,
waiver, renunciation, expiry or abandonment of an asset.
(c) Scrapping, loss or destruction of an asset.
(d) Vesting of an interest in a trust asset in a beneficiary.
(e) Distribution of an asset by a company to a holder of shares.
(f) Granting, renewal, extension or exercising of an option.
(g) Decrease in value of a person’s interest in a company, trust or partnership as a result of a
‘value-shifting arrangement’.
Paragraph 11 defines a disposal in very broad terms. In general terms, a disposal has taken place
where a person held an asset at the beginning of a year and no longer holds it at the end of the year.
Example 17.6. Exchange of an asset is also deemed to be a disposal
Jacob Smith purchased a piece of land in 2011 for R200 000. In 2021 he entered into an
exchange transaction with Zanele Dube. The terms of the transaction were as follows:
l Jacob agreed to give Zanele land valued at R300 000 plus cash of R20 000.
l Zanele, in exchange, agreed to give Jacob her holiday home, valued at R320 000.
l In 2022, Jacob sold the holiday home for R340 000.
Calculate the CGT effects of these transactions for Jacob Smith.
SOLUTION
Land
In 2011, Jacob acquired the land for a base cost of R200 000.
As a result of the exchange with Zanele, there has been a disposal of the land in terms of
par 11(1)(a). As this is a barter transaction, the proceeds are equal to the market value of the
asset acquired. Jacob received a holiday home valued at R320 000, but only R300 000 of this
amount relates to the land. The remaining R20 000 relates to the cash paid to Zanele. Therefore,
in 2021, Jacob will have a capital gain of R100 000 (R300 000 (R320 000 – R20 000) proceeds
less R200 000 base cost) on the sale of the land.
Holiday home
The base cost of the holiday home is equal to the amount of expenditure incurred in acquiring it.
This is equal to the value by which Jacob’s assets have been reduced as a result of the
transaction. Jacob gave up land valued at R300 000 plus cash of R20 000, decreasing his assets
by R320 000. Therefore, in 2022, Jacob will have a capital gain of R20 000 (R340 000 proceeds
less R320 000 base cost).
17.7.2 Non-disposals (par 11(2))

The following events will not be regarded as disposals of assets and will therefore not give rise to
CGT:
Par 11(2) Non-disposal events
(a) The transfer of an asset by a person as security for a debt; or the release of the security by the
creditor who transfers the asset back to that person when the security is released.
(b) The issuing, cancellation, or extinction of a share in a company; or the granting of an option to
acquire a share or a certificate acknowledging or creating a debt owed by the company.
(c) The issuing by a portfolio of a collective investment scheme (unit trust) of participatory in-
terests; or the granting by the scheme of an option to acquire participatory interests in the
scheme.
(d) The issuing of debt by or to that person.
continued
614
Par 11(2) Non-disposal events

(g) A disposal by a person in order to correct an error in the registration in the deeds registry of
immovable property in his name.
(h) A transaction under which any security (or bond in respect of securities lending arrangements
entered into on or after 1 January 2017) is lent by a lender to a borrower under a ‘securities
lending arrangement’.
(i) The vesting of a person’s asset in the Master of the High Court or in a trustee in consequence
of the sequestration of the estate of his or her spouse, or the subsequent release of the asset.
(k) When the right to acquire a marketable security (for example a share) is ceded or released,
whether in whole or in part, for a consideration that consists of or includes another right to
acquire a marketable security in the case of directors of companies or employees to which
s 8A (employee share incentive arrangements prior to 26 October 2004) was applicable.
(l) In respect of shares held in a company, where that company
l subdivides or consolidates those shares;
l converts shares of par value to no par value or of no par value to par value, or
l converts shares (either conversion of a close corporation to a company or the conversion
of a co-operative to a company)
solely in substitution of shares held, and
– the proportionate participation rights and interests remain the same, and
– no other consideration (for example cash) passes in consequence of that subdivision,
consolidation or conversion.
(m) Where a person exchanges a qualifying equity share for another qualifying equity share as
contemplated in s 8B (broad-based employee share plans).
(n) Where any share (or bond in respect of any collateral arrangements entered into on or after
1 January 2017) has been transferred in terms of a collateral arrangement.
(o) Where a person disposed of an asset to a person and reacquired that asset from the same
person because of the cancellation or termination of the contract and both persons are
restored to their former positions in the same year of disposal.
Although the issuing of a share in a company is not regarded as a disposal

Please note! (par 11(2)(b)), the anti-avoidance provisions contained in par 43A provide for
circumstances where the issuing of shares will lead to certain CGT conse-
quences (refer to chapter 20).
17.7.3 Deemed disposals (par 12 and ss 9H and 9K)

Certain events are deemed as disposals for the purpose of CGT. The deemed disposal provisions
(excluding the deemed disposal provisions relating to death) can be found in par 12 of the Eighth
Schedule as well as ss 9H and 9K of the Act.
These deemed disposals generally have two purposes:
l firstly, to calculate a capital gain or loss in respect of certain situations (for example, when moving
an asset out of the CGT net), and
l secondly, to determine the base cost of an asset in respect of certain situations (for example,
when moving an asset into the CGT net).
In terms of the general deemed disposal rules, a person is deemed to have disposed of an asset at
market value and is deemed to have immediately reacquired the asset at expenditure equal to that
market value (where applicable). The expenditure (market value) at the time of reacquisition must be
treated, where applicable, as an amount actually incurred for the purposes of par 20. In other words,
the market value at the time of reacquisition then become the asset’s base cost.
Remember
In some situations, the deemed disposals under par 12 are used to trigger a capital gain or loss,
and in other cases to establish a base cost equal to market value.
The following events are treated as deemed disposals in terms of par 12 and ss 9H and 9K of the Act:
(1) Deemed disposal if a person commences to be a resident (par 12(2)(a)(i))
A non-resident who becomes a resident moves fully into the CGT net and will be subject to CGT
on his worldwide assets. However, any capital gains or losses that are attributable to the period
of ownership prior to the non-resident becoming a resident must be disregarded.
615
Remember
The non-resident’s South African source assets (in terms of par 2) have already been included in
the CGT net, prior to becoming a resident.
The non-resident is deemed to have disposed of each of his assets, other than those specif-
ically excluded from the ambit of the deemed disposal (as discussed below), at proceeds
equal to its market value as at the date before that person becomes a resident and to have
immediately reacquired it at a cost equal to the same market value. This cost will then be the
base cost of the asset. This rule does not apply to assets that were already within the CGT tax
net before the person became a resident. This deemed disposal is subject to the provisions of
par 24 (see 17.8.8).
This deemed disposal rule does not apply to
l immovable property (or an interest or right to or in immovable property) situated in South
Africa or assets effectively connected with a ‘permanent establishment’ of that person in
South Africa, and
l any right to acquire any marketable security contemplated in s 8A (employee share
incentive arrangements prior to 26 October 2004).
Remember
When a non-resident becomes a resident, the deemed disposal in terms of par 12 results in the
establishment of a base cost equal to market value and does not trigger a capital gain or loss.
(2) Deemed disposal if a person ceases to be a resident (s 9H(2) for persons other than
companies and s 9H(3)(a) for companies)
Where a taxpayer ceases to be a resident of South Africa, that person is deemed to have
disposed of all of his assets (with certain exclusions) for proceeds equal to their market value
on the date before that person ceases to be a resident and to have immediately reacquired
them at a cost equal to the same market value.
This would be the case even if the taxpayer continues to have some operations in South Africa.
An example of this is where a taxpayer, who is a natural person, emigrates to another country
but still rents out property he owns in South Africa. The taxpayer is deemed to have disposed of
all his assets at their market value on the day before ceasing to be a resident. Excluded from
this deemed disposal are assets that will remain within the CGT net (typically immovable
property located within South Africa, since this type of asset is subject to CGT irrespective of
the residency status of the owner). The taxpayer is therefore deemed to have made a capital
gain or loss of an amount equal to the market value of the relevant asset less its base cost.
The deemed disposal occurs on the date before the taxpayer ceases to be a resident and any
double taxation agreement between the taxpayer’s new country of residence and South Africa
must therefore be ignored. The effect of this is that any double taxation agreement provision
that exempts the taxpayer from a possible CGT exit charge in South Africa, must be ignored.
Section 9H was amended after a decision of the Supreme Court of Appeal (in the Tradehold
Limited case) to confirm that the time of disposal takes place while the taxpayer is still a
resident, i.e., just before the taxpayer ceases to be a resident.
Remember
The deemed disposal rule in terms of s 9H is often referred to as the exit charge. A cessation of
tax residence will take place in the following circumstances:
l for a person other than a natural person cessation of tax residence takes place when that
person moves its place of effective management to another country, and
l for a natural person cessation of tax residence takes place when that individual permanently
leaves South Africa.
This deemed disposal rule does not apply to

l immovable property situated in South Africa (excluding an interest or right to or in immovable
property in South Africa – see ‘please note’ block below)
l assets attributable to a ‘permanent establishment’ of that person in South Africa
l qualifying equity shares in terms of s 8B (broad-based employee share plans) granted to
the person less than five years before the date on which the person ceases to be a resident
616
l equity instruments in terms of s 8C (employee share incentive arrangements after 26 Octo-

ber 2004) that have not yet vested at the time that the person ceased to be a resident, and
l any right to acquire any marketable security contemplated in s 8A (employee share
incentive arrangements prior to 26 October 2004).
A person who ceases to be a South African resident is deemed to have also

disposed of his interests in or right to immovable property (at least 20% interest in
an entity if 80% of the market value of the interest in that entity is attributable to
South African immovable property – see 17.3.2). The person reacquires the
Please note! interest in immovable property at the same market value. The interest remains
within the CGT net and if the person, as non-resident, then later disposes of the
interest, a further capital gain or loss can arise. The further capital gain or loss will
be in respect of the difference between the market value of the interest on the day
before ceasing to be a resident and the proceeds on disposal of the interest.
In addition to the possible CGT exit charge upon ceasing to be a resident, companies that
cease to be resident are also subject to dividends tax consequences (refer to chapter 19 for
further information with regard to dividends tax). Companies that cease to be resident are
deemed to have declared and paid a dividend in specie that is calculated as the difference
between
l the market value of all the shares in that company on the day immediately before the day on
which the company ceases to be a resident, and
l the sum of the contributed tax capital of all the classes of shares in the company on the
same date.
For dividends tax purposes such a dividend is deemed to have been declared to the share-
holders of the company according to their effective interest in the shares. The company will be
liable for the dividends tax.
See par 3.2.3 in chapter 3 for a detailed discussion of s 9H.
Remember
When a person ceases to be a resident, the deemed disposal in terms of s 9H triggers a capital
gain or loss.
(3) Deemed disposal if a foreign company commences to be a controlled foreign company (CFC)
(par 12(2)(a)(ii))
A foreign company that becomes a CFC moves fully into the CGT net for purposes of s 9D.
The foreign company is deemed to have disposed of each of the relevant assets at proceeds
equal to its market value as at the date before that company becomes a CFC and to have
immediately reacquired it at a cost equal to the same market value. This cost will then be the
base cost of the asset.
Remember
When a foreign company becomes a CFC, the deemed disposal in terms of par 12 results in the
establishment of a base cost equal to market value and does not trigger a capital gain or loss.
(4) Deemed disposal if a controlled foreign company (CFC) ceases to be a CFC other than by
becoming a resident (s 9H(3)(b))
Where a foreign company ceases to be a CFC, other than by becoming a resident, it is a
deemed disposal for CGT (and income tax) purposes as the CFC moves out of the CGT net.
The CFC is deemed to have disposed of all its assets at their market value on the day before
ceasing to be a CFC and to have immediately reacquired it at cost equal to the same market
value. Excluded from this deemed disposal are assets that will remain within the CGT net
(typically immovable property located within South Africa, since this type of asset is subject to
CGT irrespective of the CFC status of the owner). The CFC is therefore deemed to have made a
capital gain or loss of an amount equal to the market value of the relevant assets less its base
cost (see chapter 3 for a detailed discussion of s 9H). Where a foreign company ceases to be a
CFC as a result of becoming a resident, the CGT consequences are dealt with in terms of par
12(4) (see point (5) of this paragraph).
617
Remember
When a CFC ceases to be a CFC other than by becoming a resident, the deemed disposal in
terms of s 9H triggers a capital gain or loss.
(5) Deemed disposal if a controlled foreign company (CFC) ceases to be a CFC as a result of
becoming a resident (par 12(4))
A foreign company that ceases to be a CFC as a result of becoming a resident moves fully into
the CGT net and will be subject to CGT on its worldwide assets. Where a company ceases to
be a CFC as a result of becoming a resident, it is deemed to have disposed of all its assets at
their market value on the day before ceasing to be a CFC and to have immediately reacquired
them at cost equal to the same market value. Excluded from this deemed disposal are assets
that are already within the CGT net (typically immovable property located within South Africa,
since this type of asset is subject to CGT irrespective of the residency status of the owner).
Remember
When a CFC ceases to be a CFC by becoming a resident, the deemed disposal in terms of
par 12 results in the establishment of a base cost equal to market value and does not trigger a
capital gain or loss.
(6) Deemed disposal where a non-resident’s asset becomes an asset of his permanent establish-
ment in South Africa by any means other than acquisition (par 12(2)(b)(i))
When an asset of a non-resident becomes an asset of that person’s permanent establishment in
South Africa, such an asset is deemed to have been disposed of by the non-resident at
proceeds equal to the market value of the asset as at the date before the asset becomes an
asset of the permanent establishment. The non-resident is further deemed to have immediately
reacquired that asset at cost equal to the same market value. There is no CGT effect, as only
the base cost of the asset is established for future CGT calculations.
Remember
When a non-resident moves assets into his permanent establishment in South Africa (i.e., into the
CGT net), the deemed disposal in terms of par 12 results in the establishment of a base cost
equal to market value and does not trigger a capital gain or loss.
(7) Deemed disposal if an asset ceases to be an asset of a non-resident’s permanent establishment

in South Africa by any means other than a disposal under par 11 (par 12(2)(b)(ii))
There is an immediate CGT effect as a capital gain or loss will be determined on the difference
between the market value of the asset on the day before the asset ceases to be an asset of the
permanent establishment (proceeds) and the base cost of the asset. There will be no CGT
effect if that asset is sold at a later stage as the asset then falls outside the CGT net.
Remember
When a non-resident moves assets out of his permanent establishment in South Africa (i.e., out of
the South African CGT net), the deemed disposal in terms of par 12 triggers a capital gain or
loss.
(8) Deemed disposal when a capital asset becomes trading stock (non-capital asset) (par 12(2)(c))
A person is deemed to have disposed of a capital asset if it becomes trading stock, for
example when the intended use of land is changed from a capital asset to trading stock by
subdividing the land and selling the plots. The capital gain will be calculated as the market
value of the capital asset on the date before the change in intention (proceeds) less the base
cost of the asset.
In terms of the rules dealing with trading stock, the market value of the capital asset on the date
before it becomes trading stock will be deductible as the cost of the trading stock for normal
tax purposes (s 22 of the Act).
618
Example 17.7. Deemed disposal when a capital asset becomes trading stock
Nthabi (Pty) Ltd deals in immovable property and land. Its financial year ends on the last day of
February. Nthabi’s land portfolio consists of 20 properties – 15 of these properties were acquired
with a speculative intention (i.e., they are owned as trading stock), while five of these properties
were acquired with a capital intention (i.e., they are owned as capital assets). On 31 January
2022 Nthabi changed its intention with regard to one of the five properties held as capital assets
and transferred the land to its speculative land portfolio (i.e., Nthabi changed its intention from
capital in nature to speculative in nature and this particular piece of land is now trading stock).
The original cost of the piece of land that was transferred to the speculative portfolio was
R500 000 when it was acquired in 2012. The market value of the piece of land for the entire
January 2022 was R1 500 000.
Determine the effect of the change of intention on Nthabi (Pty) Ltd’s taxable income for the 2022
year of assessment if you assume that this was the only CGT event in Nthabi’s 2022 year of
assessment.
SOLUTION
Nthabi (Pty) Ltd changed its intention from capital to revenue in nature when it moved the land
from a capital asset to trading stock.
In terms of the provisions of par 12 of the Eighth Schedule, a deemed disposal at market value
takes place on 30 January 2022 (in terms of par 13(1)(g)(i) the time of disposal in this case is the
date immediately before the day that the event occurs).
The change from capital asset to trading stock triggers the calculation of a capital gain or loss.
Proceeds (market value on 30 January 2022) .......................................................... R1 500 000
Less: Base cost........................................................................................................ (500 000)
Net capital gain (there are no other capital gains or losses) ..................................... 1 000 000
Taxable capital gain (@ 80%) ................................................................................... R800 000
Opening stock (s 22(2)(b) read together with s 22(3)(ii)) ......................................... (R1 500 000)
Closing stock (s 22(1)(a) read together with s 22(3)(ii)) ........................................... 1 500 000
Taxable capital gain .................................................................................................. 800 000
Taxable income......................................................................................................... R800 000
Remember
When a capital asset becomes trading stock, the deemed disposal in terms of par 12 triggers a
capital gain or loss. Where allowances were previously claimed on the capital asset, the allow-
ances are recouped in terms of s 8(4)(k)(iv).
(9) Deemed disposal when trading stock becomes a capital asset (par 12(3))
If a person does not dispose of trading stock, but instead begins holding it as a capital asset,
that person is deemed to have
l disposed of that trading stock the day before it ceased to be trading stock for a consid-
eration equal to market value (this is determined in terms of s 22(8)(B) of the Act), and
l immediately reacquired it at a base cost equal to the same amount (i.e., market value).
Remember
When trading stock becomes a capital asset, the deemed disposal in terms of par 12 results in
the establishment of a base cost equal to market value and does not trigger a capital gain or
loss.
In terms of the rules dealing with trading stock, the market value of the trading stock will be
included as a recoupment in the person’s income (in terms of s 22(8)). This market value will
then be regarded as expenditure actually incurred in calculating the base cost of the asset. On
any subsequent disposal of the asset, the capital gain or loss will be an amount equal to the
proceeds of the disposal less the base cost determined when the asset became a capital
asset.
619
Example 17.8. Deemed disposal when trading stock becomes a capital asset
Nthabi (Pty) Ltd deals in immovable property and land. Its financial year ends on the last day of
February. Nthabi’s land portfolio consists of 20 properties – 15 of these properties were acquired
with a speculative intention (i.e., they are owned as trading stock), while five of these properties
were acquired with a capital intention (i.e., they are owned as capital assets). On 31 January
2022 Nthabi changed its intention with regard to one of the 15 properties held as trading stock
and transferred the land to its investment land portfolio (i.e., Nthabi changed its intention from
speculative in nature to capital in nature and this particular piece of land is now a capital asset).
The original cost of the piece of land that was transferred to the investment portfolio was
R500 000 when it was acquired in 2012. The market value of the piece of land for the entire
January 2022 was R1 500 000.
Determine the effect of the change of intention on Nthabi (Pty) Ltd’s taxable income for the 2022
year of assessment if you assume that this was the only CGT event in Nthabi’s 2022 year of
assessment.
SOLUTION
Nthabi (Pty) Ltd changes its intention from revenue to capital in nature when it moved the land
from trading stock to a capital asset.
In terms of the provisions of par 12 of the Eighth Schedule, a deemed disposal at market value
takes place on 30 January 2022 (in terms of par 13(1)(g)(i) the time of disposal in this case is the
date immediately before the day that the event occurs).
The change from trading stock to capital asset does not trigger the calculation of a capital gain
or loss and is done to establish a base cost for the ‘new’ capital asset.
Calculation of CGT consequences:
The R1 500 000 market value is the ‘new’ base cost of the transferred land and will
be used for future disposals.
Opening stock (s 22(2)) ............................................................................................... (R500 000)
Recoupment (s 22(8) recoupment at market value) .................................................... 1 500 000
Taxable income............................................................................................................ R1 000 000
(10) Deemed disposal when a personal-use asset becomes a non-personal-use asset (excluding
disposals under par 11) (par 12(2)(d))
This situation will, for example, arise when a person starts using a personal computer for busi-
ness purposes; it therefore becomes a capital asset used in the trade of that person. The per-
son will be deemed to have disposed of it at its market value as at the date before the asset
becomes a non-personal-use asset and to have reacquired it at cost equal to the same market
value. The market value constitutes the base cost on the subsequent disposal of the asset.
Remember
l When a personal-use asset becomes a non-personal-use asset, the deemed disposal in
terms of par 12 results in the establishment of a base cost equal to market value and does
not trigger a capital gain or loss.
l This deemed disposal is not applicable to a company, as a company cannot hold a personal-
use asset.
(11) Deemed disposal when a non-personal-use asset becomes a personal-use asset (par 12(2)(e))
This would occur, for example, if a delivery vehicle that was previously used in a person’s trade
is now being used only for private purposes. It then becomes that person’s personal-use asset.
A capital gain or loss will arise on the difference between the market value as at the day before
the change in use and its base cost. The subsequent disposal of the asset will give rise to a
capital gain or capital loss, but since the asset has now become a personal-use asset, the
capital gain or loss will be disregarded upon the subsequent disposal in terms of par 53.
Remember
When a non-personal-use asset becomes a personal-use asset, the deemed disposal in terms of
par 12 triggers a capital gain or loss.
620
(12) A deemed disposal arises on the transfer of an asset between the funds of a long-term insurer
(par 12(2)(f)).
When a long-term insurer transfers an asset from one of its policyholder funds to another, the
transferor fund will be deemed to have disposed of it on the date of the transfer at its market
value and the transferee fund will be deemed to have acquired it at the same value.
(13) A deemed disposal arises on the removal of a listed security from a South African exchange to
an exchange outside South Africa in the hands of the South African resident holding the listed
security (s 9K).
The deemed disposal arises in the hands of the person (being a South African resident trust or
natural person) holding the security. A deemed disposal and reacquisition are triggered when a
domestic listed security is removed from the JSE and is listed on an exchange outside South
Africa. This means that if the holder of the security remains a South African resident and sub-
sequently disposes of the interest, a further capital gain can arise. The further capital gain or
loss will be the difference between the reacquisition cost and the proceeds on the subsequent
disposal of the security. This amendment comes into operation on 1 March 2021 and applies in
respect of listed securities moved to an exchange outside South Africa on or after that date.
See chapter 19 for a detailed discussion of s 9K.
Remember
Where the resident holds the security as trading stock, the disposal triggers a revenue gain or
loss, and not a capital gain or loss.
(14) A deemed disposal arises in the hands of the South African resident shareholder, holding at
least 10% interest in a resident company, when the resident company moves its tax residence
outside South Africa (s 9H(3A)).
In terms of s 9H(3)(c)(iii), a dividend in specie is deemed to be declared to the holder of the
shares in the company that ceases to be a resident. The company that ceases to be a resident
is liable for this exit charge, i.e., the dividends tax. In terms of the new s 9H(3A), an exit charge
now also arises in the hands of the South African shareholder holding at least 10% of the equity
shares and voting rights in the company that ceases to be resident where s 9H(3)(c)(iii) applies.
A deemed disposal of such shares and reacquisition thereof at market value on the day before
the company ceases to be a resident are triggered in the hands of the resident shareholder. A
further capital gain can arise if the resident shareholder subsequently disposes of the shares in
the then non-resident company. The further capital gain or loss will be the difference between
the reacquisition cost and the proceeds on the subsequent disposal of the shares. This amend-
ment to s 9H comes into operation on 1 January 2021 in respect of the holder of the shares in a
company that ceases to be a resident on or after that date.
See par 3.2.3 in chapter 3 for a detailed discussion of s 9H.
Remember
Where the shareholder holds the shares as trading stock, the disposal triggers a revenue gain or
loss, and not a capital gain or loss.
17.7.4 Time of disposal (par 13)

Most of the timing rules for the disposal of assets are provided in par 13.
The time of disposal is an important concept, because it may affect

l the rate at which a capital gain is taxed (any taxable capital gain will effect-
ively be taxed at the taxpayer’s marginal rate of tax for the year of assessment
Please note! in which the disposal occurs), and
l whether a capital loss may be set off against a capital gain (normal tax will be
payable on the taxable capital gain if the capital loss was only incurred in a
subsequent year of assessment).
Paragraph 13(1) provides the time of disposal of an asset in two situations:

(1) When a specific event, act, forbearance or operation of law occurs, the time-of-disposal rules
apply when that stipulated event occurs, whether it precedes a change of ownership or, for
some unforeseen reason, a change of ownership never occurs. Ten different events are then
specified:
621
Specific event, act, forbearance or operation of law Time of disposal

An agreement for the disposal of the asset subject Date on which the suspensive condition is
to a suspensive condition satisfied
An agreement not subject to a suspensive Date of conclusion of agreement (usually the
condition date when the offer is accepted by the seller)
Distribution of an asset on which the beneficiary The date on which the interest vests
holds a vested interest
Where a s 8C equity instrument (employee share The date that the equity instrument vests in
incentive arrangements after 26 October 2004) is that beneficiary in terms of s 8C
granted to a beneficiary by a trust
Donation of an asset Date of compliance with all the legal require-
ments for a valid donation, which includes, for
example, acceptance of the donation by the
recipient
Expropriation of an asset Date on which the taxpayer receives the full
compensation for the expropriation that is
agreed to or finally determined
Conversion of an asset Date on which the asset is converted
Granting, renewal or extension of an option Date on which the option is granted, renewed,
or extended
Exercise of an option Date on which the option is exercised
Termination of an option to acquire a share, partici- Date on which the option terminates
patory interest or debenture of the company
In the case of a suspensive condition, the time of disposal is suspended pending the occur-
rence a specified event. An example of a suspensive condition is a clause in a sales agreement
stating that the sale will only be confirmed if a mortgage bond is granted.
Example 17.9. Time of disposal: Suspensive condition
Lindsay disposed of his luxury townhouse at Ballito to Nantha on 28 February 2022, subject to
Nantha being able to obtain a bond. On 30 June 2022, Nantha obtained the bond, and on
15 August 2022 the property was transferred into his name. Therefore, the date of disposal would
be 30 June 2022, when the suspensive condition was fulfilled.
(2) When none of events in (1) above apply, the date of disposal will be the date on which owner-
ship of the asset changes.
Apart from par 13, certain other paragraphs, for example par 12 (deemed disposals), also
provide specific timing rules, of which the most important are set out in the table below:
Type of disposal (par 12 and other) Time of disposal
Scrapping, loss or destruction of an asset The date when
l the full compensation is received, or
l if no compensation is payable, the later of
the following dates:
– the date when the scrapping, loss or
destruction is discovered, or
– the date of establishing that no compen-
sation will be payable
Extinction of an asset including by way of for- Date of the extinction of the asset
feiture, termination, redemption, cancellation,
surrender, discharge, relinquishment, release,
waiver, renunciation, expiry or abandonment
Distribution of an asset by a company to a The date on which that asset is distributed as
holder of shares under par 75 contemplated in par 74 (i.e., the earlier of the date
on which the distribution is paid or becomes due
and payable)
continued
622
Type of disposal (par 12 and other) Time of disposal

Decrease of a person’s interest in a company, The date on which the value of the interest
trust or partnership as a result of a ‘value-shifting decreases
arrangement’
Deemed disposals under par 12 (see 17.7.3) The day preceding the day that the event occurs
The proceeds from the disposal of a partner’s Each individual partner will have to account for
interest in an asset of a partnership under par 36 the capital gain/loss resulting from the disposal
of his share of the asset on the date that the
proceeds accrue to each individual partner.
Normally the date of disposal
The person who acquires the asset is deemed to have acquired it at the time of
Please note!
disposal.
17.7.5 Disposals by spouses married in community of property (par 14)

When an asset is disposed of by a spouse who is married in community of property, and that asset
falls within the joint estate of the spouses, the disposal is treated as having been made in equal
shares by each spouse. However, if the asset in question was excluded from the joint estate of the
spouses, the disposal is treated as having been made solely by the spouse making the disposal.
17.8 Base cost

Two of the four building blocks of CGT (asset and disposal) have already been dealt with. The third
building block of CGT is base cost (see 17.4). The base cost of an asset is determined using the
rules in part V (paras 20 to 34) of the Eighth Schedule.
The base cost of assets acquired before 1 October 2001 is determined differently from those
acquired on or after 1 October 2001.
Remember
CGT became effective in South Africa on 1 October 2001.
(1) The base cost of assets acquired before 1 October 2001 (these are known as pre-valuation
date assets) is
l the value on 1 October 2001 (also referred to as the ‘valuation date value’)
l plus any expenditure incurred on or after 1 October 2001.
(2) The base cost of assets acquired on or after 1 October 2001 is
l the expenditure incurred in acquiring the asset.
Paragraph 20 sets out the expenditure that may form part of the base cost of an asset (discussed in
detail below).
l In terms of s 102 of the Tax Administration Act the taxpayer bears the
burden of proof to establish the base cost of an asset.
l If this cannot be done, the base cost will be Rnil (or as much as can be
Please note!
established).
l It is therefore essential for the taxpayer to retain all documentation that
verifies the expenditure incurred.
17.8.1 Qualifying expenditure included in base cost (par 20(1))

Paragraph 20 sets out the qualifying expenditure that may form part of the base cost of an asset. The
determination of qualifying expenditure in terms of par 20 is necessary in the following situations:
l determining the base cost of an asset acquired on or after the valuation date
l determining the base cost of a pre-valuation date asset, where the time-apportionment base (TAB)
cost method (one of the methods as discussed in 17.8.9) is adopted as valuation date value
l applying the possible limitations to the valuation date value (the kink tests as discussed in 17.8.9).
623
l A taxpayer may not take any amount into account more than once in deter-
mining the base cost of an asset.
Please note! l VAT not allowed as an input tax deduction in terms of the VAT Act will form
part of the qualifying expenditure included in base cost. VAT allowed as an
input tax deduction will be deducted from the base cost (s 23C).
l Only expenditure actually incurred forms part of base cost.
The following amounts form part of qualifying expenditure included in base cost (par 20(1)):
Par 20(1) Qualifying expenditure included in base cost
(a) Acquisition or creation cost
(b) Valuation cost (only where the asset was valued for CGT purposes)
(c) Direct cost of acquisition or disposal, including:
l remuneration for services rendered by a surveyor, valuer, auctioneer, accountant,
broker, agent, consultant or legal advisor
l transfer cost (including the cost of a certificate for electrical installation, but excluding any
cost of repairs necessitated by such inspection)
l stamp duty, transfer duty, securities transfer tax or any similar duty
l advertising cost to find a seller or buyer
l sales commission
l any cost in moving the asset
l installation cost, including the cost of foundations and supporting structures
l option cost (excluding an option that was acquired before 1 October 2001 and exercised
after 1 October 2001, in which case the valuation date value of the asset must be
included in the base cost of the asset)
l a portion of the donations tax (par 22) payable by the donor on an asset disposed of by
way of a donation in terms of par 38 (see 17.8.7 for further detail)
l a portion of the donations tax (capital gain/market value) payable by the donee on an
asset disposed of by donation (see 17.8.7 for further detail)
(d) The cost of establishing or defending legal title
l The expenditure will qualify even if the person is unsuccessful in defending legal title.
l This type of base cost expense can occur, for example, where a taxpayer operates a
night club and the city council wishes to expropriate the night club’s premises.
l The cost of legal fees incurred in resisting the expropriation is added to the base cost of
the night club’s premises regardless of the outcome of the case.
(e) Cost of improvements or enhancements to the value of the asset. The requirement that the
relevant improvement should still be reflected in the asset at the time of disposal of the
property was deleted by the 2019 Tax Laws Amendment Act with effect from the date of
promulgation.
l These improvements include improvements to the common property of owners of sec-
tional title units and share block units.
l It also includes improvements to a property by a tenant (not deductible for tax purposes),
as they enhance the value of the tenant’s occupational right and it should therefore be
added to the base cost of the tenant.
Example 17.10. Cost of improvements and enhancements added to base cost

(a) Janet, the owner of a sectional title unit, has to pay a special levy of R500 for the installation
of a swimming pool on the common property.
(b) Neo installed a swimming pool at her house for R40 000. Three years later, after becoming a
mother and due to her fear of the risk of drowning, she had the swimming pool filled up and
covered it with grass.
Explain whether the cost of the improvements can be added to the base cost of the assets of the
respective taxpayers.
624
SOLUTION
(a) Since it enhances Janet’s right of use, it may be added to the base cost of the sectional title
unit.
(b) Although the swimming pool is not part of the property anymore, the R40 000 will still be
added to the base cost of the house. At the date of the swimming pool’s removal (the filling
up of the pool), it is dealt with as a part disposal (see 17.8.15) as there is an extinction of an
asset (par 11). A portion of the base cost of the house must therefore be allocated to the
part disposed of (namely the swimming pool) by applying the ratio of the market value of the
swimming pool as determined immediately before disposal relative to the market value of
the entire house. The base cost not allocated to the swimming pool will form part of the base
cost of the remainder of the house.
Ownership of immovable property in South Africa can take many forms. Two ways
in which immovable property can be owned is through sectional title units and
share block units.
l Sectional title unit: Ownership of units or sections within a complex or a
Please note!
development. The most common example of sectional title units are town-
house developments.
l Share block units: Ownership of a share in a company that owns and runs a
building. Ownership of the share block unit establishes the right to use the
building. An example of a share block unit is interest in holiday apartments.
Par 20(1) Qualifying expenditure included in base cost (continued)

(f) Cost of an option acquired before 1 October 2001 where the asset was acquired or disposed
of after 1 October 2001
l The valuation date value of the option must be included in the base cost of the asset.
l This situation is illustrated by the following example: On 1 July 2001, Jonathan paid
R10 000 for a 6-month option to acquire a beach cottage at a price of R300 000. The
market value of the option was R5 000 on 1 October 2001. He exercised the option on
1 December 2001 and paid R300 000 for the cottage. The base cost of the cottage will
therefore be R300 000 + R5 000 = R305 000.
(g) One-third of s 24J interest incurred in financing listed shares or a participatory interest in a
portfolio of a collective investment scheme
l One-third of the interest is included in the base cost of an asset, irrespective of whether
these shares or interests are business related (i.e., held for trade purposes) or private in
nature.
Example 17.11. Section 24J interest incurred in financing listed shares

Quinton acquires 2 000 shares in Gentry Ltd (a company listed on the JSE) at a cost of
R100 000, which he finances by means of a bank loan. During the year of assessment, he
incurred interest on the loan of R15 000.
Explain whether the interest can be added to the base cost of the shares.
SOLUTION
The shares are listed on a recognised exchange (the JSE). Quinton may therefore add a third
of R15 000 = R5 000 to the base cost of R100 000.
The base cost equals R105 000 as two thirds of the interest is not allowed as part of base cost.
A deduction of the interest of R15 000 is prohibited by s 23(f).
625
(h) The amount included in ‘gross income’ for income tax purposes, must be included in the
base cost of the asset
Type of asset Income tax provisions Amount included in base cost
(h)(i) Marketable In terms of rules dealing with The market value of the market-
securities or equity employee share incentive able security or the equity instru-
instruments schemes (ss 8A or 8C), the ment taken into account in deter-
acquisition or vesting of mar- mining the gain or loss for normal
ketable securities or equity tax purposes (even if the gain or
instruments results in a gain or loss is nil). See Example 17.12.
loss for normal tax purposes.
(h)(ii)(aa) Lease assets Assets acquired by a lessee The recoupment that is included
from a lessor and there has in the lessee’s income at the end
been a recoupment in terms of a lease in terms of s 8(5). See
of s 8(5). Example 17.13.
(h)(ii)(bb) Fringe benefit The value of the fringe benefit The value placed on the asset in
assets is determined in terms of the determining the fringe benefit,
Seventh Schedule. This value included in a person’s gross in-
is included in the employee’s come in terms of par (i) of the
gross income in terms of par (i) gross income definition.
of the definition of ‘gross in-
come’ as a fringe benefit.
(h)(ii)(cc) Lease In terms of par (h) of ‘gross The amount included in gross
improvements income’ an amount is included income in terms of par (h) of the
in the lessor’s gross income gross income definition, less the
for obligatory improvements special allowance for lessors
affected by the lessee to land granted in terms of s 11(h) (see
or buildings. A special allow- chapter 13 for information on
ance is granted for lessors in s 11(h)).
terms of s 11(h).
(h)(ii)(dd) Debt asset in the In terms of par (c) of ‘gross The base cost of the debt asset
hands of a person income’ an amount is included will be the amount included in
that renders a in a person’s gross income for gross income in terms of par (c).
service any services rendered. If the
person renders the service but
the salary is only payable after
year end the person that ren-
dered the service has a debt
asset.
(h)(iii) Share in a con- In terms of s 9D, the propor- The proportional amount of net
trolled foreign tional amount of the net income of CFC taxed in terms of
company (CFC) income of a CFC in which the s 9D in resident’s hands, adjusted
held directly or resident directly or indirectly with certain amount such as tax-
indirectly has an interest, must be able capital gains and exempt
included in the income of the foreign dividends, will be added
resident during any tax year. to the base cost of the foreign
shares.
Example 17.12. Base cost: Restricted equity instruments (shares) acquired under s 8C
Trevor is employed by Xenon Ltd and is not a share-dealer. In 2018, he acquired a restricted
Xenon Ltd share from the company in exchange for R50 cash (market value was R100). In 2022,
the restrictions are lifted when the share has a R250 value. Trevor eventually sells the share for
R400.
Calculate the capital gain or loss on the sale.
626
SOLUTION
Proceeds ............................................................................................................................. R400
Less: Base cost (market value when share vests) .............................................................. (250)
Capital gain ......................................................................................................................... R150
Note that Trevor pays R50 cash for the share and he is taxed on a gain of R200 (R250 – R50) in
terms of s 8C. By using the market value when the share vests, the base cost equals the sum of
the R50 cash and the R200 on which Trevor was taxed for normal tax purposes.
Example 17.13. Base cost of asset acquired from lessor at less than market value
Andrew leased land and buildings from Vivian at a rental of R10 000 per annum. The rent paid,
which Andrew claimed as a deduction under s 11(a), was as follows:
R
2018 10 000
2019 10 000
2020 10 000
2021 10 000
2022 10 000
50 000
At the end of the 2022 tax year, Andrew acquired the property from Vivian at a price of R2 000,
even though its market value was R50 000. This was in recognition of the fact that most of the
rentals paid by Andrew were excessive and really in part payment of the purchase price. In
terms of s 8(5) an amount of R48 000 (R50 000 – R2 000) was included in Andrew’s income for
the 2022 tax year. In 2022 Andrew sold the property for R65 000.
Calculate the base cost of the property as well as Andrew’s capital gain.
SOLUTION
The base cost of Andrew’s property is as follows:
Amount paid ..................................................................... R2 000 (par 20(1)(a))
Amount included in income in terms of s 8(5) .................. 48 000 (par 20(1)(h)(ii)(aa))
Base cost .......................................................................... R50 000
Andrew’s capital gain is therefore R65 000 – R50 000 = R15 000

(iv) In the case of a value-shifting arrangement, the person who benefits from the arrangement
must increase the base cost of his interest by the deemed proceeds calculated in terms of
par 23 (see 17.12.1).
(v) Where an asset was inherited by a resident from the deceased estate of a non-resident, the
base cost of the asset is
l the market value of that asset immediately before the death of the non-resident, and
l any expenditure incurred by the executor of the deceased estate in respect of the
inherited asset in the process of the liquidation or distribution of the deceased estate.
Where an asset is inherited from the deceased estate of a resident, the base cost of the asset
will be determined in terms of s 9HA (see chapter 25).
(vi) Where a non-resident
l donates an asset to a resident
l sells an asset to a resident for a consideration not measurable in money, or
l sells an asset to a connected person resident for a non-arm’s length consideration
the base cost of the asset for the resident is the market value of that asset on his date of
acquisition.
Both the special rules in par 20(1)(v) and par 20(1)(vi) above (dealing with
Please note! assets acquired from non-residents) only apply if the asset is not already in the
CGT net (not par 2 assets).
627
17.8.2 Qualifying expenditure excluded from base cost (par 20(2) and s 23C)
The following expenditure incurred by a person in respect of an asset is not included in base cost:
Par/section Expenditure excluded from base cost (continued)
Par 20(2)(a) Borrowing costs (including interest contemplated in s 24J), raising fees, bond registration
costs and bond cancellation costs (excluding the one-third of s 24J interest incurred in
the acquisition of listed shares or units in a portfolio of a collective investment scheme –
see 17.8.1).
Par 20(2)(b) Expenditure related to the cost of ownership (holding cost)
l Expenditure on repairs, maintenance, protection (for example the monthly fee paid to
a security company (not the capital cost of the alarm system)), insurance, rates and
taxes or similar expenditure.
Par 20(2)(c) The valuation date value of any option or right to acquire any marketable security contem-
plated in s 8A (employee share incentive arrangements prior to 26 October 2004).
Section 23C Input VAT provided that it has been allowed as an input tax deduction.
17.8.3 Reduction of base cost (par 20(3))

The following amounts must reduce the base cost of an asset:
Par 20(3) Amounts that must reduce the base cost of an asset
(a) Expenditure already allowed as a deduction in the calculation of taxable income, for
example capital allowances and s 11(o) deduction
l The exception to this is any previously allowed expenditure regarding a qualifying
share (share held for more than three years). Previously allowed expenditure that
has been added back to taxable income in terms of the recoupment provisions of
s 9C(5) (see chapter 14), can be added to the base cost of the qualifying share.
(b) Expenditure that has been reduced or recovered or paid by another person (irrespective
of whether the recovery took place before or after the expense was incurred)
l Any reduced or recoverable expenditure will, however, not reduce the base cost of
an asset if
– taken into account for normal tax purposes as a recoupment in terms of s 8(4)(a), or
– applied against an amount of trading stock as contemplated in s 19(3), or any
other asset as contemplated in par 12A(3) (in the case of debt reduction).
(c) Any amount received in respect of official development assistance that was granted or
paid for purposes of the acquisition of an asset and the amount is exempt for normal tax
purposes.
Example 17.14. Base cost reduction
Khaya buys an asset for R100 cash. After a dispute arises, the seller repays Khaya R10 of the
selling price. Khaya later sells the asset for R150.
Calculate the capital gain or loss on the sale.
SOLUTION
Proceeds ................................................................................................................................ R150
Less: Base cost
Purchase price .............................................................................................. R100
Less: Amount recovered (par 20(3)(b)) ......................................................... (10)
(90)
Capital gain ............................................................................................................................ R60
The base cost of an asset can be reduced in two circumstances:

l if the underlying expenditure is reduced or recovered – par 20(3)(b) as men-
tioned above will apply in this scenario, and
Please note! l if the debt associated with the asset is reduced or cancelled – in this case the
provisions of debt relief (par 12A) will apply.
Please refer to 17.8.4 and Example 17.20 for further information regarding the
debt relief provisions (par 12A), and to compare the working of par 20(3)(b) to the
working of par 12A.
628
17.8.4 Concession or compromise in respect of debt (par 12A)

The debt relief provisions are found in s 19 of the Act and par 12A of the Eighth Schedule. In order to
provide for the different ways in which a debtor may settle his debt, these provisions were amended
with effect from 1 January 2018. The focus of this chapter will be on the provisions of par 12A. Refer
to chapter 13 for the provisions of s 19.
Where a creditor writes off a debt of a debtor, the creditor has disposed of an
asset in terms of paragraph 11. From the creditor’s point of view par 56 needs to
be considered and from the debtor’s point of view the debt relief provisions in
Please note!
par 12A need to be considered in all instances where there is a concession or
compromise in respect of debt. A concession or compromise is defined in sub-
paragraph of par 12A.
A ‘concession or compromise’ means an arrangement where:

l a debt is cancelled or waived, extinguished by redemption of the debt claim owed by that person
(i.e., the debtor) or that person's connected person (for example a compromise with creditors) or
extinguished by the acquisition of the debt claim by the debtor in terms of a merger;
l the debt is settled by being converted to or exchanged for shares in that company or applying
the proceeds from shares issued by that company.
(Definition of ‘concession or compromise’ in par 12A(1).)
In order to determine the CGT consequences for the debtor where there is a concession or com-
promise in respect of debt, the following approach (based on a series of questions that are asked) is
recommended:
Question 1: Is there a debt benefit? NO

Par 12A is not applicable.
(see 17.8.4.1)
YES
Question 2: Is the debt benefit specifically YES

excluded from the provisions of par 12A? Par 12A is not applicable.
(see 17.8.4.2)
NO
Question 3: What was the debt used for, i.e., Apply par 12A
what was the purpose of the debt? accordingly.
17.8.4.1 Is there a debt benefit? (the definitions of ‘debt’ and ‘debt benefit’ in par 12A(1))
In order for the debt relief provisions in terms of s 19 and par 12A to apply, there needs to be a debt
benefit resulting from a concession or compromise of a debt entered into with a creditor. The defini-
tion of ‘debt’ excludes any tax debt owed to SARS. Clearly, any concession or compromise of tax
debts has no s 19 or par 12A implications. The definition of a ‘debt benefit’ in par 12A is the same as
the definition in s 19 which is discussed in detail in chapter 13 (see 13.10.7).
Example 17.15. Debt benefit amount
Jonathan owes Nonthle R500 000 in respect of an asset that he purchased from her two years
ago (all interest charged on the debt was paid up to date). During the 2022 year of assessment
Jonathan proposed to pay Nonthle 20% of the outstanding capital amount if she writes off the
remainder of the capital balance as bad debt. Nonthle agreed to Jonathan’s proposal.
Determine the debt benefit amount.
629
SOLUTION
Debt benefit amount (80% of outstanding capital of R500 000) .................................. R400 000
Remember
From the definitions in s 19 and par 12A, it can be inferred that the debt benefit amount is deter-
mined differently in respect of the different ways in which a concession or compromise can occur:
l where the debt is cancelled or waived, the debt benefit amount equals the amount that is
cancelled or waived
l where there is a redemption of the debt claim or a merger, the debt benefit amount equals
the face value of the claim prior to the arrangement less the expenditure incurred in respect of
redemption/merger
l where the debt is converted to equity and the person acquiring the shares did not hold an
effective interest in that company prior to entering into the arrangement, the debt benefit
amount equals the face value of the claim prior to the arrangement less the market value of
the shares acquired immediately after the arrangement, and
l where the debt is converted to equity and the person acquiring the shares held an effective
interest in that company prior to entering into the arrangement, the debt benefit amount
equals the face value of the claim prior to the arrangement less the difference in the market
values of the effective interest held by that person as a result of the arrangement. (The
difference in the market values of the effective interest is the market value immediately prior
to the arrangement less the market value immediately after the arrangement.)
An analysis of the definition of a debt benefit shows that if the debt is converted to equity shares
and the market value of the shares in respect of the concession or compromise is equal to or
exceeds the face value of the claim prior to arrangement, there is no debt benefit. Consequently,
if there is no debt benefit, par 12A cannot be applicable.
Once it has been established that there is a debt benefit and that an amount can be attributed to the
debt benefit, the second question can be considered, i.e., is the debt benefit specifically excluded
from the provisions of par 12A?
17.8.4.2 Is the debt benefit specifically excluded from the provisions of par 12A? (par 12A(6))
There are six situations where the provisions of par 12A will not be applicable:
(a) Debt owed by an heir or legatee to a deceased estate
Debt that
l is owed by an heir or legatee of a deceased to that deceased estate, and
l is subsequently reduced by the deceased estate
will not be subject to the debt benefit provisions in par 12A. This will be the case as long as that
debt constitutes ‘property’ as defined (according to the Estate Duty Act) in that deceased estate.
It is not a requirement that the debt must be subject to Estate Duty. The require-
Please note!
ment is only that it must constitute ‘property’ as defined in the Estate Duty Act.
(b) Donated debt

Where the debt benefit qualifies as a donation or a deemed donation for donations tax pur-
poses in respect of which donations tax is payable, par 12A will not apply. A donation is
defined in s 55(1) of the Act as ‘any gratuitous disposal of property including any gratuitous
waiver or renunciation of a right’. A deemed donation is where any property has been disposed
of for a consideration which is not an adequate consideration (s 58).
It is required that the donation of the debt must be subject to donations tax for
Please note! this exclusion from par 12A to apply. Hence, the debt benefit will be subject to
par 12A to the extent that the donation is exempt from donations tax.
(c) Employee debt

Where an employee’s debt is reduced by his employer and this reduction constitutes a fringe
benefit in terms of the Seventh Schedule to the Act, such a debt benefit will not be subject to
630
the debt benefit provisions of par 12A. Fringe benefits will generally attract employees’ tax in
terms of the Fourth Schedule to the Act.
(d) Intra-group debt owed by a dormant group company
Where the debtor and creditor are members of the same group of companies (as defined in
par 12A(1)) and the debtor is a dormant company, the provisions of par 12A will not apply. A
dormant company is a company that has not carried on any trade, during the year of assess-
ment during which that debt benefit arises and the immediately preceding year of assessment.
However, there are two exceptions to the above where the par 12A provisions will still apply
even when it is an intra-group debt of a dormant company that is waived
l the debt was acquired to fund an asset that was subsequently disposed of by that company
by way of an asset-for-share, amalgamation or intra-group transaction or a liquidation distri-
bution in respect of which ss 42, 44, 45 or 47 applied, whether directly or indirectly, or
l the debt was incurred or assumed in order to settle, take over, refinance or renew any debt
incurred by another group company or a controlled foreign company in relation to any
group company, whether directly or indirectly.
(e) Liquidation, winding-up or deregistration
Debt owed by a company (the debtor) to a connected person (the creditor) that is reduced in
the liquidation, winding-up, deregistration or final termination of the existence of the debtor, will
not be subject to the debt benefit provisions of par 12A. Paragraph 12A will not apply to the
extent that the amount of the debt benefit is less than the amount of the creditor’s base cost of
that debt in terms of par 20.
However, there are two exceptions to the above where the debt benefit provisions of par 12A
will still be applicable:
(1) (2)*
Where the debt was reduced as part of Where the
any transaction, operation or scheme l the debtor has not taken the necessary
entered into to avoid any tax imposed by steps within 36 months to liquidate, wind
this Act; and up deregister or finally terminate the
The debtor and creditor only became company, or
connected persons after the debt arose l the debtor has invalidated any of the
or any debt issued in substitution of that above steps with the result that the com-
debt arose, and these transactions were
pany is not liquidated, wound up, de-
part of a scheme to avoid any tax registered or finally terminated, or
imposed by the Act.
l the debtor has withdrawn any step taken
to liquidate, wind up deregister or finally
terminate its corporate existence.
* Any tax which becomes payable as a result of steps not taken, invalidated or withdrawn must be recov-
ered from the company and the connected person, who are jointly and severally liable for that tax.
(f) Intra-group debts settled by issuing shares

Where intra-group debts are reduced or settled by issuing shares in the debtor company and
the debtor and creditor are members of the same group of companies (as defined in par 12A),
the provisions of par 12A will not apply.
However, there are two exceptions to the above where the par 12A provisions will still apply
even when the intra-group debts were reduced or settled by issuing shares in the debtor
company
l the debt was acquired directly or indirectly to settle or renew any debt incurred by a com-
pany that was not a member of the group of companies at the time the debt was incurred,
or
l the debtor company is not a member of the group of companies at the time the shares are
issued.
631
Remember
Two of the exclusions to par 12A refer to the term ‘group of companies’ (see paras 12A(6)(d)
and (f)). This term is defined in terms of par 12A(1) as a group of companies in terms of s 41 of
the Act. Section 41 refers to s 1 that defines a group of companies as two or more companies in
which one company (the ‘controlling group company’) directly or indirectly holds shares in at
least one other company (the ‘controlled group company’). To qualify as part of a group of com-
panies, however, at least 70% of the equity shares of each controlled group company must be
directly held by
l the controlling group company
l one or more other controlled group companies, or
l any combination of the above.
The controlling group company must directly hold 70% or more of the equity shares in at least
one controlled group company.
Section 41 further narrows this definition in s 1 by excluding certain companies from the defini-
tion of a group of companies. Examples of these excluded companies are co-operatives, a com-
pany that is a public benefit organisation or a recreational club, etc.
(g) Debt substituted or converted to shares

Where the debt claim is converted to shares or exchanged for shares, the debt benefit is
excluded from par 12A to the extent that the debt does not consist of interest, in other words, to
the extent of the capital portion of the debt. In this context, the meaning of ‘interest’ as defined
in s 24J applies in respect of years of assessment commencing on or after 1 January 2022.
It is submitted that where shares are issued in return for debt, the provisions of
Please note! ss 40CA and 24BA should be considered in respect of the capital portion of the
debt.
If the debt benefit is not specifically excluded from the provisions of par 12A, it can now be con-
sidered what the purpose of the debt is, i.e., what was the debt used for.
17.8.4.3 What was the purpose of the debt (what was the debt used for)? (paras 12A(2) to
12A(5))
The purpose of the debt, i.e., what the funds were used for, will determine how the debt benefit
amount must be dealt with in the hands of the debtor. For the purposes of this chapter, we will be
looking at two types of assets
l capital assets, and
l allowance assets.
Trading stock and non-capital expenditure is dealt with in terms of s 19.
l A capital asset is defined as an asset that is not trading stock (for example
land).
l An allowance asset is no longer defined in par 12A and the Act simply refers
Please note! to expenditure in respect of which a deduction or allowance was granted.
Any capital asset on which allowances can be claimed (for example a s 12C
manufacturing asset) is by implication still dealt with in the same way as
before and for purposes of this explanation referred to as an allowance asset.
632
Once it has been established whether the debt was used to fund a capital asset or an allowance
asset, the actual effect of par 12A on the debtor can be determined:
The debt was originally used (directly or indirectly) to fund an asset other than trading stock,
i.e., either
l a capital asset, or
l an allowance asset.
Then the effect for

the debtor is:
On a capital asset: On an allowance asset:

l if the capital asset is still held (i.e., l if the allowance asset is still held (i.e.,
owned) during the year of assessment the owned) during the year of assessment
debt benefit arises, the base cost of the the debt benefit arises, the base cost of
asset must be reduced with the debt the asset must be reduced with the debt
benefit amount (only down to Rnil) (par benefit amount (only down to Rnil)
12A(3)). (par 12A(3)). If the amount of the debt
l if the capital asset is no longer held (i.e., benefit exceeds the base cost, the excess
no longer owned) during the year of amount must be taxed as a recoupment
assessment the debt benefit arises, (s 19(6)). Future capital allowances are
limited in terms of s 19(7) to the cost
– the capital gain or loss must be recal-
price less the sum of the debt benefit
culated by assuming that the debt bene-
AND the aggregate of deductions and
fit occurred prior to the disposal in the
allowances previously allowed on that
year of disposal, and
asset.
– the absolute difference (recalculated
capital gain or loss LESS prior capital l if the allowance asset is no longer held
gain or loss (par 12A(4)) must be taxed (i.e., no longer owned) during the year of
in the year of assessment in which the assessment the debt benefit arises,
debt benefit arises. – the recoupment and capital gain or
loss must be recalculated by assuming
that the debt benefit occurred prior to
the disposal in the year of disposal,
and
– the absolute differences, the additional
recoupment (recalculated recoupment
LESS prior recoupment (s 19(6A))
AND the additional capital gain or
loss (recalculated capital gain or loss
LESS prior capital gain or loss (par
12A(4)) must be taxed in the year of
assessment in which the debt benefit
arises.
Example 17.16. Where the debt was used to fund capital assets and one asset is still
held at date the debt benefit arises while the other asset is no longer held
Jeff borrowed R5 million from ABC Bank to acquire two vacant lots as capital assets. In year 1
Vacant Lot 1 was purchased for R3 million and Vacant Lot 2 was purchased for R2 million. In
year 2 Jeff ran into financial difficulties and Vacant Lot 2 was sold for R1,2 million, generating a
R800 000 capital loss. Jeff used the R1,2 million of proceeds from Vacant Lot 1 for urgent
running expenses. Due to circumstances beyond Jeff’s control, Vacant Lot 1 has also sig-
nificantly declined in value. In order to alleviate Jeff’s circumstances, ABC Bank cancels
R3 million of the debt in year 3. Of this amount, R2 million of the debt benefit is attributable to
formerly held Vacant Lot 2 and R1 million of the debt benefit is attributable to Vacant Lot 1.
Explain the CGT consequences of the cancellation of the debt on Jeff.
633
SOLUTION
Question 1: Is there a debt benefit?
Yes, Jeff’s debt has been reduced with R3 million. The face value of the claim prior to the
arrangement exceeds the market value of the debt with R3 million. R1 million of the debt benefit
is attributable to Vacant Lot 1 and R2 million is attributable to Vacant Lot 2.
The debt benefit amount is R3 million in total.
Question 2: Is the debt benefit specifically excluded from the provisions of par 12A?
No, none of the exclusions (for example a donation or debt to a deceased estate) apply.
Question 3: What was the purpose of the debt?
The debt was used to fund the acquisition of capital assets (land is not an allowance asset as no
allowance can be claimed thereon).
CGT consequences for Jeff:
Vacant Lot 1 (asset still held):
The R1 million amount of debt cancelled that is attributable to Vacant Lot 1 reduces the base
cost of that lot from R3 million down to R2 million in year 3 as the asset is still held at the date the
debt benefit arises (par 12A(3)).
Vacant Lot 2 (asset no longer held):
The R2 million cancelled cannot be applied against the base cost of Vacant Lot 2 because the
asset is no longer held during the year of assessment that the debt benefit arises. The capital
gain or loss determined in the prior year (year 2) should be recalculated, taking into account the
R2 million debt benefit as though it accrued prior to the disposal of Vacant Lot 2. The capital gain
or loss is thus recalculated as a R1,2 million capital gain (R1,2 million (proceeds) less Rnil (base
cost of R2 million reduced to Rnil)). The difference between the original R800 000 capital loss
(R1,2 million (proceeds) less R2 million base cost) that arose on the disposal of Lot 2 and the
recalculated R1,2 million capital gain, equals R2 million.
This absolute difference of a R2 million capital gain should be included in the sum of capital
gains and losses in the year that the debt benefit arises (year 3) (par 12A(4)).
(Source: Adapted from Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012)
Example 17.17. Where the debt was used to fund an allowance asset and the asset is still
held at the date the debt benefit arises
During its 2021 year of assessment Hakuna (Pty) Ltd borrowed R3,5 million from ABC Bank to
acquire new plant and machinery used in a process of manufacture. During the 2022 year of
assessment, Hakuna (Pty) Ltd started experiencing serious financial difficulty and the bank sub-
sequently cancelled a portion of the debt (none of the capital amount had been repaid by
Hakuna (Pty) Ltd).
Explain the CGT consequences of the cancellation of the debt on Hakuna (Pty) Ltd) assuming
(a) R1 million of the debt was cancelled, and
(b) R3,5 million of the debt was cancelled.
SOLUTION
Yes, Hakuna (Pty) Ltd’s debt has been reduced with R1 million. The face value of the claim prior
to the arrangement exceeds the market value of the debt with R1 million.
The debt benefit amount is R1 million.
The debt was used to fund the acquisition of allowance assets (plant and machinery used in a
process of manufacture that qualify for a capital allowance in terms of s 12C).
continued
634
CGT consequences for Hakuna (Pty) Ltd:

(a) R1 million of the debt was cancelled:
The R1 million debt benefit amount reduces the base cost of that plant and machinery with
R1 million as the plant and machinery is still held at the date the debt benefit arises (par 12A(3)).
The new base cost is calculated as follows:
Acquisition costs (2021) ............................................................................................ R3 500 000
Less: Amounts claimed for income tax purposes ...................................................... (2 100 000)
s 12C (2021) R3 500 000 × 40% ............................................................................... 1 400 000
s 12C (2022) R3 500 000 × 20% ............................................................................... 700 000
Base cost before concession or compromise ............................................................ 1 400 000
Less: Debt benefit amount ......................................................................................... (1 000 000)
New base cost after the concession or compromise ................................................. R400 000
Note
In terms of par 12A(3) the debt benefit amount of R1 million must be applied against the base
cost of R1 400 000 (the tax value is not affected). The plant and machinery will therefore have a
new base cost of R400 000. Hakuna will continue to claim capital allowances, but future capital
allowances will be limited in terms of s 19(7) to the cost price (R3 500 000) less the sum of the
debt benefit (R1 000 000) AND the capital allowances previously allowed (R2 100 000), i.e.,
R400 000. The following year’s capital allowance of R700 000 (R3 500 000 × 20%) will thus be
limited in terms of s 19(7) to R400 000.
(b) R3,5 million of the debt was cancelled:
The R3,5 million debt benefit amount reduces the base cost of that plant and machinery with
R1,4 million as the plant and machinery are still held at the date the debt benefit arises
(par 12A(3)). The excess amount is then recouped (s 19(6)). The new base cost is calculated as
follows:
Acquisition costs (2021) ............................................................................................ R3 500 000
Less: Amounts claimed for income tax purposes ...................................................... (2 100 000)
s 12C (2021) R3 500 000 × 40% ............................................................................... 1 400 000
s 12C (2022) R3 500 000 × 20% ............................................................................... 700 000
Base cost before concession or compromise ............................................................ 1 400 000
Less: Debt benefit amount ......................................................................................... (1 400 000)
New base cost after the concession or compromise ................................................. Rnil
Note
In terms of par 12A(3), the debt benefit amount of R3,5 million must be applied against the base
cost of R1 400 000 (the tax value is not affected). The plant and machinery will therefore have a
new base cost of Rnil. Because the amount of the debt benefit exceeds the base cost, the
excess amount of R2 100 000 (R3 500 000 less R1 400 000) must be taxed as a s 8(4)(a)
recoupment (s 19(6)). This recoupment cannot be taxed again when the asset is disposed of
because par (iii) of the proviso to s 8(4)(a) provides that s 8(4)(a) will not apply to any amount
previously included as deemed recoupment in terms of s 19(6). Hakuna will continue to claim
capital allowances, but future capital allowances will be limited in terms of s 19(7) to the cost
price (R3 500 000) less the sum of the debt benefit (R3 500 000) AND the capital allowances
previously allowed (R2 100 000), i.e., Rnil. The following year’s capital allowance of R700 000
(R3 500 000 × 20%) will thus be limited in terms of s 19(7) to Rnil.
Example 17.18. Where the debt was used to fund an allowance asset and the asset is no
longer held at the date the debt benefit arises
During the 2020 year of assessment, ABC (Pty) Ltd borrowed R3,5 million from a local bank to
purchase new plant and machinery used in a process of manufacturing. ABC (Pty) Ltd started
experiencing serious financial difficulty during the 2021 year of assessment and had to sell the
asset for R1 500 000. During the 2022 year of assessment the bank cancelled R2 million of the
debt (none of the capital amount had been repaid by ABC (Pty) Ltd).
Explain the CGT consequences of the cancellation of the debt on ABC (Pty) Ltd).
635
SOLUTION
Yes, ABC (Pty) Ltd’s debt has been reduced with R2 million. The face value of the claim prior to
the arrangement exceeds the market value of the debt with R2 million.
The debt benefit amount is R2 million.
The debt was used to fund the acquisition of allowance assets (plant and machinery used in a
process of manufacturing that qualified for a capital allowance in terms of s 12C).
Disposal of plant and machinery (2021):
Acquisition costs (2020) ....................................................................................... R3 500 000
Less: Amounts claimed for income tax purposes ................................................ (2 100 000)
Section 12C (2020) R3 500 000 × 40% ............................................................... (1 400 000)
Section 12C (2021) R3 500 000 × 20% ............................................................... (700 000)
Base cost and tax value are the same when sold in 2021 .................................... R1 400 000
Recoupment (2021):
Selling price (limited to cost)................................................................................. 1 500 000
Less: Tax value for income tax purposes ............................................................ (1 400 000)
R100 000
Capital gain (2021):
Proceeds (R1 500 000 selling price less R100 000 recouped) ............................ 1 400 000
Less: Base cost (R3 500 000 less R2 100 000 capital allowances) ..................... (1 400 000)
Rnil
Debt benefit arises in 2022:
Recalculate base cost and tax value as though the debt benefit of R2 million
arose prior to the sale in 2021 and then recalculate the recoupment and capital
gain
Acquisition costs (2020) ....................................................................................... R3 500 000
Less: Amounts claimed for income tax purposes ................................................ (2 100 000)
Section 12C (2020) R3 500 000 × 40% ........................................................... (1 400 000)
Section 12C (2021) R3 500 000 × 20% ........................................................... (700 000)
Base cost and tax value prior to taking debt benefit into account ........................ 1 400 000
Less: Debt benefit of R2 000 000 limited to R1 400 000 ....................................... (1 400 000)
Base cost after taking debt benefit into account (par 12(3) – note 1) .................. Rnil
(The tax value remains the same at R1 400 000 – see note 1.) R3 500 000
The portion of the debt benefit that was not used to reduce the base cost, i.e.,
R600 000 (R2 000 000 less R1 400 000) must be treated as a recoupment in
terms of s 19(6) read together with s 8(4)(a).
Recalculated recoupment on sale (2021):
Recoupment in terms of s 19(6) on excess debt benefit ...................................... R600 000
Recoupment relating to sale:
Selling price (limited to cost) ............................................................................. (1 500 000)
Less: Tax value for income tax purposes (see above) ..................................... (1 400 000)
100 000
Excluded from s 8(4) in terms of proviso (iii) of s 8(4)(a) (note 2) ......................... (100 000)
nil
Total recalculated recoupment (R600 000 plus Rnil) ............................................ 600 000
Less: Original recoupment for 2021...................................................................... (100 000)
Absolute difference included in terms of s 19(6A) in 2022 ................................... R500 000
continued
636
Recalculated capital gain on sale (2021):

Proceeds (R1 500 000 selling price less R0 recouped (note 3)) .......................... R1 500 000
Less: Base cost (see above)................................................................................ (nil)
1 500 000
Less: Original capital gain for 2021 ...................................................................... (nil)
Absolute difference included in terms of par 12A(4) in 2022 (note 4) .................. R1 500 000
Notes
1. From the information provided, it is clear that ABC (Pty) Ltd has acquired a debt benefit to
the amount of R2 000 000 to fund the acquisition of an allowance asset. The reduction of the
base cost should therefore be calculated in terms of par 12A(3). The tax value remains
R1 400 000 after the compromise since par 12A(3) only reduces the par 20 expenditure for
CGT purposes and does not result in an income tax deduction.
2. Par (iii) of the proviso to s 8(4)(a) provides that s 8(4)(a) will not apply to any amount pre-
viously included as deemed recoupment in terms of s 19(6). It is submitted that the R100 000
has been included previously in terms of s 19(6) and should thus be excluded.
3. The R600 000 has been included as a deemed recoupment previously in terms of s 19(6)
and should thus be excluded.
4. The absolute difference in terms of par 12A(4) of R1 500 000 should first be multiplied with
the 80% inclusion rate before including it in taxable income.
5. The net tax effect over the years should equal the cash flow and can be used as a test:
2020: Section 12C (R3 500 000 × 40%) ......................................................... (1 400 000)
2021: Section 12C (R3 500 000 × 20%) ......................................................... (700 000)
2021: Actual recoupment (s 8(4)(a)) .............................................................. 100 000
2022: Additional recoupment (s 19(6A)) ........................................................ 500 000
2022: Additional capital gain par 12A(4) ........................................................ 1 500 000
Net effect ........................................................................................................ Rnil
This equals the actual cash flow on the transaction of Rnil (actual cost of the asset of R1,5 million
(R3,5 million less debt relief of R2 million) less selling price of R1, 5 million).
Remember
The CGT implications depend on the purpose of the debt (the type of asset that was funded by
the debt):
l In the case of capital assets
1. If the asset is still held during the year of assessment the debt benefit arises, reduce the
base cost of the asset (par 12A(3)), or
2. If the asset is no longer held during the year of assessment the debt benefit arises, tax the
additional capital gain or loss (recalculated capital gain or loss LESS prior capital gain or
loss (par 12A(4)).
l In the case of allowance assets
1. If the asset is still held during the year of assessment the debt benefit arises, reduce the
base cost of the asset (par 12A(3)) and tax any excess as a recoupment (s 19(6)). Future
allowances are limited in terms of s 19(7).
2. If the asset is no longer held during the year of assessment the debt benefit arises, tax
the absolute differences:
– the additional recoupment (recalculated recoupment LESS prior recoupment
(s 19(6A)) AND
– the additional capital gain or loss (recalculated capital gain or loss LESS prior capital
gain or loss (par 12A(4)).
Where debt was used to fund a pre-valuation date asset

Where the debt was used to fund a pre-valuation date asset, par 12A provides that a ‘new’ date of
acquisition and a ‘new’ base cost for the pre-valuation date asset need to be determined before any
debt benefit can be applied.
Firstly, the debtor must be treated as having disposed of that asset immediately before the debt
benefit arises for an amount equal to the market value of the asset at that time.
Secondly, the debtor must be treated as having immediately reacquired that asset on that same date
(this results in a ‘new acquisition date’ for the pre-valuation date asset) at a base cost equal to
l the market value at that date
l less any capital gain or plus any capital loss (determined as if the asset had been disposed of at
market value at that time).
637
This amount (the market value plus any capital loss/less any capital gain) must be treated as the
debtor’s new base cost.
This capital gain or capital loss is not recognised as an actual capital gain or
loss, but is simply used to redetermine the base cost of the asset (if a capital
Please note!
loss, the amount is added to base cost and if a capital gain, the amount is
deducted from base cost).
Example 17.19. Where the debt was used to fund a pre-valuation asset
ABC (Pty) Ltd borrowed R3,5 million from a local bank in September 2001 to purchase a capital
asset. No allowances were claimed on the asset. Due to ABC (Pty) Ltd experiencing financial
hardship during the financial year ended 31 December 2021, the bank cancelled R500 000 of
the remaining debt on 29 February 2022. The market value of the capital asset on 29 February
2022 was R1 million. The valuation date value is the market value as on 1 October 2001, namely
R3,5 million.
Determine the effect of the debt benefit on ABC (Pty) Ltd.
SOLUTION
The asset constitutes a pre-valuation date asset since it was acquired in September 2001 (before
1 October 2001). Before the base cost of the asset can be reduced by the reduction amount, the
acquisition date and the base cost of the asset need to be re-determined.
The asset is deemed to have been disposed of on 29 February 2022 at its market value of
R1 million and to have been immediately reacquired on 29 February 2022 at R1 million. If the
asset had actually been disposed of for R1 million on 29 February 2022, the capital gains tax
effect would have been as follows:
Proceeds ..................................................................................................................... R1 000 000
Less: Base cost.......................................................................................................... (3 500 000)
(R2 500 000)
Note
This ‘determined’ capital loss will be added to the market value of the asset to determine a new
base cost on 29 February 2022. The new base cost of the asset before the debt benefit is taken
into account will thus be R3 500 000 (R1 000 000 + R2 500 000). Thereafter the normal conse-
quence of paragraph 12A should be applied.
In terms of par 12A, the debt benefit amount of R500 000 must be used to reduce the base cost of
R3 500 000. The effect of par 12A is that ABC (Pty) Ltd will have a new base cost of R3 000 000
(R3 500 000 – R500 000).
17.8.4.4 The interaction between the provisions of par 12A (reducing base cost when debt is
reduced) and par 20(3) (reducing base cost when the underlying expenditure is
reduced)
Paragraph 12A will only reduce the base cost of an asset if the underlying debt that funded the asset,
is reduced. In terms of the general base cost reductions (see 17.8.3), the base cost of an asset is
also reduced if the underlying expenditure is reduced or recovered. If the asset is no longer held, this
will give rise to a capital gain in terms of par 20(3)(b) (see 17.13.1), unless the reduction or recoup-
ment of expenditure relates to a concession or compromise in which case par 12A will apply.
Please work through par 17.8.3 to understand the working of par 20(3)(b).
Example 17.20. Interaction between paras 12A and 20(3)(b)
During its 2020 year of assessment Matata (Pty) Ltd borrowed R5 million from ABC Bank to
acquire intellectual property. Matata (Pty) Ltd paid the seller in cash (using the money from the
loan). Due to unforeseen circumstances in 2022, the intellectual property is now worth less than
the purchase price. Assume the intellectual property is a capital asset other than an allowance
asset.
Explain the CGT consequences of the reduction on Matata (Pty) Ltd, if
(a) during the 2022 year of assessment the seller refunds R600 000 to the purchaser pursuant
to the initial sales contract.
(b) during the 2022 year of assessment ABC Bank writes off R600 000 on the loan as part of a
debt workout (assume it meets the requirement of a ‘concession or compromise’).
(Source: Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012)
638
SOLUTION
(a) The R600 000 refund results in a base cost reduction of R600 000 in terms of par 20(3)
because the underlying expenditure is reduced or recovered. If Matata (Pty) Ltd sells the
intellectual property before the seller provides the refund, the R600 000 refund results in a
capital gain.
(b) The R600 000 debt benefit results in a base cost reduction of R600 000 in terms of par 12A
because of the concession or compromise. If Matata (Pty) Ltd sells the intellectual property
before the seller provides the concession or compromise, the R600 000 refund can also
result in a capital gain in terms of par 12A.
Remember
There are also CGT implications for the creditor when debt is written off. The waiver of a debt is a
disposal for CGT purposes, which may trigger a capital loss in the hands of the creditor. In spe-
cific circumstances, the capital loss on the disposal of a debt owed by a connected person in
relation to the creditor must be disregarded (see par 17.10.5.8).
17.8.5 Cancellation of contracts (par 20(4))

The cancellation of contracts has CGT consequences and a distinction must be drawn between the
following situations:
l a contract cancelled in the same year of assessment in which the contract was entered into, and
l a contract cancelled in the subsequent year of assessment in which the contract was entered
into.
Contracts cancelled in the same year of assessment that it was entered into (par 11(2)(o))
Where a contract is cancelled in the same year of assessment that it was entered into, the disposal
and subsequent cancellation of the contract in the hands of the original owner is considered a non-
disposal. This will have the effect that no capital gain or loss calculation will be required. The base
cost in the hands of the original owner will be the exact same amount as it was prior to entering into
the contract.
Contracts cancelled in a subsequent year of assessment that it was entered into (par 20(4))
Where a contract is cancelled in a subsequent year of assessment to which it was entered into, the
base cost of the asset that is reacquired by the original owner is limited to the base cost of that asset
prior to entering into the cancelled contract. Any subsequent expenditure (for example improve-
ments) incurred by the new owner and recovered from the original owner can also be added to the
base cost of the cancelled contract, provided that it complies with the general requirements of
par 20(1) (see 17.8.1).
In addition to the above, any capital loss or gain in a previous year of assessment when the contract
was entered into, is nullified. If the seller calculated a capital loss in the year that the contract was
entered into, the Eighth Schedule deems that the seller realises a capital gain equal to that capital
loss in the year that the contract is cancelled (par 3(c)). By contrast, if the seller calculated a capital
gain in the year that the contract was entered into, the Eighth Schedule deems that the seller realises
a capital loss equal to the capital gain in the year that the contract is cancelled (par 4(c)).
Example 17.21. Cancellation of contracts
Tshego sells his asset with a base cost of R100 000 for R150 000 to Wayne. Wayne immediately
improves the asset at a cost of R20 000. A dispute arises and the selling contract is cancelled.
Tshego reacquires the asset. He agrees to reimburse Wayne for the improvement cost of
R20 000. No other costs were incurred.
Calculate the capital gain or loss on the transactions in Tshego’s hands if
(a) the contract is cancelled in the same year of assessment in which the contract was entered
into, and
(b) the contract is cancelled in a subsequent year of assessment to which it was entered into.
639
SOLUTION
(a) Where contract is cancelled in the same year it is entered into
It is not a disposal in Tshego’s hands in terms of par 11(2)(o). No capital gain or loss arises. The
improvement expenditure of R20 000 reimbursed by Tshego is added to the base cost of
R100 000, which means the total base cost is equal to R120 000.
(b) Where contract is cancelled in a subsequent year
Year of assessment in which contract is entered into:
Proceeds ....................................................................................................................... 150 000
Less Base cost .............................................................................................................. (100 000)
Capital gain ................................................................................................................... R50 000
Subsequent year of assessment in which contract is cancelled
In terms of par 20(4), Tshego reacquires the asset at a base cost of R120 000 (R100 000
(original base cost) plus R20 000 (subsequent improvement expenditure incurred by Wayne and
recovered from Tshego). The original capital gain of R50 000 calculated in the year the contract
is entered into is cancelled out by a deemed capital loss of R50 000 in the year the contract is
cancelled. Although the objective of the legislature is to nullify the original capital gain, one must
bear in mind that assessed capital losses are dealt with differently from net capital gains for CGT
purposes (see 17.5).
17.8.6 Limitation of expenditure (par 21)

An amount that qualifies as allowable expenditure for CGT purposes shall not be taken into account
more than once in determining a capital gain or loss. In addition to this, no expenditure will be
allowed as qualifying expenditure in terms of par 20(1)(a) to (e) (see 17.8.1) if it is allowable under
any other provision of the Eighth Schedule. This is the case even if the expenditure has been limited
by that other provision.
Paragraph 21 embodies principles similar to those contained in s 23B (the prevention of double
deductions) of the Act (see chapter 12).
17.8.7 Donations tax paid by donor or donee (par 22 read with par 20(1)(c)(vii) and (viii))
A donation of an asset is considered to be a disposal for CGT purposes (par 11(1)(a)). A portion of
the donations tax (see chapter 26 for further information regarding the calculation of the donations
tax) on an asset that is donated should be included in the base cost of the donated asset.
Donations tax paid by the donor

The portion of the donations tax that can be added to the base cost of the donated asset in the
hands of the donor is determined in accordance with a specific formula provided in par 22 (and
included in the base cost in terms of par 20(1)(c)(vii)). The purpose of par 22 is to achieve parity with
the estate duty liability that would have been payable had the donor died on the date of the donation
(ignoring the effect of the R100 000 donations tax exemption and the R3,5 million estate duty
abatement). Where the disposal (the donation of the asset) results in a capital loss (before donations
tax is taken into account), no donations tax will be included in the base cost.
According to the formula in par 22:
(M – A)
Y = × D
M
In this formula
M = the market value of the donated asset
A = all amounts other than the donations tax taken into account in the determination of the base
cost of the donated asset
D = the total amount of donations tax payable.
Remember
Paragraph 22 applies in respect of donations in terms of par 38 which determines that the donor
is deemed to have disposed of the asset for market value.
640
Donations tax paid by the donee

When a donor fails to pay donations tax within the prescribed period, the Act provides that the donor
and donee shall be jointly and severally liable for the donations tax (s 59). Where the donee pays the
donations tax, par 22 cannot apply. This is because par 22 is applicable to the donor’s base cost and
not the donee’s base cost (compare par 20(1)(c)(vii) to par 20(1)(c)(viii)). However, the donee will be
entitled to include a portion of the donations tax paid in the base cost of the asset acquired in terms
of par 20(1)(c)(viii).
According to the ratio in par 20(1)(c)(viii) the following amount can be added to the donee’s base
cost:
Capital gain of donor

Y = × Donations tax
Market value of asset
Example 17.22. Donations tax included in base cost
Mr Lethiba donates a 12m yacht to his son on 1 April 2021. The market value of the yacht is
R1 250 000 and its base cost, excluding donations tax, is R750 000. Assuming this is the only
donation made by Mr Lethiba during the 2022 tax year, donations tax of R230 000 ((R1 250 000 –
R100 000) × 20%) is payable.
Calculate Mr Lethiba’s capital gain on the disposal of the yacht and his son’s base cost of the
yacht if
(a) Mr Lethiba (the donor) pays the donations tax, and
(b) Mr Lethiba’s son (the donee) pays the donations tax.
SOLUTION
(a) If the donor pays the donations tax
Mr Lethiba’s capital gain:
Deemed proceeds on disposal par 38(1)(a)) ............................................................. R1 250 000
Less: Base cost
Base cost excluding donations tax......................................................... R750 000
Portion of donations tax paid by donor, calculated in terms of par 22:
Y = (M – A)/M × D
= (R1 250 000 – R750 000)/R1 250 000 × R230 000 ............................. R92 000
(R842 000)
Capital gain ................................................................................................................ R408 000
Base cost to his son (market value on date of donation par 38(1)(b)) ....................... R1 250 000
(b) If the donee pays the donations tax
Mr Lethiba’s capital gain:
Deemed proceeds on disposal (par 38(1)(a)) ............................................................ R1 250 000
Less: Base cost .......................................................................................................... (R750 000)
Capital gain ................................................................................................................ R500 000
Base cost to his son:
Market value on date of donation (par 38(1)(b))......................................................... R1 250 000
Portion of donations tax paid by donee:
Capital gain of donor
× Donations tax paid by donee
Market value of asset on date of donation
500 000 (see above, excluding donations tax)
× 230 000 (see above) = R92 000
1 250 000
Base cost .................................................................................................................... R1 342 000
Note
The yacht is not a personal-use asset, as its length exceeds ten metres; Mr Lethiba’s capital gain
is therefore not disregarded (see paras 15 and 53).
17.8.8 Immigrants (par 24)

Where non-residents become South African residents, their assets (other than assets already included
in the CGT net) are treated as having being disposed of on the day of becoming South African
residents, and then reacquired at market value on the same day.
641
Due to the fact that the determination of ‘market value’ can sometimes be subjective and easily
manipulated, the Eighth Schedule provides for loss-limitation rules when these assets (that have a
base cost equal to market value) are disposed of at a loss.
17.8.9 Determining base cost of pre-valuation date assets (paras 25 to 27)

Special rules apply to determine the base cost of assets acquired before valuation date. The ‘valu-
ation date’ is
l 1 October 2001, or
l the date on which a person ceases to be a tax exempt person, if this date is after 1 October 2001.
Remember
Where assets were acquired before the valuation date, the increase in the value of the asset
which took place up to valuation date (i.e., before 1 October 2001) is excluded from the CGT
net. The CGT provisions only apply to increases in the realised value of assets that took place on
or after that date.
Example 17.23. Determining profit subject to CGT
An asset with a historical cost of R100 is sold for R700. This asset was originally acquired before
1 October 2001. The capital gain is R600 (R700 – R100). A portion of the gain of R600 refers to
the pre-valuation date period (before 1 October 2001) and is not subject to CGT, but a portion of
this gain of R600 refers to the post-valuation date period (on or after 1 October 2001) and is
therefore subject to CGT.
Discuss how one should determine which part of the R600 is subject to CGT.
Acquisition Disposal
date Valuation date date
1 October 2001
R100 Valuation date value = ? R700
Portion of gain not Portion of gain

subject to CGT subject to CGT
Total gain = R600
SOLUTION
The only way to determine which portion of the total gain refers to which period is to determine
the valuation date value. If one assumes that the valuation date value was R200, then the portion
of the gain subject to CGT would be R500 (Proceeds of R700 – Valuation date value of R200).
The valuation date value should therefore be determined to determine which portion of the gain
is subject to CGT.
The valuation date value is determined according to paras 26 to 28. These paragraphs provide for
different valuation date values in different situations. After determining the valuation date value, one
must remember to add expenditure incurred after valuation date (for example improvement cost).
The base cost of an asset that was acquired by a taxpayer before 1 October 2001, is the sum of
l the valuation date value (VDV) determined according to paras 26 to 28, plus
l any qualifying expenditure (allowable in terms of par 20) incurred on the asset on or after valu-
ation date.
642
The following diagram illustrates how the different valuation date values are determined in different
situations, as well as the effect of the loss-limitation rules (also known as kink tests):
Abbreviations used in diagram

VD = Valuation Date
P = Proceeds
B = Par 20 allowable expenditure incurred before valuation date
A = Par 20 allowable expenditure incurred on/after valuation date
MV = Market Value on valuation date
TAB = Time-Apportionment Base cost method (see 17.8.12)
Determine historical gain or loss*
PB+A
P>B+A Historical loss or
Historical gain break-even
(par 26) (par 27)
No election by
Taxpayer elects VDV: taxpayer
l MV
l 20% (P – A)
l TAB
Has taxpayer
determined/
SARS published MV?
Has MV been adopted
and is
P MV?
Yes No
Yes No
Is VDV = TAB
BP Loss-limitation
and rule 4
VDV = P – A VDV = B > MV? (par 27(4))
Loss-limitation l MV,
rule 1 l 20% (P – A) or
(par 26(3)) l TAB
as elected by Yes No
taxpayer
VDV = higher of VDV = lower of

l MV or l MV or
l P–A l TAB
Loss-limitation rule 2 Loss-limitation rule 3
(par 27(3)(a)) (par 27(3)(b))
* The presumption in this calculation is that the general provisions regarding the determination of base
cost and proceeds will apply. Where applicable, exclude VAT and income tax amounts.
The base cost provisions regarding pre-valuation date assets do not apply where
a person has elected to adopt the weighted average method for valuing certain
Please note! categories of identical assets. Typical identical assets are listed shares, gold or
platinum coins and unit trusts. The reason for this is simply that pre-valuation date
assets cannot be separately identified once they have been merged in a pool with
post-valuation date assets.
643
(1) Valuation date value in a historical gain situation (par 26)

Where the disposal of an asset results in a historical gain situation (i.e., proceeds from the disposal
exceed the qualifying expenditure incurred before, on and after the valuation date), the taxpayer
must adopt one of the following amounts as the valuation date value of the asset (par 26(1)):
l the market value of the asset on valuation date, or
l 20% of (the proceeds of the disposal less allowable expenditure incurred on or after valuation
date), or
l the TAB cost of the asset.
The rule above does not apply to
l interest-bearing financial instruments, or
l identical assets (for example shares) where the weighted-average basis of valuation is used.
A person may only apply the market value as the valuation date value where
l the asset has been valued within three years after 1 October 2001, or
Please note! l the price of the asset was published by the Commissioner in the Govern-
ment Gazette, or
l the asset was acquired from a spouse who had adopted the market value
as valuation date value.
Remember
Regardless of the fact that the taxpayer determined market value on valuation date, the elec-
tion whether to adopt the market value, TAB cost, or 20%-method can only be made in the
year of disposal.
The election of market value as valuation date value is not without its pitfalls. Due to the fact that the
determination of ‘market value’ can sometimes be subjective and easily manipulated, the Eighth
Schedule provides for certain loss-limitation rules (also known as the ‘kink tests’). These special rules
were introduced in an attempt to replace artificial (phantom) losses. Please note that the term ‘kink
test’ is not found in the Act itself, but is borrowed from the United Kingdom where similar rules were
introduced.
Loss-limitation rule 1 (par 26(3))

The first of these loss-limitation rules deals with the situation where a person disposes of a pre-
valuation date asset, and adopts the market value as the valuation date value. If the proceeds from
the disposal of the pre-valuation asset do not exceed that market value, the market value used as the
valuation date value must be replaced with the following amount:
l proceeds
l less the allowable expenditure incurred on/after 1 October 2001 in respect of that asset.
This rule replaces the loss with a neutral position (nil) or reduces the loss.
Example 17.24. Paragraph 26(3): Loss-limitation rule 1
Mr Ditaba disposes of a pre-valuation date asset after the valuation date. He adopts the market
value as the valuation date value of the asset. Other relevant information:
Expenditure incurred before valuation date......................................................................... R100
Expenditure incurred after valuation date ............................................................................ R25
Market value on valuation date ............................................................................................ R200
Proceeds on disposal .......................................................................................................... R150
Calculate Mr Ditaba’s capital gain or loss arising from the disposal of the asset.
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SOLUTION
This is a historical gain situation. The market value is greater than proceeds.
Paragraph 26(3) is applicable, in other words loss-limitation rule 1. Therefore the valuation date
value must be replaced with
Ƒ the proceeds less the expenditure incurred on the asset after valuation date (R150 – R25).
The capital gain will therefore be determined as follows:
Proceeds .............................................................................................................................. R150
Less: Base cost
Proceeds .................................................................................................... R150
Less: Expenditure incurred after valuation date ......................................... (25)
Valuation date value (par 26(3)) ................................................................. R125
Add: Expenditure incurred after valuation date ................................................... 25
(R150)
Capital gain............................................................................................................... Rnil
When neither the taxpayer nor SARS can determine the expenditure on a pre-valuation date asset
incurred before valuation date, the taxpayer may adopt only one of the following two amounts as the
valuation date value of the asset:
l the market value of the asset on valuation date, or
l 20% of the proceeds of the disposal of the asset, less allowable expenditure incurred on/after
valuation date.
The TAB method will not be allowed in this situation as the amount of the expenditure cannot be
determined.
This situation is not indicated on the diagram above, as no loss-limitation rule is applicable.
Remember
To determine the expenditure incurred before valuation date, proof of expenditure is required.
Before 1 October 2001, taxpayers did not retain documentation to verify expenditure incurred on
assets, as CGT was not levied at that time. Original evidence of expenditure incurred before
valuation date may therefore not always be easy to find.
Example 17.25. Base cost of pre-valuation date asset when cost is unknown
In 2022, Mr Gumede disposes of an asset that he acquired in 1985 for proceeds of R130 000. He
no longer has a record of the expenditure incurred on the asset. The market value of the asset on
1 October 2001 was R25 000 and he had incurred expenditure of R2 000 on the asset after
1 October 2001. He may adopt as the valuation date value of the asset on 1 October 2001, its
market value (R25 000) or 20% of the proceeds (R130 000) less the expenditure incurred after
1 October 2001 (R2 000), i.e., 20% of R128 000, or R25 600. Since the higher amount will be
R25 600, Mr Gumede will no doubt choose this amount as the base cost of the asset.
Remember
Loss-limitation rule 1 only refers to the situation where the taxpayer can choose between three
methods as valuation date value of the asset (i.e., information regarding expenditure before and
on/after valuation date is known). It does not refer to the situation where the TAB method falls
away (i.e., information regarding the expenditure before and on/after valuation date is not
known).
It is therefore presumed that where neither the taxpayer nor SARS can determine the expenditure
incurred on a pre-valuation date asset before valuation date, loss-limitation rule 1 will not apply
and a loss may be created using the market value.
(2) Valuation date value in a historical loss or break-even situation (par 27)
Where the disposal of an asset results in a historical loss or break-even situation (the proceeds from
the disposal of an asset do not exceed the base cost expenditure incurred before, on and after
valuation date), the following rules apply:
(a) If the taxpayer determined market value on valuation date, or it was published by the Commis-
sioner, two situations may occur:
l In the first situation, the allowable expenditure incurred before valuation date equals or
exceeds both the proceeds from the disposal of the asset and exceeds the market value of
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the asset on valuation date. In this situation, the valuation date value must be taken as the
higher of the
– market value, or
– the proceeds less base cost expenditure incurred on/after valuation date (loss-limitation
rule 2).
Example 17.26. Loss-limitation rule 2 (par 27(3)(a))
Ms Malekane disposes of a pre-valuation date asset after the valuation date. She determined the
market value as R200 on valuation date. Other relevant information:
Expenditure incurred before valuation date ......................................................................... R250
Expenditure incurred after valuation date ............................................................................ R25
Calculate Ms Malekane’s capital gain or loss arising from the disposal of the asset.
SOLUTION
This is a historical loss situation. The market value was determined by the taxpayer.
The expenditure incurred before valuation date of R250 exceeds both the proceeds of (R150)
and the market value (R200). Therefore par 27(3)(a) or loss-limitation rule 2 will apply.
The valuation date value will be the higher of
l market value (R200), or
l proceeds less the expenditure incurred on the asset after valuation date (R150 – R25).
Proceeds ............................................................................................................................ R150
Less: Base cost
Valuation date value (par 27(3)(a)) ........................................................... R200
Add: Expenditure after valuation date ............................................................... 25
(225)
Capital loss .......................................................................................................................... (R75)
A typical example of a loss-limitation rule 2 situation is where the value of the asset has declined
steadily from inception as in the case of a wasting asset, such as a mine. Paragraph 27(3)(a)
mostly favours the taxpayer, as the market value is allowed despite the fact that a loss is created.
l In the second situation, the allowable expenditure incurred before valuation date is either
less than the proceeds from the disposal of the asset, or it is equal to or less than the
market value of the asset on valuation date. In this situation, the valuation date value of the
asset must be taken as the lower of the
– market value, or
– the TAB cost of the asset (loss-limitation rule 3).
Example 17.27. Loss-limitation rule 3 (par 27(3)(b))
Mr Jones disposes of a pre-valuation date asset after the valuation date. He determined market
value as R150 on valuation date. The asset was purchased five years prior to the valuation date
and sold five years after the valuation date. Other relevant information:
Expenditure incurred before valuation date ......................................................................... R100
Time apportionment base cost ............................................................................................ R75
Calculate Mr Jones’s capital gain or loss arising from the disposal of the asset.
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SOLUTION
This is a historical loss situation. The market value was determined by the taxpayer.
The valuation date value will be the lower of
l market value (R150), or
l time-apportionment base cost (R75).
Proceeds .............................................................................................................................. R50
Less: Base cost.................................................................................................................... (R75)
Capital loss .......................................................................................................................... (R25)
Loss-limitation rule 3 mostly favours the fiscus. The large artificial loss of R100, using market
value (R50 – R150), is replaced with a smaller loss of R25 (using TAB).
(b) If the taxpayer did not determine market value on valuation date, nor was it published by the
Commissioner,
l the taxpayer must adopt the TAB cost of the asset as its valuation date value (loss-limitation
rule 4).
The rules relating to the determination of a valuation date value in the case of a
historical loss of break-even situation do not apply to
Please note! l interest-bearing financial instruments, or
l identical assets (for example shares), where the weighted-average basis of
valuation is used.
There is a view that SARS will never know whether the taxpayer ‘determined’
market value. In the case of high-value items, it should be noted that SARS will
Please note! have the market value. SARS could request the taxpayer to confirm valuation in
the case of other assets.
17.8.10 Valuation date value in respect of s 24J interest-bearing instruments (par 28)
The valuation date value of a s 24J interest-bearing instrument acquired before valuation date is
determined using two alternative methods. These are
l yield-to-maturity method
l market value method.
17.8.11 Market value of assets on valuation date (par 29)

The market value of assets on 1 October 2001 is determined in terms of par 29. This is a transitional
measure and deals with the requirements regarding the valuation of certain assets on valuation date
(temporary market value rules). In all other cases par 31 will be used to determine market value. The
permanent market value rules are therefore dealt with in par 31 (see 17.8.13).
Remember
The rules in par 29 apply unless there are specific rules governing these situations. The following
specific rules override the par 29 rules:
l s 24J interest-bearing instruments (see 17.8.10)
l identical assets valued on the weighted average method (see 17.8.14).
17.8.12 Time-apportionment base (TAB) cost (par 30)

When a pre-valuation date asset is disposed of after valuation date, the only way to determine the
portion of the gain that is subject to CGT is to determine the valuation date value. The taxpayer must
use one of three methods to determine the valuation date value of the asset (see 17.8.9). One
method to determine valuation date value is the time-apportionment base (TAB) cost method.
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Example 17.28. Determine profit subject to CGT using the TAB method
Twenty years after the valuation date, an asset with a historical cost of R100, is sold for R700.
This asset was originally acquired ten years before the valuation date. The capital gain is R600
(R700 – R100). A portion of the gain of R600 refers to the pre-valuation date period and is not
subject to CGT, but a portion of this gain of R600 refers to the post-valuation date period and is
therefore subject to CGT.
Discuss which portion of the R600 is subject to CGT by using principles behind the TAB cost
method.
SOLUTION
The TAB cost method seeks to achieve a linear spread of the historical gain or loss between the
pre- and post-CGT periods.
If the asset has been sold for a profit based on historical cost of R600 (R700 – R100), the period
before 1 October 2001, is ten years and the period after 1 October 2001 is 20 years. It follows
that one third of the profit relates to the pre-CGT period, i.e., R600 × 10/30 = R200. The valuation
date value is determined by adding the gain relating to the pre-CGT period to the original cost:
R100 + (R600 × 1/3) = R300.
The capital gain will then be: R700 less R300 = R400 (i.e., two-thirds of the profit relates to the
post-CGT period, i.e., R600 × 20/30).
The following diagram illustrates how the TAB method achieves a linear spread of the gain or loss
over the period:
R700
R300
R100
10 years VD 20 years
This linear spread principle leads to two sets of formulas under the TAB method (par 30):
(1) standard formulas (paras 30(1) and 30(2))
(2) depreciable assets formulas (par 30(4)).
The following abbreviations are used in these formulas:
Y= Valuation date value
P= Proceeds
B= Par 20 allowable expenditure incurred before valuation date
A= Par 20 allowable expenditure incurred on/after valuation date
N= Number of years from acquisition date until the day before valuation date
T= Number of years from valuation date until disposal date
Remember
When performing a standard TAB calculation, the general rule is that expenditure and proceeds
are determined using basic CGT principles. In the case of depreciable assets, this means that
there has to be a relevant cost reduction through capital allowances, while any recoupments
must be deducted from the amount received on disposal of the asset. However, this rule is
varied when the depreciable assets formulas are applicable.
648
A part of a year is treated as a full year in the formula, for example three years and
one day will be taken as four years.
When determining the number of years prior to and after valuation date (N and T
in the formula), the years are determined as follows:
l Pre-1 October 2001: Start at the date of acquisition and count the completed
years up to, and including 30 September 2001. The final part of the year up to
Please note! and including 30 September 2001, is counted as a full year.
l Post-1 October 2001: Start at 1 October 2001 and count the number of com-
pleted years ending 30 September up to and including the date of disposal.
The final part of the year immediately preceding the date of disposal is
counted as a full year. It is presumed that T is 2 where the disposal date is
1 October 2002 (1 October 2001 – 30 September 2002 plus one day (1 Octo-
ber 2002) taken as a full year).
Rand = B Y A P
Valuation date
Period =
N T
Selling expenses incurred on/after the valuation date must be deducted from the
amounts represented by the symbols R, R1 and P for purposes of calculating TAB.
Any reference to ‘expenditure allowable in terms of par 20’ must exclude selling
expenses (except when determining whether the depreciable assets formulae
should be used).
‘Selling expenses’ means expenditure incurred directly for the purposes of dis-
posing of that asset, which would have constituted expenditure allowable in terms
Please note! of par 20 to be added to base cost. This provision only applies when calculating
TAB and not for other CGT purposes.
It is very important to remember that selling expenses remain post-valuation date
expenditure for the purposes of
l determining base cost when calculating a capital gain or loss of a pre-valu-
ation date asset, and
l the loss limitation rules.
(see 17.8.9)
(1) The standard formulas (paras 30(1) and 30(2)):

(a) the standard TAB formula
(b) the standard proceeds formula
The standard formulas above are used when
l no capital allowances have been claimed on the asset, or
l expenditure was only incurred before 1 October 2001 (nothing incurred on/after 1 Octo-
ber 2001), or
l the asset was disposed of at a capital loss (or break-even).
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The following diagram indicates the application of the standard formulas:
Method incurred Application

Expenditure incurred during a single year of assess- Use standard TAB formula; no limit on period before
ment before 1 October 2001. 1 October 2001.
Expenditure incurred in more than one year of Use standard TAB formula. Period before 1 October
assessment before 1 October 2001. 2001 limited to 20 years.
Expenditure incurred before, and on/after 1 October Use standard proceeds formula and thereafter
2001. standard TAB formula.
Remember
When determining whether expenditure incurred in more than one year, one must refer to years of
assessment.
However, when determining the number of years prior to and after the valuation date (N and T in
the formula), the years are determined by not looking at the years of assessment, but at the years
before the valuation date ending on 30 September 2001, and the years after the valuation date
commencing on 1 October 2001. (A part of a year will be treated as a full year.)
(a) Standard TAB formula in par 30(1)

Under normal circumstance (such as in Example 17.28 above), the only formula neces-
sary will be
Y = B + (((P – B) × N)/(T + N))
In this formula:
Y= Amount to be determined
B= Par 20 qualifying expenditure before 1 October 2001
P= Proceeds from disposal (less certain selling expenses allowed)
N= Number of years from the date the asset was acquired until the day before 1 October
2001 (limited to 20 years if the qualifying expenditure was incurred in more than one
year of assessment prior to 1 October 2001)
T= Number of years from 1 October 2001 until the date the asset was disposed of
Remember
Improvements to an asset before the valuation date are deemed to have been expended on the
date of acquisition. It was necessary to place a cap on how far back one can deem to have
expended these improvements and the 20-year limit was introduced. There is no limit if all pre-
valuation date expenditure happened in a single year. The 20-year limit will also not trigger where
improvements take place post valuation date, although in this case, a portion of the proceeds will
form part of the post-CGT period.
Example 17.29. Standard TAB formula in par 30(1)

An asset was acquired for R100 ten years before 1 October 2001, and was disposed of for R700
20 years after 1 October 2001. The TAB cost will be as follows:
Y = B + (((P – B) × N)/(T + N))
= (R100) + ((R700 – R100) × 10/30) = R300
The TAB cost is, therefore, R300 and the capital gain on the disposal, using the TAB cost, will be
R400 (R700 – R300).
Test: Two-thirds of the profit relates to the post-CGT period, i.e., R600 × 20/30 = R400.
650
(b) Standard proceeds formula in par 30(2)

P = (R × B)/(A + B)
Both standard formulas (standard TAB and standard proceeds) are applied when qualify-
ing expenditure was incurred
l before 1 October 2001, and
l on or after 1 October 2001.
The standard proceeds formula is used to determine the proceeds derived from qualify-
ing expenditure incurred before 1 October 2001.
Thereafter, the standard TAB formula is applied to determine the valuation date value.
In this formula:
P= Proceeds to be used in standard TAB formula in par 30(1)
R= Real or actual proceeds from disposal (less certain selling expenses allowed)
B= Par 20 qualifying expenditure before 1 October 2001
A= Par 20 qualifying expenditure on or after 1 October 2001
Remember
The proceeds formula is based on the premise that
l post-valuation date expenditure generates only post-valuation date gain/loss, while
l pre-valuation date expenditure generates both pre-valuation date gain/loss and post-valuation
date gain/loss.
Example 17.30. Standard formulas: Expenditure incurred before and after the valuation date
An asset was acquired for R100 ten years before 1 October 2001, and was disposed of for R700
20 years after 1 October 2001. Improvements of R200 were made ten years after the valuation
date. Calculate the capital gain on the disposal of the asset.
Firstly, the standard proceeds formula should be used to determine the proceeds that relate to
the period before 1 October:
P = (R × B)/(A + B)
700 × 100
=
200 + 100
= R233
Secondly, the TAB cost is determined using the standard TAB formula:
Y = B + ((P (as adjusted) – B) × (N/(T + N)))
= R100+ ((233 – 100) × (10/(20 + 10)))
= R100 + 44
= R144
Thirdly, the total base cost is determined as the TAB cost (R144), plus the expenditure incurred
after the valuation date (R200) = R344.
The capital gain on the disposal using the TAB cost will be R356, i.e., (R700 – R344).
The answer to the formula can be confirmed using the following test (based on the linear spread
principle):
l portion of proceeds that relate to pre-CGT expenditure: R700 × 100/300 = R233
l gain on this pre-CGT expenditure = R233 – 100 = R133
l portion of this gain that relates to post-CGT period = R133 × 2/3 = R89
l portion of proceeds that relate to post-CGT expenditure: R700 × 200/300 = R467
l gain on post-CGT expenditure = R467 – 200 = R267
l total gain relating to post-CGT period = R267 + 89 = R356.
(2) The depreciable assets formulas (par 30(4))

The portion of the capital gain to be allocated to period after 1 October 2001 can be influenced
by the speed with which expenditure has been written off against income, when the following
scenarios are present:
l when expenditure has been incurred before and on/after the valuation date, and
l the asset qualifies for capital allowances.
651
As a result, in cases where the entire amount of the pre-valuation date expenditure had been
written off against income, the entire gain is deemed to have been earned during the post-
valuation date period. To rectify this problem, the ‘depreciable asset formulas’ were introduced.
Three conditions are required before the ‘depreciable asset formulas’ become applicable:
l the date of the incurred expenditure must be before and on/after the valuation date, and
l the asset in respect of which capital allowances were claimed, must be a depreciable asset,
and
l the proceeds (not reduced by recoupments) must exceed the expenditure (not reduced by
capital allowances). In other words, the asset must have been disposed of at an overall
capital profit.
There are two depreciable assets formulas:
(a) the depreciable TAB formula
(b) the depreciable proceeds formula.
Unlike the standard TAB formula that can, under certain circumstance, be
Please note! applied on its own (without the standard proceeds formula), the depreciable
TAB formula can never be applied without the depreciable proceeds formula.
(a) The depreciable TAB formula

Y = B + (((P1 – B1) × N)/(T+N))
In this formula:
Y= Amount to be determined
B1 = Par 20 qualifying expenditure before 1 October 2001, but not reducing it by deductions such
as capital allowances
P1 = Proceeds calculated according to the depreciable proceeds formula (see below)
B= Same as standard TAB formula
N= Same as standard TAB formula
T= Same as standard TAB formula
(b) Depreciable proceeds formula
P1 = (R1 × B1)/(A1 + B1)
In this formula:
B1 = Par 20 qualifying expenditure before 1 October 2001, but not reducing it by deductions, such
as capital allowances
P1 = Proceeds to be calculated
R1 = Proceeds from disposal of the asset, but not reducing it by normal tax amounts, such as
recoupments (less certain selling expenses allowed)
A1 = Par 20 qualifying expenditure on or after 1 October 2001, but not reducing it by deductions,
such as wear and tear
Remember
When performing a standard TAB calculation, the general rule is that expenditure and proceeds
are determined using the rules in terms of paras 20 (see 17.8.1) and 35 (see 17.9). In the case of
depreciable assets, this means that there has to be a relevant cost reduction through capital
allowances, while any recoupments must be deducted from the amount received on disposal of
the asset. However, this rule is varied when the depreciable assets formulas are applicable.
652
Example 17.31. The depreciable assets formulas

A depreciable asset was acquired for R100 ten years prior to 1 October 2001 (the full R100 had
been claimed as capital allowances for tax purposes). The asset was disposed of for R700,
20 years after 1 October 2001. Ten years after the valuation date, improvements to the value of
R200 were done (on which capital allowances of R100 had been claimed up to the date of
disposal). Calculate the capital gain on the disposal of the asset using TAB formulas.
Firstly, one should determine whether the depreciable formulas are applicable. Determine whether:
l expenditure was incurred before and after the valuation date, and
l the asset is a depreciable asset and capital allowances of R200 were claimed, and
l the proceeds (R700) exceed the expenditure (R300) – in other words, whether the asset was
disposed of at an overall capital profit.
Thereafter, the depreciable proceeds formula should be used to determine the proceeds that
relate to the period before 1 October 2001:
P1 = R1 × B1/(A1 + B1)
700 × 100
=
200 + 100
= R233
Next, the TAB cost is determined using the depreciable TAB formula:
Y = B + ((P1 – B1) × (N/(T + N)))
= R0 + ((233 – 100) × (10/(20 + 10)))
= R0 + R44
= R44
The total base cost is the TAB cost (R44), plus the expenditure incurred after valuation date
(R200 – 100) = R144.
The capital gain on the disposal using the TAB cost will be R356; i.e., ((R700 – 200) – R144).
The normal rules for ‘B’ (expenditure is reduced by capital allowance) are
applied from the depreciable TAB formula onwards. Recoupments and capital
allowances are therefore only excluded in ‘P1’ and ‘B1’ respectively for purposes
of the depreciable assets formula.
Please note!
Had the gain been calculated in terms of the standard formulas, B would have
been nil and the P would have been allocated to the post-valuation date period.
In the end, the entire gain would have been attributable to the period after
1 October 2001 and thus subject to CGT.
653
The following diagram illustrates how the correct formulas should be selected:
l Have capital allowances been claimed on the asset?

l Has expenditure been incurred on/after valuation
date?
l Was the asset disposed of at a capital profit*?
NO to any question YES to all three questions
Has expenditure been incurred

on/after valuation date?
NO YES
Apply the standard

proceeds formula –
Example 17.30
Apply both
depreciable asset
formulas –
Apply the standard TAB formula – Example 17.29 Example 17.31
* Capital profit/loss should be calculated inclusive of income tax amounts.

* In determining this capital profit, selling expenses must be taken into account.
SARS has provided a ‘TAB calculator’ on its website (www.sars.gov.za). This

‘TAB calculator’ uses an Excel worksheet that enables the taxpayer to calculate
the time apportionment base cost of an asset by simply keying in the information
Please note! as required by the ‘TAB calculator’. It is no longer necessary for the taxpayer to
apply the formulas or to even know which formulas to select as the program
automatically applies the formulas according to the information supplied by the
taxpayer. However, this does not apply when using the depreciable formulas.
17.8.13 Market value of assets (par 31)

Paragraph 31 is used to determine the ‘market value’ in respect of assets in most non-valuation date
situations and is considered to contain the permanent valuation rules.
The term ‘market value’ is used throughout the Eighth Schedule in circumstances such as
l valuation date (base cost)
l death
l donation
l cessation
l emigration
l commencement of residence, and
l non-arm’s-length transactions between connected persons.
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Some of these permanent valuation rules, as contained in par 31, are summarised in the table below:
Type of asset Market value
Financial instrument listed on Ruling price on exchange at close of business on last business day before
a recognised exchange disposal
Long-term insurance policy Greater of
l surrender value
l insurer’s market value (assume policy runs to maturity).
South African collective Management company’s repurchase price.
investment scheme
(securities and property)
Foreign collective investment Management company’s repurchase price or if not available, selling price
scheme in open market.
Immovable farming property l Price based on willing buyer, willing seller at arm’s length in open
market, or
l 30% below fair market value.
Any other asset Price based on willing buyer, willing seller at arm’s length in open market.
Unlisted shares Price based on willing buyer, willing seller at arm’s length in open market,
ignoring any
l restrictions on transferability
l stipulated method of valuation.
It should be noted that the use of the 30% below fair market value for farming property is restricted. It
may only be used in the case of the death of a person or when the immovable property is disposed of
by way of donation or non-arm’s-length transaction if
l fair market value less 30% or Land Bank value was used as valuation for the purposes of pre-
valuation date assets, or
l the then Land Bank value or fair market value less 30% was used as base cost when the im-
movable property was acquired on or after the valuation date by way of inheritance, donation or
non-arm’s-length transaction.
Remember
Section 23C provides that VAT should be excluded where the vendor was entitled to an input tax
in terms of the Value-Added Tax Act of 1991. Non-vendors, or vendors who were not entitled to
claim an input tax, may include VAT when determining the market value.
17.8.14 Identical assets (par 32)

Assets that form part of a group of similar assets are generally referred to as identical assets. When
an asset of this nature is sold, it may not be possible to physically identify the particular asset, for
example Krugerrand coins or shares. Identical assets meet the following requirements:
l Firstly, should any asset be sold, it would realise the same amount, regardless of which asset was
disposed of.
l Secondly, all the assets in the group must share the same characteristics, but should have indi-
vidual identification numbers.
To determine the base cost of identical assets, taxpayers must apply one of the following three
methods:
l specific identification
l first in, first out (FIFO), or
l weighted average.
There are no restrictions on the use of the specific identification and FIFO methods; they may be
used for any identical asset. However, the weighted average method may only be used for the follow-
ing classes of assets:
l local and foreign listed shares
l participatory interests in collective investment schemes (related to securities or property carried
on inside and outside South Africa)
655
l gold and platinum coins of which prices are regularly published in newspapers
l s 24J instruments that are listed.
If, for example, the weighted average method had been used in respect of ABC Limited, a listed
share, and that share became unlisted, the weighted average method would no longer be per-
missible in respect of those shares and the taxpayer would be forced to switch to either the specific
identification or FIFO method.
Remember
It is evident from the above that the weighted average method may not be used for
l financial instruments not listed, for example private company shares
l gold and platinum coins of which prices are not published in newspapers (for example a
collection of identical old Roman coins)
l other tangible assets.
The specific identification or FIFO methods will have to be adopted in respect of these assets.
The weighted average must be determined as follows:

l On valuation date – The total market value of the pre-valuation date identical assets, divided by
the number of pre-valuation date identical assets.
l After valuation date – Following each acquisition of an identical asset after valuation date, the
expenditure incurred must be added to the base cost of the identical assets on hand, and
divided by the number of identical assets on hand.
There is no specific rule with regards to the effect that a disposal of an identical asset may have on
the base cost pool of identical assets. Common sense, however, suggests that the pool must be
proportionately reduced by the number of units and base cost of assets sold.
Example 17.32. Weighted average base cost of identical assets

A person purchased 1 000 shares (with an average price of R25 per share) in Ubuntu Ltd for a
total cost of R25 000. If A purchases another 5 000 shares in Ubuntu Ltd for R155 000, the total
cost would be R180 000 and the weighted average price per share would be calculated as R30
(i.e., R180 000/6 000).
The valuation method that is selected for specific financial instruments or identical assets must be
applied until all those identical financial instruments are disposed of.
Example 17.33. Identical assets
Mrs Singh holds the following assets:

l 400 units in a unit trust
l 5 000 ordinary shares in Apollo Ltd
l 700 12% preference shares in Apollo Ltd
l 2 Krugerrand coins.
Which of the above is a holding of identical assets?
SOLUTION
All of the above are holdings of identical assets.
656
Example 17.33. Identical assets – continued

Mrs Singh uses the specific identification method for the Apollo Ltd preference shares and
ordinary shares and the FIFO method for the Krugerrand coins.
She is uncertain which valuation method to use for the units in the unit trust that she acquired on
Date purchased Number Cost per unit Total cost
1 October 2020 100 R1,70 R170
1 December 2020 50 R1,80 R90
1 March 2021 200 R1,90 R380
1 August 2021 50 R2,10 R105
Total 400 R745
On 1 September 2021, Mrs Singh sells 120 units comprising 50 units acquired on 1 December
2020, and 70 units acquired on 1 March 2021.
Calculate the base cost according to the
(a) specific identification,
(b) FIFO, and
(c) weighted average
valuation methods.
SOLUTION
(a) Specific identification method
Date purchased Number Cost per unit Base cost
1 December 2020 50 R1,80 R90
1 March 2021 70 R1,90 R133
Total 120 R223
(b) FIFO method
Date purchased Number Cost per unit Base cost
1 October 2020 100 R1,70 R170
1 December 2020 20 R1,80 R36
Total 120 R206
(c) Weighted average method
Cost per unit is R1,8625 (R745/400). Base cost of 120 units is R224 (R1,8625 × 120).
Remember
The weighted average method may not be used where the base cost of an asset was deter-
mined by using TAB (see 17.8.12) because it is necessary to know the acquisition date of each
asset when using this method, and in situations where the assets are pooled, this would be
almost impossible to establish. When the weighted average method is adopted, the loss-
limitation rules for pre-valuation date assets are therefore also not applicable.
17.8.15 Part disposals (par 33)

In the event of a part-disposal of an asset, it is necessary to allocate part of the base cost of the
whole asset to the part-disposal in order to determine the capital gain or loss of the disposed of part.
When part of an asset is disposed of, the base cost of the part of the asset that is disposed of, is
Market value* of the asset disposal
Allowable expenditure (base cost) of the entire asset ×
Market value* of the entire asset.
* Market values immediately prior to the disposal of the asset are used.
The remainder of the expenditure would be allowable as base cost on a future disposal of the
retained part.
A similar principle is applied when determining the market value on 1 October 2001 of part of a pre-
valuation date asset that is disposed of.
657
Example 17.34. Base cost: Part-disposal where part of base cost cannot be directly attributed
Mr Davids has been the owner of a two-hectare piece of vacant land for many years. A devel-
oper offers him R400 000 for half the property. An estate agent values the entire property at
R1 000 000. The market value of the property was R700 000 on 1 October 2001, and Mr Davids
has elected to adopt the market value as the valuation date value.
Calculate the capital gain or loss on the sale of land disposed of.
SOLUTION
Proceeds ....................................................................................................................... R400 000
Less: Base cost of part-disposal (R400 000/R1 000 000 × R700 000) ......................... 280 000
Capital gain ................................................................................................................... R120 000
When a part of the base cost of an asset can be directly attributed to the part of the asset that is
disposed of or retained, an apportionment of the base cost using the formula is not necessary.
Example 17.35. Base cost: Part-disposal where part of base cost can be directly attributed
Ms Mabato purchased two adjoining pieces of land ten years before valuation date within two
months of each other. She paid R50 000 for the first piece and R75 000 for the second piece of
land. Thereafter the two pieces of land were consolidated. On 30 September 2006, she
subdivided the property and sold the original piece of land for R170 000. She adopted the TAB
cost as the valuation date value of the asset.
Calculate the capital gain on the sale of the property.
SOLUTION
Proceeds ....................................................................................................................... R170 000
Less: Base cost R50 000 + [(R170 000 – R50 000) × 10/15] (note 2) .......................... 130 000
Capital gain ................................................................................................................... R40 000
Notes
(1) No apportionment of the base cost is necessary as the allowable expenditure (R50 000) can
be directly attributed to the part of the asset (the first piece of land) that is disposed of.
(2) Because the asset was acquired before 1 October 2001 and the TAB method was adopted
as valuation date value, the standard TAB formula is used to determine base cost.
The following four events will not trigger part-disposal for CGT purposes:
l The granting of an option in respect of an asset. The base cost of the asset will only be affected
when the option is exercised and the asset is disposed of.
l The granting, variation or cession of a right of use of an asset without the receipt or accrual of any
proceeds. When the owner of a property enters into a lease agreement, it is not regarded as a
part-disposal and there is no resulting gain or loss.
l Improvement, by a lessee, of immovable property owned by a lessor. Any disposal of the bare
dominium (the ownership of the improvements without the right of use thereof) in the improve-
ments is deferred until the end of the lease. The time of disposal therefore occurs when the lease
expires. (See 17.12.4 for a detailed discussion of lease improvements.)
l Replacement of part of an asset where that replacement comprises a repair. This provision
prevents numerous small capital loss claims. This provision does not affect persons who are
entitled to claim repairs as normal tax deductions under s 11(d) of the Act.
Example 17.36. Base cost: Part-disposal where it comprises a repair

Mr Lesedi replaced a broken window in a privately used building. He originally acquired the
building for R500 000; by apportioning the R500 000 base cost (using market values), he
determines that the base cost of the window is R500. He sells the broken window for R50 and
makes a loss of R450.
Discuss the CGT effect of this transaction.
658
SOLUTION
Where replacement of part of an asset constitutes a repair, it does not trigger the part disposal
rules in the Eighth Schedule. The base cost of the building may therefore not be allocated to the
window. Any proceeds derived from the disposal of the window will be recognised as a capital
gain at the time of its disposal, with no base cost deduction. The R50 will therefore be taxed as a
capital gain. Please note that no normal tax deduction for these repairs can be claimed under
s 11(d) of the Act as this is a privately used building.
17.8.16 Debt substitution (par 34)

Sometimes a debtor settles or reduces his debt by disposing of an asset to the creditor. This would
result in a disposal for both the debtor and the creditor (similar to a barter transaction). The debtor
disposes of an asset and the creditor disposes of his right to claim payment from the debtor.
The capital gain or loss in the hands of the debtor (for disposal of the asset) is determined as follows:
l proceeds: the amount by which the debt owed to the creditor is reduced as a result of the
disposal of the asset
l base cost: the base cost of the asset as determined according to the general base cost rules
(see 17.8.1).
The capital gain or loss in the hands of the creditor (for disposing of his right to claim payment) is cal-
culated as follows:
l proceeds: the market value of the asset obtained from the debtor
l base cost: the amount by which the creditor's claim to payment was reduced.
Remember
The creditor will only account for a capital gain or loss in respect of his disposal over the right to
claim payment if the gain or loss is not taken into account for determining his taxable income. If
the creditor is allowed to claim a bad debt deduction in terms of s 11(i) of the Act, there will
generally be no capital gain or loss.
Paragraph 34 is an anti-avoidance provision as it prevents the gain or loss (already determined in

respect of the exchange of the creditor's claim to payment for the asset) from being taken into
account twice in the hands of the creditor. Without this provision the base cost of the asset acquired
(for the creditor) would be the amount of the claim given up by the creditor. This rule determines,
however, that the asset is deemed to be acquired by the creditor at a base cost equal to the market
value of the asset at the time.
Example 17.37. Debt substitution

Mogale owes Angie R1 000. Angie agrees to release Mogale from the debt in return for the
transfer, by Mogale to Angie, of an asset to the value of R900. Mogale acquired the asset at a
cost of R500.
Explain the CGT effect for Mogale and Angie. Assume that this is a loan with no underlying asset
and that the bad debt deduction of s 11(i) of the Act is not applicable. Also assume that par 56 is
not applicable.
SOLUTION
Effect for Mogale (debtor)
Capital gain = proceeds – base cost = R1 000 – R500 = R500.
Effect for Angie (creditor)
Capital loss = base cost – proceeds = R1 000 – R900 = R100.
The base cost of Angie’s new asset is R900, which is the market value of the asset.
Please note: Without par 34, the loss of R100 would have been accounted for twice (as the base
cost would have been R1 000 instead of R900).
659
17.9 Proceeds
The fourth and last building block of CGT is proceeds. Whenever there is a disposal of an asset and
the base cost has been determined, the next step in calculating the capital gain or loss is to establish
the proceeds received or accrued on the disposal of the asset.
The proceeds of an asset are determined using the rules in part VI (paras 35 to 43) of the Eighth
Schedule. Proceeds are equal to the total amount received by, or accrued to a person in respect of
that disposal.
The following table provides the meaning of each term that describes ‘proceeds’ in par 35:
Term Meaning
Amount Anything that has a monetary value, including cash.
In respect of The words ‘in respect of’ make it clear that a receipt and accrual must be causally
connected (linked) to the disposal of an asset to qualify as part of the proceeds
from that disposal. A receipt or accrual can therefore precede a disposal.
Received or accrued The meaning of the words ‘received or accrued’ is the same as their meaning for
‘gross income’ as used for gross income in the Act. ‘Received’ means ‘received
by the taxpayer on his own behalf for his own benefit’ (Geldenhuys v CIR (1947)).
‘Accrued’ means ‘to which the taxpayer has become entitled to’ (Lategan v CIR
(1926 CPD)).
Specific inclusions The following amounts are expressly included as proceeds:
l The amount by which any debt owed by a person has been reduced or
discharged. See Example 17.38.
l Any amount received by, or accrued to a lessee from the lessor related to
improvements to leased property.
l The amount by which the market value of a person’s interest in a company,
trust or partnership decreases in consequence of a ‘value-shifting arrange-
ment’ (see 17.12.1).
Only the face value of an amount that is payable in future must be taken into
Please note!
account as proceeds. Present values should be disregarded.
Example 17.38. The amount of debt discharged is specifically included in ‘proceeds’
Anele owes Brian R10 000. Anele sells an asset to Charles for R15 000. Anele requests Charles
to settle his (Anele’s) debt with Brian and only gives Charles R5 000 in cash. Determine the
amount of ‘proceeds’ in the hands of Anele.
SOLUTION
The amount of R10 000, paid by Charles to Brian, will constitute part of the proceeds of the
disposal of Anele’s asset. The total proceeds on the disposal of Anele’s asset will therefore be
R15 000 (R5 000 cash plus R10 000 debt discharge).
17.9.1 Amounts excluded from the definition of ‘proceeds’ (par 35(3))

The following amounts are excluded from ‘proceeds’:
Paragraph Amounts excluded from proceeds
(a) Amounts taken into account when determining a person’s taxable income for normal tax
purposes, for example, a recoupment of capital allowances.
(b) Any amount that has been repaid or becomes repayable to the purchaser of an asset, for
example where the seller repays part or all of the proceeds to the buyer.
(c) Any reduction of the proceeds as the result of the following:
l the cancellation, termination or variation of an agreement*;
l the prescription or waiver of a claim;
l the release from an obligation;
l any other event (for example, if the price of a disposed asset is reduced).
* Other than an agreement that results in the asset being reacquired by the person who disposed of it.
VAT vendors act as agents for SARS. Any output tax levied on the supply (disposal) of an
asset in terms of the VAT Act needs to be paid over to SARS and does not form part of
proceeds.
660
Example 17.39. Exclusions from proceeds
The following transactions occurred during the same year of assessment: Bob sells a flat to
Yvonne for R400 000. Yvonne pays R380 000 immediately, with the remaining R20 000 to be
paid a month later. When Yvonne complains that there is damp (moisture) in the flat, Bob
decides to give Yvonne a discount of R40 000 on the purchase price. Calculate the proceeds in
the hands of Bob for CGT purposes.
SOLUTION
The proceeds of R400 000 (R380 000 cash plus R20 000 outstanding) should be reduced by the
discount of R40 000. The proceeds, for the purpose of the CGT calculation, are therefore
R360 000 (R380 000 cash plus R20 000 debt less R40 000 discount).
17.9.2 Disposal of certain debt claims (par 35A)

The purpose of this provision is to prevent the understatement of proceeds subject to CGT on the
disposal of an asset, if a portion of the proceeds only accrues in a subsequent year of assessment
and the debt claim (the right to claim payment of the unpaid proceeds) is also subsequently
disposed of. The understatement occurs because the unaccrued proceeds are diverted to the
disposal of the debt.
17.9.3 Incurred and accrued amounts not quantified (s 24M)

Section 24M of the Act deals with the situations where an asset is acquired for an unquantified
amount or where an asset is disposed of for an unquantified consideration. This particular provision
defers the recognition of the incurral of the expense or the accrual of the proceeds until the amount
has been quantified. It does not, however, determine the capital or revenue nature of those amounts.
Any capital losses arising from amounts that have not yet accrued are ring-fenced (see 17.9.4) until
all unquantified amounts have been quantified.
17.9.4 Disposal of assets for unaccrued amounts of proceeds (par 39A)

If an asset is sold, and all or parts of the proceeds from the disposal only accrue in future years of
assessments, then
l any capital loss arising from such a disposal is ring-fenced until sufficient proceeds have
accrued to the seller, but
l if it becomes certain that no further proceeds will accrue, any previously ‘ring-fenced’ capital loss
relating to that asset may be taken into account for CGT purposes.
Example 17.40. Ring-fencing of capital losses in respect of unaccrued proceeds

Marc acquired a block of flats in December 2005 at a base cost of R250 000. In March 2019 he
sold the block of flats to Jessica. The contract determined that the purchase price was payable
in annual instalments over three years, with the first payment due on 28 February 2020. Each
instalment was payable only if Jessica achieved a net rental return of at least 10% during the
specific year. Jessica was able to achieve the net rental return of at least 10% during the
required three years and she paid R150 000, R120 000 and R55 000 as required by the contract,
starting on 28 February 2020.
Determine the CGT effect of the above for Marc’s 2020, 2021 and 2022 years of assessment.
SOLUTION
The entire proceeds from the disposal of the block of flats do not accrue to Mark in 2020 – they
accrue at the end of each year of assessment, as Jessica achieves the net rental return of at
least 10%.
Any capital losses that arise in this situation are ring-fenced until sufficient proceeds have
accrued to Marc to absorb the capital losses.
continued
661
Calculation of capital gain or loss in 2020

Proceeds (only R150 000 accrues in 2020) ................................................................. R150 000
Less: Base cost........................................................................................................... (250 000)
Capital loss .................................................................................................................. (R100 000)
The capital loss of R100 000 is ring-fenced in terms of the provisions of par 39A
and cannot be set off against any other capital gains and losses of Marc during the
CGT consequences 2021
Further proceeds deemed to accrue in 2021 (s 24M(1)(b)) when it became quanti-
fiable ............................................................................................................................ R120 000
Less: Ring-fenced loss in terms of par 39A brought over from 2020.......................... (100 000)
Capital gain .................................................................................................................. R20 000
The ring-fenced capital loss of R100 000 can be set-off against the capital gain
calculated in 2021.
CGT consequences 2022
Further proceeds are taxed as a capital gain in 2022 when it becomes quantifiable
(s 24M(1)(b) read together with par 3(b)) .................................................................... R55 000
17.9.5 Disposals and donations not at arm’s length or to a connected person (par 38)
When a person disposes of an asset
l to anyone by means of a donation, or
l to anyone for a consideration not measurable in money, or
l to a connected person* for a consideration that does not reflect an arm’s length price
the proceeds of that disposal are deemed to be the market value of that asset on the date of the
disposal.
* ‘Connected persons’ immediately before or immediately after the transaction.
Section 9HB, which deals with the roll-over provisions between spouses, takes
Please note! priority over the provisions of par 38. This means that assets transferred between
spouses will not be deemed to be at market value.
Paragraph 38 does not only determine the amount of proceeds for the person who disposes of the
asset, but it also determines the base cost of the acquirer of the asset. The person who acquires the
asset is treated as having acquired it for a base cost equal to the same market value.
There are specific instances where this deemed disposal at market value do not apply. These include
l the issue of share options in terms of employee share incentive arrangements prior to 26 October
2004 (par 38(2)(a))
l the cancellation or repurchase of shares under certain share incentive schemes (par 38(2)(b))
l the transfer of equity shares to employees in terms of a broad-based employee share plan
(par 38(2)(c))
l the disposal of an asset in exchange for shares issued in respect of which the rules of s 40CA
apply (par 38(2)(e))
l disposal of land defined as ‘declared land’ (land conservation regarding to nature reserves or
national parks) in terms of s 37D(1) (par 38(2)(f)).
Example 17.41. Disposal of a depreciable asset between connected persons
Mthemba Ltd and Van Vuuren Ltd are connected persons in relation to each other. Mthemba sells
a fully depreciated asset that was acquired at a cost of R100 to Van Vuuren for R100. The market
value of the asset at the date of disposal was R120.
Explain the CGT consequences.
662
SOLUTION
In terms of par 38(1)(a), Mthemba Ltd has proceeds of R120 (market value) – R100 (recoup-
ment) = R20, and a base cost of nil (R100 cost reduced by capital allowances of R100 in terms
of par 20(3)(a) = R0), resulting in a capital gain of R20. Van Vuuren Ltd acquires the asset at a
base cost of R120 (par 38(1)(b)).
17.10 Exclusions, roll-overs, attributions and limitations

The four building blocks of CGT (asset, disposal, base cost and proceeds) are necessary to deter-
mine the capital gain or loss in respect of each asset (these building blocks have been dealt with in
this chapter in 17.1 to 17.9). The next step would be to calculate the capital gain or loss (‘proceeds’
less ‘base cost’).
l Where the proceeds exceed the base cost of the asset, a capital gain is determined. However,
the following must be noted:
– Various capital gains must be disregarded.
– Certain capital gains may be rolled-over.
– Certain gains resulting from a donation must be attributed to the donor.
l Where the base cost exceeds the proceeds of the asset, a capital loss is calculated. However,
the following must be noted:
– Various capital losses must be disregarded.
– Certain capital losses must be limited.
Firstly, various capital gains and losses must be disregarded or excluded. Part VII (paras 44 to 50) of
the Schedule deals with the primary residence exclusion and part VIII (paras 52 to 64E) of the Schedule
deals with all other exclusions. In general, any capital gain or capital loss that is subject to an exclusion
must be disregarded before determining a person’s aggregate capital gain or aggregate capital loss.
17.10.1 Primary residence exclusion (paras 44 to 51A)

Where a natural person sells his private residence certain capital gains and losses on the disposal of
the primary residence (par 45(1)) must be disregarded. Because the primary residence has to be
situated in South Africa, the primary residence exclusion is only available to South African residents.
The primary residence exclusion can also apply if the primary residence is held by a special trust. In
terms of the primary residence exclusion rule, there are two possibilities: If the primary residence
is sold for more than R2 million, the first R2 million of the capital gain or loss should be disregarded
(the R2 million gain or loss rule – par 45(1)(a)). If the primary residence is sold for R2 million or less
and a capital gain is realised, the full capital gain is disregarded (the R2 million proceeds rule –
par 45(1)(b)).
(1) The R2 million gain or loss rule (par 45(1)(a))
A natural person and a special trust must disregard any capital gain or capital loss of up to
R2 million on the disposal of a primary residence (par 45(1)(a)) but only if the R2 million
proceeds rule (par 45(1)(b)) does not apply. Where more than one natural person or special
trust jointly holds an interest in a primary residence, they will have to apportion the capital gain
exclusion of R2 million in relation to each interest held (par 45(2)).
The R2 million primary residence exclusion is not a once-in-a-life-time exclusion, and the
taxpayer will therefore be entitled to this exclusion each time he sells his primary residence.
However, only one residence at a time can be regarded the primary residence of a person
(par 45(3)). There could never be an overlapping period where one person owns two resi-
dences and uses both as primary residences, except under certain circumstances (death,
where residence is offered for sale, in process of erection or if accidently left uninhabitable for
absences not exceeding two years (par 48 applies)). Therefore, a holiday home that is not a
person’s main residence will not qualify for the primary residence exclusion.
(2) The R2 million proceeds rule (par 45(1)(b))
Any capital gain on the disposal of a primary residence by a natural person or special trust is
disregarded if the proceeds from the disposal of that primary residence do not exceed
R2 million (par 45(1)(b)). However, this R2 million proceeds rule does not apply where that
natural person or the beneficiary or spouse of that special trust
l was not ordinarily resident in that residence for the entire period of ownership (after 1 Octo-
ber 2001) (par 45(4)(a)), or
663
l used that residence or a part thereof for the purposes of carrying on a trade for any portion
of the period of ownership (after 1 October 2001) (par 45(4)(b)).
Paragraph 45(4) sets out circumstances where the R2 million proceeds rule can-
Please note! not be applied. Paragraph 45(4) does, however, not list the 2ha limitation on land
as one of the circumstances where the R2 million proceeds rule cannot apply.
Where the R2 million proceeds rule cannot apply (proceeds from the disposal of the primary
residence exceeds R2 million or the two exclusions (par 45(4)) apply), then the R2 million gain
or loss rule (par 45(1)(a)) may still be applied.
Remember
Although a primary residence is used mainly for purposes other than the carrying on of a trade,
fixed property is excluded from personal-use assets (par 53(3)(b)). The only exclusions from CGT
for a capital gain or loss made on a primary residence are the exclusions in terms of par 45(1).
Example 17.42. Primary residence exclusion – two possibilities
Raymond’s residence was originally purchased on 1 October 2001 for R1 000 000 solely to be
used as a primary residence for the entire period of ownership. Six years later he sold the primary
residence for
(a) R1 500 000
(b) R3 500 000.
Calculate the primary residence exclusion in each instance.
SOLUTION
(a) (b)
R R
Proceeds ................................................................................ 1 500 000 3 500 000
Base cost................................................................................ (1 000 000) (1 000 000)
Capital gain before primary residence exclusion ................... 500 000 2 500 000
The primary residence exclusion in terms of par 45(1)(b)...... (Note 1) (500 000)
The primary residence exclusion in terms of par 45(1)(a) ...... (Note 2) (2 000 000)
Capital gain ............................................................................ nil 500 000
Notes
(1) As the proceeds do not exceed R2 million, the full capital gain of R500 000 is disregarded in
terms of the R2 million proceeds rule (par 45(1)(b)). None of the exclusions in par 45(4) apply
as the residence was solely used as primary residence for the entire period of ownership. If
one of the exclusions in par 45(4) applied, then the par 45(1)(a) R2 million gain or loss rule
should have been used to disregard the capital gain.
(2) The proceeds exceed R2 million. Therefore, the capital gain up to R2 million is disregarded
in terms of the R2 million gain or loss rule (par 45(1)(a)). If the residence was partly used for
trade purposes or not used as primary residence for the entire period of ownership, the
R2 million gain or loss rule (par 45(1)(a)) would have still been applicable.
17.10.1.1 Important definitions (par 44)

Meaning of ‘residence’
‘Residence’ is defined as ‘any structure, including a boat, caravan or mobile home, which is used as
a place of residence by a natural person, together with any appurtenance belonging to it and enjoy-
ed with it’ (par 44).
Meaning of ‘primary residence’
The term ‘primary residence’ is defined as a residence in which a natural person or a special trust
holds an ‘interest’ (see below) (par 44). In addition, the natural person or a beneficiary of the special
trust or the spouse of the person or beneficiary must
l ordinarily reside or have resided in the residence and regard it as his or her main residence, and
l use or have used it mainly (more than 50%) for domestic purposes.
664
Example 17.43. Residence not qualifying as a primary residence

Jane is the owner of a double-storey building. She runs a shop on the ground floor and lives on
the first floor. The area of the ground floor is 110 square meters, whilst the area of the first floor is
100 square meters.
Determine whether the building will qualify as a primary residence.
SOLUTION
As less than 50% of the residence is used for domestic purposes, the entire residence will not
qualify as a primary residence (not mainly used for domestic purposes).
Note
It is clear from the definition that if a company, close corporation or ordinary trust owns a
residence, it will not qualify as a primary residence, even if it is occupied as the primary resi-
dence of the shareholder of the company, member of the close corporation or beneficiary of the
trust.
Meaning of an ‘interest’
An interest is defined as
l any real or statutory right, or
l a share in a share block company which owns the residence, or
l a right of use or occupation
l excluding a right under a mortgage bond and excluding a right or interest in a trust or trust asset
other than a right of a lessee who is not a connected person in relation to that trust (par 44).
This means that a person may hold an interest in a residence by owning it, by holding shares in a
share block company or even by holding a mere right to occupy the residence (for example a
99-year lease or a usufruct unless the bare dominium is held by a trust).
17.10.1.2 Apportionment of exclusion if interest is held by more than one person (par 45(2))
The R2 million gain exclusion operates on a ‘per primary residence’ basis and not on a ‘per person
holding an interest in the primary residence’ basis. This means that where, for example, two indi-
viduals have an equal interest in the same primary residence and both of them use it as a primary
residence, the R2 million must be apportioned and each will be entitled to a primary residence
exclusion of a maximum of 50% of R2 000 000, i.e., R1 000 000. This would typically apply to
spouses married in community of property where each spouse is deemed to hold a 50% interest in
the residence.
Example 17.44. Apportionment of primary residence exclusion
Peter is married in community of property to Paula and the primary residence falls within their
joint estate. The residence was originally purchased on 1 October 2001 for R800 000 solely to be
used as a primary residence. Five years later they sold the primary residence for R3 500 000 in
order to purchase another primary residence. Assume that Peter and Paula had no other capital
gains or losses during the year in question.
Calculate the taxable capital gain for Peter and Paula.
SOLUTION
Peter and Paula’s taxable capital gains are determined as follows:
Total Peter Paula
R R R
Capital gain apportioned par 14 (R3 500 000 –
R800 000) ....................................................................... 2 700 000 1 350 000 1 350 000
The primary residence exclusion in terms of par 45(2) .. (2 000 000) (1 000 000) (1 000 000)
Balance subject to CGT ................................................. 700 000 350 000 350 000
Annual exclusion ............................................................ (40 000) (40 000)
Aggregate capital gain ................................................... 310 000 310 000
Taxable capital gain (R310 000 × 40%) ......................... 124 000 124 000
665
The apportionment of the R2 000 000 exclusion only applies if more than one natural person or
special trust holds an interest in the residence as primary residence. This means that if a company
holds 30% and a natural person holds the other 70%, then the natural person can claim the full
R2 000 000 exclusion when the residence is sold and not only 70% of R2 000 000. The company will
not be entitled to the R2 000 000 exclusion as it only applies to natural persons and special trusts.
The apportionment furthermore only applies if each of the natural persons holds the residence as
primary residence. Therefore, if individual A holds 30% of the residence and individual B holds the
other 70%, but only individual A uses the residence as primary residence, individual A can claim the
full R2 000 000 exclusion when the residence is sold, and not only 30% of R2 000 000.
17.10.1.3 Apportionment of capital gain or loss (paras 46 to 50)

In order to determine the portion of the capital gain or loss that qualifies for the primary residence
exclusion, the following requirements need to be considered:
l The exclusion is limited to a land size of two hectares (par 46).
When a person disposes of a primary residence together with the land on which it is situated, the
exclusion of the capital gain or loss will apply only to so much of the land, including unconsoli-
dated adjacent land, as does not exceed two hectares.
l The exclusion is limited to the period occupied as primary residence (par 47).
When a person disposes of a primary residence, the exclusion of the capital gain or loss will
apply only to the period that the person was ordinarily resident in the primary residence. This
means that a person need not be living in the residence at the time of the sale in order to qualify
for the primary residence exclusion. The person only had to use it as primary residence for a part
of the time he or she owned it (after 1 October 2001).
l The exclusion is limited to the residential use of the primary residence (par 49).
When a person disposes of a primary residence, the exclusion of the capital gain or loss will
apply only to the residential use of the property. Any trade or non-residential use of the primary
residence does not qualify for the exclusion.
The capital gain or loss needs to be apportioned regarding each of these three limitations in order to
determine the portion of the capital gain or loss that qualifies for the primary residence exclusion. The
apportionment of these limitations will now be discussed in detail:
(1) Apportionment where the land size exceeds two hectares (par 46)
The primary residence exclusion is only available to the extent that the land upon which the
residence is situated does not exceed two hectares. The land must be used mainly for domes-
tic or private purposes together with the residence and the land must be disposed of at the
same time and to the same person who buys the residence. Where the size of the land exceeds
two hectares, apportionment of the capital gain of the land is required.
Example 17.45. Apportionment where the land exceeds two hectares
Jonathan owns a primary residence situated on four hectares of land. The base cost of the
property was R6 million (R2 million for the residence and R4 million for the land). Jonathan
disposes of the property for R8 million of which R5 million is attributable to the land.
Calculate the taxable capital gain for Jonathan.
666
SOLUTION
Jonathan’s taxable capital gain is determined as follows:
Total Land not Primary
qualifying residence
R R R
Proceeds from disposal (Land of R5 million ×
2ha/4ha is excluded) ................................................... 8 000 000 2 500 000 5 500 000
Less: Base cost (Land of R4 million × 2ha/4ha is
excluded) ......................................................... (6 000 000) (2 000 000) (4 000 000)
Capital gain ................................................................. 2 000 000 500 000 1 500 000
The primary residence exclusion in terms of
par 45(2)(a) (R2 million limited to R1 500 000) ............ (1 500 000) (0) (1 500 000)
Balance subject to CGT .............................................. 500 000 500 000 0
Annual exclusion ......................................................... (40 000)
Aggregate capital gain ................................................ 460 000
Taxable capital gain (R460 000 × 40%) ...................... 184 000
(2) Apportionment for periods not ordinarily resident in the primary residence (par 47)
An adjustment must be made when a person has occupied a residence as his primary resi-
dence for only a part of the period of ownership (after 1 October 2001). The capital gain or loss
to be disregarded in these circumstances must be determined with reference to the period
during which the person concerned was ordinarily resident in the residence. Certain periods of
absence from the primary residence are deemed as still being periods of primary residence
(see par 48 discussed below the example).
Example 17.46. Interrupted residence

Mr Ayanda bought a house on 1 July 2002 for R350 000. He lived in it for 15 years and con-
sidered it as his primary residence, where after he moved into a flat with his family. He then let
the house for five years before disposing of it for R2 150 000.
Determine the portion of the capital gain that will qualify for the primary residence exclusion.
SOLUTION
Mr Ayanda’s taxable capital gain is determined as follows:
Total Period of Period
Absence ordinarily
resident
R R R
Capital gain (Note 1) .................................................... 1 800 000 450 000 1 350 000
The primary residence exclusion in terms of
par 45(2)(a) (R2 million limited to R1 350 000)............. (1 350 000) (0) (1 350 000)
Balance subject to CGT ............................................... 450 000 450 000 0
Annual exclusion .......................................................... (40 000)
Aggregate capital gain................................................. 410 000
Taxable capital gain (R410 000 × 40%) ....................... 164 000
Note 1: Of the capital gain of R1 800 000 (R2 150 000 – R350 000), R1 350 000 (R1 800 000 ×
15/20) is attributable to the period during which the house was occupied as his primary
residence, and R450 000 is attributable to the period during which it was not occupied by
Mr Ayanda as his primary residence. Of the capital gain of R1 800 000, R1 350 000 must
therefore be disregarded, and the balance of R450 000 attributable to the period in which the
house was not occupied as a primary residence will be taxable as a capital gain (par 47).
Please note: The method of apportioning is not prescribed in the Act, but according to the
examples in the Comprehensive Guide to Capital Gains Tax (issued by the SARS) months are used
when apportioning.
Periods of absence deemed to be ordinarily resident (par 48)

A natural person or a beneficiary of a special trust (or a spouse of the natural person or beneficiary)
is treated as being ordinarily resident in a residence for a continuous period of up to two years if that
person does not reside in it during this period for any of the following reasons:
l The residence was offered for sale while it was the primary residence of that natural person or
special trust and was vacated due to the acquisition, or intended acquisition, of a new primary
residence.
667
l The residence was being erected on land acquired for the purposes of building a residence to be
used as the primary residence of that natural person or special trust.
l The residence was accidentally rendered uninhabitable.
l The natural person or the beneficiary of a special trust (or a spouse of the natural person or
beneficiary) died.
Where the period of absence (in terms of par 48) exceeds two years, the natural
Please note! person or the beneficiary of a special trust (or a spouse of the natural person or
beneficiary) is treated as still being ordinarily resident in the residence, but only
for two years out of the total period of absence.
Example 17.47. Absence from residence pending sale
Mr Ahmed lived in a house as his primary residence for several years before he decided to sell it.
He put the house on the market, but bought another house while trying to sell the first house. He
sold the first house only 18 months after moving into his new house.
Determine the portion of the capital gain that will qualify for the primary residence exclusion.
SOLUTION
The full capital gain on the disposal of the first house will qualify for the exclusion of up to
R2 million, since Mr Ahmed must be treated as having been ordinarily resident in the house until
it was sold, because he vacated it for a period not exceeding two years while it was offered for
sale and vacated it due to the acquisition of a new primary residence (par 48).
(3) Apportionment for non-residential use of the primary residence (par 49)
An adjustment must be made with reference to the period during which part of the residence is
used by a natural person or a beneficiary of a special trust (or a spouse of the natural person or
beneficiary) for the purpose of carrying on of a trade (par 49). This adjustment requires that the
capital gain or loss should be adjusted with both the period of trade use and the part of the
residence that is used for trade. Certain periods of letting, where that person is absent from the
primary residence for five years or less, will still be treated as periods of residential use (see
par 50 discussed below the example).
Example 17.48. Non-residential or trade use
Mr Adams lived in a house that he bought on 1 July 2002 for R650 000. The house was his
primary residence for 20 years before he sold it. For the last ten years prior to selling it, he let
approximately 20% of the area of the house to a doctor, who used it as a surgery. He disposed
of the house for R2 850 000.
Calculate the taxable capital gain that should be included in the taxable income of Mr Adams.
SOLUTION
Mr Adams’s taxable capital gain is determined as follows:
Total Trade use Residen-
tial use
R R R
Capital gain (Note 1) ......................................................... 2 200 000 220 000 1 980 000
The primary residence exclusion in terms of par 45(2)(a)
(R2 million limited to R1 980 000) ...................................... (1 980 000) (0) (1 980 000)
Balance subject to CGT .................................................... 220 000 220 000 0
Annual exclusion ............................................................... (40 000)
Aggregate capital gain ...................................................... 180 000
Taxable capital gain (R180 000 × 40%) ............................ 72 000
continued
668
Note 1
Of the capital gain of R2 200 000 (R2 850 000 – R650 000) made on the disposal of the house,
R220 000 (R2 200 000 × 10/20 (period) × 20% (part)) will be taxable as a capital gain, since it is
attributable to non-residential or trade use. The balance of the capital gain, that is, R1 980 000
(R2 200 000 – R220 000) will qualify for the primary residence exclusion of up to R2 million and
R220 000 would be included in aggregate capital gain or aggregate capital loss.
Please note: The method of apportioning is not prescribed in the Act, but according to the
examples in the Comprehensive Guide to Capital Gains Tax months are used when apportioning.
Periods of non-residential use deemed to be residential use (par 50)

In certain circumstances, where the trade constitutes the temporary letting of the primary residence,
the non-residential use will be treated as residential use. A non-trade adjustment in terms of par 49
will not be necessary even though the person or beneficiary of a special trust is absent from it for a
continuous period of up to five years while it is being let. This concession applies if
l the person (or spouse or beneficiary of a special trust) concerned resided in the residence as a
primary residence for a continuous period of at least one year prior to and after the period of
letting, and
l no other residence was treated as his or her primary residence during the period of letting, and
l he or she was either temporarily absent from South Africa during the period of letting or was
employed or engaged in carrying on business in South Africa at a location further than 250 kilo-
metres from the residence during the relevant period (par 50).
Where the period of absence (in terms of par 50) exceeds five years, the natural
person or the beneficiary of a special trust is treated as having used the resi-
Please note!
dence for trade purposes (i.e., not domestic purposes) for the entire period of
absence.
The following diagram illustrates how the R2 million gain or loss rule (par 45(1)(a)) should be applied
when disposing of a primary residence:
Capital gain = proceeds (exceeding R2 million*) less base cost.
LESS
The portion of the gain that relates to land that is greater than two
hectares.
LESS
The portion of the gain that relates to the period the property was not
occupied as primary residence.
LESS
The portion of the gain that relates to the trade use of the primary
residence (where more than 50% of the residence is used for trade
purposes, no primary residence exclusion will be allowed).
EQUALS
This portion of the
capital gain does not
qualify for the
R2 million gain
This portion of the capital gain qualifies for the primary residency exclusion and will be
exclusion of R2 million. subject to CGT in full.
* The R2 million proceeds rule (par 45(1)(b)) applies only where the proceeds do not exceed R2 million provided
no apportionment is necessary in terms of paras 47 or 49.
669
17.10.1.4 Relief where a primary residence is transferred from a company, close corporation or
trust (paras 51 to 51A)
Paragraphs 51 and 51A applied until December 2012. Please refer to the 2013 edition of Silke for a
detail discussion of these provisions.
17.10.2 Other exclusions (paras 52 to 64E and s 12Q)

Part VIII (paras 52 to 64E) of the Schedule deals with all the other exclusions.
(1) Personal-use assets exclusion
A natural person or a special trust must disregard a capital gain or a capital loss determined on
the disposal of a personal-use asset (par 53).
A ‘personal-use asset’ is an asset of a natural person or a special trust that is used mainly for
purposes other than the carrying on of a trade. However, a qualifying asset for which an
allowance is paid for business use, for example a motor car, must be treated as being used
mainly for purposes other than the carrying on of a trade and will, therefore, qualify as a
personal-use asset (par 53(4)). Examples of personal-use assets are personal jewellery, a
private art collection and personal furniture.
The following diagram provides a list of the items excluded from personal-use assets (par 53(3)):
l An aircraft with an empty mass exceeding 450 kg. Any capital loss
must be disre-
l A boat exceeding ten metres in length (a ‘boat’ being defined as
garded in terms of
any vessel used or capable of being used in, under or on the sea or
par 15 (to the
internal waters, whether self-propelled or not and whether equipped
extent that it is
with an inboard or outboard motor) (par 1).
used for purposes
l Any fiduciary, usufructuary or other like interest, the value of which other than trade),
decreases over time. but a capital gain
l A right or interest of whatever nature to or in any of the above assets. must be taken into
account.
l A coin made mainly of gold or platinum, the market value of which is

mainly attributable to the material from which it is minted or cast.
l Immovable property. Any capital gain
l A financial instrument or loss is not dis-
l Any contract, including a reinsurance policy in respect of such a regarded, but is
contract, under which a person, in return for payment of a premium, taken into account
is entitled to policy benefits upon the happening of a certain event, when calculating
but excluding any short-term policy (see below). the aggregate gain
l Any short-term policy but only to the extent that it relates to any or loss.
asset that is not a personal-use asset.
l A right or interest of whatever nature to or in any of the above assets.
Example 17.49. Disposal of personal-use assets

Peter disposes of the following assets (none of which was used for purposes of trade):
1. a town house
2. a motor vehicle for which Peter receives a travel allowance from his employer
3. a boat 15 metres in length solely used by Peter for recreational purposes
4. a portfolio of shares listed on the Johannesburg Securities Exchange
Indicate which of the above assets will qualify as personal-use assets.
670
SOLUTION
1. Town house – not a personal-use asset as immovable property is excluded (could qualify for
primary residence exclusion if Peter used it as his primary residence).
2. Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business allow-
ance is paid.
3. Boat exceeding ten metres in length – not a personal-use asset as specifically excluded (in
terms of par 15 any capital loss must be disregarded but a capital gain must be included).
4. Portfolio of listed shares – not a personal-use asset as financial instruments are excluded.
Note
Because Peter is a natural person, some assets like the motor vehicle will be considered per-
sonal-use assets and any capital gain or loss on the disposal thereof must be disregarded. This
would also be the case if the motor vehicle was sold by a special trust. If, however, the same
motor vehicle was sold by a company, it would not qualify as personal-use asset and the capital
gain or loss would not be disregarded.
(2) Lump sum retirement benefits exclusions (par 54)

A person must disregard capital gains and losses determined in respect of a disposal that
resulted in him receiving
l a lump sum benefit as defined in the Second Schedule, that is, from a pension, pension
preservation, provident, provident preservation or retirement annuity fund, or
l a lump sum benefit from a fund, arrangement or instrument situated outside South Africa
that provides similar benefits under similar conditions to a pension, provident or retirement
annuity fund approved in terms of the Act.
(3) Long-term assurance policies exclusions (par 55)
A person must disregard capital gains or capital losses determined on the disposal of long-
term insurance policies as long as the policy is not a foreign policy. A disposal includes the
selling, maturing or surrendering of a policy. In order to qualify for the exclusion, the person
receiving the proceeds must be
l the original owner or owners of the policy, or
l the spouse, nominee, dependant or the deceased estate of the original owner, or
l the former spouse (of the original owner) who acquired the policy in terms of a divorce order.
In general, second-hand policies will not qualify for this exclusion as the proceeds will not
be received by the original owner. However, although certain policies’ proceeds are not
received by the original owner they can still qualify for this exclusion. These are
l key-man policies in terms of which the employee or director life was insured and any pre-
miums paid by that person’s employer were deducted in terms of s 11(w)
l policies taken out to buy a partner or co-shareholder’s interest in a partnership or company
provided no premium was borne by the insured or his or her connected person, or
l policies ceded to a member or his dependant if the policy was originally taken out on the
life of that member in consequence of his membership to the pension, pension preserva-
tion, provident, provident preservation or retirement annuity fund.
All risk policies are specifically excluded from the application of capital gains tax
provided the policy has no cash or surrender value. A specific exemption from
capital gains tax will also apply in respect of employer-owned long-term insurance
policies if the amount to be taxed is included in the gross income of any person,
Please note! regardless of whether that amount is subsequently exempted from gross income.
Therefore, when policy proceeds from an employer-owned insurance policy are
exempted from gross income, the exemption should not trigger an adverse capital
gains result. In effect, the exemptions should be broad enough to effectively
exempt the policy proceeds from the income tax (in terms of s 10(1)(gG) or (gH) as
well as from the capital gains tax regime (in terms of par 55).
(4) Disposal of small business assets exclusion (par 57)

Where a natural person makes a capital gain on the disposal of the active business assets of
his small business he can disregard up to R1,8 million of the gain (par 57). A small business
includes interests held through a company or close corporation. A ‘small business’ is defined
as a business where the market value of all the assets does not exceed R10 million as at the
date of disposal of the assets or interests (par 57(1)). Where a person owns more than one
business, the exclusion will only apply where all the assets of the combined businesses do no
exceed R10 million. The assets include all assets of the businesses (active business assets and
other assets).
671
The purpose of this exclusion contained in par 57 is to provide relief to small business persons
who have invested their resources in their active business assets. The definition of an ‘active
business asset’ refers to both immovable property and assets other than immovable property. If
the active business asset constitutes an asset other than immovable property, the asset must
be used or held wholly or exclusively for business purposes. On the other hand, if the active
business asset constitutes immovable property, it does not have to be held wholly or exclu-
sively for business purposes. The R1,8 million exclusion will then apply only to the extent that
the immovable property is held for business purposes. This means that if, for example, 30% of
the property is used for the small business and 70% for private purposes, then only 30% of the
gain will qualify for the R1,8 million exclusion. Please note that the definition of an active
business asset specifically excludes
l financial instruments (for example shares), and
l assets held mainly to derive annuities, rental income, foreign exchange gains, royalties or
similar income (par 57(1)).
When a person sells a small business, one must first determine whether the natural
person qualifies for the R1,8 million exclusion by testing whether the requirements
of a ‘small business’ is met, i.e., the market value of all business assets do not
Please note!
exceed R10 million. It is only thereafter that the total capital gain on all the ‘active
business assets’ (immovable property and other assets) must be calculated. Up to
R1,8 million of the total capital gain can then be disregarded.
This exclusion of any capital gain up to R1,8 million is available only to a natural person, made
on the disposal of
l an active business asset of a small business owned by him as a sole proprietor, or
l interest in each of the active business assets of a partnership, to the extent of his interest in
the partnership, or
l an entire direct interest, which consists of at least 10% of the equity of a company, in as far
as that interest relates to assets of that company qualifying as active business assets.
Remember
The amount to be disregarded is limited to R1,8 million during a person’s lifetime. This means
that, although he or she may qualify for the concession more than once, the aggregate amount
to be disregarded over his or her lifetime may not exceed R1,8 million (par 57(3)).
Where a person operates more than one small business by way of a sole proprietorship, partner-
ship interest or direct interest of at least 10% in the equity of a company, he or she may include
all these businesses in the lifetime exemption of R1,8 million. However, the exemption will be
unavailable if the total market value of all the assets of all his or her small businesses exceeds
R10 million.
For a person to qualify for this exclusion, he or she must

l have held the small business for his or her own benefit for a continuous period of at least
five years prior to the disposal
l have been substantially involved in the operations of the small business during that period
l have attained the age of 55 years or, if younger, have disposed of the asset or interest in
consequence of his ill-health, other infirmity, superannuation or death, and
l have realised all his or her qualifying capital gains within a period of 24 months, commencing
from the date of the first qualifying disposal (par 57(2) and (4)).
Example 17.50. Disposal of small business asset
Elias wishes to retire when he attains the age of 55 in 2022. He operates a taxi business in the
Gauteng Province as a sole proprietor and has done so for the past eight years. He is substan-
tially involved in the operations of this business, although he does not do any of the driving
himself. He also owns and manages a building that he rents out to a number of tenants. The cost
of the building was R1 000 000 and it market value is currently R3 000 000.
The ten vehicles used in his taxi business have been paid off and the taxis are now more than
five years old. Someone offered to buy his taxi business 'lock, stock and barrel' for R3 200 000 in
February. The purchase price includes an amount of R1 900 000 that relates to self-generated
goodwill that had a Rnil base cost, and the remaining R1 300 000 relates to the purchase price
of the taxies. The original cost of the taxies was R900 000 and capital allowances claimed on the
taxi amount to R900 000.
Calculate the CGT consequences on the disposal of the taxi business.
672
SOLUTION
The first step is to determine whether the business qualifies as small business. In this instance
the requirements of a ‘small business’ is met as the market value of all business assets does not
exceed R10 million (R3 million (building) plus R3,2 million (assets of taxi business) equals
R6,2 million). Clearly, Elias qualifies for the R1,8 million exclusion.
The total capital gain on the disposal of the active business assets is:
Taxi
Proceeds R400 000 (R1 300 000 less R900 000 recoupment)
Base cost R0 (R900 000 less R900 000 capital allowances claimed)
Therefore, the capital gain is R400 000.
Goodwill
Proceeds R1 900 000
Base cost Rnil
Therefore the capital gain is R1 900 000 (R1 900 000 less Rnil).
Total capital gain
= R400 000 + R1 900 000 = R2 300 000
Elias will have attained the age of 55 in 2022, and will have owned or held an interest in the
active assets for more than five years. He will have been substantially involved in the operations
of the business. He may, therefore, disregard up to R1,8 million of the total capital gain of
R2,3 million realised in the year that he disposes of his taxi business and only the balance of
R500 000 will be included in his sum of capital gains and losses.
Note
If the business was conducted in a close corporation (CC), the CGT calculation would have
looked different. Elias would have disposed of his interest in the CC, and not the separate assets.
The proceeds of the interest would have been R3 200 000 and the base cost would have been
the amount that Elias paid for his interest in the CC. Elias would have also disregarded up to
R1,8 million of the total capital gain made on the disposal of his interest in the CC as it relates to
active business assets.
(5) Disposal of microbusiness assets exclusion (par 57A)

Where a person disposes of micro business assets (as defined in terms of the Sixth Schedule),
he must disregard any capital gain or capital loss in respect of the disposal by that business of
any asset used mainly for business purposes. See chapter 23.
(6) Options exclusion (par 58)
A person must disregard a capital gain or loss determined in respect of the exercise of an
option when, as a result of the exercise of the option by him, he acquires or disposes of an
asset in respect of which the option was granted. The cost of the option may, however, form
part of the base cost of the asset under par 20.
For example, a person may buy the option to acquire an asset. Since the option will effectively
terminate when it is exercised and the asset is acquired, a capital loss will arise. Any capital
gain or loss on the exercise of the option must be disregarded, since the cost of the option is
included in the base cost of the asset acquired.
(7) Compensation for personal injury, illness or defamation – exclusion (par 59)
A person must also disregard a capital gain or loss determined in respect of compensation for
personal injury, illness or defamation. This provision applies only to compensation for personal
injury to natural persons and beneficiaries of special trusts.
(8) Gambling, games and competitions – exclusion (par 60)
A natural person must disregard a capital gain or loss determined on a disposal relating to any
form of gambling, game or competition, as long as the particular form of gambling, game or
competition is authorised by and conducted under the laws of South Africa. However, the
following capital gains on gambling, games and competitions will be subject to CGT:
l foreign winnings by natural persons
l illegal gambling games and competitions in South Africa
l capital gains by companies, trusts and other non-natural persons from any gambling,
games or competitions whether local or foreign and whether lawful or unlawful.
(9) Collective investment scheme in securities – exclusion (par 61)
Any capital gain or loss made by a holder in a portfolio of a collective investment scheme in
securities (non-property investments, generally shares) must be determined only upon the
disposal of that participatory interest by that holder. The capital gain or capital loss must be
673
determined with reference to the proceeds from the disposal of that participatory interest and
its base cost. Any capital gain or loss made by a portfolio of a collective investment scheme
must be disregarded meaning the portfolio of a collective investment scheme does not pay tax
on any capital gain, nor does it take into account any capital loss.
(10) Donations to public benefit organisations and other exempt persons – exclusions (par 62)
A person must disregard a capital gain or capital loss determined in respect of the donation or
bequest of an asset by that person to
l the Government of the Republic in the national, provincial or local sphere, as contemplated
in s 10(1)(a)
l a public benefit organisation contemplated in par (a) of the definition of ‘public benefit
organisation’ in s 30(1) that has been approved by the Commissioner in terms of s 30(3)
l a person approved by the Commissioner in terms of s 10(1)(cA) (for example certain
persons conducting scientific research or who promotes agriculture) or (d)(iv)
l a political party referred to in s 10(1)(cE) or body corporate and share block company refer-
red to in s 10(1)(e), or
l a recreational club, which is a company, society or other organisation as contemplated in
the definition of ‘recreational club’ in s 30A(1) that has been approved by the Commissioner
in terms of s 30A.
(11) Exempt persons (par 63)
A person, body or institution that is exempt from tax in terms of s 10 must disregard the capital
gain or capital loss in respect of the disposal of any asset. This exclusion only applies to
persons who are fully exempt from tax with regard to all gross income in terms of s 10. Public
benefit organisations and recreational clubs that are partially exempt are therefore excluded
from the par 63 exclusion. They may however qualify for the par 63A exclusion.
(12) Capital gains or losses of public benefit organisations (par 63A)
A public benefit organisation (PBO) approved by the Commissioner in terms of s 30(3) must
disregard any capital gain or capital loss determined in respect of the disposal of an asset if
l that asset was not used in carrying on any business undertaking or trading activity, or
l the whole of the use of that asset was directed at
– a purpose other than carrying on a business or trading activity, or
– carrying on a business undertaking or trading activity contemplated in s 10(1)(cN)(ii)(aa),
(bb) or (cc).
Remember
Where the public benefit organisation ceases to be a public benefit organisation in terms of
s 30(3), the valuation date value must be determined in respect of its ‘exempt’ assets on date of
cessation.
(13) Disposals by small business funding entities (par 63B)

Any capital gain or loss made by a small business funding entity on the disposal of an asset
must be disregarded (see chapter 5 for more detail on small business funding entities).
Any capital gain or loss made on the donation of an asset to a small business
Please note!
funding entity is not disregarded.
(14) Assets used to produce exempt income (par 64)

A person must disregard a capital gain or capital loss for the disposal of an asset that is used
by him solely to produce amounts that are exempt from normal tax.
Assets that are used to produce the following receipts and accruals are excluded from this
exclusion:
l s 10(1)(cN) (the exemption for a PBO because par 63A provides a specific exemption)
l s 10(1)(cO) (the exemption for a recreational club)
l s 10(1)(i) (the basic interest exemption available to natural persons)
l s 10(1)(k) (the exemption available in respect of local dividends), or
l s 12K (the exemption for certified emission reductions).
674
(15) Awards under the Restitution of Land Rights Act (par 64A)
In terms of the Restitution of Land Rights Act, persons who were dispossessed of their land as
a result of discriminatory laws or practices may claim compensation. The compensation may be
in the form of a restitution of a right to land, or an award or compensation.
A person who has put in a claim for land restitution effectively disposes of his or her claim for
the amount of the award or compensation received.
Any capital gain or loss in respect of a disposal of this nature, including that derived by virtue of
measures as contemplated in Chapter 6 of the National Development Plan: Vision 2030 (the
NDP) of the South African Government, must be disregarded (par 64A).
(16) Disposal of equity shares in foreign companies (par 64B)
Paragraph 64B disregards the capital gain or loss on the disposal of equity shares in a foreign
company by a resident provided certain requirements are met. This is called the CGT participa-
tion exemption and can be divided into two categories:
l the general participation exemption that applies to the disposal of foreign equity shares by
residents
l a specific participation exemption that applies to the disposal of foreign equity shares by
headquarter companies.
This par 64B exclusion does not apply to par 2(2) interests (more than 80% of the value of the
foreign company’s assets consists of immovable property in South Africa and at least 20% of the
equity shares are held by the person).
(a) General participation exemption (par 64B(1))
A person (other than a headquarter company) must disregard any capital gain or capital
loss in respect of the disposal of equity shares in foreign companies to a non-resident
(other than a controlled foreign company or a connected person) if the following conditions
are met:
l The person (alone or as part of the same group of companies) immediately before the
disposal has held at least 10% of the equity shares and voting rights of the foreign
company for at least 18 months prior to the disposal (with interim holdings by group
members taken into account for this purpose).
l The transferred foreign equity shares must be disposed of to a non-resident (other than
a controlled foreign company or a connected person).
l The person must receive consideration that equals or exceeds the market value of the
foreign equity shares transferred. For purposes of this requirement, the receipt of
shares will not be taken into account as consideration.
Remember
When a South African resident company ceases to be a resident, that company is deemed
under s 9H to have disposed of all of its assets (with the exception of immovable property
situated in South Africa or assets attributable to a permanent establishment in South Africa) at
their respective market values on the day before ceasing to be a resident. In addition, a claw-
back is triggered under s 9H(3)(e) if the company had, in the three years preceding the date on
which it ceases to be a resident, disregarded any capital gain in terms of par 64B(1) on the
disposal of equity shares in a foreign company.
The effect of this claw-back provision is that if a resident company was allowed to disregard a
capital gain with the disposal of foreign equity shares in terms of par 64B(1) in the three years
preceding it ceasing to be a resident, then upon ceasing to be a resident, the following occurs:
l that resident company has to account for a deemed disposal on all of its assets at market
value in terms of s 9H(3)(a), and
l the amount of any capital gain that was disregarded in the preceding three years in terms of
the provisions of par 64B(1) will be deemed to be a net capital gain that has to be included
in the company’s taxable income calculation when it ceases to be a resident (s 9H(3)(e)). It
is important to note that no capital losses can be offset against this deemed net capital gain.
(b) Headquarter company participation exemption (par 64B(2))

A headquarter company must disregard any capital gain or capital loss in respect of the
disposal of equity shares in foreign companies if the headquarter company (whether alone
or together with other group members) holds a participation interest of at least 10% of the
equity shares and voting rights of the transferred foreign company.
675
The requirement that the shares must be held for a minimum period of 18 months,
was deleted in respect of headquarter companies. The exemption for head-
quarter companies stems from the fact that the headquarter company has a
number of other deviations from the general rules. Firstly, the headquarter com-
Please note! pany may not participate in the reorganisation roll-over rules (see 16.9). Secondly,
all conversions to a headquarter company will trigger immediate tax (see 5.2.3).
Headquarter company provisions were brought in to allow for the headquarter
company to operate somewhat freely from the South African net (because the
funds are derived offshore and being redeployed offshore).
Foreign return of capital (par 64B(4))

A person must also disregard any capital gain determined in respect of any ‘foreign return of
capital’ received by or accrued to that person from a ‘foreign company’ where that person
(together with any other company in the same group of companies as that person) holds at least
10% of the total equity shares (and voting rights) in that company.
Remember
‘Foreign return of capital’ means any distribution (excluding the foreign dividend portion) that is
paid or payable by a foreign company regarding any share in that foreign company. Income tax
legislation in the country in which the foreign company is effectively managed must be used to
determine the dividend portion and the non-dividend portion of the distribution. If the foreign
country does, however, not have any applicable laws in relation to company distributions, the
foreign country’s company law characterisation will prevail.
Excluded from the participation exemption (par 64B(5) and (6))

The par 64B exclusion does not apply to the disposal of an interest in a foreign collective invest-
ment scheme in securities nor to any foreign returns of capitals by these schemes (par 64B(5)).
The par 64B exclusion does, furthermore, not apply to the disposal of shares in a controlled
foreign company to the extent that the value of the assets of the controlled foreign company is
attributable to assets directly or indirectly located, issued or registered in South Africa
(par 64B(6) – effective from any disposal on or after 1 January 2021).
(17) Disposal of s 8C restricted equity instruments (par 64C)
Any capital gain or loss on the disposal of a restricted equity instrument to a connected person
(in terms of s 8C(4)(a), 8C(5)(a) or 8C(5)(c)) must be disregarded (see chapter 8 for more detail
on restricted equity instruments). The intention of the legislature is to defer any capital gain or
loss until the s 8C equity instrument is unrestricted and vests for purposes of s 8C.
(18) Land donated under the Restitution of Land Rights Act (par 64D)
Any capital gain or loss in respect of the donation of land or a right to land by the owner of the
land (by virtue of measures as contemplated in Chapter 6 of the NDP), must be disregarded.
Remember
Paragraph 64A is from the perspective of the person that has a claim to a piece of land whereas
par 64D is from the perspective of the owner of a piece of land.
(19) Disposal by trust in terms of a share incentive scheme (par 64E)

Any capital gain or loss in respect of the disposal of an asset by a trust in terms of a share
incentive scheme, where the trust beneficiary has a vested right to the amount, must be
disregarded, if the amount is included in the income or taken into account in the gain or loss of
that trust beneficiary in terms of s 8C.
(20) Disposals by an international shipping company – s 12Q
Any capital gain or loss made by an international shipping company must be disregarded (see
chapter 21 for more detail on international shipping companies).
17.10.3 Roll-overs (paras 65 to 67D)

Certain capital gains may be rolled over before determining a person’s aggregate capital gain or
loss. The recognition of these gains is delayed for CGT purposes or rolled over until a future event
occurs. Part IX (paras 65 to 67C) of the Schedule deals with roll-overs. Certain roll-over provisions are
contained in the main Act, in ss 41 to 47 (corporate rules), s 9HA (assets bequeathed to a spouse)
and s 9HB (transfer of assets between spouses).
676
The following diagram illustrates the three important roll-over provisions dealt with below:
Paragraphs 65, 66 and section 9HB deal with the deferment of

capital gains
Involuntary disposal of Reinvestment in Transfer of assets

assets replacement assets between spouses
(par 65) (par 66) (s 9HB)
The taxpayer opts for the application of paras 65 and 66.

Please note!
No such option exists in terms of section 9HB.
17.10.3.1 Involuntary disposals (par 65)

Paragraph 65 deals with involuntary disposals, that is, instances where an asset is destroyed, lost,
expropriated or stolen and the person receives compensation (such as an insurance pay-out) and
the proceeds are used to acquire a replacement asset.
The following diagram illustrates the requirements of par 65:
If a person disposes of an asset (other than a financial instrument);
and
the disposal took place by way of operation of law, theft or destruction and proceeds accrue to him by way
of compensation in respect of that disposal (involuntary disposal);
and
the proceeds are equal to or exceed the base cost of the assets;
and
an amount at least equal to the receipts and accruals from the disposal has been or will be expended to
acquire one or more replacement assets;
and
all these replacement assets constitute assets contemplated in s 9(2)(k) or (j), that is, certain immovable
property and assets attributable to a permanent establishment in South Africa;
and
the contracts for the acquisition of the replacement asset or assets have been or will be concluded within
12 months after the date of disposal of the asset;
and
the replacement asset will be brought into use within three years of the disposal of the asset and that asset is
not deemed to have been disposed of and reacquired by that person;
then
the taxpayer can choose to defer any capital gain in the year of disposal, as follows:
l In the case of a non-depreciable replacement asset, the capital gain is deferred to the date when the
replacement asset is disposed of (par 65(5)).
l In the case of a depreciable replacement asset, the capital gain will be taxed in proportion to the capital
allowances claimed on the replacement asset (par 65(4)).
677
l The third requirement (proceeds must be equal to or exceed base cost) en-
sures that a capital loss is not deferred.
l If the person concerned fails to conclude a contract or bring the replacement
asset into use within the prescribed period, he must treat the deferred capital
gain as a capital gain on the date on which the prescribed period ends. In
Please note! addition, he must determine interest at the ‘prescribed rate’ on the capital gain
from the date of the disposal to the end of the prescribed period. The interest
so determined must then be treated as an additional capital gain made on the
last day of the prescribed period (par 65(6)).
l There is no requirement that the replacement asset must fulfil the same func-
tion as the old asset.
Paragraph 65 also provides for a few specific situations:

(1) When the replacement asset is a depreciable asset (par 65(4))
When the replacement asset is a ‘depreciable asset’ (defined in par 1), the person must treat a
certain portion of the disregarded capital gain (determined on the disposal of the original asset)
as a capital gain in each year of assessment during which the replacement asset is being
depreciated.
The amount to be treated as a capital gain in the year of assessment equals:
Allowance for the replacement asset allowable in the
current year of assessment
Total capital gain ×
Total allowance allowable on replacement asset for
all years of assessment
Example 17.51. Replacement of depreciable asset with single replacement asset
Arson Ltd. purchased a machine on 28 February 2017 at a cost of R100 000. On 28 February
2019 the machine was destroyed in a fire. The company received R120 000 from its insurer as
compensation. Arson Ltd. purchased and started using a more advanced replacement machine
on 30 June 2019 at a cost of R150 000. Arson Ltd. has a 30 June year-end.
Determine the capital gain to be brought into account in the 2019 to 2022 years of assessment.
SOLUTION
The capital gain on disposal of the old machine amounts to R20 000. Under par 65 this must be
disregarded and spread over future years of assessment in proportion to the capital allowances
to be claimed on the replacement asset.
The capital allowances on the new machine will be as follows:
2019: R150 000 × 40% = R60 000
2020: R150 000 × 20% = R30 000
2021: R150 000 × 20% = R30 000
2022: R150 000 × 20% = R30 000
The capital gain of R20 000 must be recognised as follows:
2019: R20 000 × R60 000/R150 000 (40%) = R8 000
2020: R20 000 × R30 000/R150 000 (20%) = R4 000
2021: R20 000 × R30 000/R150 000 (20%) = R4 000
2022: R20 000 × R30 000/R150 000 (20%) = R4 000
Note
Had there been a recoupment (s 8(4)), it would have been taxed to the same extent as the
capital gain.
(2) When the person who has made the election acquires more than one replacement asset
(par 65(3))
When the person who has made the election acquires more than one replacement asset, he
must allocate the capital gain on the disposal of the original asset. The gain must be allocated
to each replacement asset in the same ratio as the amount of receipts and accruals, from dis-
posal of the original asset spent on each particular replacement asset, bears to the total
amount expended in acquiring all the replacement assets.
678
Example 17.52. Allocation of capital gain across multiple replacement assets
Pluto Ltd acquired a machine on 1 October 2017 at a cost of R200 000. On 28 February 2022 a
flood irreparably damaged the machine. The insurer paid out R240 000, being the replacement
cost. Pluto Ltd decided to replace the old machine with two smaller machines, X and Y.
Machine X cost R180 000 and machine Y cost R60 000.
Allocate the capital gain between the machines.
SOLUTION
The capital gain on disposal of the old machine will be allocated to the replacement machines as
follows:
Machine X: R180 000/R240 000 × R40 000 = R30 000
Machine Y: R60 000/R240 000 × R40 000 = R10 000
These capital gains will be brought into account in future years of assessment in accordance
with the respective capital allowances claimable in respect of each of the machines
(3) When the replacement asset is disposed of before the full amount of the previously disregarded
capital gain has been taxed (par 65(5))
If the full amount of the previously disregarded capital gain apportioned to a depreciable asset
has not yet been treated as a capital gain by the time the replacement asset is disposed of, the
person concerned must treat the amount not yet otherwise regarded as a capital gain as a
capital gain from the disposal of the replacement asset in that year of assessment. This has the
effect of an ongoing chain of relief in respect of depreciable replacement assets (provided that
all the roll-over requirements are met when replaced again).
The periods of 12 months and three years (required by par 65) may be extended by a
maximum of six months at the discretion of the Commissioner, on application by the taxpayer, if
all reasonable steps were taken to conclude a contract or bring the replacement asset into use.
l The above rules do not apply to replacement assets that constitute per-
sonal-use assets (par 65(7)).
Please note!
l There is no requirement that the replacement asset must fulfil the same
function as the old assets.
17.10.3.2 Reinvestment in replacement assets (par 66)

Paragraph 66 applies to all disposals where the taxpayer was entitled to claim a capital allowance on
the asset and the proceeds on disposal are used to acquire a replacement asset.
679
The following diagram illustrates the requirements of par 66:
If a person disposes of an asset
and
the replaced asset qualified for capital allowances under ss 11(e), 11D(2), 12B, 12C, 12DA, 12E, 14, 14bis
or 37B
and
the proceeds are equal to or exceed the base cost of the assets
and
an amount at least equal to the receipts and accruals from the disposal has been or will be expended to
acquire one or more replacement assets that will all qualify for a capital deduction or allowance in terms of
ss 11(e), 11D(2), 12B, 12C, 12DA, 12E or 37B
and
all these replacement assets constitute assets contemplated in s 9(2)(j) or 9(2)(k)
and
the contracts for the acquisition of the replacement asset or assets have been or will be concluded within
12 months after the date of disposal of the asset
and
the replacement asset will be brought into use within three years of the disposal of the asset and that asset
is not deemed to have been disposed of and reacquired by that person
then
the taxpayer can choose to tax the capital gain in proportion to the capital allowances claimed on the
replacement asset (par 66(4)).
l When a person fails to conclude a contract or to bring a replacement asset into

use within the prescribed period, the election falls away and he must treat the
previously disregarded capital gain as a capital gain on the date that the
relevant period ends. He must also determine interest at the prescribed rate on
the capital gain from the date of the disposal to the date that the relevant
Please note! period ends and treat that interest as a capital gain when determining his
aggregate capital gain or aggregate capital loss (par 66(7)).
l There is no requirement that the replacement asset must fulfil the same
function as the old asset. The only requirement is that the replacement asset
must qualify for an allowance under the specified sections of the Act.
l The third requirement (proceeds must be equal to or exceed base cost)
ensures that a capital loss is not deferred.
A person must include a portion of the disregarded capital gain contemplated above in his aggre-
gate capital gain or loss in each year of assessment during which the asset is being depreciated
(see Example 17.53. The amount to be treated as a capital gain in the year of assessment equals:
Allowance for the replacement asset allowable in the
current year of assessment
Total capital gain ×
Total allowance allowable on replacement asset for
all years of assessment
(See Example 17.53.)
Paragraph 66 also provides for a few specific situations:
(1) When the person who has made the election acquires more than one replacement asset
(par 66(3))
When a person acquires more than one replacement asset, he must apportion the capital gain
derived from the disposal of the original asset to each replacement asset in the same ratio as
the receipts and accruals from the disposal of the original asset spent in acquiring each of the
680
replacement assets bear to the total amount of those receipts and accruals expended in
acquiring all the replacement assets (see Example 17.52).
(2) When the replacement asset is disposed of before the full amount of the previously disregarded
capital gain has been taxed (par 66(5))
When a person disposes of a replacement asset and any portion of the disregarded capital
gain that is apportioned to that asset as contemplated above has not yet been treated as a
capital gain, he must treat that portion of the disregarded capital gain as a capital gain from the
disposal of the replacement asset.
(3) If a person ceases to use a replacement asset for the purposes of his trade and the full amount
of the previously disregarded capital gain has not yet been taxed (par 66(6))
If a person ceases to use a replacement asset for the purposes of his trade and any portion of
the disregarded capital gain that is apportioned to that asset has not yet been treated as a
capital gain as explained above, he must treat that portion of the disregarded capital gain as a
capital gain.
Example 17.53. Reinvestment in a similar asset
Choice (Pty) Ltd acquired a new machine for R100 000 from a local supplier (not a connected
person) on 1 October 2017. The machine was brought into use immediately and qualified for the
s 12C allowance.
Due to the rapid expansion of the operations of Choice (Pty) Ltd, it was decided to replace this
machine with a technologically more advanced machine. On 1 November 2019 the old machine
was sold for R150 000 and a new machine was purchased at a cost of R450 000. The new
machine was brought into use on 15 November 2019 and also qualifies for the s 12C allowance.
The company’s year-end is the last day of December each year.
Calculate the normal tax implications for Choice (Pty) Ltd arising from the above transactions,
assuming that the company elects to apply the provisions of par 66. (Assume that the company
has no other capital gains or losses for the relevant tax years.)
SOLUTION
Old machine:
Original cost ................................................................................................................... R100 000
Less: Section 12C allowance (2018 tax year) (40% of R100 000) ............................... 40 000
Section 12C allowance (2019 tax year) (20% of R100 000) ............................... 20 000
Income tax value on date of sale ................................................................................... R40 000
Recoupment on old machine:
Proceeds of R150 000 (limited to cost price of R100 000) ............................................ R100 000
Less: Income tax value on date of sale (calculated above) ......................................... 40 000
Section 8(4)(a) recoupment ........................................................................................... R60 000
This recoupment is not fully included in income (for income tax purposes) if the
taxpayer has elected the provisions of par 66 (s 8(4)(e)). Instead, the inclusion in the
taxpayer’s income in the 2019 tax year will be R60 000 × 40% .................................... R24 000
The inclusion in the 2020, 2021 and 2022 tax years will be R60 000 × 20% ................. R12 000
New machine:
Original cost ................................................................................................................... R450 000
Less: Section 12C allowance (2019 tax year) (40% of R450 000) ................................. 180 000
Income tax value at end of year ..................................................................................... R270 000
Capital gain on disposal of old machine:
Proceeds on disposal .................................................................................................... R150 000
Less: Section 8(4)(a) recoupment ................................................................................. 60 000
R90 000
Less: Base cost (income tax value calculated above)................................................... 40 000
Capital gain .................................................................................................................... R50 000
The capital gain of R50 000 on the old machine must be rolled over. The company
must account only for 40% of the capital gain of R50 000 in the 2019 year of assess-
ment. This means 40% × R50 000 = R20 000 multiplied with the inclusion rate of
80% should be included in taxable income ................................................................... R16 000
The inclusion in the 2020, 2021 and 2022 tax years will be R50 000 × 20% × 80% ..... R8 000
continued
681
Note
If the company disposes of the new machine or ceases to use it for the purposes of its trade in a
year of assessment before the full capital gain has been brought into account, it must treat the
balance of the capital gain that has not yet been brought into account as a capital gain in that
year.
17.10.3.3 Transfer of assets between spouses (s 9HB)

Section 9HB (previously par 67) provides a form of ‘roll-over relief’ with regard to disposals between
spouses. The transferor must disregard any capital gain or loss determined in respect of the disposal
of an asset to his or her spouse (transferee). The transferee is treated as having
l acquired the asset on the same date on which it was acquired by the transferor
l acquired the asset for an amount equal to the base cost expenditure incurred by the transferor
prior to the disposal
l incurred that expenditure on the same date and in the same currency that it was incurred by the
transferor
l used the asset in the same manner that it was used by the transferor in the period prior to the
disposal, and
l received an amount equal to an amount received by the transferor in respect of that asset that
would have constituted proceeds on disposal of that asset had that transferor disposed of it to a
person other than the transferee.
(Section 9HB(1))
Therefore, if the transferee subsequently disposes of the asset, he or she will calculate the capital
gain or capital loss in the same way as the transferor would have calculated it. Also, if the transferee
subsequently disposes of the asset, he or she will be treated as having used the asset in the same
way as the transferor. For example, if the transferor used the asset as a personal-use asset, it will
constitute a personal-use asset in the hands of the transferee regardless of the manner actually used
by the transferee. The transferee must therefore disregard any capital gain or loss on the disposal of
such an asset in terms of paragraph 53 of the Eighth Schedule even if the transferee uses that asset
50% or more for purposes of carrying on a trade.
This relief will be unavailable if the asset is disposed of to a spouse who is not a
Please note! resident, unless the asset is an asset that remains in the tax net for non-
residents, for example, immovable property situated in South Africa or assets of
a permanent establishment in South Africa.
Example 17.54. Donations between spouses where one spouse is a non-resident
During the year of assessment Mrs Abanda (a non-resident) got married (out of community of
property) to Mr Abanda (a resident). Mrs Abanda had no assets on date of marriage. After their
marriage Mr Abanda transfers the following assets to Mrs Abanda (which remains a non-
resident):
Asset Base cost Market value
Holiday home in KwaZulu-Natal ............ R1 500 000 R3 000 000
Listed shares ........................................ R5 000 000 R7 000 000
How should the above disposals be treated for CGT purposes?
SOLUTION
As Mr Abanda disposes of the assets to Mrs Abanda, a non-resident, a capital gain of
R2 000 000 (R7 000 000 – R5 000 000) will arise on the disposal of the listed shares. The capital
gain arising on the disposal of the holiday home to Mrs Abanda must be disregarded in terms of
section 9HB in the hands of Mr Abanda as this is an asset contemplated in par 2(1)(b). With
regard to the holiday home Mrs Abanda must be treated as having
l acquired the holiday home on the same date as Mr Abanda for an amount equal to the base
cost to Mr Abanda (in the same currency), and
l used the holiday home in the same manner that it was used by Mr Abanda for the period
prior to disposal.
682
A person must also be treated as having disposed of an asset to his or her spouse for the purposes
of this roll-over provision if the asset is transferred to the spouse is
l in consequence of a divorce order or an agreement (dividing the assets) made in a court order, and
l in settling an accrual claim of the deceased spouse against the surviving spouse where an asset
of the surviving spouse is transferred to the deceased estate.
In settling an accrual claim of the deceased spouse, the surviving spouse is treated as having
disposed of the assets immediately before the death of the deceased spouse. This means that the
surviving spouse will not be subject to normal tax on capital gains on the transfer of the assets to the
deceased estate in terms of the accrual claim.
(Section 9HB(2))
17.10.3.4 Other roll-overs (paras 65B, 67B, 67C and 67D)

(1) Disposal by a recreational club (par 65B)
A recreational club (approved in terms of section 30A) may elect that any capital gain in
respect of the disposal of an asset in order to acquire a replacement asset may be rolled over
when determining that club’s aggregate capital gain or aggregate capital loss. The asset must
be used wholly or mainly for purposes of providing social and recreational facilities and amen-
ities for members of that club.
(2) Transfer of a unit by a share block company to a member (par 67B)
When a company that operates a share block scheme transfers a unit in immovable property to
a person who holds a share in it, the company must disregard any capital gain or capital loss
determined on the disposal of that unit. The shareholder must disregard any capital gain or loss
on the disposal of the share.
The holder is deemed to have acquired the property for the cost of the share, which includes
the amount of the loan account, at the date that the holder acquired the share.
(3) Conversions and renewals of mineral rights and communications licences (paras 67C and 67D)
Where certain old mineral rights or communications licences are converted or renewed, the
new right or licence will be treated as one and the same asset as the original right or licence.
17.10.4 Attribution of capital gains (paras 68 to 73)
Certain capital gains resulting from a donation can be attributed to the donor. These capital gains are
disregarded in the hands of the recipient and are deemed to accrue to the donor and will be
included in the aggregate capital gain or loss of the donor. Part X (paras 68 to 73) of the Schedule
deals with the attribution rules. Attribution rules are therefore special rules that will effectively shift the
liability for tax on capital gains to the person who made a ‘donation, settlement or other disposition’.
The Act contains similar income tax provisions that may deem a person’s income to be that of
another person (see 24.6).
The attribution rules in paras 68 to 73 are summarised and compared to similar income tax provisions
in the following diagram:
Event for CGT purposes Par CGT consequences Similar income tax provision
Gain vested in a spouse 68 Taxed in hands of donor spouse Section 7(2)
Gain vested in a minor (not a 69 Taxed in the hands of donor Sections 7(3) and 7(4)
stepchild) parent (can be a stepchild)
Gain not vested in beneficiary 70 Taxed in hands of donor Section 7(5)
because it’s subject to a
condition (for example exer-
cise of trustee’s discretion)
Gain vested in beneficiary but 71 Taxed in hands of donor Section 7(6)
can be revoked by donor
Asset or gain vested in non- 72 Taxed in hands of donor Section 7(8)
resident beneficiary
Section 7 income and capital 73 The amount that can be deem- None
gain taxed in the hands of the ed a capital gain in the hands of (Principles from the Woulidge
donor. Selling price left out- the donor is limited to case are applied – see
standing as an interest-free or l the interest saving enjoyed 24.6.9)
low-interest loan less
l any income deemed back
to the donor in terms of s 7
683
Remember
In the application of paras 68 to 73 the person liable to pay the tax is entitled to recover it from
the person who would have been liable for the tax in the absence of paras 68 to 72 (s 90).
There is no provision equal to s 7(7) in the Eighth Schedule because the donor has a right to
regain ownership of the asset and the asset may therefore not be disposed of.
For the attribution rules under paras 68 to 73 to apply, there must first be a ‘donation, settlement
or other disposition’. Also note that where the donor no longer exists, for example he is
deceased, no attribution can occur. If a gain is distributed to a non-resident beneficiary and
par 72 is not applicable (for example the donor is deceased), then the trust will be subject to tax
on the capital gain.
Each of these six attribution rules will now be discussed in detail:

(1) Capital gains made by a spouse are attributed to the donor spouse (par 68)
Paragraph 68 consists of two parts:
Paragraph 68(1) Capital gain made from a donation Paragraph 68(2) Capital gain made from a trade
by a spouse: with a spouse:
When a spouse’s capital gain may be attributed When a spouse derives a capital gain
wholly or partly to l from a trade carried on in partnership with the
l a donation, settlement or other disposition made other spouse or connected with a trade of the
by the other spouse, or other spouse, or
l a transaction, operation or scheme made, l from the other spouse or a partnership or pri-
entered into or carried out by the other spouse vate company (at a time when that spouse
then it will be deemed to be made by the other was a partner or the sole, main or one of the
spouse, if carried out mainly for the purpose of principal holders of shares)
l reducing, or then, to the extent that the capital gain derived by
l postponing or the spouse exceeds the amount to which the
spouse is reasonably entitled, regard being had to
l avoiding
l the nature of the relevant trade, or
the other spouse’s liability for any tax, duty or levy
that would otherwise have become payable under l the extent of the spouse’s participation in it, or
any Act administered by the Commissioner. l the services rendered by the spouse, or
Therefore, the spouse who initiated the transaction l any other relevant factor
is made liable for the tax on the capital gain. it must be disregarded by that spouse and must
instead be taken into account by the other spouse.
Remember
It is only par 68(1) that requires that the transaction be entered into or carried out mainly for the
purpose of avoiding any tax, duty or levy administered by the Commissioner.
For the other attribution rules (paras 68(2) to 72), this is not a requirement.
(2) Capital gains made by a minor child are attributed to the donor parent (par 69)
If a capital gain is made by a minor child and it can be attributed wholly or partly to a donation,
settlement or other disposition made by a parent of the child
l then it will be taxed in the hands of the parent and not in the hands of the minor child
(similar to s 7(3)).
The capital gain would also be considered the parent’s if it vests in the minor or is treated as
vested in him or is used for his benefit during the year of assessment in which it arises.
This rule also applies where the minor child’s capital gain may be attributed to a donation made
by another person in return for a donation made by the parent of the child in favour of the other
person concerned (or his family). This provision is similar to s 7(4) of the Act.
Remember
The parent who is liable for the tax is entitled to recover it from the minor child who is actually
entitled to the proceeds on the disposal of the asset (s 90).
684
(3) Capital gains that arise as a result of a conditional donation are attributed to the donor (par 70)
When a person makes a donation whereby a capital gain (attributable to the donation) will not
vest in the beneficiaries until some fixed or contingent event occurs
l then the capital gain will be taxed in the hands of the donor, as long as the capital gain or
any portion of it has not vested in any resident beneficiary during the year of assessment.
The person who made the donation (as well as the person receiving the donation) must be a
resident throughout the year. The capital gain or portion of it will be taxed in the hands of the
donor and disregarded when determining the aggregate capital gain or loss of the trust. The
stipulation or condition may be imposed by the donor or anyone else. This provision is similar to
s 7(5) of the Act.
Example 17.55. Conditional donations
Mr Abro donates shares to a discretionary family trust. The trust deed provides that the trustees
may distribute income derived by the trust and gains made on its assets to the beneficiaries
entirely at their discretion. The trust eventually sells the shares at a capital gain of R150 000. The
trust does not distribute the capital gain. It uses the proceeds to buy other assets.
Determine in whose hands the capital gain will be taxed.
SOLUTION
The capital gain will be attributed to Mr Abro in terms of par 70, as vesting is subject to the hap-
pening of some contingent event (the exercising of the trustee’s discretion).
(4) Capital gains that arise as a result of a revocable donation are attributed to the donor (par 71)
When a donation confers upon a resident beneficiary, who has the right to receive a capital
gain or portion thereof, subject to the donor’s right to revoke the right or confer it upon another
person, and the donor retains the powers of revocation
l then any capital gain or portion of a capital gain that has vested in a beneficiary during a
year of assessment under the right must be disregarded by the beneficiary and instead
taxed in the hands of the donor.
The person who made the donation must be a resident throughout the relevant year of assess-
ment. This provision is similar to s 7(6) of the Act.
(5) Capital gains of a non-resident that arise as a result of a donation by a resident are attributed to
the resident donor (par 72)
When a resident makes a donation, settlement or other disposition to any person (excluding a
non-resident entity similar to a public benefit organisation referred to in s 30 of the Act) and a
capital gain arises during the year of assessment (attributable to that donation) and it has
vested in or is treated as having vested in a non-resident during the year of assessment
l then it must be disregarded by the non-resident and instead taken into account by the
resident donor.
This provision does not apply where donations are made to the resident’s ‘controlled foreign
entities’, as defined in s 9D.
This provision is similar to s 7(8) of the Act.
l Paragraph 72 applies to any capital gain made as a result of the donation,

not only to South African source capital gains.
l Paragraph 72 was amended to also apply to amounts that would have con-
Please note! stituted a capital gain had that person been a resident. In determining if an
amount would have constituted a capital gain the participation exemption in
terms of par 64B must be disregarded in respect of the disposal of shares in
a foreign company if disposed of by a non-resident (see par 72(2)(a)–(c)).
(6) Attribution of income and capital gains

Paragraph 73 limits the total amount of
l the s 7 income that is deemed to accrue to the donor plus
l the capital gain attributed to him in terms of the attribution rules of the Schedule
to ‘the amount of the benefit derived from that donation, settlement or other disposition’.
685
According to par 73(2) ‘the amount of the benefit derived from that donation, settlement or other
disposition’ means
l the amount by which the donee has benefited from the fact that the donation, settlement or
disposition was made for or an inadequate consideration
l including a consideration in the form of interest.
Remember
Where the asset has been financed by a low or interest-free loan from the donor, the capital gain
amount that can be deemed the donor’s is limited to
l the interest saving enjoyed by the trust less
l any income deemed to be the donor’s in terms of s 7.
Example 17.56. Parent: Minor disposition with interest-free loan

On 1 March 2017 Lorna lent R100 000 interest-free to the Lorna Family Trust. Had the trust bor-
rowed the funds to purchase the shares, it would have paid interest at the annual rate of 15%.
The discretionary beneficiaries of the trust are Lorna and her two minor children, Peter and
Harry. The trustee used the funds to purchase some listed shares in Green Ltd, a company listed
on the JSE Ltd. On 28 February 2022, the trustee sold the shares at a capital gain of R205 000
and vested it in Peter (16) and Harry (14) in equal shares. Assume that no dividends were ever
received on the listed shares.
Determine in whose hands the capital gain will be taxed.
SOLUTION
There has been a donation, settlement or other disposition in that no interest has been charged
on the loan. The following interest would have been payable on the loan (on or after valuation
date) had the funds been borrowed from the bank (all tax years end on 28 February):
2018:15% × R100 000 .................................................................................................. R15 000
2019: ............................................................................................................................. R15 000
2020: ............................................................................................................................. R15 000
2021: ............................................................................................................................. R15 000
2022: ............................................................................................................................. R15 000
R75 000
In terms of paras 69 and 73, R75 000 of the capital gain of R205 000 will be taxed in the hands of
Lorna, whilst the balance of R130 000 will be taxed in the hands of Peter (R65 000) and Harry
(R65 000).
17.10.5 Limitation of losses (paras 15 to 19, 37, 39 and 56)

Capital losses in respect of certain assets must be disregarded in determining the aggregate capital
gain or aggregate capital loss of a person. The reason for these provisions are generally anti-avoidance.
17.10.5.1 Certain personal-use aircraft, boats, rights and interests (par 15)
The capital loss is disregarded to the extent that the following assets are not used in carrying on a
trade:
l an aircraft with an empty mass exceeding 450 kg
l a boat exceeding ten metres in length (a ‘boat’ being defined as any vessel used or capable of
being used in, under or on the sea or internal waters, whether self-propelled or not and whether
equipped with an inboard or outboard motor) (par 1)
l any fiduciary, usufructuary or other like interest, the value of which decreases over time
l a right or interest of whatever nature to or in any of the above assets.
This means that any capital loss on the disposal of a boat exceeding ten metres in length, used only
for private purposes, should be disregarded. Any capital gain should, however, be included. In terms
of par 53 the above assets are excluded from the definition of ‘personal-use assets’ (see 17.10.5.1).
If a par 15 asset is used for both private and trade purposes, an apportionment
Please note! should be made. Only the portion of the capital loss relating to private use will be
disallowed in terms of par 15.
686
17.10.5.2 Intangible assets acquired prior to the valuation date (1 October 2001) (par 16)
Any capital loss on intangible assets acquired prior to 1 October 2001 is disregarded if:
l the assets were acquired from a connected person, or
l the assets were associated with a business taken over by this person or any connected person.
This means that any capital loss on the disposal of an intangible asset acquired prior to 1 Octo-
ber 2001 and associated with a business taken over by that person, must be disregarded. Intangible
assets generally refer to patents, designs, trademarks, copyrights and goodwill.
17.10.5.3 Forfeited deposits (par 17)

Any capital loss on a forfeited deposit must be ignored if the deposit was made for the purposes of
acquiring an asset that was not intended for use wholly and exclusively for business purposes.
Paragraph 17 does not apply to
l gold or platinum coins of which the market value is mainly attributable to the material from which it
is made (for example Krugerrands)
l immovable property (excluding a primary residence)
l financial instruments (for example shares), or
l any right or interest in these assets.
17.10.5.4 Options (par 18)

Any capital loss on the disposal of an option to acquire an asset not intended for use wholly and
exclusively for business purposes. Disposal includes any event where the option is abandoned,
allowed to expire or is disposed of in any manner other than the exercise of the option (par 18).
Paragraph 18 does not apply to
l gold or platinum coins of which the market value is mainly attributable to the material from which
it is made (for example Krugerrands)
l immovable property (unless the property is intended to be a primary residence)
l financial instruments (for example shares), or
l any right or interest in these assets.
17.10.5.5 Shares disposed of at a capital loss (par 19)

Paragraph 19 is an anti-avoidance provision aimed at dividend stripping situations whereby a portion
of the capital loss must be disregarded upon the disposal of such a share. Dividend stripping in
general refers to a situation where the value of a share is diminished by the extraction of an exempt
dividend and the share is thereafter disposed of at a diminished value. The provisions of par 43A,
which also deals with dividend-stripping situations, override par 19. Paragraph 19 applies in one of
the following two situations:
Situation 1: (par 19(1)(a)) Situation 2: (par 19(1)(b))

If a person disposes of a share at a capital loss If a person disposes of a share at a capital loss
l as a result of a share buy-back by the com- l as a result of circumstances other than a share
pany, or the liquidation, winding-up or deregis- buy-back, liquidation, winding-up or deregistra-
tration of that company tion of that company
l then the capital loss is disregarded to the l then the capital loss is disregarded to the
extent that ‘exempt dividends’ are received or extent that ‘extraordinary exempt dividends’ are
accrues to that person within 18 months prior or received or accrue to that person within
as part of that disposal. 18 months prior or as part of that disposal
(other than a disposal in terms of s 29B in
respect of long-term insurers).
Clearly, par 19(1)(b) will only apply in circumstances where the situation as set out in par 19(1)(a)
does not apply.
The terms ‘exempt dividends’ and ‘extraordinary exempt dividends’ are defined in terms of
paras 19(3)(b) and (c) respectively:
‘Exempt dividends’ means any dividend or foreign dividend that is
l not subject to any dividends tax, and
l exempt from normal tax in terms of ss 10(1)(k)(i) or 10B(2)(a), (b) or (e).
687
‘Extraordinary exempt dividend’ is defined as

l so much of the amount of the aggregate of any ‘exempt dividend’ received or accrued within the
period of 18 months prior to or as part of the disposal
l as exceeds 15% of the proceeds received or accrued from the disposal (or part disposal) and
l has not been taken into account as extraordinary dividend in terms of par 43A.
The period of 18 months excludes any days during which the person concerned
l had an option to sell or was under a contractual obligation to sell or had made (and not closed) a
short sale of, substantially similar financial instruments
l was the grantor of an option to buy substantially similar financial instruments, or
l otherwise diminished the risk of loss on the share by holding one or more contrary positions with
respect to substantially similar financial instruments.
Remember
Paragraph 19 applies in two situations when a person disposes of shares at a capital loss:
l Where the capital loss is a result of a share buy-back or as part of the liquidation, winding up
or deregistration of the company, the person must disregard so much of the capital loss that
does not exceed any exempt dividends.
l Where the capital loss is a result of circumstances other than those described in the first
bullet point, the person must disregard so much of the capital loss as does not exceed any
extraordinary exempt dividends.
Example 17.57. Dividend stripping as a result of a share buy-back, liquidation, winding up

or deregistration of the company (par 19(1)(a))
Ace Ltd., a South African resident company who is not a share-dealer, owns shares in Bongo Ltd
(a JSE-listed South African resident company) which it acquired for R100 000 on 1 March 2006.
On 31 May 2021 Bongo Ltd buys back 10% of its shares from all its shareholders. The directors
advise the shareholders that 75% of the consideration is a dividend while the remaining 25% is a
return of capital. Ace Ltd. receives R20 000 as consideration for the buy-back.
Calculate Ace Ltd's capital gain or loss.
SOLUTION
Proceeds (return of capital R20 000 × 25%) ................................................................. R5 000
Less: Base cost (R100 000 × 10%) ............................................................................... (10 000)
Capital loss.................................................................................................................... (R5 000)
The dividend portion of the consideration of R15 000 (R20 000 × 75%) is an ‘exempt dividend’ in
terms of par 19 because it is not subject to normal tax or dividends tax. The capital loss is
disregarded to the extent that any ‘exempt dividend’ is received by or accrues to Ace Ltd as a
result of the share buy-back.
Exempt dividend received or accrued as a result of the share buy-back .................... R15 000
Capital loss disregarded (limited to R15 000 exempt dividend) ................................... R5 000
Capital loss allowed (R5 000 – R5 000) ........................................................................ Rnil
Example 17.58. Dividend stripping in other circumstances (par 19(1)(b))

Hunter Ltd, who is not a share-dealer, purchased a share in Coco (Pty) Ltd on 1 March 2020 for
R550 000. On 30 April 2021 Hunter Ltd receives a dividend of 400 000. Hunter Ltd sells the
shares on 1 May 2021 for R100 000.
Calculate Hunter Ltd’s capital gain or loss.
688
SOLUTION
Proceeds...................................................................................................................... R100 000
Less: Base cost ........................................................................................................... (550 000)
Capital loss .................................................................................................................. (R450 000)
The capital loss is disregarded to the extent that any extraordinary exempt dividend is received
by or accrues to Hunter Ltd within 18 months prior to or as part of the disposal. The capital loss
that is disregarded is calculated as follows:
Extraordinary exempt dividend (capital loss disregarded):
Dividend received or accrued within 18 months before date of disposal.................... R400 000
Less: 15% of proceeds (15% × R100 000) .................................................................. 15 000
Capital loss disregarded.............................................................................................. R385 000
Capital loss allowed (R450 000 – R385 000) ............................................................... R65 000
According to SARS’ Tax Guide for Share Owners, par 19 has the practical effect that it will not apply
to an individual holding share in a resident company or non-resident JSE-listed company because
dividends from these companies are subject to the dividends tax. It will, however, apply to resident
companies receiving dividends from such companies because such dividends are exempt from
dividends tax under s 64F(a). In the case of foreign dividends par 19 will apply to
l an individual who enjoys the participation exemption in s 10B(2)(a), and
l a company that enjoys the participation exemption in s 10B(2)(a) or the same country exemption
in s 10B(2)(b).
17.10.5.6 Interest in a company holding certain personal-use aircraft, boats, rights and interests
(par 37)
Paragraph 37 is an anti-avoidance provision. Its purpose is to prevent persons from avoiding the dis-
regarding of capital gains and losses in respect of personal-use assets, by holding these assets in a
company or trust.
17.10.5.7 Assets disposed of to a connected person (par 39)

Where a person disposes of an asset to a connected person and the transaction results in a capital
loss, this loss is ‘clogged’ in terms of par 39. A person must disregard capital losses (‘clogged’
losses) on the disposals of assets to a person who
l was his connected person immediately before the disposal, or
l is a member of the same group of companies immediately after the disposal, or
l is a trust with a beneficiary that is a member of the same group of companies immediately after
the disposal.
The disregarded or ‘clogged’ capital loss may only be deducted from capital
gains arising from disposals of assets to the same connected person. These dis-
Please note! posals can be in the same or a subsequent year of assessment, provided that
the other person is still the first person’s connected person at the time of the sub-
sequent disposals.
Connected persons are defined in s 1 of the Act, but the definition of connected person in par 39 is
narrower for the purposes of par 39. A connected person in relation to a natural person only includes
the parent, child, stepchild, brother, sister, grandchild or grandparent of that natural person.
The ‘clogged’ loss rule does not apply where a share incentive trusts disposes of a right, a market-
able security or equity instrument to the beneficiaries of the trust.
Where a company redeems its shares, the holder of those shares must be treated as having dis-
posed of the shares to that company. This means that if the holder is a connected person to the
company immediately before the transaction and a capital loss arises, the loss will be clogged.
Example 17.59. Disposals to connected person
In Year 1, Gama (Pty) Ltd sells an office building to a fellow subsidiary, Ray (Pty) Ltd, at a capital
loss of R7 000 000. In Year 4, Gama (Pty) Ltd sells a block of listed shares to Ray (Pty) Ltd at a
capital gain of R5 000 000.
Explain the CGT consequences.
689
SOLUTION
Gama (Pty) Ltd must disregard the capital loss of R7 000 000 in Year 1, since Ray (Pty) Ltd is its
connected person, but it may carry forward the capital loss and set it off against the capital gain
of R5 000 000 made on the subsequent disposal of shares to Ray (Pty) Ltd.
The capital gain of R5 000 000 in respect of the shares will, therefore, be tax-free, while Gama
(Pty) Ltd may carry forward the balance of the capital loss of R2 000 000 (R7 000 000 –
R5 000 000) to set off against capital gains on future disposals to Ray (Pty) Ltd.
If Ray (Pty) Ltd had ceased to be a connected person of Gama (Pty) Ltd before Year 4, Gama
(Pty) Ltd’s capital loss of R7 000 000 would have fallen away.
17.10.5.8 Debt owed by a connected person (par 56)

A loss arises when a person waives or cancels any debt due to him. Where a capital loss arises on
the waiver or cancellation of debt owed by a connected person, the capital loss must be disregarded
(par 56(1)). The capital loss on the disposal of a loan or debt owed by a connected person must
however not be disregarded to the extent that the amount of the debt benefit
l reduced the expenditure or base cost of an asset of the debtor in terms of s 19(3) or par 12A(3)
l must be taken into account by the debtor as a capital gain in terms of par 12A(4)
l is or was included in the gross income of the person acquiring that debt and which the creditor
proves to be the case
l is or was included in the capital gain of the person acquiring that debt and which the creditor
proves to be the case, or
l is or was included in the gross income of the debtor or taken into account in the assessed loss of
the debtor in terms of s 20(1)(a).
(Par 56(2))
This provision overrides par 39 that deals with the clogging of losses on the
disposal of assets to a connected person. This means that where the asset
consists of any loan or debt owed by a connected person, the capital loss will be
Please note!
disregarded in terms of par 56, i.e., if a debt or loan owed by a connected person
is waived, reduced or cancelled. If the capital loss is, however, allowed in terms
of one of the exceptions to par 56 (see par 56(2)), the capital loss will be allowed
in the hands of the creditor.
Example 17.60. Cancellation of debt owed by a connected person (par 56)

During 2022, Lesedi lent R200 000 to her son, Bill, who used the loan to pay for his studies. In
2022, Lesedi cancelled the loan after Bill failed to make any payments on the loan.
Determine whether Lesedi will be entitled to claim the capital loss.
SOLUTION
Lesedi must disregard the loss on the loan cancellation because the debtor is a connected
person and none of the exceptions in terms of par 56(2) apply.
Example 17.61. Cession of debt at less than face value to person who will be subject to
tax on capital gain (par 56(2)(d))
Peter and Paul are brothers. Paul owes Peter R500 000 for a flat Paul acquired for investment
purposes. Peter needs the cash and sells the claim to his sister, Carla, for R400 000. Carla does
not normally deal in debts or claims.
Determine the capital loss in Peter’s hands.
SOLUTION
It is reasonable to assume that when Paul repays the loan, Carla will realise a capital gain of
R100 000. In terms of par 56(2)(d), Peter will be entitled to a capital loss of R100 000 provided
Peter can prove that the R100 000 is included in the determination of Carla’s aggregate capital
gain or loss.
690
17.11 CGT for different entities or persons
17.11.1 Companies (paras 74 to 77)

Companies is a specialised field and the CGT provisions relating to companies are dealt with in detail
in chapter 19.
17.11.2 Trusts (paras 80 to 82)

Trusts is a specialised field and the CGT provisions relating to trusts are dealt with in detail in chap-
ter 24.
17.11.3 Insolvent estates (par 83)

Insolvent estates is a specialised field and the CGT provisions relating to insolvent estates are dealt
with in detail in chapter 25.
17.11.4 The deceased and the deceased estate (ss 9HA and 25)
The deceased and the deceased estate is a specialised field and the CGT provisions relating to the
deceased and deceased estates are dealt with in detail in chapter 27.
17.11.5 Partnerships (par 36)

Partnerships is a specialised field and the CGT provisions relating to partnerships are dealt with in
detail in chapter 18.
17.12 Miscellaneous anti-avoidance rules and other special rules

There are a few anti-avoidance rules as well as a few special rules contained in the Schedule that
have not yet been dealt with in this chapter yet. These rules are only applied in specific circum-
stances or for specific types of assets.
17.12.1 Value-shifting arrangements (par 23)

A deemed disposal occurs where the value of a person’s interest decreases in terms of a ‘value-shift-
ing arrangement’ which is defined as
l an arrangement by which a person retains an interest in a company, trust or partnership
l but the market value of his interest decreases, following a change of the interests in that com-
pany, trust or partnership,
l while the value of his connected person’s direct or indirect interest in it increases or his con-
nected person acquires a direct or indirect interest in it.
(Par 1)
A typical example of a value-shifting arrangement is when a parent who owns interest in a partner-
ship sells a portion of his interest to his children at a discount, thereby reducing the value of his own
interest. He has effectively shifted value from himself to his children. In terms of this anti-avoidance
rule in the Eighth Schedule, a disposal is then deemed to have occurred (par 11(1)(g)). The amount
by which the market value of his interest has decreased as a result of the arrangement (par 35(2)) will
equal proceeds and his base cost will be determined according to the formula in par 23.
17.12.2 Reacquired financial instruments (par 42)

A special rule applies when a person makes a capital loss on the disposal of a financial instrument
and he or his connected person acquires (or enters into a contract to acquire) a financial instrument
of the same kind and of the same or equivalent quality within a period that starts 45 days before the
date of the disposal and ends 45 days after that date (therefore a 91-day period). In terms of par 42 the
loss cannot be taken into account at the time of disposal, but is carried forward and added to the
base cost of the replacement asset.
17.12.3 Pre-sale dividends treated as proceeds (par 43A)

These provisions are dealt with in detail in chapter 20.
691
17.12.4 Leasehold improvements

In the absence of par 33(3)(c), when a lessee attached an asset (such as a building) to the land of a
lessor, there would be an immediate disposal by the lessee of the bare dominium in the assets con-
cerned, while the right of use would be retained by the lessee until the end of the lease. According to
par 33(3)(c), there is no part-disposal of an asset by a lessee when that lessee improves or enhances
the leased asset. Instead, disposal is deferred until the end of the lease, and the time of disposal
therefore occurs when the lease expires (par 13(1)(b)).
For the lessee, this provision defers the disposal of the bare dominium until the termination of the
lease, when the entire disposal of the asset will occur (bare dominium and right of use).
For the lessor, the base cost of the leasehold improvements will be determined on the termination
date of the lease, and the disposal will therefore only occur on disposal of the improved property.
The following table provides a summary of the CGT consequences of leasehold improvements:
Factor Effect on lessor Effect on lessee

Time of disposal Disposal only occurs on disposal of the A disposal of the bare dominium in the
improved property. improvements is not a part-disposal
(par 33(3)(c)), but is deferred until the
end of the lease. The time of disposal
therefore occurs when the lease
expires (par 13(1)(b)).
Obligatory improvements Obligatory improvements affected will Obligatory improvements under s 11(g)
affected in terms of lease not constitute a disposal of an asset for are allowed as a deduction. On dis-
agreements CGT purposes, but the acquisition of an posal (termination of the lease),
asset. The base cost of the improve- amounts allowed as a deduction under
ments under par 20(1)(h)(ii)(cc) is the s 11(g) must be excluded from base
amount included in gross income cost (par 20(3)(a)(i)).
(par (h)), less any allowance granted
under s 11(h).
Voluntary improvements No expenditure will be added to the Expenditure incurred will form part of
affected base cost of the land, since none was the base cost in terms of par 20(1)(a).
incurred.
Compensation paid by Compensation will form part of the base Compensation (reduced by recoup-
lessor cost of the improvements acquired in ments) will be included in proceeds in
terms of par 20(1)(e). terms of par 35(1)(b).
Example 17.62. Voluntary leasehold improvements by lessee

Trader (Pty) Ltd entered into a ten-year lease for a shop on 2 February 2021 with Landlord (Pty)
Ltd, and voluntarily spent R300 000 (VAT excluded) on the shop-front and fixtures on which no
income tax allowances could be claimed. The companies are not connected persons. The lease
agreement is silent with regard to lease improvements. The value of the bare dominium of
disposal is equal to the total value of the improvements (R300 000), less the value of the right of
use for the next ten years (R203 406). The bare dominium of the improvements calculated over
the remaining term of the lease is therefore R96 594.
(1) Indicate the CGT consequences for
l Trader (Pty) Ltd (the lessee), and
l Landlord (Pty) Ltd (the lessor).
(2) Indicate the CGT consequences for Trader (Pty) Ltd (the lessee) and Landlord (Pty) Ltd (the
lessor) assuming that in terms of the lease agreement the lessee was obliged to affect lease
improvements.
(3) Indicate the CGT consequences for Trader (Pty) Ltd (the lessee) if the lessee was obliged to
erect the lease improvements. Trader (Pty) Ltd purchased the entire building from Landlord
Ltd (lessor) for R600 000 (R50 000 less than market value at the end of the lease term).
Assume that the lessee was taxed on a s 8(5) recoupment of R50 000.
692
SOLUTION
(1) The lessee was not obliged to erect lease improvements, therefore the CGT consequences
would be:
Trader (Pty) Ltd (the lessee):
The lease agreement of the lessee constitutes an asset in his hands. The time of disposal
occurs when the lease expires (par 13(1)(b)), in other words, at the end of the ten-year
lease. According to par 33(3)(c) there is no part-disposal of an asset by a lessee when that
lessee improves or enhances the leased asset.
In terms of par 20(1) the expenditure will form part of the base cost of the asset (i.e., the
lease agreement). The base cost will therefore be R300 000. If no compensation for the
improvements is received on termination of the lease, the capital loss will be R300 000
(proceeds (R0) less base cost (R300 000)). A capital loss of R300 000 will therefore be
allowed at the time of the expiry of the lease. There is no limitation on this loss in terms of the
Eighth Schedule,
Landlord (Pty) Ltd (the lessor):
Expiration of the lease period is considered to be an acquisition of an asset, not a disposal.
Since voluntary improvements were erected, no expenditure will be added to the base cost
of the land. Disposal will only occur later when there is disposal (by the lessor) of the land on
which the improvements are situated.
(2) If the lessee was obliged to erect lease improvements in terms of the lease agreement, the
CGT consequences would be:
Obligatory improvements of R300 000 would be allowed as a tax deduction in terms of
s 11(g). On disposal (termination of the lease) amounts allowed as a deduction under s 11(g)
must be excluded from base cost (par 20(3)(a)). If no compensation for the improvements is
received on termination of the lease, the capital gain/loss would be Rnil (proceeds (R0) less
base cost (R300 000 – R300 000)). Therefore, no capital gain or loss. Where an amount above
the contract amount is spent, which is not allowed as a deduction for income tax purposes, it
would result in a capital loss at the end of the lease term.
Obligatory improvements erected will not constitute a disposal of an asset for CGT pur-
poses, but the acquisition of an asset. The base cost of the improvements under
par 20(1)(h)(ii)(cc) is the amount included in gross income (par (h)), less any allowance
granted under s 11(h). If no s 11(h) deduction was allowed, the lease improvements would
have a base cost of R300 000. This amount will be added to the base cost of the asset.
(3) Integration with s 8(5):
Obligatory improvements of R300 000 would be allowed as a tax deduction in terms of
s 11(g). On disposal (termination of the lease), amounts allowed as a deduction under
s 11(g) must be excluded from base cost (par 20(3)(a)). If no compensation for the
improvements is received on termination of the lease, the capital gain/loss would be Rnil
(proceeds (R0) less base cost (R300 000– R300 000)).
The s 8(5) recoupment will be added to the base cost of the asset purchased from the
lessor. The base cost of the building will therefore be the purchase price of R600 000 +
R50 000 = R650 000.
17.12.5 Transactions in foreign currency (par 43) and cryptocurrency

When dealing with assets acquired or disposed of in foreign currency, it is necessary to determine
the capital gain or loss in rand. This is needed in order to calculate the taxable capital gain that
should be included in the taxable income of a person (s 26A).
If an asset that was acquired in a foreign currency is subsequently disposed of, the capital gain or
loss must be calculated by applying the specific translation rules of par 43 of the Eighth Schedule,
and not in terms of the general provisions in s 25D. The same translation rules apply if an asset was
acquired in rand and is subsequently disposed of in a foreign currency. The detail of these
translation rules are discussed in chapter 15 (see 15.7). Transactions in cryptocurrency are also dealt
with in chapter 15 (see 15.9).
693
Remember
l The general provision in the Act that deals with the translation of foreign exchange is found in
s 25D (see 15.2.2).
l The translation rules relating to exchange gains and losses arising on exchange items are
determined by s 24I (see 15.3).
l The translation rules relating to capital gains and losses are determined by par 43 of the
Eighth Schedule (see 15.7).
17.12.6 Base cost of assets of controlled foreign companies (par 43B)

If a controlled foreign company abandons it’s currency and adopts a new currency after a period of
hyper-inflation (inflation of 100% or more), a special rule (par 43B) in respect of the base cost of
assets acquired before the hyper-inflationary currency was abandoned, applies. Paragraph 43B
determines that for the purposes of determining the base cost of an asset, the asset is deemed to
have been acquired in that new currency on the first day of the foreign tax year of the controlled
foreign company, and for an amount equal to the market value of the asset on the date on which the
new currency was adopted by it. The new acquisition date and the new base cost amount will apply
as if the affected assets were brought into the South African tax net for the first time.
17.12.7 Foreign currency assets and liabilities (paras 84 to 96)

Part XIII (paras 84 to 96) contained rules dealing with gains and losses from holding foreign monetary
assets (‘foreign currency assets’) and settling ‘foreign currency liabilities’. These rules did not, how-
ever, apply to persons to whom (or transactions in respect of which) s 24I applies. These provisions
were extremely complicated. Taxpayers were often required to spend significant time and resources
to review ordinary day-to-day currency movements solely for purposes of the tax computation.
Therefore, these capital gain and loss rules (Part XIII of the Schedule) were repealed effective for
years of assessment commencing from 1 March 2011.
17.13 Final step in the CGT calculation and changes to capital gains or losses
in subsequent years
Final step in the CGT calculation
If a person has a net capital gain, it must be multiplied by the inclusion rate applicable to that specific
entity to determine that person’s taxable capital gain. This fact, as well as the different inclusion rates
and special rules that apply to specific entities, was discussed in 17.5. Once a person’s taxable
capital gain has been determined, it is included in his taxable income in terms of s 26A. Thereafter
the normal rates of tax are applied to his taxable income to determine the normal tax payable by him.
A capital gain is therefore subject to normal tax.
Remember
Because capital gains and losses do not occur on a regular basis, they may be excluded from
the taxpayer’s basic amount for the purpose of estimating the first provisional tax payments of
the taxpayer. The capital gains in a year of assessment therefore do not affect the calculation of
provisional tax in a later year of assessment.
It is nonetheless possible for certain events to occur in subsequent years that may require a recalcu-
lation of the capital gain or loss.
When capital gains or losses change in subsequent years

This occurs where there was a disposal of an asset in a previous year of assessment, the capital gain
or loss was determined and taken into account in that year of assessment and thereafter certain
events occurred causing the capital gain or loss previously calculated to be incorrect. The capital
gain or loss previously calculated should be corrected.
From 1 January 2016, a new provision applies in respect of the corrections: Where a contract is can-
celled in a subsequent year, the capital gain or loss on the original disposal will be cancelled out by
recognising a capital gain equal to the original capital loss or a capital loss equal to the original
capital gain (see 17.8.4 for a detailed discussion). All other corrections in subsequent years are still
dealt with in 17.13.1 and 17.13.2.
694
The following diagram illustrates how the correction of the capital gain or loss for pre-valuation date
assets is dealt with differently from the correction of the capital gain or loss for assets acquired on or
after valuation date.
Valuation Date
1 October 2001
Assets acquired before 1 October 2001 Assets acquired on or after 1 October 2001
Recalculate capital gains or losses (start from Further capital gain or loss arises in subsequent
scratch) (see 17.13.2). year (no recalculation) (see 17.13.1).
17.13.1 Further capital gains or losses in the case of post-valuation date assets in terms
of paras 3(b)(i), (ii) and 4(b)(i), (ii)
Apart from the cancellation of a contract in terms of par 20(4) (see 17.8.4), there are four other
situations relating to the correction of a capital gain or loss incurred in a previous year of assessment.
The following four situations may cause a further capital gain or loss to arise in the current year of
assessment on an asset that was already disposed of in a previous year of assessment:
(1) The receipt or accrual of further proceeds in the current year in respect of an asset disposed of
in a prior year will give rise to a capital gain in the current year. This will occur if the proceeds
have not been taken into account in determining the capital gain or loss on disposal of the
asset in the previous year (par 3(b)(i)).
(2) If part of the proceeds is reduced in a subsequent year, a capital loss will occur in the current
year. In terms of par 4(b)(i) the capital loss will be so much of the proceeds as the person is no
longer entitled to as a result of the
l cancellation, termination or variation of any agreement
l prescription or waiver of a claim, or
l release from an obligation or any other event.
The proceeds may have become irrecoverable, repaid or become repayable. This will happen,
for example, where the debtor to whom an asset has been sold is sequestrated or liquidated.
(3) If any portion of the base cost that was taken into account in determining a capital gain or loss
in a previous year is recovered or recouped in the current year, a further capital gain will arise
in the current year. The recovery or recoupment may take place in the form of a cash refund or
repossession of the asset, but excludes the cancellation or reduction of all or part of any debt
incurred in acquiring the asset (par 3(b)(ii)).
(4) If the base cost increases in a subsequent year, a capital loss will occur (par 4(b)(ii)). The cap-
ital loss equals any allowable par 20 expenditure incurred during the current year of assess-
ment in respect of the asset. The expenditure must not have been taken into account during
any previous year. An example is additional expenditure incurred after the disposal of an asset
that was not anticipated at the time of disposal of the asset.
These further capital gains or losses will be calculated, unless the additional or reduced amount has
been taken into account in terms of par 25(2).
17.13.2 Redetermination of pre-valuation date assets in terms of paras 25(2) and (3)(iii)
and (4)(iii)
Paragraph 25(2) and (3) deals with the redetermination of capital gains and losses in respect of pre-
valuation date assets required when any of the following four events occur:
(1) Additional proceeds are received or accrued.
(2) Any proceeds already taken into account become
l irrecoverable, or
l repayable, or
l the taxpayer is no longer entitled to those proceeds
– as a result of the cancellation, termination or variation of an agreement, or
– due to the prescription or waiver of a claim or the release from an obligation or any other
event in that year.
695
(3) Additional base cost expenditure is incurred.

(4) Expenditure taken into account in a prior year as base cost has been recovered or recouped in
a subsequent year (par 25(2)).
When a redetermination is required, it simply means that the capital gain or loss on disposal of the
asset must be redetermined from scratch, taking into account all amounts of proceeds and expend-
iture from the date on which the asset was first acquired. Redetermination is necessary for the
following reasons:
l Any capital gain or loss determined under the first disposal may have been eliminated by the
loss-limitation rules in paras 26 and 27, and this could cause hardship or confer an undue benefit
on a taxpayer.
l Where the TAB method was used with the first disposal, any subsequent capital gain or loss
would otherwise not be time-apportioned.
696
18 Partnerships
Jolani Wilcocks
Assisted by Lizelle Bruwer

l describe the legal status of a partnership
l apply the provisions of the Act that specifically applies to partners
l explain and apply how specific deductions apply to partners
l explain the tax consequences for partners on dissolution or termination of a part-
nership agreement
l calculate a partner’s taxable income.
Contents
Page
18.1 Overview .......................................................................................................................... 697
18.2 Legal status of a partnership ........................................................................................... 698
18.3 Normal tax consequences for a partnership and its partners (s 24H) ........................... 698
18.4 Accrual of partnership income ........................................................................................ 700
18.5 Connected persons ......................................................................................................... 700
18.6 Employment relationship ................................................................................................. 701
18.7 Specific deductions and allowances .............................................................................. 702
18.7.1 Annuities paid to former employees or partners or their dependents
(s 11(m)) ........................................................................................................... 702
18.7.2 Partnership contributions to a fund (s 11(l)) .................................................... 702
18.7.3 A partner’s contribution to a pension fund, provident fund or retirement
annuity fund (s 11F) ......................................................................................... 703
18.7.4 Key person insurance contributions (s 11(w)) ................................................. 705
18.7.5 Capital allowances ........................................................................................... 706
18.7.6 Motor vehicle expenses ................................................................................... 706
18.7.7 Deduction for bad debt (s 11(i)) ...................................................................... 707
18.8 Fringe benefits ................................................................................................................. 708
18.9 Turnover tax (Sixth Schedule) ......................................................................................... 709
18.10 Capital gains tax consequences (par 36 of the Eighth Schedule) ................................. 709
18.11 Limited partnerships (partnerships en commandite) (s 24H(4))..................................... 710
18.12 Dissolution/termination of partnership agreement .......................................................... 710
18.13 Default by partner ............................................................................................................ 711
18.14 Comprehensive example................................................................................................. 712
18.1 Overview
A partnership is a legal relationship between two or more persons who carry on a business and to
which each partner contributes either money or labour or anything else with the objective of making a
profit and of sharing it between them. A partnership is not subject to normal tax as it is not a separate
legal entity. The individual partners of a partnership are liable for their proportionate share of the
normal tax on the partnership’s taxable income. The partnership is, however, liable for VAT on taxable
supplies made by the partnership and not its individual partners (see chapter 31).
The Income Tax Act contains specific provisions whereby income received and expenses incurred
by a partnership are deemed to be received and incurred by the individual partners (s 24H). In
certain cases, the partnership is deemed to be an employer of the partners to allow for specific
deductions in the partners’ hands that only apply to employees. The formation and dissolution of a
partnership may also have specific normal tax consequences for the individual partners. In addition,
697
the Eighth Schedule to the Income Tax Act provides for specific capital gains tax (CGT) conse-
quences for capital transactions involving partnerships. Before these principles are discussed in
detail, it is important to understand the legal nature of a partnership as well as the different types of
partnerships that exists.
18.2 Legal status of a partnership

A partnership is not a separate legal persona distinct from the individuals who represent it. This
means that the partnership cannot legally own assets and cannot be held liable for any obligation
incurred. The individual partners own the assets used for purposes of the partnership. The individual
partners may also be held liable for obligations incurred.
There are different types of partnerships. The most basic form of partnership is the general partner-
ship where all the partners manage the business and are personally liable for its debts. A limited
partnership is one in which certain partners are not involved in the management of the business and
also only liable for the partnership debt to a limited extent. The liability of a limited partner is usually
limited to the partner’s partnership contribution. A silent partner is one who shares in the profits and
losses of the business, but who is not involved in the management of business and whose associa-
tion with the business is not publicly known.
18.3 Normal tax consequences for a partnership and its partners (s 24H)
A partnership is not a separate legal entity and it is not liable for normal tax. The individual partners
are liable for normal tax on the partnership’s taxable income. The Act provides that where any trade
or business is carried on in partnership, each partner is deemed to be carrying on such trade or
business (s 24H(2)). It also provides that where the partnership receives income, it is deemed to be
received by each member of the partnership. The same applies for any deduction or allowance for
which the partnership may have qualified. Deductions and allowances are allocated to the individual
partners. The portion of income, deductions and allowances allocated to a specific partner, is the
same as the ratio that the partners agreed in which they will share partnership profits and losses
(s 24H(5)).
The taxpayer in Grundlingh v C:SARS (FB 2009) was a South African resident and a partner of a legal
partnership in Lesotho. The court had to consider whether the taxpayer's share of the profits of the
Lesotho partnership was taxable only Lesotho. The double tax agreement between South Africa and
Lesotho provides that the profits of an enterprise of a Contracting State shall be taxable only in that
state unless the enterprise carries on business in the other contracting state through a permanent
establishment situated therein (article 7(1) of the DTA). The taxpayer argued that the Lesotho part-
nership was an enterprise of Lesotho and therefore only taxable in Lesotho. However, the court held
that
l neither the South African Income Tax Act nor the Lesotho Income Tax Act recognise a partner-
ship as a separate legal taxable entity
l the taxpayer (i.e. the partner) is deemed to carry on the business of the Lesotho partnership
l the individual partners, and not the partnership, are tax entities, liable to pay taxes
l the Lesotho partnership is not an enterprise, liable to pay tax in Lesotho, and therefore article 7(1)
of the DTA is not applicable
l the profits from the Lesotho partnership was not only taxable in Lesotho in the hands of the South
African resident, but also in South Africa.
When calculating the taxable income of the partners in a partnership, it is SARS’s practice that one
first determines the taxable income of the partnership as if it is a separate taxable entity. This amount
of taxable income is then apportioned among the partners according to their agreed-upon profit-
sharing ratio. The partners are then individually assessed on their respective shares of the partner-
ship income after taking into account any income derived from sources outside the partnership. Each
partner pays tax according to his total taxable income (including his share of the partnership income)
and the exemptions, deductions and rebates available to him. In this way, the same net effect is
achieved as if income and expenses were separately apportioned between the respective partners
(as contemplated in s 24H).
Should the determination of the taxable income of a partnership result in an assessed loss, the as-
sessed loss is apportioned among the partners according to their rights to participate in profits or
losses. Each partner is deemed to carry on the trade carried on by the partnership and is entitled to
698
18.3 Chapter 18: Partnerships
set off his share of the assessed loss against any income derived during the same year from sources
outside the partnership, subject to the provisions of s 20 and 20A (see chapters 7 and 12).
In determining the taxable income or assessed loss of a partnership, the Commissioner must have
regard to the terms of the partnership agreement. If, in terms of the agreement, salaries are payable
to the partners or interest is to be credited on capital contributions made by them, the salaries or
interest will be allowed as a ‘deduction’ to the partnership. These amounts will then be included in
(i.e. added to) the taxable incomes of the relevant partners. It is, therefore, the practice of the Com-
missioner to subject a partner to tax on his transactions with the partnership as if he were a third
party. Partnerships and the partners are treated as distinct entities for this purpose.
The provisions of s 24H also apply to foreign partnerships. Foreign partnerships

Please note!
are discussed in chapter 21.
A partner’s normal tax liability can be calculated in terms of the following framework:
Framework for calculating a partner’s normal tax liability

Income and expenses of the partnership as per statement of comprehensive income:
Income
Gross income from trading ................................................................................................... Rx
Interest received on credit balance of bank account ........................................................... x
Dividends received by partnership ....................................................................................... x
Expenses
Salaries paid to employees ................................................................................................... (x)
Salaries paid to partners ....................................................................................................... (x)
Contribution to pension fund (contributions on behalf of partners and employees) ............. (x)
Contributions to medical scheme (contributions on behalf of partners and employees)...... (x)
RAF contributions made on behalf of partners ..................................................................... (x)
Bad debt ............................................................................................................................... (x)
Life insurance premiums on the lives of partners ................................................................. (x)
Depreciation.......................................................................................................................... (x)
Interest paid in respect of partners’ capital .......................................................................... (x)
Net profit as per statement of comprehensive income Rx
STEP 1: Calculate taxable income from partnership:

Net profit as per statement of comprehensive income ......................................................... Rx
Adjusted for income and expenses that are subject to special rules in the individual part-
ners’ hands:
Less: Interest received on credit balance of bank account ................................................. (x)
Less: Dividends received by partnership ............................................................................ (x)
Add: Bad debt ..................................................................................................................... x
Add: Contributions to funds not deductible in terms of s 11(l) ............................................. x
Add: Life insurance premiums on the lives of partners (not deductible in terms of s 11(w)) x
Add: Depreciation ................................................................................................................ x
Less: Wear and tear .............................................................................................................. (x)
Adjusted partnership taxable income Rx
Split adjusted partnership taxable income between: Rx
Trade income from partnership .......................................................................................... a
Interest received on credit balance of bank account ......................................................... b
Dividends received by partnership..................................................................................... c
STEP 2: Calculate partner’s pro rata taxable income from partnership

Partner’s share of partnership’s taxable income (Ra × profit sharing ratio) .......................... Rx
Partner’s share of partnership’s interest income (Rb × profit sharing ratio) ......................... x
Partner’s share of partnership’s dividend income (Rc × profit sharing ratio) ....................... x
STEP 3: Add partner’s personal income from partnership
Salary from partnership ......................................................................................................... x
Interest received from partnership ........................................................................................ x
Contributions to pension fund, provident fund and retirement annuity fund paid by part-
nership .................................................................................................................................. x
Contributions to medical aid scheme paid by partnership ................................................... x
Net rental income .................................................................................................................. x
continued
699
STEP 4: Claim exemptions and deductions per partner

Less: Interest exemption in terms of s 10(1)(i) ....................................................................... (x)
Less: Dividend exemption in terms of s 10(1)(k) .................................................................... (x)
Taxable income before specific deductions .......................................................................... Rx
Less: Other deductions (s 11(a) and 11(e) as well as travel cost) ......................................... (x)
Less: Bad debts (s 11(i)) ....................................................................................................... (x)
Add: Taxable capital gain (s 26A).......................................................................................... x
Less: Contributions to pension fund (s 11F) .......................................................................... (x)
Less: Donations (s 18A) ......................................................................................................... (x)
Taxable income ...................................................................................................................... Rx
Normal tax liability of partner.................................................................................................. Rx
Less: Primary, secondary and tertiary rebates ...................................................................... (x)
Less: Section 6quat tax credit for foreign taxes paid ............................................................. (x)
Less: Medical fees tax credit (ss 6A and 6B credits)............................................................. (x)
Normal tax liability .................................................................................................................. Rx
Example 18.1. Deemed income and expenses

For the 2022 year of assessment, Majola and De Wet Medical Practitioners (a 50:50 partnership
between P Majola and K de Wet) received income of R4 500 000. Tax deductible expenses of
R1 600 000 were actually incurred.
Determine P Majola’s taxable income for the 2022 year of assessment.
SOLUTION
Partnership net profit
Income R4 500 000
Less: Expenses (1 600 000)
Net profit ...................................................................................................................... R2 900 000
Partner’s pro rata taxable income from partnership
Partnership net profit .................................................................................................... R2 900 000
P Majola’s share in the partnership net profit (50% × R2 900 000).............................. R1 450 000
Note
P Majola will be liable for tax on the above amount even if he does not actually receive the
amount. The reason for this is that the income is deemed to have accrued to and expenses are
deemed to be actually incurred by the partner, P Majola (s 24H(5)).
18.4 Accrual of partnership income

Income is deemed to accrue to or be received by a partner on the same day on which it accrues to
or is received by the partners in common (this refers to the day on which the income accrues to or is
received by the partnership) (s 24H(5)). This applies irrespective of any contrary rule contained in
any law or the partnership agreement.
The effect of the above rule is that partners will be subject to normal tax on an amount that is re-
ceived by or that accrues to the partnership irrespective of whether, or when, the amount is distri-
buted to the partners. The partnership agreement may, for example, provide that profits are only
distributed to partners after the end of a financial year. Despite such a clause in a partnership
agreement, amounts are deemed to be received by or to accrue the partners in the same ratio in
which they have agreed to share profits and losses at the same time that the amount is received by
or accrued to the partnership.
18.5 Connected persons

The Act contains a number of provisions aimed at combating tax avoidance where transactions are
entered into between connected persons. These are generally aimed at ensuring that transactions
between connected persons are conducted on an arm’s length basis. A connected person in relation
to a partner of a partnership is any other partner of the partnership, as well as any connected person
in relation to other partners in the partnership (par (c) of the definition of ‘connected person’ in s 1).
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18.5–18.6 Chapter 18: Partnerships
Example 18.2. Connected person in relation to the partner

Khosi and Dino are partners in a partnership. Khosi is also a beneficiary of a family trust, the KL
Family Trust. Discuss who will be connected persons (as defined in s 1) under these circum-
stances.
SOLUTION
In these circumstances the following persons are connected persons:
l Khosi and Dino are connected persons because they are partners in the same partnership.
l Khosi and the KL Family Trust are connected persons (par (b) of the definition of ‘connected
person’ provides that a beneficiary of a trust is a connected person in relation to the trust).
l Dino and the KL Family Trust are connected persons. Since Khosi and her family trust are
connected persons and Khosi and Dino are connected persons, Dino is also a connected
person in relation to the KL Family Trust.
18.6 Employment relationship

There is no employment relationship between a partner and a partnership. In COT v Newfield (1970
RAD) the court confirmed that the relationship between partners is one of agency and not of employer-
employee.
Since a partnership does not qualify as an employer of a partner, a salary paid to a partner is not
subject to employees’ tax (see definition of ‘employer’ in par 1 of the Fourth Schedule). A partner is,
for this reason, a provisional taxpayer (see chapter 11).
Although a partnership qualifies as a ‘person’ (the definition of ‘person’ in the Interpretation Act, 1933,
includes ‘any body of persons corporate or unincorporated’), amounts paid by a partnership to a
partner do not qualify as ‘remuneration’ as defined in the Fourth Schedule. The definition of ‘remuner-
ation’ in the Fourth Schedule includes ‘salary, leave pay, wage, overtime pay, bonus, gratuity, com-
mission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend’, which
requires a relationship similar to that of an employee or service provider and therefore does not apply
to partners and partnerships.
The Act provides that a partner in a partnership is deemed to be an employee of the partnership and
a partnership is deemed to be the employer of the partners for purposes of the following specific
cases:
l s 11F, which allows a partner to claim a deduction (subject to specific limitations) for contribu-
tions made to a pension fund, provident fund or retirement annuity fund (see 18.7.3)
l s 11(l), which allows a partnership to claim a deduction for contributions made for the benefit of
or on behalf of a partner to a pension fund, provident fund or retirement annuity fund (see 18.7.2)
l contributions made by a partnership for the benefit of a partner to a pension fund or a provident
fund are to be regarded as a taxable fringe benefit (par 2(l) and 12D of the Seventh Schedule –
see chapter 8), and
l paragraph 2A of the Seventh Schedule, which provides that a partner is deemed to be an em-
ployee of a partnership for purposes of par 2 of the Seventh Schedule. The effect of par 2A is that
a partner must include fringe benefits in his gross income in terms of par (i) of the definition of
‘gross income’ and will be subject to normal tax on the fringe benefits provided by the partner-
ship, similar to fringe benefits provided to an employee. Although the value of a fringe benefit will
be included in a partner’s gross income, it will still not be subject to employees’ tax.
The following provisions of the Act which specifically apply to employees, will not apply to partners in
a partnership:
l par (d) of the definition of ‘gross income’ (termination gratuities) because this paragraph specif-
ically refers to an office holder, employee or employer
l a salary payable to a partner is not subject to employees’ tax
l the provisions of s 8(1) that determine the taxable portion of a travel allowance, subsistence
allowance and an allowance granted to the holder of a public office
l s 23(m) that limits the deductions that relate to any employment or office held by a person, and
l s 12M that provides that amounts that are incurred by a taxpayer as contributions to a medical
scheme in respect of a former employee (or dependent of a former employee) may be deducted
from the taxpayer’s income.
701
18.7 Specific deductions and allowances

18.7.1 Annuities paid to former employees or partners or their dependents (s 11(m))
A specific deduction is provided for annuities paid to former employees, former partners and de-
pendents of such former employees or partners (s 11(m) – see chapter 12). In the case of a former
employee, the deduction is allowed if the former employee has retired on grounds of old age, ill
health or infirmity.
In the case of a former partner in a partnership, the person must have been a partner in the partner-
ship for at least five years and should have retired from the partnership on grounds of old age, ill
health or infirmity. The deduction is only allowed if the annuity paid is reasonable having regard to the
services rendered by the partner prior to his retirement and the profits made by the partnership. The
annuity may also not represent consideration payable to the former partner for his interest in the
partnership.
A deduction is also allowed for annuities paid to a dependent of a former employee or former partner.
The deduction is only allowed if the annuity is paid to a person who is dependent for his maintenance
upon a former employee or former partner, or in the case where a former employee or former partner
is deceased, to a person who was so dependent immediately prior to the employee or partner’s
death.
The amount of the deduction that may be claimed is not subject to a limitation.
Example 18.3. Annuities paid to former employees and partners
Cebisa, Fezeka and Esihle had been in partnership for the past 10 years and shared profits and
losses equally. Esihle retired as partner on 1 March 2021 due to ill health. Cebisa and Fezeka
decided to pay an annuity of R12 000 per month to Esihle (assume that the amount of the annuity
is reasonable in light of the services that she rendered to the partnership and the partnership’s
profits). The first payment was made on 31 March 2021. This amount was paid in addition to an
amount of R1 500 000 that was paid to Esihle on 1 March 2021 for her interest in the partnership.
One of the partnership’s employees, Nceba, died during February 2020. The partners decided to
pay an annuity of R2 000 per month to her husband for a five-year period for the maintenance of
their two minor children. The first payment was made on 31 March 2020.
Discuss whether the annuities that were paid to Esihle and Nceba’s husband qualify for a deduc-
tion in terms of s 11(m).
SOLUTION
Annuity paid to Esihle:
Esihle had been a partner for longer than five years. She retired due to ill health. The amount of
the annuity is reasonable in the light of the services that she rendered to the partnership and the
partnership’s profits. The annuity did not represent a payment for her interest or goodwill in the
partnership (a fixed amount of R1 500 000 was paid for this). The annuities may therefore be
deducted in terms of s 11(m).
Annuity paid to Nceba’s husband:
The annuity paid to Nceba’s husband qualifies for a deduction in terms of s 11(m). Although the
amount is paid to Nceba’s husband (and he was not necessarily dependent on her for his
maintenance), the amount still qualify for deduction in terms of s 11(m) since the amount is paid
for the benefit of Nceba’s two minor children (who had been dependent on her for their mainte-
nance).
18.7.2 Partnership contributions to a fund (s 11(l))

Where an employer makes a contribution to a pension fund, provident fund or retirement annuity fund
for the benefit of or on behalf of an employee, the employer may claim a deduction of the amount
contributed (s 11(l) – see chapter 12). The deduction is also allowed if the amount is contributed for
the benefit of or on behalf of a former employee, or any dependent or nominee of a deceased
employee or former employee.
A partner in a partnership is, for purposes of this deduction, deemed to be an employee of the part-
nership. The partnership is deemed to be the employer of the partner. Since partners are otherwise
not employees of a partnership (there is no employer – employee relationship between a partnership
702
and its partners), this deeming provision makes it possible for a partnership to claim a deduction
where it makes a contribution to one of these funds for the benefit of a partner, a former partner, or
any dependent or nominee of a deceased partner or former partner.
Where an employer makes a contribution to a pension fund or a provident fund for

the benefit of an employee, the contribution qualifies as a taxable benefit for the
Please note! employee (par 2(l) of the Seventh Schedule – see Chapter 8). A partner is, for this
purpose, also deemed to be an employee of the partnership (par 2A of the Sev-
enth Schedule). The contribution therefore creates a taxable fringe benefit in the
partner or employee's hands (see 18.8).
18.7.3 A partner’s contribution to a pension fund, provident fund or retirement annuity fund
(s 11F)
A natural person is allowed to deduct the contributions made to a pension fund, provident fund or
retirement annuity fund, subject to certain limitations (s 11F – see chapter 7). For purposes of this
deduction, a partner in a partnership is deemed to be an employee of the partnership. The partner-
ship is deemed to be the employer of the partners (s 11F(5)). This means that a partner may also
deduct contributions to a pension fund, provident fund or retirement annuity fund.
The total amount deducted in a particular year of assessment may not exceed the lesser of (s 11F(2)):
l R350 000, or
l 27,5% of the higher of the person’s:
– remuneration as defined in par 1 of the Fourth Schedule, or
– taxable income as determined including any taxable capital gain, but before allowing this
deduction (the s 11F deduction), a deduction for foreign taxes in terms of s 6quat(1C) and a
deduction for donations made (the deduction for donations is made in terms of s 18A), or
l the person’s taxable income before allowing for this deduction (the s 11F deduction), a deduction
for foreign taxes in terms of s 6quat(1C), a deduction for s 18A donations and the inclusion of any
taxable capital gain.
For purposes of the above calculation, the person’s remuneration should exclude any retirement fund
lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit.
If an employer makes a contribution to a pension fund or a provident fund for the benefit of an em-
ployee, the contribution creates a taxable fringe benefit in the employee’s hands (par 2(l) of the
Seventh Schedule – see chapter 8). For purposes of this fringe benefit, a partner is deemed to be an
employee of a partnership (par 2A of the Seventh Schedule). A partnership’s contribution to a part-
ner’s pension fund or a provident fund will therefore be a taxable fringe benefit in the partner’s hands.
An amount equal to the taxable fringe benefit is deemed to have been contributed by the employee
or partner when determining the s 11F deduction (s 11F(4)).
A person’s remuneration, as defined in par 1 of the Fourth Schedule, is taken into account when
calculating the deductible portion of contributions made to a pension fund, provident fund or retire-
ment annuity fund. In the case of partner, it is not clear whether a salary paid to a partner should be
regarded as remuneration for purposes of this deduction. As discussed in par 18.6, a partner is not
an employee of a partnership and a salary paid to a partner does not qualify as remuneration as
defined in the Fourth Schedule. However, since s 11F(5) provides that the partner is deemed to be an
employee of a partnership, it was probably the intention of the legislature that a salary paid to a
partner be regarded as remuneration for purposes of calculating the deductible portion of the con-
tribution made.
Example 18.4. A partner’s contribution to a pension fund

Kabelo is a partner in a partnership. During the 2022 year of assessment, he received a salary of
R860 000 from the partnership. His share of the partnership profit for the year was R500 000.
During the year he sold an investment property and realised a taxable capital gain of R300 000.
Kabelo contributed 12% of his salary from the partnership to a pension fund.
Calculate the amount of Kabelo’s contribution to the pension fund that he may claim as a deduc-
tion.
703
SOLUTION
Contribution to pension fund (R860 000 × 12%)........................................................ R103 200
The deductible portion of the above contribution is calculated by following the
following steps:
Step 1: Calculate the person’s remuneration (As discussed above, it is not clear
whether a salary that a partner receives from a partnership qualifies as
remuneration for purposes of this deduction. However, it is assumed that it was
the legislature’s intention that if a partner receives a salary from a partnership, the
salary should be regarded as remuneration for purposes of this deduction.) ........... R860 000
Step 2: Calculate the person’s taxable income including any taxable capital gain
but before deducting contributions made to a pension fund, provident fund or
retirement annuity fund, foreign taxes and donations
Salary from partnership .............................................................................................. R860 000
Partnership profit........................................................................................................ 500 000
Taxable capital gain................................................................................................... 300 000
Taxable income.......................................................................................................... R1 660 000
Step 3: Calculate 27,5% of the higher of the above remuneration and taxable
income (R1 660 000 × 27,5%) ................................................................................... R456 500
Step 4: Calculate the person’s taxable income before deducting contributions
made to the pension fund, provident fund or retirement annuity fund, foreign taxes,
donations and the inclusion of a taxable capital gain
Salary from partnership .............................................................................................. R860 000
Partnership profit........................................................................................................ 500 000
Taxable income.......................................................................................................... R1 360 000
Step 5: Determine which is the lesser of the following values:
l R350 000
l R456 500 (27,5% of the higher of remuneration and taxable income before deducting the
contribution to a retirement fund, foreign taxes and donations)
l R1 360 000 (taxable income before deducting contributions made to a retirement fund,
foreign taxes, donations and the inclusion of a taxable capital gain).
The lesser of the above amounts is R350 000. Since the amount that Kabelo contributed to the
pension fund is less than R350 000, he may claim the full amount of R103 200 contributed as a
deduction.
Example 18.5. A partner and partnership’s contribution to a pension fund
If, in the previous example, the partnership contributed 12% of Kabelo’s salary from the partner-
ship to the pension fund in addition to Kabelo’s own contribution of 12% of his salary and Kabelo
had an unclaimed balance of contributions of R200 000 (carried forward from the 2021 year of
assessment in terms of section 11F), calculate the amount of the contribution to the pension fund
that Kabelo may claim as a deduction. Assume that the full amount contributed by the partner-
ship qualifies as a taxable fringe benefit in Kabelo’s hands. Also assume that the remainder of
the facts in the previous example remain the same.
SOLUTION
Contribution to pension fund (Kabelo’s contribution (R860 000 × 12%) + Taxable
fringe benefit (R860 000 × 12%)). The amount contributed by the partnership to
the pension fund is a taxable fringe benefit in Kabelo’s hands. This amount is
deemed to be a contribution made by Kabelo to the pension fund.......................... R206 400
Unclaimed balance of contributions from the 2021 year of assessment .................. R200 000
Total contributions to be considered for the section 11F deduction for the 2022
year of assessment R406 400
The deductible portion of the above contribution is calculated by following the
following steps:
Step 1: Calculate the person’s remuneration
Salary from partnership ............................................................................................. R860 000
Taxable fringe benefit ............................................................................................... 103 200
R963 200
continued
704
Step 2: Calculate the person’s taxable income including any taxable capital gain
but before deducting contributions made to a pension fund, provident fund or
retirement annuity fund, foreign taxes and donations.
Partnership profit....................................................................................................... 500 000
Taxable capital gain.................................................................................................. 300 000
Taxable income......................................................................................................... R1 763 200
Step 3: Calculate 27,5% of the higher of the above remuneration and taxable
income (R1 763 200 × 27,5%) R484 880
Step 4: Calculate the person’s taxable income before deducting contributions
made to the pension fund, provident fund or retirement annuity fund, foreign
taxes, donations and the inclusion of a taxable capital gain
Partnership profit....................................................................................................... 500 000
Taxable income......................................................................................................... R1 463 200
Step 5: determine which is the lesser of the following values:
l R350 000
l R484 880 (27,5% of the higher of remuneration and taxable income before deducting the
contribution to a retirement fund, foreign taxes and donations)
l R1 463 200 (taxable income before deducting contributions made to a retirement fund,
foreign taxes, donations and the inclusion of a taxable capital gain).
The lesser of the above amounts is R350 000. Since the amount that Kabelo contributed to the
pension fund is more than R350 000, he may only claim R350 000 as a deduction during the
current year of assessment. The excess of R56 400 (R406 400 – R350 000) is carried forward to
the 2023 year of assessment and can be considered for a possible deduction in terms of s 11F
in the 2023 year of assessment.
18.7.4 Key person insurance contributions (s 11(w))

A taxpayer may deduct the premiums payable under a so-called ‘key person insurance policy’ of
which the taxpayer is the policyholder (s 11(w); see chapter 12). These insurance policies are taken
out by a business to compensate the business for financial losses or the extended incapacity of an
important person in the business.
One of the requirements to claim key person insurance contributions as a deduction under s 11(w), is
that the policy must relate to the death, disablement or illness of an employee or director of the tax-
payer. The partners of partnership are not employees or directors of the partnership. This means that
where a partnership takes out a key person insurance policy on the life of a partner, the partnership
will not be entitled to deduct the premiums paid under s 11(w). These premiums are also not deduct-
ible in terms of s 11(a), since it is expenditure of a capital nature. When the policy matures and the
remaining partners receive the proceeds, the amounts are not included in the partners’ gross in-
come, since it represents a receipt of a capital nature.
Where a partnership takes out a key person insurance policy on the life of an employee, the pre-
miums paid will qualify for a deduction under s 11(w).
l A person should disregard the capital gain or loss for a disposal that results in
the receipt of an amount in respect of policy that was taken out to insure
against the death, disability or illness of that person by any other person who
is a partner of the person (par 55(1)(c) of the Eighth Schedule – see chap-
ter 17). The policy should be taken out for the purpose of enabling the other
Please note! person to acquire the person’s interest in the partnership upon the death, dis-
ability or illness of the person. The person whose life is insured should not pay
the premium on the policy while the other person is the beneficial owner of the
policy.
l The proceeds from a key person insurance policy is excluded from estate
duty in the deceased partner’s estate if certain conditions are complied with
(see chapter 27).
705
18.7.5 Capital allowances

The property of the partnership does not belong to the partnership as such since, as already noted, a
partnership is not a legal entity. The property of the partnership, whether originally introduced into the
partnership by one or more of the partners or subsequently bought by the partnership, belongs jointly
to the individual partners who are its co-owners. Any capital allowances granted on assets must be
apportioned between the partners according to the ratio in which they share profits or losses. Re-
coupments are included in their incomes in the same proportions.
Not all property used in a partnership business is necessarily owned jointly by the partners. A partner
may contribute property or buy assets for use in the partnership, it being the clear intention that they
are not to form part of the property of the partnership, but are to be owned by the particular partner.
In that event, it is submitted that the capital allowances that are deductible must be allowed in full to
the partner who owns the assets. Certain capital allowances are calculated on the cost to the tax-
payer of the particular asset. Therefore, when a partner lays out the cost, and the asset does not belong
to the partnership, that partner is the taxpayer who enjoys the benefit of the capital allowances. The
capital allowances on such assets are therefore not deducted in the calculation of the ‘taxable income’
of the partnership, but are only claimed as a deduction in the calculation of the taxable income of the
individual partner (see 18.3).
18.7.6 Motor vehicle expenses

Since partners are not employees of a partnership, the provisions of the Act relating to travel allow-
ances do not apply to partners (s 8(1) – see chapter 8). Partners may claim motor vehicle expenses
based on the actual costs incurred in respect of a vehicle and the actual distance travelled for busi-
ness purposes. The portion of the vehicle expenses incurred for private purposes is not deductible
(s 23(b)). The partner must retain adequate records, such as a logbook and receipts of expenses to
prove the amount of vehicle expenses incurred for business purposes.
Partners are, however, deemed to be employees of a partnership for fringe benefit purposes (par 2A
of the Seventh Schedule – see 18.8 and chapter 8). Where a vehicle is owned by the partnership and
the right of use of the vehicle is granted to a partner, the value of the taxable benefit (and any poten-
tial reductions of such value due to business usage and expenses incurred by the partner) will be
determined in terms of par 7 of the Seventh Schedule (see chapter 8).
A partner will therefore only be allowed to claim the actual cost incurred in respect of a vehicle for
business purposes (based on actual distance travelled and actual cost incurred) if the partner owns
the vehicle.
Remember
l The provisions (s 8(1)(b) of the Act) in respect of travel allowances are not applicable to a
partner of a partnership. This is because a partnership (or the other partners) is not a princi-
pal in relation to a partner. Section 8(1)(b) requires that a principal has to pay an allowance to
a recipient. A partner may therefore not use the deemed cost tables in calculating the amount
expended in respect of travelling for business purposes.
l A travel allowance is not a fringe benefit. Travel allowances are dealt with in s 8 of the Act,
whereas fringe benefits are dealt with in terms of the Seventh Schedule.
Example 18.6. Motor vehicle expenses
Mabhuti is a partner in a partnership and shares in 40% of the profits and losses of the partner-
ship. On 1 March 2021 Mabhuti purchased a motor vehicle in terms of an instalment credit
agreement. The cash purchase price of the vehicle was R273 600. Mabhuti incurred interest of
R29 780 during the period between 1 March 2021 and 28 February 2022. Passenger cars are
written off for tax purposes over a five-year period in terms of Interpretation Note No. 47. The total
cost for the maintenance, insurance and fuel for this vehicle for the 2022 year of assessment was
R80 000. Mabhuti paid for all these expenses. The vehicle was used by Mabhuti for both business
and private purposes. He kept a logbook of his business and private kilometres travelled during the
year; he travelled 25 000 km for business purposes and 16 000 km for private purposes.
continued
706
The partnership’s income and expenses for the period 1 March 2021 to 28 February 2022 were
as follows:
Income:
Gross profit from trading ........................................................................................... R3 000 000
Expenses:
General partnership expenses (all deductible) ......................................................... (1 650 000)
Salary paid to Mabhuti............................................................................................... (280 000)
Salary paid to other partners ..................................................................................... (530 000)
Net profit .................................................................................................................... R540 000
Calculate Mabhuti’s taxable income for the 2022 year of assessment.
SOLUTION
STEP 1: Calculate taxable income from partnership
Taxable income of partnership...................................................................................... R540 000
Partner’s share of partnership’s taxable income (R540 000 × 40%) ............................. R216 000
Salary from partnership ................................................................................................. R280 000
Less: Business component of vehicle use, calculated as:
Capital allowance on the vehicle (R273 600/5) ......................................... R54 720
Maintenance, insurance and fuel .............................................................. 80 000
Interest incurred on the vehicle ................................................................. 29 780
R164 500
Business component of vehicle use
(R164 500 × 25 000 km/(25 000 km + 16 000 km) ........................................................ (100 305)
Taxable income ............................................................................................................. R395 695
18.7.7 Deduction for bad debt (s 11( i))

A deduction is allowed for any debt due to a taxpayer that became bad during the year of assess-
ment. The deduction is only allowed if the amount was included in the taxpayer’s gross income in the
current or previous years of assessment (s 11(i); see chapter 12). When debt due to a partnership
becomes bad during the year of assessment, the deduction is apportioned among the partners
according to their profit-sharing ratios. A deduction is only allowed in a specific partner’s hands to
the extent that the amount was included in the partner’s gross income in the current or previous years
of assessment.
On admitting a new partner to the partnership, the new partner may acquire an interest in debt that is
owed to the partnership. Should the debt subsequently become bad, the new partner may not claim
a deduction for bad debt, since the amount would not have been included in the partner’s gross
income in the current or previous years of assessment. The debt written off will result in a capital loss
for the new partner (see chapter 17).
Example 18.7. Bad debt deduction

One of the three partners of a partnership retired on 28 February 2021. The original partners
shared profits and losses equally. Khosi was admitted as a new partner to the partnership with
effect from 1 March 2021 and the partners continued to share profits and losses equally.
The amount owed by one of the partnership’s debtors on 28 February 2021 became irrecover-
able during the 2022 year of assessment. An amount of R300 000 was written off as bad debt.
Calculate the bad debt deduction (s 11(i)) that the different partners can claim.
707
SOLUTION
The original two partners may claim a deduction in terms of s 11(i) of R100 000 (R300 000 × 1/3)
each. The new partner, Khosi, is not entitled to a deduction in terms of s 11(i) as the amount was
never included in his gross income.
The debt written off will result in a capital gains transaction in Khosi’s hands as all four building
blocks required for CGT has been met. Khosi has disposed of an asset (his right to collect pay-
ment for the outstanding debt) by writing his portion of the debt off as irrecoverable. His pro-
ceeds with regards to this disposal is Rnil and his base cost is R100 000 (the assumption is that
Khosi paid R100 000 for the retired partner’s one-third share). The result is a R100 000 capital
loss in Khosi’s hands (see chapter 17).
When partners take over the interest of an outgoing partner, the principles discussed above relating
to bad debt will similarly apply to the remaining partners. The remaining partners will acquire the out-
going partner’s interest in debt owed to the partnership. If the debt subsequently becomes bad, the
remaining partners will only be entitled to claim a deduction for bad debt to the extent that the
amount was included in their gross incomes in the current or previous years of assessment. The
remaining partners will therefore not be entitled to deduct the portion of the bad debt that relates to
the debt they acquired from the outgoing partner. The debt written off will result in a capital loss for
the remaining partners (see chapter 17).
When debt that was written off is later recovered, the amount so recovered is included in the person’s
gross income (par (n) of the definition of ‘gross income’ read with s 8(4)(a); see chapter 4). The
amount is, however, only included in the person’s gross income to the extent that the person claimed
a deduction for the bad debt. If a specific partner did not claim a deduction for bad debt when the
debt became bad (for example, the specific partner had not been admitted as a partner at the time
when the debt became bad), the partner’s share in the amount recovered is not included in the
partner’s gross income, since it is of a capital nature (such amount will also not be subject to CGT
since there was no disposal of an asset).
18.8 Fringe benefits

A partner is deemed to be an employee of partnership for fringe benefit purposes (par 2A of the
Second Schedule; see chapter 8). The effect of this is that partners will be subject to income tax on
fringe benefits provided by the partnership, similar to fringe benefits provided to an employee. The
valuation of fringe benefits is discussed in chapter 8.
Example 18.8. Right of use of motor vehicle owned by the partnership
John is a partner in a partnership and shares in 40% of the profits and losses of the partnership.
On 1 March 2021 the partnership purchased a motor vehicle for R300 000. John was granted the
right of use of the vehicle from 1 March 2021 to 28 February 2022. John kept a logbook of his
business and private kilometres travelled during the 2021 year of assessment. He travelled
25 000 km for business purposes and 16 000 km for private purposes.
The partnership’s income and expenses for the period 1 March 2021 to 28 February 2022 are as
follows:
Income:
Gross profit from trading .............................................................................................. R3 000
000
Expenses:
General partnership expenses (all deductible) ............................................................ (1 650 000)
Salary paid to John ....................................................................................................... (280 000)
Salary paid to other partners ........................................................................................ (530 000)
Depreciation on vehicle provided to John (depreciation is determined over a period
of four years for accounting purposes) (R300 000/4) ................................................... (75 000)
Net profit ....................................................................................................................... R465 000
Calculate John’s taxable income for the 2022 year of assessment. Note that passenger vehicles
are written off for tax purposes over a five-year period in terms of Interpretation Note No. 47. As-
sume that the retail market value of the vehicle was R300 000 on 1 March 2021.
708
SOLUTION
Net profit........................................................................................................................ R465 000
Add: Depreciation ........................................................................................................ 75 000
Partnership taxable income........................................................................................... R540 000
John’s share of partnership’s taxable income (R540 000 × 40%)................................. R216 000
Salary from partnership ................................................................................................. 280 000
Taxable benefit from the right of use of motor vehicle (R300 000 × 3,5% × 12) ........... 126 000
Less: Business component of vehicle use
(R126 000 × 25 000 km / (25 000 km + 16 000 km) ...................................................... (76 829)
Taxable income ............................................................................................................. R545 171
Note
Refer to chapter 8 for a detailed explanation of how to determine the value of the taxable benefit
from the right of use of the motor vehicle, as well as the business component deduction (paras 2(b)
and 7 of the Seventh Schedule).
18.9 Turnover tax (Sixth Schedule)

An elective turnover tax applies to micro businesses (see chapter 23). The turnover tax effectively
replaces income tax and capital gains tax. In general, a person may elect to be subject to the turn-
over tax if the person’s turnover for the year of assessment does not exceed R1 000 000. With regard to
a partner, the following specific rules apply (par 3(g) of the Sixth Schedule):
l Where any of the partners in the partnership is not a natural person, the partners may not elect to
be subject to the turnover tax.
l Where a partner is a partner in more than one partnership at any time during the year of assess-
ment, that partner may not elect to be subject to the turnover tax.
l Where the qualifying turnover of the partnership for the year of assessment exceeds R1 000 000,
the partners may not elect to be subject to the turnover tax.
18.10 Capital gains tax consequences (par 36 of the Eighth Schedule)

A partnership is not a separate legal entity and it is not a taxpayer for normal tax purposes. As a
result the individual partners must bear the consequences of any transaction that gives rise to capital
gains consequences under the Eighth Schedule.
Disposal of partnership assets when a partner joins or withdraws from the partnership
According to common law, every time that a partner joins or leaves, the existing partnership is dis-
solved and a new partnership is formed. These strict common law principles would therefore trigger a
disposal of the entire interest of the partners each time a partner joins or leaves the partnership.
Because of the practical difficulties, SARS does not follow this strict legal approach. Instead, SARS
regards each partner as having a fractional interest in the partnership assets. Therefore, when a
partner withdraws from the partnership and is paid out for his share, there will be a disposal in re-
spect of the leaving partner’s interest, and a capital gain or loss must be determined for each of the
partnership’s assets. The remaining partners will have an increase in their base costs in respect of
each of the partnership’s assets.
Because partners are connected persons, the proceeds received by the leaving partner are deemed
the market value of his partnership interest. When valuing the interest, SARS accepts that the good-
will need not be included in the market value of his interest where he did not pay for the goodwill on
admission to the partnership.
Disposal of a partnership asset to a third party

In terms of par 36, the proceeds on the disposal of a partner’s interest in a partnership asset are
treated as having accrued to each partner at the time of disposal of that asset, in proportion to each
partner’s interest in the partnership. When there is a disposal of an asset to a third party, the
709
proceeds must be apportioned among the partners according to the partnership agreement, or if one
does not exist, according to partnership law. In the absence of a specific asset-surplus-sharing ratio,
the proceeds will normally be allocated according to the profit-sharing ratio.
18.11 Limited partnerships (partnerships en commandite) (s 24H(4))

A limited partnership is one in which certain partners are not involved in the management of the
business and also only liable for the partnership debt to a limited extent. The liability of a limited
partner is usually limited to the partner’s partnership contribution.
A limited partner is defined in the Act as a member of the partnership en commandite, an anonymous
partnership or similar partnership or a foreign partnership. A limited partner’s liability towards a
creditor of the partnership is limited to the amount that the limited partner contributed to the partner-
ship, or limited in any other way (definition of ‘limited partner’ in s 24H(1)).
The deductions or allowances that may be claimed by a limited partner may not in aggregate exceed
the sum of the amount for which the partner may be held liable to any creditor of the partnership and
any income received by or accrued to the partner from the partnership business (s 24H(3)). Any
deductions or allowances that are disallowed because they exceed these amounts, are carried
forward to the succeeding year of assessment. These amounts may be deducted in the succeeding
year of assessment, but will be subject to the above limitation for the succeeding year of assessment
(s 24H(4)).
18.12 Dissolution/termination of partnership agreement

A partnership may be dissolved in a number of ways, such as ceasing to trade, the death or retire-
ment of a partner, or the admission of a new partner. If any of these events occur, the agreement
between the partners at the time is cancelled. If the partnership continues to trade after one of these
events, for example when a partner dies, retires or a new partner is admitted to the partnership, a
new agreement is entered into between the continuing partners. This means that the old partnership
ceases to exist, and a new partnership is formed.
The tax consequences of payments made to former partners after the dissolution of the partnership
depend on what the payments were made for. Before a number of scenarios are considered, it is
important to remember the following principles:
l Income is deemed to accrue or be received by a partner at the same time it accrues or is re-
ceived by the partnership (s 24H(5)). This means that even though a partner may not have re-
ceived income from the partnership, the amount is deemed to accrue to the partner when it is
received by or when it accrues to the partnership.
l Where a taxpayer disposes of income after it accrued to the taxpayer, the amount is still taxable
in the taxpayer’s hands (CIR v Witwatersrand Association of Racing Clubs (1960 A); see chap-
ter 3).
l An amount received for the disposal of a right will be of a capital nature if the right forms part of
the taxpayer’s income-producing structure (WJ Fourie Beleggings v C:SARS (2009 SCA) and
Stellenbosch Farmers Winery Ltd v CIR (2012 SCA); see chapter 3).
l The disposal of an interest in a partnership asset qualifies as a disposal of an asset for CGT
purposes (see 18.10).
l An increase or decrease in a partner’s interest in the partnership assets triggers a part disposal
of the partnership assets for CGT purposes (see 18.10).
Where a former partner receives a lump sum amount from the remaining partners for his share of the
partnership profit for the year up to the date of dissolution, the amount should be included in the
former partner’s gross income. The lump sum amount in this scenario represents a payment of an
amount that already accrued to the former partner. This is so because an amount is deemed to
accrue to a partner at the same time it is received by or accrues to the partnership (s 24H(5)). If, on
dissolution of the partnership, the parties agree to amend the partnership agreement with regards to
the sharing of profits and the outgoing partner receives less than the amount that accrued to him
during the year prior to dissolution, he will still be liable for tax on the amount that accrued to him. The
difference between the amount that accrued to him and the amount that he agrees to receive will
result in a capital loss in his hands. If the agreement results in him receiving more than the amount
that accrued to him, the excess amount will be a capital gain in his hands.
710
If, on dissolution of the partnership, the outgoing partner receives an amount from the other partners
as consideration for his share of the partnership assets, the amount will be of a capital nature in his
hands. The amount will qualify as proceeds from the disposal of an interest in the partnership assets
and will be subject to CGT (see 18.10 and chapter 17). If this amount is paid to the outgoing partner
in instalments over an agreed period, the amount that accrued to the outgoing partner is still of a
capital nature. The amount is treated as having accrued to the outgoing partner at the time of dis-
posal for CGT purposes (par 36 of the Eighth Schedule – see 18.10). However, if, on dissolution of
the partnership, the remaining partners agree to pay an annuity over a specific period to the outgoing
partner, the amount will be included in the outgoing partner’s gross income. This is because par (a)
of the definition of ‘gross income’ provides that any amount received or accrued by way of annuity is
specifically included in a person’s gross income.
Example 18.9. Dissolution of partnership
Mpho, Lungelo and Nelson each contributed R1 000 000 on 1 March 2013 to form a partnership
that acquired a commercial property for R3 000 000. The three partners shared profits and losses
equally. For the period 1 March 2021 to 28 February 2022 the property was rented out for
R30 000 net per month. On 30 November 2021 Mpho sold his interest in the partnership asset in
equal shares to Lungelo and Nelson for R1 800 000 in total. Mpho received R1 890 000 on
30 November 2021, which was made up as follows:
l R900 000 from Lungelo for half of Mpho’s interest in the partnership asset
l R900 000 from Nelson for half of Mpho’s interest in the partnership asset
l R90 000 from the partnership representing Mpho’s share in the net rental income received
from 1 March 2021 to 30 November 2021.
Calculate the effect of the above on Mpho’s taxable income for his 2022 year of assessment.
SOLUTION
Income
Profit from partnership (representing Mpho’s interest in the net rental income
received calculated as R30 000 × 9 months = R270 000 / 3 partners).......................... R90 000
Proceeds from disposal of interest in partnership asset (this amount is not included
in Mpho’s income, since it is of a capital nature) ........................................................... nil
Taxable capital gain (see 18.10)
Proceeds from disposal of interest in partnership asset ....................... R1 800 000
Less: Base cost of interest in partnership asset (the base cost of
Mpho’s interest in the partnership asset is equal to his initial
contribution to the partnership) ............................................................. (1 000 000)
Capital gain ........................................................................................... R 800 000
Less: Annual exclusion.......................................................................... (40 000)
Aggregate capital gain.......................................................................... 760 000
Taxable capital gain (R760 000 × 40%) ................................................ 304 000
Taxable income ..................................................................................... R394 000
18.13 Default by partner

Partners are in general jointly and severally liable for the debt incurred by the partnership. This
means that a partnership creditor may recover an amount due to him jointly from all the partners, or
from any of the individual partners.
If a partnership incurs a loss and one of the partners is unable to contribute his share of the loss, the
other partners will have to contribute to make good the loss. The assessed loss in these partners’
hands will be limited to the amount for which they were liable under the partnership agreement. This
is because deductions and allowances are allocated to partners in the same ratio in which the profits
or losses of the partnership are shared (s 24H(5)(b)). The amount that the partners contributed to
make good the loss incurred by the defaulting partner will be an expense of a capital nature. These
partners will have a claim against the partner who could not contribute his share of the loss. If the
amount becomes irrecoverable, these partners will realise the capital loss (see chapter 17).
711
Example 18.10. Partnerships: Comprehensive example
Paul (aged 34) and Ebrahim (aged 65) started SolMac Electronics on 1 March 2013 as a partner-
ship when they each contributed R100 000 to the partnership. Ebrahim retired as a partner on
28 February 2021. One of SolMac Electronics’ employees, Ashwin (aged 36), acquired Ebrahim’s
interest in the partnership on 1 March 2021 for R700 000 (this amount was made up of R100 000
for Ebrahim’s partnership contribution and R600 000 for Ebrahim’s interest in the partnership
assets). Paul and Ashwin share equally in the profits and losses of the partnership. The income
and expenses of the partnership for the year that ended on 28 February 2022 were as follows:
Income
Gross income from trading operations ..................................................................... R2 830 000
Interest received on credit balance of bank account ............................................... 60 000
Dividends (the partners own 100 000 of the ordinary shares of Electron (Pty) Ltd
and received a gross dividend of R2,60 per share) ................................................. 260 000
Profit on sale of office building (this office building was purchased on
1 March 2013 for R900 000 and was immediately brought into use by the part-
nership. It did not qualify for any capital allowances. Upon Ebrahim’s retirement,
Ashwin paid R500 000 for Ebrahim’s share in the office building, which was
included in the R700 000 paid upon acquisition of the partnership interest. The
office building was sold on 20 February 2022 for proceeds of R1 500 000.) ........... 600 000
Expenses
Salaries paid to employees (the partnership employed four (4) employees
throughout the year of assessment who each received an annual salary of
R108 000) ................................................................................................................. (432 000)
Unemployment insurance fund contributions (UIF) and skill development levies
(SDL) in respect of employees’ salaries ................................................................... (8 640)
Salaries paid to partners (R800 000 to each partner) ............................................... (1 600 000)
Contribution to employees’ pension fund (the partnership contributes an amount
equal to 8% of its employees’ salaries to a pension fund on behalf of the
employees) ............................................................................................................... (34 560)
Contribution to partners’ pension fund (the partnership contributes an amount
equal to 8% of its partners’ salaries to a pension fund on behalf of the partners) .... (128 000)
Short-term insurance premiums ................................................................................ (68 000)
Life insurance premiums on the lives of partners ..................................................... (12 000)
Depreciation on office furniture (the office furniture was purchased on
1 March 2020 for R75 000. The office furniture is depreciated over four years for
accounting purposes. Interpretation Note No. 47 provides for a write-off period of
six years on furniture) ............................................................................................... (18 750)
Interest paid in respect of partners’ capital contributions (Paul and Ashwin each
made a capital contribution of R100 000 on 1 March 2013 and 1 March 2021
respectively. Interest on the partner’s capital contributions are calculated at the
end of each year at a rate of 12% per annum) ......................................................... (24 000)
Net profit ................................................................................................................... R1 424 050
Additional information relating to Ashwin:

l He contributes 8% of his monthly salary from the partnership to the partnership’s pension fund
in addition to the partnership’s contribution.
l He contributes R1 680 per month to a retirement annuity fund.
l He contributes R1 850 per month to a medical scheme. Ashwin is the only dependant on the
scheme.
l He received R36 000 net rental income during the 2022 year of assessment.
Calculate Ashwin’s taxable income for the 2022 year of assessment. You may assume that the
provisions of s 20A (i.e. ring-fencing of assessed losses) are not applicable.
712
SOLUTION
Partnership net profit................................................................................................. R1 424 050
Adjusted for income and expenses that are subject to special rules in the individu-
al partner’s hands:
Less: Profit with sale of office building (note 1)........................................................ (600 000)
Add: Life insurance premiums on the lives of partners (note 2) ............................... 12 000
Add: Excess wear and tear (note 3) ......................................................................... 6 250
Partnership taxable income R842 300
Ashwin’s share in partnership taxable income (R842 300 × 50%) ........................... R421 150
Salary from partnership ............................................................................................. 800 000
Interest received from partnership (R100 000 × 12%) .............................................. 12 000
Contributions to pension fund paid by partnership (R800 000 × 8%) (note 4) ......... 64 000
Net rental income ...................................................................................................... 36 000
Income ...................................................................................................................... R1 333 150
Less: Interest exemption (s 10(1)(i)) (note 5) ............................................................ (23 800)
Less: Dividend exemption (s 10(1)(k)(i)) (note 6) ..................................................... (130 000)
Taxable income before taxable capital gains and specific deductions .................... 1 179 350
Add: Taxable capital gain (note 7)............................................................................ 84 000
Taxable income before specific deductions ............................................................. 1 263 350
Less: Contributions to pension fund and retirement annuity fund (s 11F) (note 8) ... (148 160)
Taxable income (note 9) ........................................................................................... R1 115 190
Notes
(1) As the office building did not qualify for capital allowances, no recoupment of allowances in
terms of s 8(4)(a) needs to be calculated. Since it is a capital asset, a capital gain or loss
will need to be calculated on the sale (see note 7).
(2) The expense is of a capital nature and therefore not deductible.
(3) Depreciation claimed for accounting purposes ............................................... 18 750
The amount that may be claimed as a deduction in terms of s 11(e) read
with Interpretation Note No. 47 (R75 000/6) ...................................................... (12 500)
R6 250
(4) The contribution made by the partnership to the partner’s pension fund is a taxable fringe
benefit in the partner’s hands.
(5) Ashwin Macebele received the following amounts of interest:
Interest from the partnership on his capital account ........................................ 12 000
Interest on partnership bank account (R60 000 × 50%) (this amount is
included in Ashwin’s share in the partnership profit) ........................................ 30 000
R42 000
Ashwin is entitled to an interest exemption of R23 800 for the 2022 year of assessment. The
exemption is limited to the amount received.
(6) Included in Ashwin’s share in the taxable income of the partnership is a dividend of
R130 000 (R260 000 × 50%). This dividend accrued to Ashwin in terms of s 24H and he is
entitled to the dividend exemption of s 10(1)(k)(i). The amount included in gross income is
the amount prior to the withholding of dividends tax (the gross amount).
(7) Proceeds from the disposal of partnership assets (in this case, the office building) must be
allocated to the partners in their respective profit-sharing ratios (par 36 of the Eighth Sched-
ule). In Ashwin’s case, the calculation of the taxable capital gain will be as follows:
Proceeds (R1 500 000 × 50%).......................................................................... 750 000
Less: Base cost (amount paid by Ashwin for Ebrahim’s interest in office
building) ............................................................................................................ (500 000)
Capital gain ....................................................................................................... 250 000
Less: Annual exclusion .................................................................................... (40 000)
Aggregate capital gain ..................................................................................... 210 000
Taxable capital gain (R210 000 × 40%) ........................................................... R84 000
continued
713
(8) Ashwin’s contribution to the pension fund and retirement annuity fund that is deductible in
terms of s 11F is calculated as the lower of:
l R350 000
l 27,5% of the higher of
– R1 263 350 (taxable income including the taxable capital gain but before s 11F, for-
eign taxes and donations), or
– R864 000 (remuneration (R800 000 salary + R64 000 fringe benefit)
Therefore R 347 421 (27,5% of R1 263 350), and
l R1 179 350 taxable income before s 11F, foreign taxes, donations and taxable capital
gains.
Ashwin’s total contribution to the pension fund and retirement annuity fund is R148 160
(R64 000 (own contribution to pension fund) + R20 160 (own contribution to retirement
annuity fund) + R64 000 (fringe benefit from partnership contribution to Ashwin’ pension
fund that is deemed to be an amount contributed by Ashwin to the fund)). The maximum
amount that Ashwin may claim as a s 11F deduction is R347 421 (the lesser of the above
three amounts). However, since Ashwin contributed less than this amount to these funds, he
will be allowed to deduct his full contribution of R148 160.
(9) Ashwin will be entitled to a medical scheme fees tax credit of R3 984 (R332 × 12) in respect
of the 2022 year of assessment (s 6A) which can be set off against Ashwin’s normal tax
liability.
714
19 Companies and dividends tax
Pieter van der Zwan

l identify entities that are treated as companies for tax purposes
l apply the method required by the income tax return (ITR14) to calculate the taxable
income of a company
l explain and calculate the effective rate at which distributed company profits are
taxed
l apply the definition of a dividend
l explain and calculate the tax implications of dividends paid by a company
l apply the definition and calculate the contributed tax capital of a company
l explain and calculate the tax implications of returns of capital by a company
l describe and apply the specific types of companies including close corporations,
foreign companies, non-profit companies, small business corporations, companies
that operate in special economic zones, personal service providers, REITs and co-
operatives.
Contents
Page
19.1 Overview ............................................................................................................................. 716
19.2 Taxation of companies ........................................................................................................ 716
19.2.1 Companies for income tax purposes (definition of ‘company’ in s 1) .................. 716
19.2.2 Taxation of company profits ................................................................................. 717
19.2.3 Tax implications of distributions by companies ................................................... 721
19.3 Taxation of dividends .......................................................................................................... 723
19.3.1 Definition of a dividend (definition of ‘dividend’ in s 1) ........................................ 723
19.3.2 Taxation of dividends ........................................................................................... 726
19.3.3 Dividends tax: Introduction................................................................................... 726
19.3.4 Dividends tax: Dividends subject to dividends tax (ss 64E and 64N) ................. 727
19.3.5 Dividends tax: Liability and withholding obligations (ss 64EA, 64G and 64H) .... 728
19.3.6 Dividends tax: Exemptions (ss 64F and 64FA) .................................................... 731
19.3.7 Dividends tax: Rate (ss 64E and 64G(3)) ............................................................. 735
19.3.8 Dividends tax: Deemed dividends subject to dividends tax (s 64E(4))............... 737
19.3.9 Dividends tax: Timing (s 64E(2)) .......................................................................... 738
19.3.10 Dividends tax: Payment of dividends tax and returns (s 64K) ............................. 739
19.3.11 Dividends tax: Refund of dividends tax (ss 64L, 64LA and 64M) ........................ 739
19.4 Taxation of a return of capital ............................................................................................. 740
19.4.1 Contributed tax capital (definition of ‘contributed tax capital’ in s 1 and s 8G) ...... 740
19.4.2 Return of capital (definition of ‘return of capital’ in s 1 and par 76B of the
Eighth Schedule) .................................................................................................. 744
19.5 Companies with specific tax implications ........................................................................... 746
19.5.1 Close corporations................................................................................................ 746
19.5.2 Foreign companies ............................................................................................... 747
19.5.3 Non-profit companies (s 10(1)(cN), 10(1)(cO), 10(1)(cQ), 10(1)(d) and
10(1)(e)) ................................................................................................................ 747
19.5.4 Small business corporations (s 12E) .................................................................... 748
19.5.5 Companies operating in special economic zones (ss 12R and 12S) .................. 751
19.5.6 Personal service providers (par 1 of the Fourth Schedule and s 23(k)) ............. 752
19.5.7 Real Estate Investment Trusts (REITs) (s 25BB) .................................................. 752
19.5.8 Co-operatives (s 27) ............................................................................................. 758
715
19.1 Overview
Companies play an integral role in business and investment activities in South Africa. The Companies
Act 71 of 2008 (the Companies Act) governs the incorporation, operation and governance of com-
panies in South Africa. A company is a juristic person with a separate legal personality from its share-
holders. The assets and liabilities of a company are those of the company rather than its share-
holders. Similarly, a company conducts business in its own name and the resulting profits belong to
it. The board of directors manage and direct the affairs of the company.
The rights of shareholders depend on the rights attached to the shares that they hold in the company.
This includes voting rights and rights to receive distributions made by the company. The Companies
Act, the company’s memorandum of incorporation (MOI), rules of the company and other
agreements, for example shareholders agreements, govern the relationship between a company’s
shareholders, its directors and other interested parties.
As a legal person, a company is taxed separately from the persons who hold the shares of the
company. The framework used in this chapter to explain the tax treatment of a company and its
shareholders is:
Overview of the components of the taxation of companies (19.2)
Shareholders
Taxation of distributions made to

shareholders (19.3 and 19.4)
Company Taxation at company level (19.2.2)
Companies with specific tax implications (19.5)
19.2 Taxation of companies

Profits generated by a company are taxed at two levels. The company, as a taxpayer in its own right,
is taxed on profits as and when it accrues to it. The profits may be subject to a further layer of tax
when distributed. This section of the chapter describes the entities that are taxed on this basis,
followed by the interaction between the two components of tax levied on company profits.
19.2.1 Companies for income tax purposes (definition of ‘company’ in s 1)

The term ‘company’, as used in the Act, has a wider meaning than only companies to which the
provisions of the Companies Act apply. The term ‘company’ is defined in s 1 and includes
l Any company, association or corporation incorporated under any law in the Republic as well as a
body corporate formed under a law in the Republic (par (a) of the definition of ‘company’ in s 1).
This category includes, but is not limited to, companies incorporated in terms of the Companies
Act.
l A close corporation (CC) (par (f) of the definition of ‘company’ in s 1). The application of the
company tax regime to CCs is discussed in 19.5.1.
l A company incorporated under the law of a foreign country or a body corporate formed under
such law (par (b) of the definition of ‘company’ in s 1). The specific tax implications of foreign
companies are discussed in 19.5.2.
l Any co-operative (par (c) of the definition of ‘company’ in s 1). A co-operative is an association of
persons in terms of s 7 of the Co-operatives Act 14 of 2005 (definition of ‘co-operative’ in s 1). An
overview of the specific tax regime that applies to co-operatives is provided in 19.5.8.
l An association (other than a company or a close corporation) formed in the Republic to serve a
specified purpose beneficial to the public or a section of the public (par (d) of the definition of
‘company’ in s 1). These associations often enjoy certain tax concessions, as described in further
detail in chapter 5.
716
19.2 Chapter 19: Companies and dividends tax
l A portfolio comprised in certain investment schemes carried on outside the Republic (foreign
collective investment schemes) (par (e)(ii) of the definition of ‘company’ in s 1). Chapter 5
discusses the taxation of portfolios of collective investment schemes in more detail.
l A portfolio of a collective investment scheme in property that qualifies as an REIT in accordance
with the listing requirements of an approved exchange, where those requirements have been
approved and published in the manner contemplated in the definition of an REIT (par (e)(iii) of the
definition of ‘company’ in s 1). The special tax regime that applies to REITs is considered in
19.5.7.
Remember
Any reference in the Act and in this chapter to a ‘company’ refers to any of the entities listed in the
definition of ‘company’ above.
The Act refers to a holder of shares, as opposed to a shareholder. This term refers to any person
who holds a proprietary interest in the above entities. In the context of a company, as contem-
plated in the Companies Act, this term refers to a shareholder of the company. In the context of
another entity that is a company, as defined in s 1, for example a CC or co-operative, this term
refers to the persons who hold the proprietary ownership units in that entity, which, in the case of
a CC or co-operative, is it members.
The definition of a company specifically excludes a foreign partnership. A foreign entity that meets
the definition of a foreign partnership (defined in s 1) is not taxed in the manner that a company is
taxed in South Africa, even if its name may suggest that it is a company (for example, certain limited
liability companies that are treated as fiscally transparent in the jurisdictions where they are incor-
porated). Chapter 18 considers the normal tax principles that pertain to foreign partnerships.
The Act classifies companies as public or private companies. The classification criteria differ from
those in the Companies Act. For purposes of the Act, companies listed in s 38(2) are recognised as
public companies. Any company that is not a public company is classified as a private company for
purposes of the Act (s 38(3)).
Remember
The distinction between public and private companies, as defined in s 38, has the following impli-
cations:
l Donations made by public companies are exempt from donations tax (s 56(1)(n)).
l Anti-avoidance rules that relate to attribution of amounts to spouses (s 7(2) and par 68 of the
Eighth Schedule) and the determination of the cash equivalent value of a fringe benefit arising
on residential accommodation in which the employee has an interest (par 9(3)(ii)(aa) of the
Seventh Schedule) only apply to shareholding in private companies.
As a result of the fact that a company is a legal or juristic person without physical existence, as
opposed to a human being, the Tax Administration Act 28 of 2011 (the TAA) requires that a human
must be responsible for all acts, matters and things that the company is required to do in terms of
any tax Act. Every company carrying on a business or having an office in the Republic must at all
times be represented by an individual residing in the Republic (called the company’s public officer).
The public officer must be a person who is a senior official of the company and must be approved by
SARS. The public officer must be appointed within one month after the company begins to carry on
business or that it acquires an office in the Republic (s 246 of the TAA (see chapter 33)).
19.2.2 Taxation of company profits
Taxable income
A company is liable for normal tax on its profits. A company’s normal tax liability is, similarly to any
other taxpayer, determined on its taxable income. The same principles for determining taxable
income, as discussed in chapters 2 to 6, also apply to the calculation of the taxable income of a
company (i.e., gross income less exempt income less deductions).
Remember
There are certain deductions or exemptions that are available to natural persons but not to
companies, for example the interest exemption in terms of s 10(1)(i).
717
In practice, a company’s taxable income is calculated on the basis of the tax computation to be
furnished in the company income tax return (ITR14). This calculation requires the taxpayer to
calculate its taxable income using its accounting profit or loss as the point of departure. The effect of
certain income or expenses recognised in profit or loss for accounting purposes must be reversed
and replaced with the amount of the relevant deduction or income amount determined in accordance
with the Act. The level of detail of the adjustments required depends on the size and tax status of the
company.
The framework for the calculation of the taxable income of a company is:
Framework for the calculation of a company’s taxable income
Profit or loss as reflected on the statement of profit or loss ............................................. Rxxx

Debit adjustments
Less: Non-taxable amounts credited to the statement of profit or loss (note 1) ........... (xxx)
Less: Allowances available for tax purposes that were not claimed in the statement
of profit or loss (note 2) ................................................................................................. (xxx)
Credit adjustments
Add: Non-deductible amounts debited to the statement of profit or loss (note 3)........ xxx
Add: Amounts not credited to the statement of profit or loss (note 4) .......................... xxx
Add: Allowances/deductions granted in previous years of assessment that are
reversed in the current year of assessment (note 5) .................................................... xxx
Add: Recoupment of allowances or expenses previously allowed as deductions
(note 6) ......................................................................................................................... xxx
Add: Amounts specifically to be included in the determination of taxable income
before s 18A donations (note 7) ................................................................................... xxx
Add: Taxable capital gains (s 26A) (note 8) ..................................................................... xxx
Less: Assessed losses brought forward from previous years of assessment (see
chapter 12) ........................................................................................................................ (xxx)
Less: s 18A donations deduction (see chapter 7) ............................................................ (xxx)
Taxable income for the year of assessment ...................................................................... xxx
Note 1
Amounts could be income for accounting purposes but not be subject to normal tax. This adjust-
ment removes the effect of such amounts included in accounting profit or loss. An example of
this is dividend income, which is included in accounting profit or loss, but that is exempt from
normal tax (see chapter 5).
Note 2
The Act provides for a number of allowances and deductions that are not available for
accounting purposes or that are not aligned with the expense recognised in the company’s
accounting profit or loss. This adjustment ensures that the amount of the tax allowance or
deduction is reflected in taxable income. An example of such an item would be an accelerated
capital allowance allowed in terms of s 12C in respect of certain movable manufacturing assets
(see chapter 13).
Note 3
Not all expenses taken into account when determining accounting profit or loss are allowed as a
deduction for tax purposes. This adjustment reverses the effect of such an expense included in
the accounting profit or loss. An example of this is fines paid in respect of unlawful activities,
which are not deductible for tax purposes (s 23(o)), but still represent expenses for accounting
purposes.
Note 4
Amounts may be subject to normal tax without being taken into account for accounting
purposes. Alternatively, amounts could be subject to tax at an earlier stage than when these
amounts are included in accounting profit or loss. This adjustment ensures that taxable income
reflects these items correctly from a tax perspective. An example of an item that is typically
included in this adjustment is amounts received in advance that would be included in gross
income (see chapter 3) but has not yet been recognised as revenue for accounting purposes.
Note 5
Certain allowances must be added back to taxable income in the subsequent year of assess-
ment. An example of this adjustment would be the inclusion of the prior year of assessment’s
deduction for allowance for doubtful debt in accordance with s 11(j) (see chapter 12).
continued
718
Note 6
When an amount that was previously deducted (for example an allowance) is subsequently
recovered by a taxpayer, a recoupment is required for tax purposes. This adjustment includes
these recoupments in the calculation of taxable income. An example of a recoupment that would
be included in this adjustment is the recoupment required in terms of s 8(4)(a) (see chapter 13).
Note 7
The Act requires certain amounts that are determined specifically for tax purposes to be
included in a taxpayer’s taxable income. These amounts are not taken into account in the deter-
mination of accounting profit or loss. A specific adjustment must be made for taxable income to
reflect this. An example is the inclusion of imputed net income from a controlled foreign com-
pany in terms of s 9D (see chapter 21).
Note 8
Companies must include their taxable capital gain in their taxable income. This taxable capital
gain is determined by applying an inclusion rate of 80% to the net capital gain for the year of
assessment (see chapter 17).
A company is subject to normal tax on its taxable income for a year of assessment. This is no differ-
ent from any other taxpayer. Unlike natural persons or trusts, a company’s year of assessment does
not necessarily end on the last day of February. A company’s year of assessment normally coincides
with its financial year for financial reporting purposes.
Tax rate
The taxable income of a company is generally subject to normal tax at a rate of 28%.
Remember
The former Minister of Finance hinted at a reduction in the corporate tax rate to 27% during the
2021 Budget Speech. The amendments relating to assessed losses and the limitation of interest
deductions in the 2021 Taxation Laws Amendment Act aim to broaden the tax base to allow a
reduction in the tax rate. Although the amendments were promulgated, their effective dates are
deferred until the rate of tax is first reduced after announcement by the Minister of Finance in the
annual National Budget. The commentary by the National Treasury in the draft response docu-
ment on the 2021 Draft Taxation Laws Amendment Bill suggests that the reduced rate and the
corresponding tax base amendments are unlikely to take effect in 2022. This remains to be
confirmed in the annual National Budget for 2022.
The taxable income of some companies is, however, subject to other tax rates. These exceptions
include
l small business corporations (see 19.5.4)
l companies that derive income within a special economic zone (see 19.5.5)
l companies that mine for gold, which are subject to tax on a formula-based rate, and
l companies that carry on long-term insurance businesses, which are taxed using a five-fund
approach (s 29A).
Remember
Companies are not entitled to all the rebates and credits available to natural persons, for example
a company is not entitled to primary, secondary or tertiary rebates. A company can also not
deduct credits for medical scheme fees. This does not mean that a company is not entitled to
deduct any rebate. It may, for example, deduct rebates for foreign taxes paid (s 6quat).
719
Example 19.1. Basic company tax computation
Blue Cross (Pty) Ltd is a resident company that carries on a manufacturing business.
The statement of profit or loss for Blue Cross (Pty) Ltd for the financial year ended 28 February
2022 is as follows:
Revenue (note 1).......................................................................................................... R2 000 000
Cost of sales ................................................................................................................ (R800 000)
Gross profit .................................................................................................................. R1 200 000
Salaries ........................................................................................................................ (R450 000)
Depreciation (note 3) ................................................................................................... (R100 000)
Repairs ......................................................................................................................... (R15 000)
Profit from the sale of machinery (note 4) .................................................................... R30 000
South African dividends received ................................................................................ R35 000
South African interest received .................................................................................... R28 000
Profit before tax ............................................................................................................ R728 000
Note 1
Blue Cross (Pty) Ltd received an advance payment of R40 000 from a customer. At year-end the
goods still had to be delivered to the customer. This amount has not yet been recognised as
revenue for accounting purposes.
Note 2
Blue Cross (Pty) Ltd entered into learnership agreements that qualify for allowances in terms of
s 12H. The allowance amounts to R60 000.
Note 3
The newly acquired manufacturing equipment qualified for an accelerated capital allowance of
R150 000 in terms of s 12C during the 2022 year of assessment.
Note 4
The machinery was sold for R320 000 on 30 August 2021. The recoupment of allowances for tax
purposes amounted to R20 000. A capital gain of R50 000 arose on the disposal.
Calculate the normal tax payable by Blue Cross (Pty) Ltd for the year of assessment ended on
28 February 2022.
SOLUTION
The taxable income for Blue Cross (Pty) Ltd for the year of assessment ended 28 February 2022
is calculated as follows:
Profit before tax ........................................................................................................... R728 000
Less: Non-taxable amounts credited to the statement of profit or loss .........................
Local dividends received (exempt from normal tax in terms of s 10(1)(k)) ................. (R35 000)
Accounting profit from sale of machinery (note 1) ....................................................... (R30 000)
Less: Special allowances available for tax purposes that were not claimed
in the statement of profit or loss ...................................................................................
Capital allowance in respect of manufacturing equipment (s 12C) (note 2) ............... (R150 000)
Learnership allowances (s 12H) .................................................................................. (R60 000)
Add: Non-deductible amounts debited to the statement of profit or loss
Accounting depreciation (note 2) ................................................................................ R100 000
Add: Amounts not credited to the statement of profit or loss
Revenue received in advance (note 3) ........................................................................ R40 000
Add: Recoupment of allowances or expenses previously allowed as deductions
Recoupment on sale of machinery (note 1) ................................................................. R20 000
Add: Taxable capital gain (s 26A) (note 1) (R50 000 × 80%) R40 000
Taxable income ............................................................................................................ R653 000
Normal tax payable (R653 000 × 28%) ........................................................................ R182 840
Note 1
The profit from the sale of machinery (R30 000) that is reflected in the statement of profit or loss
was calculated with reference to the carrying amount of the machinery for accounting purposes.
Any recovery of previously allowed deductions must be included in income when recouped
(s 8(4)(a)). This amount (R20 000) is calculated on the basis of the tax value of the machinery, as
opposed to the carrying amount for accounting purposes. The adjustments reverse the effect of
the accounting profit and include the recoupment as well as the taxable capital gain, calculated
at an inclusion rate of 80%, in taxable income.
continued
720
Note 2
The depreciation allowed in respect of the manufacturing equipment for accounting purposes is
determined in terms of the relevant accounting standard. This amount is calculated in
accordance with accounting principles that require it to take into account the useful lives and
residual values of the assets. For tax purposes, the capital allowance must be determined in
terms of s 12C. The adjustments remove the accounting depreciation from the taxable income
calculation and replace it with the capital allowance determined in accordance with s 12C.
Note 3
Amounts are included in gross income at the earlier of receipt or accrual. Even though this
amount has not yet been recognised as revenue for accounting purposes, it has been received
by Blue Cross (Pty) Ltd and should therefore be taken into account in the company’s taxable
income.
19.2.3 Tax implications of distributions by companies

The Companies Act allows a company to make distributions to its shareholders. It does not distin-
guish between dividends and other forms of distributions. From a tax perspective, the distinction is
drawn between a distribution made as a return of capital or as a dividend.
Remember
Shareholders of a company may receive payments from the company for reasons other than their
shareholding, for example drawing a salary from the company or charging fees to the company
for services rendered. These payments are not distributions. The normal principles discussed in
chapters 3 and 4 are applied to determine whether the recipient is subject to tax on the amount
received or accrued. Similarly, the deductibility of the payment by the company must be
established in accordance with the principles set out in chapter 6.
Conceptually, a return of capital occurs when a company returns an amount that was previously con-
tributed to the company when the company issued shares to a shareholder. Any amount transferred
by the company to its shareholder(s), other than a return of capital, represents a dividend. These
amounts are usually paid from the profits generated by the company.
In broad terms, a return of capital does not attract a further layer of tax. A dividend may be subject to
dividends tax at a rate of 20%. Dividend income is mostly exempt from normal tax in the hands of the
shareholder as it represents a distribution made from profits that have already been subject to normal
tax in the hands of the company (see 19.2.2). A company’s board can elect whether a distribution is
made from contributed tax capital (in which case it is a return of capital) or not (in which case it is a
dividend). A company can, however, not distribute returns of capital in excess of its available con-
tributed tax capital. There are certain restrictions on transfers of contributed tax capital (see 19.4 for
more detail).
Example 19.2. Effective tax rate calculation
Bingle (Pty) Ltd is a resident company with one shareholder, Mr Dlamini (33 years old).
Bingle (Pty) Ltd had a profit before tax of R1 000 000 for the financial year ended 28 February
2022. You may assume that the company’s taxable income equals its accounting profit before
tax. Bingle (Pty) Ltd distributed all the available profits after tax to Mr Dlamini on 28 February
2022.
Calculate all the taxes payable by both Bingle (Pty) Ltd and Mr Dlamini in respect of Bingle (Pty)
Ltd’s profits and the distribution thereof for the 2022 year of assessment.
721
SOLUTION
Normal tax payable by Bingle (Pty) Ltd:
Taxable income .......................................................................................................... R1 000 000
Normal tax payable (R1 000 000 × 28%) ................................................................... R280 000
Normal tax payable by Mr Dlamini in respect of the distribution of Bingle (Pty) Ltd’s
profits:
Dividend received from Bingle (Pty) Ltd (par (k) of the definition of gross income
in s 1).......................................................................................................................... R720 000
Dividend exemption s 10(1)(k) ................................................................................... (R720 000)
Effect on taxable income ............................................................................................ Rnil
Dividends tax liability of Mr Dlamini (withheld by Bingle (Pty) Ltd):
Amount available for distribution as a dividend (R1 000 000 – R280 000) ................. R720 000
Dividends tax on this distribution (R720 000 × 20%) ................................................. R144 000
Note
The effective tax rate on distributed company profits can be calculated as follows:
Total tax paid by both persons on the distributed profits (R280 000 + R144 000)..... R424 000
Effective tax rate on distributed company profits (R424 000/ R1 000 000 × 100) ...... 42,4%
If Mr Dlamini carried on the business as a sole proprietor (as opposed to in a
company), his taxable income would have been taxed at the progressive tax
scale that applies to natural persons. In this instance, the tax payable would have
amounted to R302 673 after taking into account the primary rebate (s 6(2)(a)) that
he would be entitled to (i.e., R1 000 000 taxed on the progressive scale that
applies to natural persons, therefore R318 387 ((R1 000 000 – R782 200) × 41%
plus R229 089) less the primary rebate of R15 714).
Remember
It is important to realise that normal tax and dividends tax are two distinct taxes, even though
both are levied in terms of the Income Tax Act. Each has its own set of rules, including exemp-
tions. A dividend that is exempt from normal tax in terms of s 10(1)(k) could still be subject to
dividends tax.
A company can make a distribution to a shareholder in the form of cash or as a distribution of an

asset in specie. A distribution of an asset to a shareholder has a number of tax implications in
addition to those normally associated with a cash dividend or return of capital. These include:
l if trading stock is distributed, the taxpayer is deemed to have recouped an amount equal to the
market value of the trading stock (s 22(8)(b)(iii))
l if the asset qualified for capital allowances, the taxpayer is deemed to have disposed of the asset
to the shareholder at its market value for purposes of determining any recoupment (s 8(4)(k)),
and
l the asset is deemed to have been disposed of at its market value for capital gains tax purposes
(par 75(1)(a) of the Eighth Schedule). The shareholder is deemed to have acquired this asset for
expenditure incurred equal to the market value of the asset for purposes of establishing the base
cost of the asset in its hands (par 75(1)(b)). The deemed disposal and acquisition occur on the
date of the distribution, being when the distribution becomes due and payable (definition of ‘date
of distribution’ in par 74 of the Eighth Schedule).
Example 19.3. Distribution of assets by a company

Ay (Pty) Ltd has 100 issued ordinary shares of which Kevin owns 90 and Leoni owns 10. Ay (Pty)
Ltd owns land as well as shares in Zulu (Pty) Ltd, an unconnected company. The Zulu (Pty) Ltd
shares have a market value of R180 000 and a base cost of R200 000. The land has a market
value of R20 000 and a base cost of R7 000.
Ay (Pty) Ltd distributes the shares in Zulu (Pty) Ltd to Kevin and the land to Leoni.
Determine the capital gains tax consequences for Ay (Pty) Ltd.
722
19.2–19.3 Chapter 19: Companies and dividends tax
SOLUTION
The distributions of shares and land are disposals deemed to be made at the market value of the
respective assets.
Ay (Pty) Ltd realises a capital loss of R20 000 from the disposal of the shares and a capital gain
of R13 000 from the disposal of the land. As Kevin is a connected person in relation to Ay (Pty)
Ltd, Ay (Pty) Ltd may only set off the capital loss of R20 000 against capital gains arising from
transactions with him (par 39(2) of the Eighth Schedule).
The distribution of the assets by Ay (Pty) Ltd will also give rise to a dividend or return of capital.
The tax implications of this aspect of the distribution are discussed in more detail in 19.3. and
19.4. below.
The next sections discuss the detailed tax implications of dividends and returns of capital, being the
two types of distributions, a company can make.
19.3 Taxation of dividends
19.3.1 Definition of a dividend (definition of ‘dividend’ in s 1)

Prior to 2011, the definition of a dividend was complex and provided for a number of deemed inclu-
sions and exclusions. The current definition replaced that definition with effect from 1 January 2011.
A dividend is defined in s 1(1) as
l any amount transferred or applied
l by a company that is a resident
l for the benefit or on behalf of any person
l in respect of any share in that company.
Remember
The definition of a dividend in s 1(1) excludes a deemed dividend that arises from a secondary
transfer pricing adjustment (that arises in terms of s 31(3)(i)). Chapter 21 explains the effect of
this exclusion in the context of tax treaty relief available to dividends. Despite not being a
dividend as defined in s 1, this secondary transfer pricing adjustment is still a dividend for
purposes of dividends tax (see 19.3.4).
The definition includes amounts transferred or applied by the company. These amounts can be trans-
ferred or applied by way of
l a distribution made by the company (par (a) of the definition of ‘dividend’), or
l as consideration paid by the company for the acquisition of any share in that company (par (b) of
the definition of ‘dividend’). The acquisition of its own shares by a company is commonly referred
to as a share buyback or a share repurchase.
The following aspects may need further consideration when deciding whether a transfer is a
dividend:
Amount
The word ‘amount’ is not defined in the Act. The courts have held that in the context of gross income,
‘amount’ refers not only to money but includes the value of every form of property, whether corporeal
or incorporeal, that has a money value (Lategan v CIR 1926 CPD (2 SATC 16); CIR v Butcher Bros
(Pty) Ltd 1945 AD (13 SATC 21)). It was held in CSARS v Brummeria Renaissance (Pty) Ltd, 69 SATC
205 that, where a right has a monetary value, the fact that such right cannot be alienated or turned
into money does not negate the fact that it has a value. The same meaning should arguably be
ascribed to the term ‘amount’ in the context of the definition of ‘dividend’.
Remember
A dividend in specie is a dividend in a form other than in cash.
Transferred or applied by a company that is a resident

All the entities discussed in 19.2.1 are considered to be companies for purposes of the Act. Any
amount transferred or applied by any of these entities in respect of proprietary interest held in that
entity could be a dividend. This would, for example, include amounts paid by a CC or by a co-opera-
tive to its members.
723
If the company is not a resident of South Africa for tax purposes, the definitions of ‘foreign dividend’
and ‘foreign return of capital’ in s 1 must be applied to determine the nature of the distributions made
by that company.
In respect of a share in that company

The reason for the transfer of the amount must be established to consider whether a transfer is a
dividend. The phrase ‘in respect of’ was explained in Stevens v C: SARS, 69 SATC 1 as connoting a
causal relationship. In the context of the definition of a dividend, the transfer of the amount by the
company should be causally connected to the share held in the company, rather than to something
else. If a shareholder is also an employee of the company and receives remuneration for services
rendered, the amount is not transferred by the company in respect of his shares, but rather in respect
of the services rendered. Remuneration paid to an employee will therefore not be a dividend, even
though the employee may also be a shareholder.
Remember
A share refers to any unit into which the proprietary interest of a company, as described in
19.2.1, is divided. In the case of a company as contemplated in the Companies Act, these units
are shares. In the case of other entities included in the definition of a ‘company’, this depends on
the nature of the entity.
Dividends arise when amounts are transferred to a shareholder as a going concern distribution,
liquidation distribution or when amounts are paid to redeem, cancel or buy back issued shares. The
important determination from the perspective of determining whether it is a dividend is therefore
whether there is a causal connection between the transfer and a share in the company, rather than
the circumstances under which it is made.
The mere fact that a person other than a shareholder received an amount does not preclude it from
being a dividend. If an amount is paid by a company to the spouse of a shareholder by reason of the
share held in the company by the shareholder, this transfer is still a dividend. In such a case,
asecond transfer, most likely in the form of a donation, arises if the shareholder transferred his right to
receive the distribution to another person.
Specific exclusions from the definition of ‘dividend’

The definition contains three specific exclusions for instances where a transfer is not considered to
be a dividend, although all the above requirements are met (par (i) to (iii) of the definition of ‘dividend’
in s 1). The following transfers are not dividends:
l To the extent that the amount that is transferred or applied results in a reduction of the company’s
contributed tax capital, the amount is not a dividend (par (i) of the definition of a ‘dividend’). This
distribution is a return of capital (see 19.4.2).
l To the extent that the amount consists of shares in the company, the amount is not a dividend
(par (ii) of the definition of ‘dividend’). If value is merely held by the shareholder in the form of
another share in the company, there is no outflow of value from the company to the shareholder
yet. This is typically the case when a company issues capitalisation shares to its existing share-
holders based on the shares they already hold.
l To the extent that the amount that is transferred or applied is an acquisition by a listed company
of its own shares on an exchange by way of a general repurchase of securities. A general repur-
chase is an acquisition as contemplated in subpar (b) of par 5.67(B) of s 5 of the JSE Limited
Listings Requirements, which complies with the requirements of paras 5.68 and 5.72 to 5.84 of
the JSE Limited Listing Requirements. General repurchases in terms of the listing requirements of
another licensed exchange that are substantially similar to those of the JSE Limited are treated
similarly (par (iii) of the definition of ‘dividend’). As a practical matter, a purchaser cannot
distinguish a purchase of shares by the company as part of a general repurchase from any other
purchaser on an exchange. The consideration paid by a company to acquire its own shares in
this manner is therefore not a dividend. It is important to note that not all share repurchases by
listed companies are general repurchases of its securities. The exclusion would, for example, not
apply to a specific share repurchase by a JSE listed company from certain shareholders.
724
The following diagram is useful to determine whether an amount transferred by a company is a

‘dividend’ as defined in s 1:
The amount could be transferred or applied

Did a company that is a resident transfer or apply an
by way of a distribution made by the com-
amount for the benefit or on behalf of any person?
pany or as consideration for the acquisition
of any share in the company.
YES
Was the amount so transferred or applied in

respect of any share in the company?
YES
Did the amount so transferred or applied:
result in a reduction of contributed tax

capital of the company (see 19.4).
To such extent, the amount so transferred or
OR applied is not a dividend.
Consist of shares in the company?
OR
NO The amount so transferred or applied is a
Involve the acquisition by a listed company
of its own shares by way of a general repur- dividend.
chase of its securities on a licensed
exchange?
Example 19.4. Definition of ‘dividend’
1. On 1 April 2022, XDF Ltd, a resident company, paid a dividend of R1,50 per share to each
of its 1 million ordinary shareholders, as well as a 10% preference share dividend to its
preference shareholders.
2. On 31 May 2022, Adco Holdings (Pty) Ltd was voluntarily liquidated and distributed
R4 000 000 to its holders of equity shares, of which R200 000 represented a reduction in
Adco Holdings (Pty) Ltd’s contributed tax capital.
3. On 15 July 2022, ABS (Pty) Ltd acquired 10% of its ordinary shares in terms of a share
buyback. ABS (Pty) Ltd paid the relevant shareholders R1 000 000.
4. On 15 October 2022, Edco Ltd, a listed company, acquired 10% of its equity shares in
terms of a general repurchase of its own securities as contemplated in subpar (b) of par
5.67(B) of s 5 of the JSE Limited Listings Requirements. The requirements prescribed by par
5.68 and 5.72 to 5.81 of s 5 of the JSE Limited Listings Requirements were complied with.
Edco Ltd paid the relevant shareholders R1 000 000 of which R100 000 represented a
reduction in Edco Ltd’s contributed tax capital.
5. On 15 December 2022, DLM (Pty) Ltd, a resident company, paid an amount of R1 000 000
to the sole shareholder’s wife at his instance.
6. On 1 January 2023, XYZ Ltd capitalised R100 000 of its retained earnings to share capital
and issued one ordinary capitalisation share for each 5 ordinary shares held to its
shareholders.
Determine which of the above amounts transferred or applied by the relevant companies are
dividends as defined.
725
SOLUTION
1. The dividend paid by XDF Ltd on 1 April 2022 to its holders of equity shares as well as the
dividend paid to its holders of preference shares will qualify as dividends. These are
amounts transferred for the benefit of shareholders in the company in respect of shares held
by the shareholders in the company.
2. The amount of R200 000 distributed by Adco Holdings (Pty) Ltd on 31 May 2022 that
represented a reduction in Adco Holdings (Pty) Ltd’s contributed tax capital, is not a
dividend. The balance of the amount distributed (R3 800 000) is a dividend since it is an
amount transferred for the benefit of shareholders in the company in respect of shares held
by the shareholders in the company. This amount is not excluded from the definition of a
dividend in paras (i) to (iii).
3. Unless the shares of all the ordinary shareholders of ABS (Pty) Ltd were bought back by the
company, no amount transferred to the shareholders can reduce contributed tax capital
(par (i) of further proviso to the definition of contributed tax capital in s 1(1)). The full amount
distributed (R1 000 000) is a dividend, since it is an amount transferred as consideration for
the acquisition of shares in the company and is transferred for the benefit of shareholders in
the company in respect of shares held by the shareholders in the company. This amount is
not excluded from the definition of a dividend in paras (i) to (iii).
4. The amount transferred by Edco Ltd on 15 October 2022 is not a dividend since it qualifies
as a general repurchase of Edco Ltd’s own securities as contemplated in subpar (b) of
par 5.67(B) of s 5 of the JSE Limited Listings Requirements and is therefore specifically
excluded from the definition of a dividend. These amounts will be treated as proceeds upon
the disposal of the shares by the shareholders.
5. The amount paid on 15 December 2022 by DLM (Pty) Ltd to the shareholder’s wife, at his
instance, qualifies as a dividend, since it was paid on behalf of a holder of shares. This
arguably also constitutes a donation of the right to receive this distribution by the
shareholder to his wife. As this is a donation between spouses, it should be exempt in terms
of s 56.
6. The amounts transferred to XYZ Ltd’s shareholders on 1 January 2023 consist of shares in
the company. Paragraph (ii) of the definition of ‘dividend’ provides that these amounts are
not dividends.
19.3.2 Taxation of dividends

Dividends, whether in cash or in specie, have the following tax implications:
l Any amount received or accrued by way of a ‘dividend’ as defined is included in the recipient’s
gross income (par (k) of the definition of gross income, s (1)).
l Most dividends are exempt from normal tax (s 10(1)(k)(i)). In certain instances, dividends may not
be exempt. Chapter 5 discusses these in more detail.
l The beneficial owner of the dividend (generally the shareholder) may be subject to dividends tax
on cash dividends paid to it. The company that pays the cash dividend will generally be
responsible to withhold the dividends tax at a rate of 20%. The company is liable for dividends
tax in respect of dividends in specie. Certain shareholders are exempt from dividends tax. Others
may be subject to a reduced dividends tax rate in terms of double tax agreements (see
chapter 21). The next part of this chapter considers dividends tax in more detail.
Remember
A dividend in specie has further tax implications for the company that distributes the asset, as
discussed in 19.2.3. above.
19.3.3 Dividends tax: Introduction

Dividends declared before 1 April 2012 were subject to secondary tax on companies (STC). The
company that declared the dividend was liable for STC at a rate of 10% on the net amount of
dividends declared during the specific dividend cycle. With effect from 1 April 2012, dividends tax
replaced STC. Dividends tax is currently levied at a rate of 20% on any dividend paid by a company,
subject to certain exemptions and rate reductions in terms of tax treaties.
726
Remember
l Companies were liable for STC on the net amount of a dividend declared by the company
during a specific dividend cycle. This tax distorted accounting profits of South African com-
panies, in comparison to their international counterparts, and posed a number of challenges
when it came to the application of treaty relief in respect of taxes on dividends.
l Dividends tax, on the other hand, is a tax that is generally imposed on the beneficial owner
(recipient) of a cash dividend paid by a company. The beneficial owner remains liable to pay
the dividends tax, but the company is responsible to withhold dividends tax from any dividend
paid.
The dividend tax provisions are relatively difficult to follow at first glance. The following stepped
approach simplifies the application of these provisions:
Step 1: Determine if a dividend or deemed dividend is subject to dividends tax. If it is, establish the nature
and amount of the dividend (19.3.4 and 19.3.8).
Step 2: Identify the person(s) liable for and/or responsible to withhold the dividends tax (19.3.5).
Step 3: Determine whether an exemption from dividends tax may be available. If an exemption is available,
consider the procedure to be followed to apply the exemption (19.3.6.).
Step 4: If no exemption applies, determine and apply the appropriate tax rate to the dividend (19.3.7).
Step 5: File the dividends tax return and make payment (19.3.9 to 19.3.11).
19.3.4 Dividends tax: Dividends subject to dividends tax (ss 64E and 64N)
Dividends paid by any company, other than a headquarter company, are subject to dividends tax
(s 64E(1)).
A dividend, as contemplated in the definition of a dividend in s 1 (see 19.3.1.), refers to a dividend
paid by a resident company. This includes both cash dividends and dividends in specie. The
dividends tax legislation distinguishes between these two types of distributions. The main reason for
this distinction is that a portion of a cash dividend can be withheld to pay the dividends tax to SARS.
This is not possible for a distribution of an asset in specie.
The term ‘dividend’, for purposes of dividends tax, also includes foreign dividends paid in cash by a
foreign company listed on a South African licenced exchange (for example the JSE). This means that
these dividends, despite being foreign dividends, are subject to dividends tax. If these dividends are
paid to a foreign person, they are exempt from dividends tax (s 64F(1)(j)). By implication, these
foreign dividends only attract dividends tax when paid to residents. This foreign dividend qualifies for
a full exemption from normal tax in the hands of the resident recipient because it has already been
subject to dividends tax in South Africa (s 10B(2)(d)). Any foreign dividend paid by a foreign
company in respect of shares not listed on a South African exchange is not subject to dividends tax.
Dividends paid by the foreign companies in respect of shares listed on a South

African exchange may also be subject to tax in the jurisdiction where the company
is a tax resident or incorporated. To avoid double taxation on these dividends, the
dividends tax is reduced by a rebate against the dividends tax (s 64N(1)). This
reduction is equal to the amount of any tax paid to any sphere of government of a
Please note! country other than South Africa, without a right of recovery, in respect of the
dividend (s 64N(2)). The foreign tax must be translated to rand at the same
exchange rate that applies to the dividend (s 64N(4)). The rebate may not exceed
the dividends tax imposed on the dividend (s 64N(3)). The company or regulated
intermediary that applies the rebate to reduce the dividends tax withheld must
obtain proof of the tax paid to the foreign government (s 64N(5)).
The term ‘dividend’ specifically includes deemed dividends that arise from secondary transfer pricing
adjustments. These amounts are within the ambit of the dividends tax regime (definition of ‘dividend’
in s 64D(1)), despite being excluded from the definition of a dividend in s 1.
727
In the case of a cash dividend, the cash amount is subject to dividends tax. If an asset is distributed
as a dividend in specie, the amount that is subject to dividends tax depends on the nature of the
asset distributed. The amount of the dividend will
l in the case where the asset distributed is a financial instrument listed on a recognised stock
exchange (local or foreign) and for which a price was quoted on that exchange, be the ruling
price for the financial instrument on that stock exchange at close of business on the last business
day before the dividend is deemed to be paid (see 19.3.9) (s 64E(3)(a)), or
l in the case of an asset other than such a listed financial instrument, be the market value thereof
on the date that the dividend is deemed to be paid (s 64E(3)(b)).
If the amount of a dividend is denominated in a currency other than rand, the amount must be con-
verted to rand by applying the spot rate on the date that the dividend is paid (s 64E(5)).
19.3.5 Dividends tax: Liability and withholding obligations (ss 64EA, 64G and 64H)
The person who is liable for dividends tax depends on the type of distribution made by the company.
Cash dividends
In the case of a cash dividend, the beneficial owner of the dividend is liable for the dividends tax
(s 64EA(a)). The beneficial owner is the person entitled to the benefit of the dividend attaching to a
share (definition of ‘beneficial owner’ in s 64D). The beneficial owner is not necessarily the share-
holder. For example, the person entitled to the benefit of a dividend that accrues to a trust, may be a
beneficiary who has a vested right to that dividend income, even though the trust holds the shares.
The responsibility to withhold and administer the dividends tax must be distinguished from the liability
for the tax. The company that pays the dividend in cash is responsible to withhold the dividends tax
from the payment of the dividend to the beneficial owner and pay this amount to SARS on behalf of
the beneficial owner (s 64G(1)). If the dividend is paid to the beneficial owner via a regulated inter-
mediary, the responsibility to withhold the dividends tax shifts to the regulated intermediary
(ss 64G(2)(c) and 64H(1)). If the dividend passes through multiple regulated intermediaries before it
is eventually paid to the beneficial owner, the responsibility to withhold dividends tax rests with the
final regulated intermediary that ultimately pays the dividend to the beneficial owner (s 64H(2)(b)).
When a regulated intermediary is involved, the company may not have sufficient or regularly updated
information or access to information about the beneficial owner of the shares and dividends to
administer the dividends tax properly. For this reason, the final regulated intermediary, as opposed to
the company, would normally be responsible to withhold the tax.
The withholding agent (the company or regulated intermediary) can be relieved from its responsibility
to withhold the dividends tax if it holds certain declarations and written undertakings submitted by the
beneficial owner. These documents indicate that the beneficial owner qualifies for an exemption from
dividends tax (see 19.3.6). The withholding agent may similarly only withhold the dividends tax at a
reduced rate if it holds declarations and written undertakings in which the beneficial owner indicates
that it qualifies for treaty relief (see 19.3.7).
728
The following persons are regulated intermediaries on whom the responsibility to

withhold dividends tax may rest, as explained above (s 64D):
l A central securities depository participant as contemplated in s 32 of the
Financial Markets Act. A central securities depository participant is a person
who holds in custody and administers securities or an interest in securities.
l An authorised user as defined in s 1 of the Financial Markets Act. This is a
person who is authorised by an exchange in terms of the exchange rules to
perform such security services as the exchange rules may permit. This may
include an authorised share broker.
l An approved nominee as contemplated in s 76(3) of the Financial Markets Act.
A nominee is a person who acts as the registered shareholder of securities or
an interest in securities on behalf of other persons. A nominee is usually not the
Please note! beneficial shareholder, but only acts as the shareholder on behalf of another
person.
l A nominee that holds investments on behalf of clients as contemplated in s 9.1
of Chapter 1 and s 8 of Chapter II of the Codes of Conduct for Administrative
and Discretionary Financial Service Providers, 2003. In terms of these pro-
visions, an administrative financial service provider and a discretionary financial
service provider must establish a nominee company with the main object of
being the registered holder and custodian of the investments of clients. Such
nominee company is a regulated intermediary for dividends tax purposes.
l A portfolio of a collective investment scheme in securities.
l A transfer secretary that is a person other than a natural person and that has
been approved by the Commissioner, or
l A portfolio of a hedge fund collective investment scheme.
Distribution of an asset in specie

The company is liable for dividends tax on the distribution of an asset in specie as a dividend
(s 64EA(b)). The company is liable for this tax because it is not possible to withhold any portion of the
asset distributed to the beneficial owner to pay the dividends tax. The dividends tax is an additional
tax on the value of the asset distributed, as opposed to a fraction of the amount declared as a
dividend by the company.
The dividends tax payable in respect of a dividend in specie is a cost for the
company paying the dividend. The dividends tax withheld in respect of a cash
dividend, which reduces the amount that a specific shareholder receives and is
Please note! therefore borne by the beneficial owner of the dividend. The dividends tax in
respect of a dividend in specie, however, reduces the company’s overall distrib-
utable reserves. This dividends tax is therefore borne by all shareholders, not only
the person to whom the distribution is made.
Example 19.5. Dividends tax in respect of various types of dividends
Casio (Pty) Ltd has a February financial year-end. The company’s shareholders are Mr Mpemvu,
who holds 30% of the shares, and Mr Mbotho, who holds the remaining 70% of the shares. They
are both residents.
Casio (Pty) Ltd made the following distributions to its shareholders during the financial year
ended on 28 February 2022:
l Casio (Pty) Ltd declared a dividend of R2 000 000 on 30 April 2021 after the finalisation of its
results for the previous financial year. Mr Mpemvu elected to receive his portion of the divi-
dend in cash, while a building to the value of R1 400 000 was transferred to Mr Mbotho in
respect of his portion of the dividend.
l Casio (Pty) Ltd invested some of the excess cash reserves of the company in shares of
Sharp Ltd that are listed on the JSE. The shareholders had differing views on this investment.
On 31 August 2021 the shares in Sharp Ltd were distributed to Mr Mpemvu and Mr Mbotho
as the shareholders of the company to enable each to deal with the funds as he deemed fit.
The quoted value of the Sharp Ltd shares held by Casio (Pty) Ltd at the close of business
was R1 180 000 on 30 August 2021 and R1 200 000 on 31 August 2021.
Explain the dividends tax implication of each of the above distributions made by Casio (Pty) Ltd.
729
SOLUTION
The amounts, including the building and Sharp Ltd shares, distributed by Casio (Pty) Ltd during
the 2022 year of assessment to its shareholders will be dividends as defined in s 1, as the
amounts are transferred to them by reason of the shares held in the company. These dividends
will be subject to dividends tax. As both of the shareholders are natural persons, none of the
exemptions from dividends tax apply (see 19.3.6).
Cash distribution to Mr Mpemvu
The amount of R600 000 distributed to Mr Mpemvu is a cash dividend. The dividends tax in
respect of this dividend amounts to R120 000 (R600 000 × 20%). Mr Mpemvu is liable for the
dividends tax. Casio (Pty) Ltd will be responsible to withhold the dividends tax from the amount
paid to Mr Mpemvu. The net amount of the dividend paid to Mr Mpemvu will therefore be
determined after taking into account the dividends tax withheld. He will receive R480 000
(R600 000 – R120 000) from Casio (Pty) Ltd.
Transfer of the building to Mr Mbotho
This dividend consists of a distribution of an asset in specie. The dividends tax is levied on the
market value of the building. The dividends tax in respect of this dividend amounts to R280 000
(R1 400 000 × 20%). Casio (Pty) Ltd is liable for the dividends tax. In addition to the transfer of
the building to Mr Mbotho, Casio (Pty) Ltd must pay an amount of R280 000 to SARS to settle its
dividends tax liability. The effect of this distribution is a reduction in the distributable reserves of
Casio (Pty) Ltd by R1 400 000 (in the form of the building transferred) as well as a further
R280 000 in the form of the dividends tax liability.
In addition to the dividends tax liability, the transfer of the building may result in recoupments (if
the company deducted capital allowances in respect of the building), capital gains tax as well as
transfer duty or VAT implications for Casio (Pty) Ltd.
Transfer of the Sharp Ltd shares to Mr Mpemvu and Mr Mbotho
This dividend also consists of a distribution of an asset in specie. The dividends tax is levied on
the quoted price of the shares on the last day before the dividend is deemed to be paid. In this
case, the dividend is deemed to be paid when it becomes due and payable upon the
declaration of the dividend. The ruling price for the Sharp Ltd shares on the JSE at the close of
business on the last business day before the dividend is deemed to be paid must be used as the
value of the dividend for purposes of dividends tax. The dividends tax in respect of this dividend
amounts to R236 000 (R1 180 000 × 20%). Casio (Pty) Ltd is liable for the dividends tax.
Like the building transferred to Mr Mbotho, the transfer of the shares may have capital gains tax
implications as the distribution is deemed to be a disposal of the shares at market value. It may
also have STT implications (see chapter 29).
Example 19.6. Dividends paid to regulated intermediaries
VLC Ltd is a listed resident company. It paid cash dividends of R3 000 000 to its ordinary share-
holders on 30 October 2022. The ordinary shareholders of VLC Ltd are
l VLC Holdings Ltd, a resident company that owns 55% of the ordinary shares of VLC Ltd
l a portfolio of the Nero Managed Fund, a collective investment scheme in securities, that
owns 20% of the ordinary shares of VLC Ltd, and
l various smaller investors who hold the remaining shares in a dematerialised form through a
number of CSD Participants (the share trading platforms provided by their banks).
Indicate the party responsible to withhold dividends tax in respect of the dividends paid by
VLC Ltd.
SOLUTION
VLC Ltd is generally responsible to withhold dividends tax in respect of dividends paid by the
company. It is, however, not required to withhold dividends tax in respect of dividends paid to
regulated intermediaries (s 64G(2)(c)).
Dividends paid to VLC Holdings Ltd
As VLC Holdings Ltd only holds 55% of the ordinary shares of VLC Ltd, these companies will not
form part of the same group of companies. VLC Holdings Ltd should therefore submit a
declaration of its exemption from dividends tax, together with a written undertaking to inform VLC
Ltd should this change for it not to withhold dividends tax on the payment (see 19.3.6 below).
This declaration and undertaking must be submitted to VLC Ltd before the dividend is paid. With
effect from 1 July 2021, this declaration and written undertaking must be re-submitted every
5 years from the date of the declaration.
continued
730
Dividends paid to the portfolio of the Nero Managed Fund

The portfolio of the Nero Managed Fund is a regulated intermediary. VLC is not required to with-
hold dividends tax in respect of the dividends paid to the portfolio of the Nero Managed Fund.
No declarations or undertakings are required to be held by VLC Ltd.
The portfolio of the Nero Managed Fund will be responsible to withhold dividends tax on the
payment of the dividends to the persons holding participatory interests in the portfolio. It would
have to consider for each such payment whether the payment is made to another regulated
intermediary (for example, another portfolio of a collective investment scheme such as a portfolio
that invests in portfolios of other collective investment schemes (often referred to as fund of
funds)). In such a case, the portfolio of the Nero Managed Fund would not be required to with-
hold dividends tax, despite not holding a declaration from such an intermediary (s 64H(2)(b)). It
is responsible to withhold dividends tax in respect of dividends paid to all other persons, except
if the person has submitted a declaration stating that it qualifies for an exemption from dividends
tax and a written undertaking to inform the portfolio of the Nero Managed Fund should this
change before the dividend is paid.
Dividends paid to the various CSD Participants
Like the portfolio of the Nero Managed Fund, the CSD Participants are regulated intermediaries.
VLC is not required to withhold dividends tax in respect of the dividends paid to these CSD Parti-
cipants. No declarations or undertakings are required to be held by VLC Ltd. The CSD Partici-
pants would be responsible to withhold the dividends tax when they pay the amounts to the
investors.
Note
If the dividends were declared in the form of a distribution of assets in specie by VLC Ltd (for
example an unbundling of shares held by VLC Ltd in another company), the obligation to obtain
declarations and undertakings to support the exemption of the dividend in the hands of the
beneficial owner would have rested on VLC Ltd. This would have been the case despite the
presence of regulated intermediaries between VLC Ltd and the beneficial owners of the divi-
dends (s 64FA(1)(a)).
19.3.6 Dividends tax: Exemptions from dividends tax (ss 64F and 64FA)
A dividend may be exempt from dividends tax. This exemption depends on the nature of the bene-
ficial owner of the dividend, the nature of the company paying the dividend or certain characteristics
of the dividend itself. Unless specifically indicated otherwise, the exemptions considered below apply
to both cash dividends as well dividends in specie.
The exemptions are administered by means of declarations and written undertakings submitted to the
company or regulated intermediary, as the case may be. A company that pays a cash dividend,
which qualifies for an exemption, is not required to withhold dividends tax if the person to whom the
dividend is paid has submitted the following documentation to the company (s 64G(2)):
l a declaration by the beneficial owner in the prescribed form that states that the dividend is
exempt from the dividends tax in terms of s 64F or a double tax agreement, and
l a written undertaking in the prescribed form to inform the company in writing should the circum-
stances affecting the exemption change, or the person ceases to be the beneficial owner.
Where the company distributes a dividend in specie, it can similarly only apply the exemption if the
person to whom it makes the distribution has submitted the above documentation to the company
(s 64FA(1)(a)). These documents must be submitted to the company before payment of the dividend
(ss 64FA(1)(a) and 64G(2)(a))).
The company does not require a declaration and written undertaking if the beneficial owner of the
dividend forms part of the same group of companies as the company that pays the dividend
(ss 64FA(1)(b) and 64G(2)(b)). If a company pays a cash dividend to a regulated intermediary, the
company is also not required to obtain the declaration and written undertaking. In this case, the
responsibility to withhold rests upon the regulated intermediary (see 19.3.5).
A regulated intermediary is not required to withhold dividends tax if the person to whom the dividend
is paid has submitted a declaration and written undertaking, similarly to those described above, to
the regulated intermediary before the dividend in paid. A regulated intermediary is also relieved of its
responsibility to withhold the dividends tax if it obtains a declaration, which states that the sole bene-
ficiary of such a vesting trust is another regulated intermediary, and a written undertaking from that
trust (s 64H(2)(a)). The requirement to hold these documents applies only to the final regulated inter-
mediary through which a dividend passes to the beneficial owner (s 64H(2)(b)). A regulated inter-
mediary does not require these documents when it pays a dividend in respect of a tax-free invest-
ment to a natural person, or a deceased estate or insolvent estate of a natural person (s 64H(2)(c)).
731
Remember
If the person to whom the dividend is paid did not submit the declaration or written undertaking
to a company or regulated intermediary before the dividend is paid, but does so subsequently,
the dividends tax withheld at the time of payment of the dividend may be refunded. The refund
process is explained in 19.3.11.
A beneficial owner does not have to submit a declaration for each dividend distribution. A
declaration applies in respect of future dividend distributions once submitted to a company. The
written undertaking to inform the company of any changes in the status or if the person ceases to
be the beneficial owner serves the purpose of notifying the company when it can no longer rely
on the declaration regarding the beneficial owner’s entitlement to an exemption.
With effect from 1 July 2020, the declaration and written undertaking are only valid for 5 years
from the date of the declaration, except when the person making the payment (company or
regulated intermediary, as the case may be) is subject to:
l the Financial Intelligence Centre Act 38 of 2001
l the Agreement between the Government of the Republic of South Africa and the Government
of the United States of America to improve International Tax Compliance and to Implement
the US Foreign Account Tax Compliance Act, or
l the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters
with regard to the person to whom the payment is made and that person takes account of these
provisions in monitoring the continued validity of the declaration (ss 64FA(3) and 64G(4)).
Exemptions based on the nature of the beneficial owner

As indicated earlier, the beneficial owner of a dividend is the person entitled to the benefit of the divi-
dend attaching to a share. Dividends paid to the following beneficial owners are exempt from divi-
dends tax:
l A resident company (s 64F(1)(a)). This exemption prevents dividends tax from being levied more
than once on the same profits when the company that receives the dividend transfers it to its
ultimate shareholders through multiple layers of companies. This exemption applies irrespective
of the extent of the resident company’s shareholding in the company declaring the dividend.
Example 19.7. Dividends declared to another company that is a resident
On 1 June 2022 Cape Logistics (Pty) Ltd (a resident) declared and paid a cash dividend of
R100 000 to its sole shareholder, NedSA (Pty) Ltd (also a resident).
NedSA (Pty) Ltd is a company that holds investments in various other companies. It has three
shareholders who each hold 33,33% of its issued shares. Two of the shareholders are natural
persons and the other is InvestCo (Pty) Ltd (a resident company). On 31 August 2022, NedSA
(Pty) Ltd declares a dividend to its shareholders of an amount equal to the cash dividend it
received from Cape Logistics (Pty) Ltd.
Calculate the amount of dividends tax that is levied in respect of the dividends paid by the
respective companies. You may assume in each case that the recipient of the dividend is its
beneficial owner.
SOLUTION
Dividend paid by Cape Logistics (Pty) Ltd to NedSA (Pty) Ltd
l No dividends tax is levied in respect of this dividend. This is because NedSA (Pty) Ltd is a
resident company. The dividend is exempt from dividends tax (s 64F(1)(a)). As Ned-
SA (Pty) Ltd holds all the shares of Cape Logistics (Pty) Ltd, these entities form part of the
same group of companies. Cape Logistics (Pty) Ltd is not required to obtain any declara-
tions or written undertakings from NedSA (Pty) Ltd. The dividends would also be exempt
from normal tax in the hands of NedSA (Pty) Ltd (s 10(1)(k)(i)).
continued
732
Dividend paid by NedSA (Pty) Ltd to its shareholders

l No dividends tax is levied in respect of the dividend paid to InvestCo (Pty) Ltd. This is
because InvestCo (Pty) Ltd is a resident company. The dividend is exempt from dividends
tax (s 64F(1)(a)). As InvestCo (Pty) Ltd does not form part of the same group of companies
of NedSA (Pty) Ltd, NedSA (Pty) Ltd needs to obtain a declaration of its exemption and
written undertaking from InvestCo (Pty) Ltd in order not to withhold dividends tax on the
distribution. With effect from 1 July 2020, InvestCo (Pty) Ltd must re-submit this declaration
and written undertaking every 5 years from the date of the declaration. The dividends would
also be exempt from normal tax in the hands of InvestCo (Pty) Ltd (s 10(1)(k)(i)).
l Dividends tax must be withheld in respect of the dividends paid to the two natural persons.
The dividends tax on these dividends would amount to R13 333 (R100 000 × 33,33% × 2 ×
20%). The dividends would be exempt from normal tax in the hands of the natural persons
(s 10(1)(k)(i)).
Remember
Dividends paid to resident companies are exempt from both dividends tax and normal tax.
Certain exempt dividends may be treated as income or proceeds, as the case may be, if they
were received within 18 months before the disposal of the shares in respect of which they are
received or as part of the disposal. Chapter 20 considers the anti-dividend stripping rules.
l The national, provincial or local sphere of the government of South Africa (s 64F(1)(b)).
l A public benefit organisation approved by the Commissioner in terms of s 30(3) (s 64F(1)(c)).
l A closure rehabilitation trust as contemplated in s 37A (s 64F(1)(d)).
l An institution, board or body contemplated in s 10(1)(cA) (s 64F(1)(e)). This is any institution,
board or body that
– in the furtherance of its sole or principal object conducts scientific, technical or industrial
research, or
– provides necessary or useful commodities, amenities or services to the state or members of the
general public, or
– carries on activities designed to promote commerce, industry or agriculture or any branch thereof.
l A fund contemplated in s 10(1)(d)(i) or (ii) (s 64F(1)(f )). This is a pension fund, provident fund,
retirement annuity fund, any friendly society registered under the Friendly Societies Act 25 of
1956 and any medical scheme registered under the provisions of the Medical Schemes Act 131
of 1998.
l A person contemplated in s 10(1)(t ) (s 64F(1)(g)). This includes the Council for Scientific and
Industrial Research (the CSIR), the South African Inventions Development Corporation and the
South African National Roads Agency Ltd.
l A non-resident beneficial owner where the dividend was declared by a foreign company in
respect of shares that are listed on a South African securities exchange (s 64F(1)(j)). Dividends
paid by foreign companies whose shares are listed on a South African securities exchange to
foreign shareholders do not attract dividends tax.
l Any fidelity or indemnity fund contemplated in s 10(1)(d)(iii) (s 64F(1)(n)).
l A small business funding entity as contemplated in s 10(1)(cQ) (s 64F(1)(i)).
Exemptions based on characteristics of the dividend

The following dividends are exempt from dividends tax on the basis that it has been subject to
another tax or are exempt from all tax based on the characteristics of the transaction or instrument
involved:
l A dividend that constitutes income of any person (s 64F(1)(l)) (examples include dividends that
are not exempt from normal tax (see chapter 5) or dividends received in respect of hybrid equity
instruments and third-party backed shares (see chapter 16)). Since these dividends are subject
to normal tax, they are exempt from dividends tax.
733
Example 19.8. Dividends subject to normal tax

Zokwakha Ltd established an employee share trust, Umsebenzi Trust, for the benefit of its em-
ployees. Certain qualifying employees are beneficiaries of the trust while employed by Zokwakha
Ltd. The Umsebenzi Trust holds 10% of the shares issued by Zokwakha Ltd.
The trust receives dividends from its shareholding and these dividends are distributed at year-
end to the employees. All distributions by the Umsebenzi Trust are made at the discretion of the
directors of Zokwakha Ltd (who act as the trustees of the trust). The trustees exercise their
discretion and make the distributions based on each beneficiary’s service performance and
contribution to Zokwakha Ltd during the year.
The employees do not have any rights in or that are linked to the shares held by the trust. You
may assume that these shares are not restricted equity instruments as contemplated in s 8C.
During the 2022 year of assessment, Zokwakha Ltd paid out a cash dividend of R1 000 000 in
total to all its shareholders (who are all natural persons, except for the Umsebenzi Trust).
The Umsebenzi Trust received dividends amounting to R100 000 and distributed the full amount
on 28 February 2022 to one of the beneficiaries, Mr Hangala, for his excellent performance
during the past year.
Discuss the tax treatment of the dividends distributed by Zokwakha Ltd to its shareholders, as
well as the amount received by Mr Hangala from the Umsebenzi Trust.
SOLUTION
The dividend of R100 000 paid to Mr Hangala will not be exempt from normal tax as it is a
dividend accrued to him in respect of services rendered to Zokwakha Ltd (s 10(1)(k)(i)(ii)). This
would be the case as the dividend is more closely related to his employment than a shareholding
interest that he has in Zokwakha Ltd, as the distribution was subject to the fact that he had to be
employed by Zokwakha Ltd in order to be a beneficiary of the trust. In addition, the trustees
exercised their discretion based on his work performance. The dividend is therefore subject to
normal tax in his hands.
The impact of this amount on Mr Hangala’s taxable income (normal tax) is the following:
Dividend received from Umsebenzi Trust
(par (k) of the definition of ‘gross income’ in s 1) ........................................................ R100 000
No dividend exemption applies (s 10(1)(k)(i)(ii)) ........................................................ –
Effect on taxable income (normal tax) ........................................................................ R100 000
Mr Hangala will not be liable for dividends tax on the R100 000 as the dividend was income in
his hands (s 64F(1)(l)). No dividends tax will therefore be withheld by Zokwakha Ltd on this
amount. However, Zokwakha Ltd must calculate and withhold employees’ tax (PAYE) from this
amount and pay it over to SARS on behalf of Mr Hangala as the dividend represents remunera-
tion (par (g)(ii) of the definition of ‘remuneration’ in par 1 of the Fourth Schedule).
The remaining dividends of R900 000 (R1 000 000 – R100 000) that are paid by Zokwakha Ltd to
the other shareholders will be subject to dividends tax. Zokwakha Ltd must withhold dividends
tax of R180 000 (R900 000 × 20%) and pay it over to SARS on behalf of the other shareholders.
l A dividend paid to a natural person (or the deceased or insolvent estate of such person) in
respect of a tax-free investment as contemplated in s 12T (s 64F(1)(o)).
l A dividend that was subject to STC (s 64F(1)(m)).
l A distribution of certain residential property (distribution in specie) in a manner that complied with
the requirements to transfer such properties to a natural person without triggering capital gains
tax (par 51A of the Eighth Schedule) (s 64FA(1)(c)).
l The distribution of a unit in specie by a share block company to its member as contemplated in
par 67B(2) of the Eighth Schedule (see chapter 17) (s 64FA(1)(d)).
Exemptions based on the nature of the company paying the dividend

A dividend paid by a registered micro business (see chapter 23). This exemption only applies to the
extent that the aggregate dividends paid by the registered micro business to all its shareholders
during the year of assessment in which the dividend is paid does not exceed R200 000 (s 64F(1)(h)).
Anti-avoidance rules related to exempt dividends (s 64EB)

When exemptions are based on the nature of the beneficial owner, this creates opportunities for
taxpayers to structure their affairs to avoid the dividends tax by transferring the right to the dividend
to a person in whose hands the dividend may be exempt. Anti-avoidance rules aim to restore the
734
position that the beneficial owner of the dividend is the transferor of the right to receive the dividend,
rather than the person to whom the beneficial ownership has been shifted.
In summary, these anti-avoidance rules apply where:
l A person in whose hands as beneficial owner the dividend would be exempt from dividends tax
acquired the right to a dividend in respect of a share, including a dividend that has not yet been
declared or has not yet accrued, and the dividend is subsequently received by or accrued to that
person. In this instance, any person that ceded the right is deemed to be the beneficial owner of
the dividend (s 64EB(1)). This rule does not apply where the person to whom the right is ceded
holds all the rights attaching to the share after the cession (s 64EB(1)).
l Certain persons who are exempt beneficial owners of dividends (these persons are listed in
s 64EB(2)(a)) borrow listed shares from another person (lender) or acquire these shares from
another person (transferor) in terms of a collateral arrangement. If a dividend, or any amount
determined with reference to such dividend, accrues to or is received by this person in respect of
the listed shares, any amount paid by the actual recipient of the dividend to the lender or transferor,
not exceeding the dividend in respect of the share or the amount determined with reference to the
dividend, is deemed to be a dividend paid for the benefit of the lender or transferor (s 64EB(2)).
l A person in whose hands the dividend would be exempt acquired a share in a listed company (or
any right in respect of the share) from another person (seller), and this acquisition is part of a
resale agreement between the person acquiring the share and the seller (or any company forming
part of the same group of companies as the seller). In this instance, the seller (or group company)
is deemed to be the beneficial owner of a dividend that accrues to or is received by the person in
respect of the shares (s 64EB(3)).
19.3.7 Dividends tax: Rate (ss 64E and 64G(3))

If a dividend is not exempt, dividends tax is levied at a rate of 20% applied to the amount of the
dividend paid.
Dividends paid by resident companies between 1 April 2012 and 21 Febru-

ary 2017 were subject to dividends tax at a rate of 15%. This rate changed to 20%
with effect from 22 February 2017 and applies to any dividend paid on or after this
date.
If the Minister of Finance announces a change in the dividends tax rate in the
Please note! national annual budget, this change takes effect from the date mentioned in that
announcement (s 64E(1)(a)(ii)). A rate announced in this manner continues to
apply for a period of 12 months from this date, to allow for the legislative process
to amend the rate to be followed. This change is, however, subject to Parliament
passing the legislation to give effect to the announcement within 12 months
(s 64E(1)(b)).
If the beneficial owner of a dividend is a resident of a country with which South Africa concluded a
double tax agreement, that person may be eligible for treaty relief in respect of the dividends tax
levied by South Africa (see chapter 21).
The treaty relief is administered on a similar basis as exemptions (see 19.3.6). If the company is
responsible to withhold or is liable for the dividends tax, it may withhold dividends tax at a reduced
rate if the person to whom the dividend is paid submitted the following to the company:
l a declaration by the beneficial owner of the dividend, in a form prescribed by SARS, that the
dividend is subject to a reduced rate as a result of the application of a double tax agreement
(ss 64FA(2)(a) and 64G(3)(a)), and
l a written undertaking, in the form prescribed by SARS, to inform the company in writing should
the circumstances affecting the reduced rate change or the person cease to be the beneficial
owner (ss 64FA(2)(b) and 64G(3)(b)).
This declaration and written undertaking must be submitted to the company before the dividend is
paid (ss 64FA(2) and 64G(3)).
If the dividends tax must be withheld by a regulated intermediary, a similar declaration and written
undertaking must be submitted to the regulated intermediary by the person to whom the dividend will
be paid if the person wants to make use of the treaty relief (s 64H(3)).
735
Remember
If the person to whom the dividend is paid did not submit the declaration or written undertaking
to a company or regulated intermediary by the date that the dividend was paid, but does so
subsequently, the dividends tax withheld in excess of the reduced rate at the time of payment of
the dividend may be refunded. The refund process is explained in 19.3.11.
With effect from 1 July 2020, declarations and written undertakings submitted in respect of reduced
rates at which tax should be withheld or paid are only valid for five years from the date of the
declaration. The same exceptions that apply to declarations and written undertakings in respect of
exemptions also apply to those in respect of reduced rates.
Example 19.9. Dividends not subject to dividends tax
Bheka Ltd is a South African resident company with a February financial year-end. The company
is a wholesaler of locally produced vegetables.
A number of companies, including three foreign companies, hold the ordinary shares issued by
Bheka Ltd. The foreign shareholders are Wales Ltd (which holds 15% of the issued ordinary
shares), Eng Ltd (which holds 7% of the issued ordinary shares) and Scot Ltd (which holds 5% of
the issued ordinary shares). All three entities are residents of the United Kingdom (UK) for tax
purposes. You may further assume that none of these entities have a permanent establishment in
South Africa.
On 25 February 2022, Bheka Ltd declared and paid out a cash dividend of R1 000 000 in total to
its shareholders.
Bheka Ltd received declarations from Wales Ltd and Scot Ltd that state that these entities are
entitled to the benefits in relation to dividends in terms of the double tax agreement between
South Africa and the United Kingdom. The entities also provided Bheka Ltd with an undertaking
to inform it should the tax status change. No correspondence has been received from Eng Ltd.
Discuss whether the dividends paid to each of the three UK companies will be subject to divi-
dends tax in South Africa and, if so, what amount of dividends tax should be withheld by
Bheka Ltd. You may assume that the treaty between South Africa and the UK allows South Africa
to tax the dividends paid to Wales Ltd at a rate of 5% and those paid to Scot Ltd and Eng Ltd at
a rate of 10%. (Example 21.6. illustrates the application of the relevant treaty provisions to this
income.)
SOLUTION
The dividends received by the three foreign companies will not be exempt from dividends tax as
the beneficial owners of the dividends are not resident companies (s 64F(1)(a)).
As residents of the United Kingdom, the recipients of the dividends may qualify for relief in terms
of the double tax agreement (DTA) between South Africa and the UK, as indicated above.
Bheka Ltd may only withhold the dividends tax at a reduced rate if the relevant declarations and
written undertakings have been submitted to it by the beneficial owners of the dividends (s 64G(3)).
With effect from 1 July 2020, this declaration and written undertaking must be re-submitted every
5 years from the date of the declaration, for Bheka Ltd to continue to withhold tax at the reduced
rate.
Wales Ltd
As Wales Ltd, as the beneficial owner of the dividends, holds at least 10% of the capital of Bheka Ltd,
it qualifies for a reduced rate of 5% of the gross dividend amount (Article 10(2)(a) of the DTA). Since it
submitted the required documentation to Bheka Ltd, Bheka Ltd should withhold dividends tax of
R7 500 (R150 000 × 5%) from the dividends paid to Wales Ltd.
Scot Ltd
As Scot Ltd, as the beneficial owner of the dividends, does not hold at least 10% of the capital of
Bheka Ltd, it qualifies for a reduced rate of 10% of the gross dividend amount (Article 10(2)(c) of
the DTA). Since it submitted the required documentation to Bheka Ltd, Bheka Ltd should
withhold dividends tax of R5 000 (R50 000 × 10%) from the dividends paid to Scot Ltd.
Eng Ltd
As Eng Ltd, as the beneficial owner of the dividends, does not hold at least 10% of the capital of
Bheka Ltd, it qualifies for a reduced rate of 10% of the gross dividend amount (Article 10(2)(c) of
the DTA). However, since it did not submit the required documentation to Bheka Ltd, Bheka Ltd
should withhold dividends tax at the normal rate of 20%. The dividends tax withheld on the
dividends paid to Eng Ltd will be R14 000 (R70 000 × 20%). If Eng Ltd subsequently submits the
declaration and written undertakings to Bheka Ltd, the excess dividends tax above the 10% may
be refunded to it (see 19.3.11).
736
19.3.8 Dividends tax: Deemed dividends subject to dividends tax (s 64E(4))

Unlike its predecessor, STC, the dividends tax regime does not have numerous detailed rules that
aim to tax disguised dividends. When dividends tax came into effect, the definition of a ‘dividend’
(see 19.3.1) was broadened to encompass all transactions that would in reality be dividends. The
dividends tax regime only has one specific anti-avoidance rule that deems a dividend to arise where
value is extracted from a company by way of a loan rather than a distribution. Shareholders may
prefer to extract value in this manner, as opposed to a dividend, because the loan does not attract
dividends tax, while practically the shareholder still has the benefit of using the company’s cash or
assets. The deemed dividend rule in s 64E(4) quantifies the benefit, and therefore the dividend, that
stems from such loans.
A deemed dividend arises where any amount is owing to a company during a year of assessment in
respect of a debt by the company to
l a resident, other than a company, who is a connected person in relation to the company, or
l a resident, other than a company, who is a connected person in relation to the above person.
Furthermore, this debt only gives rise to a deemed dividend if the debt arose by virtue of a share held
in the company by the first-mentioned person above.
Remember
If an amount is extracted from a company as a loan to a foreign connected person, the transfer
pricing rules apply. The secondary adjustment required by the transfer pricing rules is a deemed
divided (s 31(3)). These rules are discussed in more detail in chapter 21.
The amount of the deemed dividend is calculated as the difference between a market-related interest
in respect of the debt and the amount of interest actually payable (s 64E(4)(b)(ii)(aa)). A market-
related interest refers to the interest that would have been payable had interest been provided at the
official rate of interest for the period of the debt that falls in the year of assessment. The official rate of
interest is the South African repurchase rate plus 100 basis points (definition of ‘official rate of
interest’ as defined in s 1). If the debt bears interest at a rate that exceeds this market-related interest
rate, no deemed dividend arises (s 64E(4)(b)(ii)(bb)).
This dividend is deemed to have been paid on the last day of the company’s year of assessment
during which the debt was owing to the company (s 64E(4)(c)). This dividend is deemed to be a
distribution of an asset in specie. This means that the company, as opposed to the beneficial owner,
is liable for the dividends tax (s 64E(4)(b)(i)).
Example 19.10. Deemed dividend: Low interest loans to shareholders
For the period 1 January 2022 to 30 June 2022, DFH (Pty) Ltd granted a R1 000 000 interest-free
loan to Louis Oosthuizen. Louis is a resident and DFH’s sole shareholder. The debt was granted
at Louis’ instance in his capacity as shareholder. DFH has a 30 June year-end.
Determine whether DFH is deemed to have paid a dividend for dividends tax purposes. Assume
that the official rate of interest remained at 8% per annum during the period 1 January 2022 to
30 June 2022.
SOLUTION
Louis Oosthuizen is a resident, a connected person in relation to DFH (refer to par (d)(iv) of the
definition of ‘connected person’ in s 1) and not a company. The debt was granted by virtue of the
shares that Louis held in DFH. DFH is consequently deemed to have paid a dividend for
dividends tax purposes. The amount of the dividend is R39 671 ([R1 000 000 (outstanding
balance of the debt) × 8% (official rate of interest) × 181/365 (the period that Louis owed the
amount during DFH’s 2022 year of assessment)] less nil (actual interest payable for the year)).
DFH is therefore deemed to have paid a dividend in specie of R39 671 on 30 June 2022 and is
liable for dividends tax of R7 934 on this deemed dividend.
continued
737
Notes
(1) If the debt was not made available to Louis Oosthuizen, but to a relative of Louis, DFH would
still be deemed to have paid a dividend in specie if the relative is a resident. The reason for
this is that Louis’ relative would be a connected person in relation to Louis (par (a) of the
definition of ‘connected person’ in s 1).
(2) If it is not intended that Louis repays the debt, the capital amount of the debt would have
qualified as a dividend that was paid by DFH on 1 January 2022. The reason for this is that
‘dividend’ is defined in s 1 as any amount that is transferred or applied by a company for the
benefit or on behalf of any person in respect of any share in the company.
(3) If DFH subsequently declares the loan balance owing to it by Louis as a dividend, this
dividend amounting to R1 000 000 would be subject to dividends tax. As the dividends paid
by distributing the right to repayment (an asset) to Louis, DFH will be liable for the dividends
tax.
Section 64E(4) does not apply to the extent that the amount owing to a company in respect of a debt
that was deemed to be a dividend that was subject to STC (s 64E(4)(e)). Debts that arose before
1 April 2012 and were not repaid before that date would have been subject to STC.
19.3.9 Dividends tax: Timing (s 64E(2))

The liability for dividends tax arises when a dividend is paid, rather than on the date on that the divi-
dend is declared.
A deemed payment rule governs the timing of the payment of a dividend. The timing of a dividend
depends on whether the dividend is distributed by a listed company or not, as well as whether the
dividend is paid in cash or not. Dividends are deemed to be paid for purposes of dividends tax on
l in the case of a cash dividend distributed by a listed company, on the date on which the dividend
is actually paid in cash (s 64E(2)(a)(i))
l in the case of a cash dividend distributed by a non-listed company, the earlier of the date on
which the dividend is paid or becomes due and payable (s 64E(2)(a)(ii)), or
l in the case of any dividend that consists of a distribution of an asset in specie, the earlier of the
date on which the dividend is paid or becomes due and payable (s 64E(2)(b)).
Example 19.11. The date on which dividends tax is levied
On 15 June 2022 ISO Logistics (Pty) Ltd (not a listed company) declared a dividend of R15 per
share, payable to shareholders registered on 30 June 2022. The dividend was paid on
5 July 2022.
Indicate the date on which dividends tax is levied.
SOLUTION
Dividends tax is levied on the date that a dividend is paid. In the case of a non-listed company
that distributes a dividend other than a dividend in specie, a dividend is deemed to be paid on
the earlier of the date on which it is paid or the date on which it becomes due and payable.
The date on which the dividend becomes due and payable is 30 June 2022 and therefore the
dividend is deemed to be paid on this date. Dividends tax is therefore levied on 30 June 2022.
This dividends tax must be paid to SARS by 31 July 2022 (see 19.3.10.).
If ISO Logistics had been a listed company, dividends tax would have been levied on
5 July 2022, the date on which the dividend was actually paid.
Remember
The deemed dividend that arises in respect of a loan owing to a company, as described in
19.3.8, has a specific timing rule. This dividend is deemed to have been paid on the last day of
the year of assessment during which the debt was owing to the company.
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19.3.10 Dividends tax: Payment of dividends tax and returns (s 64K)

When a company or regulated intermediary pays a dividend, it must submit a return in respect of that
dividend. If it was liable for or responsible to withhold the dividends tax, it must pay this dividends tax
to SARS.
Returns
Any person who paid a dividend must submit a dividends tax return in respect of that dividend to
SARS by the last day of the month following the month during which the dividend was paid
(s 64K(1A)(a)). This requirement applies to the company that pays the dividend, whether in cash or
as a distribution in specie, as well as to regulated intermediaries that on-pays the dividend. In
practice, this return is the DTR02 return.
A company or regulated intermediary that did not withhold dividends tax as a result of an exemption,
or that applied a reduced rate in terms of a tax treaty when withholding dividends tax, must submit
any declaration that it received from the beneficial owner and relied on in determining the amount of
the dividends tax withheld and paid to SARS (s 64K(4)). In practice, these declarations are only
submitted to SARS if requested from the company or regulated intermediary.
Payment of dividends tax

The beneficial owner of a cash dividend is liable for the dividends tax. This beneficial owner must pay
the dividends tax to SARS by the last day of the month following the month during which the dividend
is paid. As discussed in 19.3.5, the company or regulated intermediary that pays the dividend to the
beneficial owner is responsible to withhold and pay the dividends tax over to SARS. The beneficial
owner is not liable to pay this amount to SARS if the tax has already been paid by another person
(s 64K(1)(a)).
Remember
As a withholding agent, a company or regulated intermediary responsible to withhold the divi-
dends tax in respect of cash dividends is personally liable for the dividends tax that it withheld
but did not pay to the Commissioner.
The company or intermediary that is responsible to withhold dividends tax from any cash dividend
paid, must pay the dividends tax to the Commissioner by the last day of the month following the
month during which the dividend is paid (s 64K(1)(c)). Similarly, a company that is liable for the
dividends tax in respect of a dividend in specie must pay the dividends tax by the last day of the
month following the month during which the dividend is paid by the company (s 64K(1)(b)).
If a person fails to pay the dividends tax within the periods described above, interest is charged on
the outstanding balance at the prescribed rate from the end of the period at which the dividends tax
was payable (s 64K(6)). No percentage-based penalties are imposed for late payment of dividends
tax.
Remember
The amount of dividends tax that must be paid to SARS can be reduced by an amount refunded
in terms of s 64L or 64M (see 19.3.11).
19.3.11 Dividends tax: Refund of dividends tax (ss 64L, 64LA and 64M)
If the declaration and written undertaking for
l a dividends tax exemption (see 19.3.6), or
l a reduced rate by reason of the application of a double tax agreement (see 19.3.7)
was not received by a company or regulated intermediary from a person to whom a dividend is paid
before the dividend was paid, dividends tax would be paid or withheld at a rate of 20%.
739
Amounts so withheld or paid are refundable if the beneficial owner submits the relevant declaration
and written undertakings to the company or regulated intermediary within a period of three years after
the dividend was paid (ss 64L(1), 64LA and 64M(1)). This refund is available notwithstanding the
provisions of the TAA relating to refunds. A refund is also available where a company or regulated
intermediary withheld dividends tax but should have reduced this amount by the rebate for foreign
tax, provided that it claims the rebate within three years after the payment of the dividend (ss 64L(1A)
and 64M(1A)).
The refund mechanism depends on whether the dividends tax was withheld by the company or a
regulated intermediary.
Where a company that paid a cash dividend withheld dividends tax and subsequently obtained the
declaration and written undertaking within the period allowed, the dividends tax is refundable
l from any dividends tax withheld by that company within a period of one year after the date on
which the declaration was submitted (s 64L(2)(a)), or
l if the refund exceeds the amounts recoverable within the year after the declaration has been
obtained, as described above, the company can recover the difference from SARS, provided that
the company submits the claim for recovery to SARS before the expiry of four years from the date
that the dividends tax was withheld (ss 64L(2)(b) and 64L(3)).
Example 19.12. Withholding and refunding of dividends tax by the company that declared
and paid the dividend
Croydon (Pty) Ltd is a resident company. The company is not a listed company and has
1 000 000 issued ordinary shares. On 15 June 2022 Croydon (Pty) Ltd declared and paid a
dividend of R5 per share held by shareholders on 31 July 2022.
Zorgvliet (Pty) Ltd, a company that is a resident, holds 500 000 shares in Croydon (Pty) Ltd.
Croydon (Pty) Ltd and Zorgvliet (Pty) Ltd are not part of the same group of companies. When
Croydon (Pty) Ltd paid the dividend in respect of its shares it had not received a declaration
from Zorgvliet (Pty) Ltd that it is exempt from dividends tax. Zorgvliet (Pty) Ltd submitted the
relevant declaration to the company on 5 August 2023.
Because Croydon (Pty) Ltd had not received a declaration from Zorgvliet (Pty) Ltd by
31 July 2022 that it is exempt from dividends tax in terms of s 64F(a), Croydon (Pty) Ltd withheld
R500 000 (500 000 shares × R5 × 20%) dividends tax from the dividend of R2 500 000 that it
declared to Zorgvliet (Pty) Ltd and paid R2 000 000 to the company. (The dividend was paid on
31 July 2022. The relevant declaration must have been submitted on this date.)
Because Zorgvliet (Pty) Ltd submitted the relevant declaration before 31 July 2025 (three years
after payment of the dividend), Croydon (Pty) Ltd must refund the R500 000 dividends tax. The
R500 000 refund must first be paid out of the dividends tax that Croydon (Pty) Ltd withholds from
any dividend declared during the period 5 August 2023 (when the relevant declaration was sub-
mitted) and 5 August 2024 (one year after the relevant declaration was submitted by Zorgvliet
(Pty) Ltd). If the dividends tax withheld by Croydon (Pty) Ltd during this period is less than the
R500 000 refund, the difference must be claimed by Croydon (Pty) Ltd from the Commissioner.
The amount recovered from the Commissioner must then be refunded to Zorgvliet (Pty) Ltd.
If a company paid dividends tax in respect of a dividend in specie because it did not receive a
declaration from or on behalf of the beneficial owner by the required date, the dividends tax is
refundable if the declaration is subsequently obtained. The company may claim a refund from SARS
within three years from the date that the dividend was paid if the beneficial owner submits the
relevant declaration and written undertaking to the company (s 64LA).
Dividends tax that is refundable to a regulated intermediary must be refunded from dividends tax
withheld by that regulated intermediary after the date that the declaration was submitted by the
person (s 64M(2)). Unlike in the case of a company, the regulated intermediary cannot recover the
dividends tax from SARS. In principle, regulated intermediaries should pay dividends with sufficient
regularity to deduct the refund amount from dividends tax payable.
19.4 Taxation of a return of capital
19.4.1 Contributed tax capital (definition of ‘contributed tax capital’ in ss 1 and 8G)
Contributed tax capital is a notional amount that is determined for tax purposes. This concept was
introduced into the legislation with effect from 1 January 2011 as part of the process to simplify the
definition of a dividend.
740
Conceptually, contributed tax capital represents the balance of

l amounts contributed to the company by shareholders when subscribing for shares
l after deducting any distributions of these amounts to the shareholders.
This can be contrasted to the profits or reserves that accumulated in the company from sources other
than shareholder contributions. When a shareholder contribution is returned to a shareholder, this is a
return of capital. In contrast, the distribution of the profits or reserves is a dividend and is taxed in the
manner discussed in 19.3.
The definition of contributed tax capital requires that a balance must be calculated for each class of
shares issued by the company. The contributed tax capital for every class of shares of such a com-
pany must be determined as follows: (par (b) of the definition of ‘contributed tax capital’ in s 1(1))
The stated capital or share capital and share premium of a class of shares of the company
immediately before 1 January 2011 ............................................................................................. Rx
Less: So much of the stated capital or share capital and premium that would have been a
dividend, as defined before 1 January 2011, had it been distributed by the company
immediately before 1 January 2011 (see note below) ..................................................... (Rx)
Add: The consideration that the company received for the issue of shares on or after
1 January 2011 ................................................................................................................. Rx
Add: If the shares of the class include shares that were converted from another class of
shares, any consideration that the company received in respect of the conversion and
the contributed tax capital attributed to the converted shares ........................................ Rx
Less: Amount transferred to a shareholder on or after 1 January 2011 that has been deter-
mined by the directors of the company to be a transfer from contributed tax capital ..... (Rx)
Less: In the case of convertible shares where some of the shares have been converted to
another class of shares, so much of the contributed tax capital attributed to the shares
that were converted .......................................................................................................... (Rx)
Contributed tax capital balance for the class of shares ............................................................... Rx
The amount that would have been a dividend in terms of the definition that applied
before 1 January 2011 is:
1. Any amount transferred on or after 1 January 1974 (but before 1 January
2011) from the company’s reserves (excluding share premium) to its share
capital or share premium account. If this amount was applied in paying up
capitalisation shares, the capitalisation shares should have been equity
shares. This amount is referred to as capitalised profits.
2. Less: Any reduction in the company’s share capital or share premium (before
1 January 2011) to the extent that it represented a distribution of its cap-
italised profits. A reduction in the company’s share capital or share premium
could have been as a result of
Please note! l the reduction in the nominal value of the company’s share capital
l the acquisition, cancellation or redemption of some of its shares, or
l the company losing some of its paid-up share capital as a result of a loss
actually incurred and the company then partially reducing its share
capital to account for the loss.
Despite the fact that the definition of a dividend was amended and the concept of
contributed tax capital was introduced in 2011, this calculation may still be relevant
to companies that were incorporated before 2011 that have not yet entered into
any transactions that required them to determine the balance of their contributed
tax capital. Such companies are unlikely to have made transfers to their share-
holders that reduced contributed tax capital.
741
Example 19.13. Contributed tax capital
On 1 January 2011, AX Logistics (Pty) Ltd’s stated capital was 100 000 ordinary shares of R1,00
each. On 15 April 2015 it issued 50 000 convertible preference shares at R3,00 each. On
1 August 2018 it distributed R20 000 to its ordinary shareholders. The directors of AX Logistics
(Pty) Ltd determined that the distribution was a distribution from contributed tax capital.
AX Logistics (Pty) Ltd’s preference shareholders converted 10 000 of their convertible prefer-
ence shares to ordinary shares on 1 February 2022.
What is the amount of AX Logistics (Pty) Ltd’s contributed tax capital after each of the above
events?
SOLUTION
AX Logistics (Pty) Ltd has two classes of shares, ordinary shares and convertible preference
shares. Contributed tax capital should be determined separately for each of the classes of
shares.
Ordinary shares
Stated capital on 1 January 2011 ................................................................................ R100 000
Distribution of contributed tax capital .......................................................................... (20 000)
Balance of contributed tax capital attributed to ordinary shares ................................. R80 000
Convertible preference shares
Consideration received for issuing the convertible preference shares........................ R150 000
Balance of contributed tax capital attributed to convertible preference shares .......... R150 000
After the conversion of convertible preference shares to ordinary shares on 1 February 2022,
AX Logistics (Pty) Ltd’s contributed tax capital will be:
Ordinary shares
Contributed tax capital allocated to convertible preference shares converted to
ordinary shares (see calculation below) ...................................................................... 30 000
Convertible preference shares
Contributed tax capital allocated to the preference shares that were converted to
ordinary shares (R150 000/50 000 shares × 10 000 shares) ....................................... (30 000)
Any consideration received by or accrued to the company for the issue of shares after
1 January 2011 increases contributed tax capital for the class of shares. This consideration not only
includes cash or the value of an asset received by the company, but arguably also the value of
services provided by a person to the company as consideration for a share issue, or the cancellation
of a loan account owed by the company as consideration for a share issue.
If the company transfers an amount to its shareholders, this may reduce the balance of contributed
tax capital for the class of shares. The amount transferred to each shareholder may not exceed an
amount determined as follows:
Total amount of contributed tax capital The number of shares of that class held
attributable to that class immediately × by that shareholder
before the transfer Total number of shares of that class
A transfer reduces the company’s contributed tax capital if the directors of the company (or another
person or body of persons with comparable authority) determined, by the date of the transfer, that the
amount is a transfer of contributed tax capital. Without this determination, contributed tax capital is
not reduced and the amount distributed will be a dividend. This determination could, for example,
take the form of a company resolution.
With effect from 1 January 2023, a company may only transfer an amount from contributed tax capital
if all shareholders in that class participate in the transfer in the same manner and are actually
allocated an amount of contributed tax capital based on their proportional shareholding within that
class of shares, except in the case of general repurchases of shares by a listed company.
742
The definition of contributed tax capital contains a specific prescription as to how

the contributed tax capital of a company that became a resident on or after
1 January 2011 should be determined (par (a) of the definition of contributed tax
capital).
The starting point for the calculation of the contributed tax capital of such a com-
pany is the market value of all the shares of a specific class immediately before
Please note! the company becomes a resident (as opposed to the stated share capital or share
premium). The effect of this starting point is that distributions equal to this amount
may be made by the company in future without being dividends.
The remainder of the calculation of the contributed tax capital of such a company
is comparable to the calculation above, with the exception that only movements
from the date that the company became a resident are taken into account.
A specific anti-avoidance rule exists to prevent the artificial creation of contributed tax capital in
South African groups of companies that are ultimately foreign owned (s 8G). Non-resident companies
are generally not subject to capital gains tax on the disposal of shares that they hold in South African
resident companies (refer chapter 17). If a South African company declares dividends to a non-
resident shareholder, the dividend is not exempt from dividends tax (refer 19.3.6). A non-resident
company could, however, attempt to avoid this dividends tax by implementing the following trans-
action: The non-resident contributes shares in a South African company (existing company) to
another South African company (new holding company). This increases the contributed tax capital of
the new holding company with the market value of the shares that it received as consideration for the
issuing of new shares to the non-resident shareholder. The disposal of the shares in the existing
company by the non-resident does not have any capital gains tax implications. This enables the
existing company to distribute its accumulated profits to the new holding company. The distribution
qualifies for an exemption from dividends tax. The new holding company in turn, as a result of the
above transaction, has sufficient contributed tax capital to distribute these same amounts to the non-
resident shareholder as a return of capital. As discussed above, this return of capital does not attract
dividends tax.
The anti-avoidance rule applies to a transaction where a resident company (issuing company) issues
shares to a non-resident company (subscribing company), if the issuing company forms part of the
same group of companies as the subscribing company after the transaction. In the context of s 8G,
the existence of a group of companies is based on a threshold of 50%, as opposed to 70% in the
definition of a group of companies in s 1 (as discussed in chapter 20) (s 8G(1)). The rule applies to
the extent that the consideration paid by the subscribing company for the shares issued to it consists
of shares in another resident company (target company), that also forms part of the same group of
companies as the subscribing company (s 8G(2)). When s 8G applies to a transaction, the amount to
be added to the contributed tax capital of the issuing company as a result of such a transaction must
be determined as:
A = B × C/D
Where:
A= amount to be added to the contributed tax capital of the issuing company
B= total contributed tax capital attributable to the class of shares of the target company
acquired by the issuing company. This amount must be determined in terms of
par (b) of the definition of contributed tax capital from the date that the target com-
pany formed part of the same group of companies as the subscribing company
(s 8G(3)).
C= number of shares of the class acquired by the issuing company
D= total number of shares of the class issued by the target company
The rule extends to an arrangement where the issuing company uses the consideration it receives
from the subscribing company directly or indirectly to acquire shares in a target company.
The definition of contributed tax capital that applies when a person becomes a resident after
1 January 2011 (par (a) of the definition of contributed tax capital in s 1) does not apply to a class of
shares issued by the issuing company before it became a resident (s 8G(4)).
743
19.4.2 Return of capital (definition of ‘return of capital’ in s 1 and par 76B of the Eighth
Schedule)
The definition of a return of capital resembles the definition of a dividend (as discussed in 19.3.1) in
many respects. This definition is, however, the inverse of the definition of a dividend.
A return of capital is defined in a similar manner to a dividend in s 1(1) as
l any amount transferred or applied
l by a company that is a resident
l for the benefit or on behalf of any person
l in respect of any share in that company.
It also includes amounts transferred or applied by the company by way of
l a distribution made by the company (par (a) of the definition of ‘return of capital’), or
l as consideration for the acquisition of any share in that company (par (b) of the definition of
‘return of capital’).
A return of capital can occur when a company acquires its shares (repurchase
Please note! of shares). A return of capital may however also be made when a distribution is
made by a company without acquiring any of its shares.
The definition of a return of capital contains similar exclusions to the definition of a dividend for trans-
fers that consist of shares in the company and for general repurchases of its own shares on a
licensed exchange by a company.
The fundamental difference between the definitions of a dividend and a return of capital lies in the
effect of the transfer on the contributed tax capital of the company. A transfer to a shareholder will
only be a return of capital to the extent that it results in a reduction in the contributed tax capital of the
company. In contrast, a transfer to a shareholder will be a dividend to the extent that it does not result
in a reduction in the contributed tax capital of the company.
The tax implications of a return of capital depends on the purpose for which the share, in respect of
which the return of capital is received or accrues, is held:
l If the share is held as trading stock, a return of capital in respect of that share represents an
amount received or accrued in the course of a scheme of profit-making. The shareholder
includes this amount in its gross income.
l If the share is held as a capital asset, the tax implications depend on whether the shareholder
receives the return of capital prior to the disposal of the share in respect of which it is received,
as part of the disposal or subsequent to the deemed disposal thereof during winding up,
liquidation or deregistration.
– Where the return of capital is received prior to the disposal of the share, the expenditure incur-
red in respect of the share (which forms part of its base cost) must be reduced by the amount
of cash or market value of an asset received or accrued as a return of capital (par 76B(2) of
the Eighth Schedule). This treatment is premised on the fact that the contributed tax capital of
the company from which the return of capital is made arose when the shareholder subscribed
for shares. The expenditure incurred at that time forms part of the base cost of the shares. This
amount should be reduced if the company returns the amounts previously contributed to the
company by the shareholder.
744
The same principle as discussed above applies where a return of capital is

received or accrues in respect of shares acquired before the valuation date
(generally, 1 October 2001). However, if the return of capital is received by or
accrued to the shareholder prior to the disposal of the shares, the base cost of
the shares is yet to be determined at this point. As set out more fully in chap-
ter 17, the base cost of pre-valuation date assets can be determined in a num-
ber of ways upon disposal of the asset. Unlike assets acquired after the valua-
tion date, the base cost is not determined directly with reference to expenditure
incurred to acquire the asset.
In this case, the shareholder must, for purposes of establishing a date of acqui-
sition of the shares and expenditure incurred to acquire the shares, be deemed
to
Please note!
l have disposed of the shares immediately prior to the return of capital at its
market value, and
l immediately thereafter reacquire the shares at expenditure equal to its
market value adjusted for the notional capital gain or loss that would have
arisen had the share been disposed of at its market value (a notional capital
gain is deducted and a notional capital loss added to the market value).
This amount represents the expenditure incurred by the shareholder to
acquire the shares for purposes of establishing its base cost (par 76B(1) of
the Eighth Schedule).
As a result of the above deemed disposal, expenditure to acquire the shares
has now been established. The return of capital will reduce this expenditure as
explained above.
– Where the return of capital exceeds the expenditure incurred to acquire the shares, the excess
amount is treated as a capital gain in the hands of the shareholder (par 76B(3) of the Eighth
Schedule). The expenditure incurred by a shareholder to acquire the shares and the con-
tributed tax capital of a company may not be aligned with each other, and therefore result in
this outcome. This can happen if a shareholder acquired the shares from another shareholder
or when the contributed tax capital reflects subsequent subscriptions by other shareholders.
l If a return of capital is received at the time of disposal of the share (as part of the consideration),
the amount of the return of capital forms part of the proceeds from that disposal (par 35(1) of the
Eighth Schedule).
l If a company is wound up, liquidated or deregistered, the shareholder must be treated as having
disposed of all shares held at the earlier of the date of dissolution or deregistration of the com-
pany or in the case of a liquidation, when the liquidator declares in writing that no reasonable
grounds exist to believe that the shareholder will receive further distributions. If a return of capital
(either cash or a distribution of an asset in specie) is only received by or accrues to the
shareholder after the date when the shares have already been treated as having been disposed
of, this return of capital must be treated as a capital gain for the shareholder (par 77 of the Eighth
Schedule).
The same rules as above apply in respect of foreign returns of capital.
Example 19.14. Returns of capital and dividends
Faith (Pty) Ltd and Themba Dindi own 60% and 40% respectively of the ordinary shares of Expo-
nent Ltd. Faith (Pty) Ltd acquired its shares at a cost of R1 400 000 in 2012. Themba Dindi
acquired his shares at a cost of R900 000 in 2008.
Exponent Ltd distributed an amount of R1 950 000 to its shareholders on 28 February 2022,
without acquiring any of its shares from the shareholders. Exponent Ltd had contributed tax
capital of R2 500 000 by this date.
Explain and calculate the tax implications of the distribution for both shareholders in the following
scenarios:
l Scenario A: The directors of Exponent Ltd determined that the full amount of the distribution
reduces Exponent Ltd’s contributed tax capital, or
l Scenario B: No portion of the distribution has the effect of reducing Exponent Ltd’s con-
tributed tax capital.
745
SOLUTION
Scenario A: Full distribution reduces Exponent Ltd’s contributed tax capital.
If the full amount of the distribution reduces Exponent Ltd’s contributed tax
capital balance, this distribution would be a return of capital. The return of capital
reduces the base cost of the shares in respect of which the return of capital is
received (par 76B(2) of the Eighth Schedule).
No portion of it would be a dividend.
Tax implications for Themba Dindi
Base cost of the investment in Exponent Ltd ............................................................ R900 000
Less: Return of capital (R1 950 000 × 40/100) ......................................................... (R780 000)
Base cost of the investment in Exposure Ltd after the return of capital .................... R120 000
Tax implications for Faith (Pty) Ltd
Base cost of the investment in Exposure Ltd ............................................................ R1 400 000
Less: Return of capital (R1 950 000 × 60/100) ......................................................... (R1 170 000)
Base cost of the investment in Exponent Ltd after the return of capital .................... R230 000
Note
The reduction in the base cost of the investments in the Exponent Ltd shares does not have an
immediate cash tax impact for either of the shareholders. This will only occur when they dispose
of the shares. At that time, the reduced base cost will result in a greater capital gain than would
have been the case had the base cost not been reduced.
Scenario B: No portion of the distribution reduces Exponent Ltd’s contributed tax capital.
If no portion of the distribution reduces Exponent Ltd’s contributed tax capital balance, this distri-
bution would be a dividend. No portion of it would be a return of capital.
Tax implications for Themba Dindi
The dividend received by Themba Dindi would be subject to dividends tax at a rate of 20%. This
dividends tax would amount to R156 000 (R1 950 000 × 40% × 20%). Exponent Ltd is required to
withhold this amount from the dividend paid to Themba Dindi.
Tax implications for Faith (Pty) Ltd
The dividend received by Faith (Pty) Ltd would be exempt from dividends tax (s 64F(1)(a)).
Exponent Ltd is not required to withhold any dividends tax if Faith (Pty) Ltd provided it with a
declaration of its exemption and a written undertaking to inform it if this status changes.
Note
Unlike the return of capital, the dividend has an immediate cash tax impact for Themba Dindi. It has
no tax impact for Faith (Pty) Ltd as no dividends tax is levied on the payment. The distribution does
also not reduce the base cost of Faith (Pty) Ltd’s investment in the shares of Exponent Ltd.
Example 20.4 illustrates the tax implications of a return of capital as part of the disposal of shares.
This edition of Silke deals only with the rules relating to the CGT treatment of a
‘return of capital’ or ‘foreign return of capital’ received on or after 1 April 2012
Please note! (par 76B). Please refer to the 2015 edition of Silke for a detailed discussion of
the CGT treatment of a ‘return of capital’ or 'foreign return of capital' received
before 1 April 2012 (dealt with in paras 76 and 76A of the Eighth Schedule).
19.5 Companies with specific tax implications

Special tax rules apply to companies that have unique characteristics. This differentiation may be
based on policy reasons (for example, a more favourable tax regime afforded to small business
corporations and companies operating in special economic zones), to curb avoidance risks that the
company may pose (for example personal service provider entities) or to reflect the special character
of the company (for example, real estate investment trusts (REITs)). This section considers these
companies.
19.5.1 Close corporations

The Close Corporations Act 69 of 1984 governs close corporations. These entities share many
similarities with companies. Smaller businesses, with a limited number of owners (members), often
still conduct business in a close corporation.
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As indicated in 19.2.1, a close corporation is a ‘company’ for tax purposes. The tax treatment of
profits generated by a close corporation and distributions made to its members is similar to that of
any other company. This includes the following:
l The tax rate that applies to a close corporation, which is currently 28%.
l Distributions to members fall within the definition of a dividend, as discussed in 19.3.1. These
distributions are subject to dividends tax and are generally exempt from normal tax in the hands
of the recipient (s 10(1)(k)(i)).
l A close corporation is a provisional taxpayer (par (b) of the definition of ‘provisional taxpayer’ in
par 1 of the Fourth Schedule).
l A close corporation must, in terms of s 246 of the Tax Administration Act (see chapter 33), be
represented by a public officer, who will be its ‘representative taxpayer’.
As a result of the fact that the governing legislation uses different terminology from the Companies
Act, a number of definitions in the Act specifically refers to a close corporation. This includes:
l A close corporation is specifically excluded from being classified as a public company
(s 38(2)(b)). It is therefore treated a private company for tax purposes.
l The term ‘director’ is defined in s 1 to include any person who, in respect of a close corporation,
holds any office or performs any function similar to that of a director of a company other than a
close corporation. A director of a close corporation for purposes of the Act is not necessarily a
member of the close corporation. A person who participates in management can also be a
director as defined. This definition is relevant for purposes of employees’ tax (see chapter 10).
From a corporate law perspective, close corporations are in the process of being phased out. No
new close corporations have been allowed to be registered since 1 May 2011. These entities also
suffer from certain limitations, for example restrictions relating to persons who may be members. This
can make it difficult to continue to conduct business in a close corporation as the business grows
and opportunities arise for it to be included in a larger corporate structure. Close corporations are
therefore often converted to companies. When a close corporation is converted to a company, the
close corporation and the resultant company are, for purposes of the Act, deemed to be one and the
same person (s 40A).
19.5.2 Foreign companies

A foreign company is a company that is not a resident (definition of ‘foreign company’ in s 1).
Chapter 3 deals with the residence status of a company. Like any other non-resident, a foreign
company will only be liable for normal tax in South Africa on income that it receives, or that accrues to
it, from a South African source.
While these companies were previously taxed at a higher rate than resident companies, they are now
also taxed at 28% (par 3(a) of Appendix I to the Income Tax Act).
Dividends declared by foreign companies are not subject to dividends tax (except if the dividend is
paid in respect of a share listed on the JSE and to a resident who does not qualify for an exemption
from dividends tax as beneficial owner of the dividend). The South African activities of a foreign com-
pany (for example a South African branch) are subject to 28% normal tax on its South African source
income. After-tax profits remitted by the foreign company are not subject to further tax in South
Africa. It may, however, be subject to income tax and taxes on the distribution of the profits in the
country where it is a resident for tax purposes.
When a foreign company carries on business or has an office in South Africa, it must at all times be
represented by an individual residing in South Africa (the company’s public officer) (s 246 of the Tax
Administration Act (see chapter 33)).
19.5.3 Non-profit companies (s 10(1)(cN), 10(1)(cO), 10(1)(cQ), 10(1)(d) and 10(1)(e))

The Companies Act distinguishes between profit and non-profit companies. The provisions of the
Companies Act apply to non-profit companies with some modifications to reflect the nature of these
entities. All the objects of a non-profit company must be public benefit objects or an object relating to
one or more cultural or social activities, or communal or group interests. All assets and income of the
non-profit company must be applied to advance these objects.
The mere fact that a company is a non-profit company does not impact its tax treatment. The purpose
and objects of the entity may, however, impact on the nature of its receipts and accruals (in
particular, whether these amounts are derived from a scheme of profit-making or not). Specific
747
exemptions are available to the entities or may apply to specific amounts received by or accrued to
it. These include:
l Non-profit companies can be approved as public benefit organisations (s 30), recreational clubs
(s 30A) or small business-funding entities (s 30C). Some of the receipts or accruals of the organ-
isation may be exempt from normal tax (ss 10(1)(cN), 10(1)(cO) and 10(1)(cQ)).
l A non-profit company formed to promote the common interest of persons carrying on a particular
kind of business, profession or occupation may be exempt from normal tax (s 30B). All the
receipts and accruals of such a non-profit company are exempt from normal tax (s 10(1)(d)).
l A non-profit company established for purposes of managing the collective interests common to
all its members may qualify for an exemption in respect of levies received by or accrued to it, as
well as a partial exemption in respect of other receipts and accruals (s 10(1)(e)). This exemption
applies to home owners’ associations.
In addition to the above exemptions, special deductions are available to non-profit companies. A
non-profit company, that carries on any sporting activity that falls under a code of sport administered
and controlled by a national federation, may deduct certain expenditure incurred in the development
or promotion of the sport or payments made to other entities for this purpose, despite not necessarily
carrying on a trade (s 11E).
The definition of a ‘company’ also includes associations established to serve a

specified purpose beneficial to the public or a section of the public. A number
Please note! of exemptions are available in respect of certain of associations. Exemptions
are discussed in detail in chapter 5.
19.5.4 Small business corporations (s 12E)

Small businesses have the potential to create employment. In this manner they can contribute to
economic growth. A number of tax concessions have been introduced since 2001 to assist these
businesses. Small business corporations, as discussed below, and micro businesses, which could
elect to be subject to turnover tax (see chapter 23), benefit from these concessions.
Definition of small business corporation

To qualify as a ‘small business corporation’, the following requirements must be complied with:
l The entity must be a close corporation, co-operative, private company or personal liability com-
pany (as contemplated in s 8(2)(c) of the Companies Act).
l All the holders of shares (proprietary interests) in the entity must at all times during the year of
assessment be natural persons.
l The entity’s gross income may not exceed R20 000 000.
If the entity carried on a trade for less than 12 months, the amount of R20 million
must be apportioned to reflect the number of months that the entity carried on a
Please note! trade, relative to 12 months. For purposes of this calculation, an entity must be
deemed to have carried on a trade for a full month if it carried on such a trade
during part of a month.
l The shareholders of the entity may at no time during the year of assessment hold shares or have
an interest in any other company, other than
– an interest in a company listed on a South African exchange
– an interest in a portfolio of certain foreign investment schemes that are comparable to a
portfolio of a collective investment scheme in participation bonds or a portfolio of a collective
investment scheme in securities, where members of the public are invited to contribute to and
hold interests in the scheme
– an interest in a portfolio of a collective investment scheme in property that qualifies as an REIT
in accordance with the listing requirements of an approved exchange
– an interest in a body corporate (as contemplated in s 10(1)(e)(i)(aa))
– an interest in a share block company (as contemplated in s 10(1)(e)(i)(bb))
– an interest in a non-profit company as defined in s 1 of the Companies Act, 2008, which was
formed solely for purposes of managing the collective interests common to all its members (as
contemplated in s 10(1)(e)(i)(cc))
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– less than 5% of the interest in a social or consumer co-operative (or a co-operative burial
society)
– an interest in a friendly society
– less than 5% of the interest in a primary savings co-operative bank or private savings and
loans co-operative bank
– an interest in a venture capital company as defined in s 12J (see chapter 12)
– an interest in a company, close corporation or co-operative that has not carried on any trade
during any year of assessment and has not during any year of assessment owned assets with
a market value of more than R5 000, or
– any terminating company, co-operative or close corporation. The company must have taken the
steps contemplated in s 41(4) to liquidate, wind-up or deregister. If the company withdraws
any of these steps, or does anything to invalidate a step with the result that the company will
not be liquidated, the other company in which the terminating company's shareholders hold
shares, will no longer qualify as a small business corporation.
l The entity may not be a ‘personal service provider’ as defined in par 1 of the Fourth Schedule
(see 19.5.6 and chapter 10).
l Not more than 20% of the total receipts and accruals of the entity (excluding those of a capital
nature) may consist collectively of investment income and income from rendering personal
services.
This last requirement, which relates to the nature of the business activities of the entity, excludes
companies that generate passive income or income from personal effort of skilled connected persons
from the concession.
Investment income, as contemplated above, refers to
l any income in the form of dividends, foreign dividends, royalties, rental derived from immovable
property, annuities or income of a similar nature
l interest from interest-bearing instruments (s 24J) (with the exception of interest on certain co-
operative banks) amounts in respect of interest rate agreements (s 24K) and any other income
that is subject to the same treatment as income from money lent in terms of the tax legislation,
and
l any proceeds derived from investment or trading in financial instruments (including futures,
options and other derivatives), marketable securities or immovable property.
The term ‘personal service’ is
l any service in the field of accounting, actuarial science, architecture, auctioneering, auditing,
broadcasting, consulting, draftsmanship, education, engineering, financial service broking,
health, information technology, journalism, law, management, real estate broking, research, sport,
surveying, translation, valuation or veterinary science
l if, and to the extent, that the service is performed personally by any person who holds an interest
in that company, co-operative or close corporation or by any connected person in relation to such
a person.
The services are, however, not regarded as personal services if the company, co-operative or close
corporation employs at least three full-time employees throughout the year of assessment in its
business of rendering services. A person who holds a share in the company or is a member of the
co-operative or close corporation, as well as their connected persons, must be disregarded for
purposes of determining whether the entity employs at least three full-time employees in the manner
described. This exclusion encourages entities to create full-time employment opportunities for per-
sons other than the owners of the businesses rendering the services listed and their relatives.
749
Tax benefits
The taxable income of a small business corporation is subject to normal tax at reduced tax rates. The
following tax rate structure applies to these entities for any year of assessment ending during the
12 months ending 31 March 2022:
Taxable income
Where the taxable income – Rates of tax
Does not exceed R87 300 ....................................... 0% of taxable income
Exceeds R87 300 but does not exceed
R365 000.................................................................. 7% of the amount by which the taxable
income exceeds R87 300
Exceeds R365 000 but does not exceed
R550 000.................................................................. R19 439 plus 21% of the amount by which
the taxable income exceeds R365 000
Exceeds R550 000 ................................................... R58 289 plus 28% of the amount by which
the taxable income exceeds R550 000
Small business corporations enjoy the benefit of accelerated tax allowances, such as an immediate
100% write-off in respect of manufacturing assets (s 12E(1)) and, at the election of the taxpayer,
either a write-off under s 11(e) or a 50:30:20 write-off rate under s 12E(1A) over a three-year period
for all other assets (see chapter 13). These accelerated allowances should assist in alleviating
some cash-flow pressures that a small business may experience when investing in capital assets.
In addition, a small business corporation qualifies as a ‘small, medium or micro-sized enterprise’.
These entities enjoy an income tax exemption in respect of amounts received from a small business-
funding entity, as discussed in more detail in chapter 5 (s 10(1)(zK)). Expenditure funded from such
amounts received from small business-funding entities do, however, not have the following conse-
quences, which would otherwise result in a duplication of benefits:
l a deduction in respect of expenditure to acquire trading stock (s 23O(2))
l expenditure included in the base cost of assets (s 23O(5))
l deductions or allowances in respect of assets (s 23O(3))
l a deduction in respect of expenditure that would otherwise qualify for deduction in terms of s 11
(s 23O(6)).
Example 19.15. Small business corporation
EngCo is a private company with two shareholders who are both natural persons. EngCo
provides a broad range of engineering services to mines in South Africa. EngCo’s shareholders
do not own shares in any other company. EngCo employs 10 full-time employees who are not
connected to its shareholders.
During its 2022 year of assessment that ended on 31 March 2022, EngCo’s turnover was
R15 million, none of which relates to investment income. Its taxable income before deducting any
capital allowances was R1,5 million. On 1 May 2021 EngCo acquired a manufacturing asset for
R300 000 and IT equipment for R250 000.
Discuss whether EngCo qualifies as a small business corporation and calculate its income tax
liability for its 2022 year of assessment.
SOLUTION
EngCo qualifies as a small business corporation because: 1) it is a private company; 2) all its
shareholders are natural persons; 3) its shareholders do not own shares in any other company;
4) its turnover for the year of assessment was below R20 million; 5) since it employs more than
three full-time employees who are not connected to its shareholders, its engineering services do
not qualify as ‘personal services’; and 6) its income from investments and personal services are
therefore not more than 20% of its total receipts.
EngCo’s tax liability for its year of assessment ending on 31 March 2022 is:
Taxable income before capital allowances ................................................................ R1 500 000
Less: Capital allowance on manufacturing asset (R300 000 × 100%) (s 12E(1)) ...... (300 000)
Less: Capital allowance on IT equipment (R250 000 × 50%) (s 12E(1A))) ................ (125 000)
Taxable income.......................................................................................................... R1 075 000
Tax liability (R58 289 + ((R1 075 000 – R550 000) × 28%)) ....................................... R205 289
750
Remember
For a detailed discussion of s 12E, refer to Interpretation Note No. 9 (Issue 7) (issued on 25 June
2018).
19.5.5 Companies operating in special economic zones (ss 12R and 12S)
The Special Economic Zones Act 16 of 2014 came into operation from 9 February 2016. This
legislation provides for the designation, promotion, development, operation and management of
Special Economic Zones (SEZs). It aims to promote industrial and economic growth and to contribute
to developmental goals. Amongst other things, the SEZ regime provides tax benefits to persons con-
ducting new or expanded businesses within these zones.
Qualifying companies
The tax benefits available to companies operating in SEZs are limited to qualifying companies. For
purposes of the tax concessions, a ‘special economic zone’ refers to a special economic zone
defined in the Special Economic Zones Act (designated as such in terms of s 23(6) of that
legislation), which has been approved by the Minister of Finance to benefit from the tax concession
(definition of ‘special economic zone’ in s 12R(1) and s 12R(3)).
A ‘qualifying company’ is a company that meets all the following requirements (definition of qualifying
company in s 12R(1)):
l it is incorporated by or under any law in force in South Africa or in any part thereof, or that has its
place of effective management in South Africa
l it carries on a trade in a special economic zone, as approved for tax purposes
l the trade is carried on from a fixed place of business situated within a special economic zone
l it derives at least 90% of its income from the carrying on of such trade within one or more special
economic zones
l for years of assessment ending on or after 1 January 2019, the company’s trade must have
– commenced before 1 January 2013 in a location that was subsequently designated as a SEZ
– commenced on or after 1 January 2013 in a location designated (or subsequently designated)
as a SEZ and not been previously carried on by the company or a connected person in South
Africa, or
– commenced on or after 1 January 2013 in a location designated (or subsequently designated)
as a SEZ and involve the production of goods not previously produced by the company or a
connected person in South Africa, use new technology in its production processes or repre-
sent an increase in the production capacity of the company in South Africa.
Certain types of business activities are not eligible for these benefits. A company is not a qualifying
company if it conducts any of the following activities classified under ‘Section C: Manufacturing’ in
the most recent Standard Industrial Classification Code (referred to as the SIC Code) issued by
Statistics South Africa (s 12R(4)(a) and (b)):
l distilling, rectifying and blending of spirits (SIC Code 1101)
l manufacturing of wines (SIC Code 1102)
l manufacturing of malt liquors and malt (SIC Code 103)
l manufacturing of tobacco products (SIC Code 12)
l manufacturing of weapons and ammunition (SIC Code 252)
l manufacturing of bio-fuels if that manufacturing negatively impacts on food security in the
Republic, or
l any additional activities classified in the SIC Code, which the Minister of Finance designated by
Notice in the Government Gazette.
Companies that pose a risk of abuse of the reduced tax rate in terms of the concession are also
excluded from being qualified companies. A company is not a qualifying company if more than 20%
of its deductible expenditure is incurred, or its income is received or accrues from, in transactions
with the following connected persons:
l a resident, or
l a non-resident, if the income or expenditure is attributable to a permanent establishment of the
non-resident in South Africa (s 12R(4)(c)).
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The taxable income of both these connected persons is subject to tax in South Africa. The risk exists
that, in the absence of the exclusion, profits could potentially be shifted to the qualifying company.
The tax concessions available to qualifying companies cease to apply in respect of any year of
assessment commencing on or after the later of 1 January 2031.
Tax benefits
Income tax is levied at a rate of 15% on the taxable income attributable to income derived by a
qualifying company within a SEZ.
If a small business corporation is also a qualifying company that has taxable

income attributable to income derived within a special economic zone (SEZ), then
the tax payable on that amount of taxable income must be the lesser of the tax
determined in terms of the above table or 15% (current rate for qualifying com-
Please note! panies under s 12R). This means that a small business corporation that operates
a business within a SEZ will not forfeit the advantages of the SEZ regime merely
because it is a small business corporation. It will benefit from being taxed at the
most advantageous rate of tax.
A qualifying company within SEZ qualifies for accelerated capital allowances in terms of s 12S (see
chapter 13). There are also employment tax incentive benefits available in respect of employees
employed within these SEZs (see chapter 10).
19.5.6 Personal service providers (par 1 of the Fourth Schedule and s 23(k))
Taxpayers attempt to save tax by rendering services to employers through a company or trust rather
than in their personal capacity. In the absence of specific provisions to curb the tax benefits that may
arise from this practice, the use of a company may be beneficial from the perspective of the timing of
tax payments, the tax rate as well as the deductions available against the income.
The anti-avoidance provisions that apply to personal service providers (defined in par 1 of the Fourth
Schedule (see chapter 10)) target such companies (and trusts used for the same purpose). If the
personal service provider is a company, the normal tax rate is 28%. Dividends paid by this company
are subject to dividends tax at a rate of 20%.
There are limited deductions available to the company (s 23(k)). This negates the benefit that such a
company could otherwise have gained from deductions in determining its taxable income. The items
in respect of which deductions are allowed are to a large extent comparable with the deductions that
a natural person may claim against remuneration (s 23(m)). A notable difference is the deduction
allowed for amounts paid to employees, which is income for the employee. This deduction prevents
these amounts from ultimately being taxed twice if it is paid on to employees of the personal service
provider. Chapter 6 discusses the deductions available to personal service providers.
The normal tax payable by a personal service provider is collected in the form of employees’ tax,
similarly to a natural person who earns remuneration from employment, and provisional tax, similar to
any other company. This employees’ tax must be withheld at the company tax rate of 28%.
Chapter 10 discusses the employees’ tax implications of personal service providers in more detail.
19.5.7 Real Estate Investment Trusts (REITs) (s 25BB)

Real estate investment trusts (REITs) are listed companies that manage a portfolio of real estate
properties. From a commercial and investment perspective, an REIT offers an investor the benefit of
investing in a portfolio of immovable properties. This overcomes the problem of raising funds to invest
in and be exposed to the risks of a limited number of properties. Investors enjoy the benefit of not
having to manage the properties. The interest that the investor has in a property investment scheme
should also be more liquid than owning the underlying property itself.
REITs provide investors with ongoing dividend income and the potential for long-term capital gains
through share price appreciation. The dividend income is derived from rental income earned by the
REIT, while capital appreciation is based on the increase in the value of the properties in which the
REIT has an interest.
In the absence of a special tax regime for REITs, investors will derive exempt dividend income from
the REIT. Interest and other expenditure incurred by the investor to acquire the shares in the REIT
and produce this dividend income would not be deductible as it is not incurred in the production of
income or for purposes of carrying on a trade. This would be the case despite the fact that the
752
dividends are indirectly derived from rental income, which would have been income had the investor
acquired the interest in the properties directly. Prior to the introduction of the REIT regime investors
could invest in property unit trusts (PUTs), where rental income flowed through the entity to the
investor, or property loan stocks (PLSs), where a large portion of the value of the investment was
attributed to a debenture in respect of which the investor earned taxable interest income.
A ‘linked unit’ is defined in s 1 as a unit comprising a share and a debenture in a

Please note! company, where that share and that debenture are linked and are traded together
as a single unit. Such a linked unit typically exists in a PLS structure.
The REIT regime was introduced in 2012. This regime introduced tax rules to facilitate flow-through
treatment for distributed rental income and ensure that capital gains in respect of property are only
taxed in the hands of the investor.
Definition of an REIT
An REIT is defined as a resident company of which the equity shares are listed on a South African
exchange as shares in an REIT in accordance with the listing requirements of that exchange. The
Director-General of the National Treasury must approve these listing requirements. The requirements
should thereafter be published by the appropriate authority (as defined in s 1 of the Financial Markets
Act) in terms of s 11 of the Financial Markets Act or by the Financial Sector Conduct Authority
(definition of ‘REIT’ in s 1). The listing requirements of the JSE, as an exchange where shares may be
listed as REIT shares, include, in broad terms, that
l The REIT entity must be primarily engaged in property activities, which include the holding and
development of properties for letting and retention as investments or the purchase of land for
development of property for retention as investments. The entity must have a minimum amount of
gross assets reflected in its financial statements.
l The REIT entity’s level of gearing must be below certain prescribed limits.
l The REIT entity must derive a specified portion of its revenue from rental revenue and distribute a
specified portion of its distributable profits within a specified period after its financial year-end.
Basic tax regime

The basic tax regime that applies to REITs deals with two components of the investments made,
namely treatment of annual income on the property investments (yield) and the treatment of gains
that may arise upon disposal.
Annual income of the REIT

REITs are partial conduits for tax purposes. Amounts received by the REIT are not subject to tax in
the REIT’s hands if distributed to the shareholders by way of a qualifying distribution (discussed
below). The REIT can deduct qualifying distributions made in respect of a year of assessment, pro-
vided that the company is an REIT on the last day of the year of assessment (s 25BB(2)(a)(i)). The
deduction in respect of qualifying distributions may not exceed the taxable income of the REIT before
taking into account assessed losses carried forward and its taxable capital gains (s 25BB(2)(b)). This
deduction can therefore not create an assessed loss.
753
A number of specific deductions are available when calculating the taxable

income of an REIT:
l Where an REIT is a beneficiary of a foreign vesting trust, which is liable for
income tax in the country where it is formed, the REIT may deduct a portion of
the foreign tax payable by the trust from its income. This amount is the foreign
tax payable by the trust that is attributable to the REIT’s interest in the trust,
without a right of recovery of that tax (other than an entitlement to carry back
losses arising during any year of assessment). The deduction for such foreign
tax is allowed before the deduction for qualifying distributions by the REIT is
taken into account (s 25BB(2A)(a)).
Please note! l An REIT may deduct any foreign taxes on income. The amount of this de-
duction is limited to the taxable income attributable to the amounts in respect
of which such taxes are payable. The deduction is allowed before taking the
qualifying distribution deduction and the deduction for donations (see below)
into account (s 25BB(2A)(b)).
l REITs may deduct the amounts of bona fide donations made by it to organisa-
tions contemplated in s 18A(1)(a) or (b) (see chapter 7). The deduction in
respect of donations may, however, not exceed 10% of the REIT’s taxable
income before the deduction for qualifying distributions (s 25BB(2A)(c)).
For years of assessment commencing on or after 1 January 2021, the participation
exemption in s 10B(2)(a) does apply to foreign dividends received by or accrued
to the REIT (s 25BB(2A)(d))
Distributions received from an REIT are subject to normal tax in the recipient shareholders’ hands
(the dividend received does not qualify for exemption in terms of s 10(1)(k)(i)(aa)). The distribution is
not subject to dividends tax (s 64F(1)(l)). Dividends that arise when an REIT acquires its own shares
and or pays dividends to non-residents by REITs are exempt from normal tax. These dividends are
subject to dividends tax.
l Interest received by a person in respect of a debenture that forms part of a

linked unit (see PLS above) in a company that is an REIT or controlled com-
pany is deemed to be a dividend received by that person. The treatment of
this interest is similar to the treatment of a dividend, as discussed above
(s 25BB(6)(a)).
l Interest received by an REIT or controlled company in respect of a debenture
Please note! that forms part of a linked unit in a property company is similarly deemed to
be a dividend received by the REIT or controlled company (s 25BB(6)(b)).
l Interest paid in respect of a linked unit by an REIT or controlled company is
deemed to be a dividend paid for dividends tax purposes and not interest for
the purposes of the withholding tax on interest (s 25BB(6)(c)).
l Interest paid by an REIT or controlled company could be a qualifying distri-
bution (definition of qualifying distribution in s 25BB(1)).
Gains on the disposal of interests in properties

A company that is an REIT on the last day of its year of assessment should disregard capital gains or
capital losses in respect of the disposal of the following assets (s 25BB(5)):
l immovable property
l a share or a linked unit in a company that is an REIT on the date of disposal, or
l a share in a company that is a controlled company on the date of disposal.
The exemption of these disposals from capital gains tax in the hands of the REIT ensure that
investors are not exposed to capital gains tax when the REIT disposes of its interest in properties and
again when the investor disposes of its interest in the REIT. Gains realised in respect of these
disposals are therefore only subject to tax when the investor disposes of its interest in the REIT.
A company that is an REIT on the last day of its year of assessment is not entitled to deduct allow-
ances in respect of immovable property (s 25BB(4)). The disposal of the property should not give rise
to any taxable recoupments in the hands of the REIT if no allowances were deducted.
754
An REIT may not deduct the allowances in respect of immovable property in

terms of (see chapter 13 for details on the capital allowances)
l s 11(g) – deduction in respect of leasehold improvements
l s 13 – deduction in respect of buildings used in a manufacturing process
l s 13bis – deduction in respect of buildings used by hotel keepers
Please note!
l s 13ter – deduction in respect of residential buildings
l s 13quat – deduction in respect of the erection or improvement of buildings
in the urban development zones
l s 13quin – deduction in respect of commercial buildings, and
l s 13sex – deduction in respect of certain residential units.
Example 19.16. Basic REIT taxation
Kulungile Properties Ltd is a South African company with a February financial year-end. Its
shares are listed as real estate investment trust (REIT) shares on the JSE. The company owns
three malls, all three of which are situated in Johannesburg. The company’s main business is to
earn rental income from these properties. The malls were all purchased on 1 March 2021 at a
total cost price of R10 000 000 each.
Kulungile Properties Ltd has 1 000 000 shares in issue. These shares are held by a number of
shareholders, including Mr Njabulo Dumisa and Mr Jan Botha.
Mr Dumisa holds 2% of the shares of Kulungile Properties Ltd, which he acquired at a cost of
R240 000. He borrowed an amount of R150 000 from a local bank to acquire the shares, while he
funded the remaining R90 000 from surplus cash reserves. He incurs annual interest on this loan
at a rate of 12% per annum. Mr Botha owns 1% of the issued shares, which he acquired at a cost
of R125 000.
The following is an extract from Kulungile Properties Ltd’s statements of financial position for the
three years from 2022 to 2024:
As at As at As at
28 February 28 February 29 February
2022 2023 2024
Investment property at fair value: R36 000 000 R46 000 000 R52 000 000
Mall 1 ............................................ R12 000 000 R13 000 000 R15 000 000
Mall 2 ............................................ R12 000 000 R13 000 000 R15 000 000
Mall 3 (note 1) ............................... R12 000 000 – –
Mall 4 ............................................ R20 000 000 R22 000 000
Other current assets (rent receivables,
deposits, cash, etc.) .............................. R1 000 000 R1 500 000 R1 800 000
Total assets ............................................ R37 000 000 R47 500 000 R53 800 000
Long-term liabilities secured by the
investment properties above.................. R18 500 000 R17 500 000 R17 300 000
Equity:
Share capital ....................................... R12 000 000 R12 000 000 R12 000 000
Retained income: R 6 500 000 R18 000 000 R24 500 000
Opening balance .......................... – R6 500 000 R18 000 000
Net rental income for the year
(rental income less funding costs
and operating expenditure)........... R2 000 000 R3 000 000 R4 000 000
Unrealised fair value movements
for the year .................................... R6 000 000 R3 000 000 R 6 000 000
Accounting gain on disposal of
Mall 3 ............................................. – R8 000 000 –
Distribution of profits to
shareholders (assume distribution
made at the end of February every
year based on the results for that
year) .............................................. (R1 500 000) (R2 500 000) (R3 500 000)
Total equity and liabilities ....................... R37 000 000 R47 500 000 R53 800 00
Listed price per share ............................ R19 R31 R37
continued
755
Note 1
On 31 August 2022 Kulungile Properties Ltd sold Mall 3 for R20 000 000. It re-invested most of
the gains realised when it acquired ownership of Mall 4 at a cost of R19 000 000.
Note 2
On 29 February 2024, after having received the final distribution for the year, Mr Botha sold his
entire shareholding at the current listed share price of R37 per share to another shareholder.
Calculate the effect of the above information on the taxable income of Kulungile Properties Ltd,
Mr Dumisa and Mr Botha for the 2022, 2023 and 2024 years of assessment. In addition, you are
required to explain the dividends tax implications of the distributions made to the shareholders.
SOLUTION
2022 2023 2024
Taxable income of Kulungile Properties Ltd:
Net rental income (given) ............................................. R 2 000 000 R3 000 000 R4 000 000
Fair value gains not included in taxable income
(note 3) ......................................................................... – – –
Qualifying distributions (s 25BB(2)(a)(i)) (note 1) ........ (R1 500 000) (R2 500 000) (R3 500 000)
No capital allowance on buildings (s 25BB(4)) ............ – – –
Sale of Mall 3 (note 3):
– Capital gain disregarded in terms of s 25BB(5) ..... –
– No recoupments when the property is disposed
of ........................................................................... –
Taxable income ............................................................ R500 000 R500 000 R500 000
2022 2023 2024

Mr Dumisa:
Dividend received from Kulungile Properties Ltd ....... R30 000 R50 000 R70 000
(2022: R1 500 000 × 2%; 2023: R2 500 000 × 2%;
2024: R3 500 000 × 2%) (included in gross income,
par (k))
Dividend exemption does not apply to distributions
received from REITs (s 10(1)(k)(i)(aa)) (note 1) ........... – – –
Interest incurred in the production of REIT dividends
(note 2) ......................................................................... (R18 000) (R12 000) (R12 000)
Effect on taxable income .............................................. R12 000 R38 000 R58 000
No dividends tax must be withheld on the distributions by the REIT as the dividends are income
in Mr Dumisa’s hands (s 64F(1)(l)).
Mr Botha:
Dividend received from Kulungile Properties Ltd ......... R15 000 R25 000 R35 000
(2022: R1 500 000 × 1%; 2023: R2 500 000 × 1%;
2024: R3 500 000 × 1%) (included in gross income,
par (k))
Dividend exemption does not apply to distributions
received from REITs (s 10(1)(k)(i)(aa)) (note 1) ............. – – –
Sale of shares in Kulungile Properties Ltd (assuming
that the shares were held for investment purposes)
Taxable capital gain: (note 3)
Proceeds (1 000 000 × 1% × R37) ..... R370 000
Base cost ............................................. (R125 000)
Capital gain .......................................... R245 000
Annual exclusion .................................. (R40 000)
Taxable capital gain, included at 40% R205 000 R82 000
Effect on taxable income ................................................ R15 000 R25 000 R117 000
continued
756
No dividends tax must be withheld on the distributions by the REIT as the dividends are income
in Mr Botha’s hands (s 64F(1)(l)).
Note 1
As all Kulungile Properties Ltd’s income consists of rental income, the distributions made meet
the definition of qualifying distributions (see below). The amounts that are deducted in the hands
of the REIT (and therefore not included in its taxable income) are included in the taxable income
of each shareholder to whom the distribution is made.
Note 2
As the REIT distributions received by Mr Dumisa are not exempt, it is income. The interest is
incurred in the production of this income. It may be debatable whether the income produced in
carrying on a trade, as contemplated by s 24J(2), is deductible. For purposes of this example,
this is presumed to be the case.
Note 3
Any capital gain made in respect of the disposal of a property by an REIT must be disregarded.
Capital gains are not taxed at the level of the REIT, but rather when the gain is realised in the
hands of the investor (in this case, Mr Botha). When Mr Botha sells his shares in the REIT for R37
each, this value of the shares sold reflects his interest in the realised capital gain when Mall 3
was sold by the REIT in 2022 as well as his interest in the unrealised gains that exist in respect of
Malls 1, 2 and 4. If the REIT were to dispose of its interest in Malls 1, 2 or 4, it would not be sub-
ject to capital gains tax on that disposal. If it had been, gains derived from the same growth in
the value of the properties may have been subject to capital gains tax in the hands of both
Mr Botha and the REIT.
A controlled company is a company that is a subsidiary, as defined in IFRS 10, of

an REIT. This entity may be a resident or foreign company. In practice, an REIT
may hold some of its investments in property through such subsidiaries under its
control.
Please note! The tax treatment of qualifying distributions made, exemption of distributions
received in the hands of the recipient, eligibility for allowances in respect of
immovable property and capital gains tax in respect of the disposal of certain
property interests by controlled companies mirrors that of an REIT. This achieves
flow-through taxation throughout the structure in which an REIT owns its property
interests.
Qualifying distributions
The concept of a qualifying distribution is central to the flow-through tax treatment of an REIT. This
determines the amount that is taxed in the hands of the recipient rather than the REIT. As indicated
earlier, an REIT is entitled to deduct any qualifying distribution made in respect of a year of assess-
ment, if the company is an REIT at the end of the year of assessment.
The same mechanism applies to qualifying distributions made by controlled companies. Any
reference to an REIT in the discussion below therefore similarly applies to a controlled company
(s 25BB(2)).
The definition of a qualifying distribution in s 25BB has two elements.
Firstly, it specifies which payments made by an REIT may be qualifying distributions. A qualifying dis-
tribution can be
l dividends paid or payable by the company in respect of an equity share (other than in the form of
a share buyback), or
l interest incurred in respect of a debenture that forms part of a linked unit in the company,
if the amount thereof is determined with reference to the financial results of the company may be
qualifying distributions.
The second element of the definition relates to the source and quantum of the amounts distributed as
a dividend. For a distribution to be a qualifying distribution, the amount of the dividend must be
determined with reference to the financial results of the company (as reflected in the financial
statements for the year of assessment in which the deduction is allowed). At least 75% of the gross
income received by or accrued to the REIT in the preceding year of assessment must consist of
rental income (see below) (par (b) of the definition of ‘qualifying distribution in s 25BB(1)). In relation
to the first year of assessment that the company qualifies as an REIT, this requirement must be
applied with regard to the gross income of the REIT for that first year of assessment (par (a) of the
definition of ‘qualifying distribution in s 25BB(1)).
757
Any amounts imputed into the income of the REIT in relation to controlled foreign
Please note! companies are not included in gross income used to apply the 75% test.
The term ‘rental income’ has a wider meaning for purposes of applying the 75% test than its ordinary
meaning. This wider definition is necessary to ensure that not only amounts received from the actual
rental of properties, but also the yield from investments in property-owning companies that pass
through the REIT to the investor, are acknowledged for purposes of achieving flow-through taxation.
Rental income, for purposes of s 25BB, consists of
l the aggregate of amounts received or accrued:
– for the use of immovable property, which would generally consist of rentals received. This
includes penalties and interest charged for the last payment of these amounts (par (b)(i) of the
definition of ‘rental income’)
– as a dividend (other than consideration in a share buyback) from a company that is an REIT at
the time that the dividend is distributed (par (b)(ii) of the definition of ‘rental income’)
– as a qualifying distribution from a company that is a controlled company at the time of the
distribution (par (b)(iii) of the definition of ‘rental income’)
– as a dividend or foreign dividend from a company that is a property company at the time of the
distribution (par (b)(iv) of the definition of ‘rental income’)
– that recoup or recover amounts previously deducted in terms of ss 11(g), 13, 13bis, 13ter,
13quat, 13quin or 13sex in terms of s 8(4)(a) (see chapter 13), and
l the total foreign exchange gains, as contemplated in s 24I (see chapter 15), in respect of any of
the above items that are exchange items or any exchange item that serves as a hedge thereto
(par (c) of the definition of ‘rental income’).
A property company is a company

l where an REIT or a controlled company (whether alone or together with any
other company forming part of the same group of companies as the REIT or
controlled company) holds 20% or more of the company’s equity shares or
linked units, and
Please note! l where 80% or more of the value of the company’s assets is directly or
indirectly attributable to immovable property (the value of the company’s
assets is the value reflected on the annual financial statements of the com-
pany for the previous year of assessment prepared in accordance with the
Companies Act or IFRS).
(s 25BB(1))
19.5.8 Co-operatives (s 27)

The Co-operatives Act 14 of 2005 governs co-operatives in South Africa. It defines a co-operative as
an autonomous association of persons that united voluntarily to meet their common economic and
social needs and aspirations through a jointly owned and democratically controlled enterprise
organised and operated on co-operative principles. Section 3 of the Co-operatives Act sets out the
principles that a co-operative should comply with and in accordance with which it should operate.
These entities differ from other companies in a number of ways. The differences include, amongst
others, that voting rights are based on membership (each member has one vote). Members are
required to provide capital to the co-operative and may receive a return on this capital at a fixed
percentage that is limited in the constitution. Since the co-operative exists for the common benefit of
its members, it allocates its surpluses to members based on the value of transactions that the
member conducted with the co-operative during a specified period of time.
For income tax purposes, a co-operative is a company and therefore subject to tax on the same
basis as any other company. Section 27 provides specific rules for deductions in the hands of a co-
operative when it distributes surplus amounts to its members (ss 27(1), 27(2)(a) and (h), 27(8)).
These provisions essentially determine the amount that shifts from the taxable income of the co-
operative to the member. It implicitly also governs the amount of the co-operative’s surplus that will
be taxed in its own hands and be taxed as a dividend upon distribution. Section 27 provides for
special allowances in respect of certain buildings of agricultural co-operatives (ss 27(2)(b) and (3)
to (5)).
758
Section 27 is hampered by the fact that many references in this provision refer to the previous
legislation that governed co-operatives. The Department of Trade and Industry has recommended
that the tax regime applicable to co-operatives should be reformed, but this has not yet happened to
date.
759
20 Companies: Changes in ownership and
reorganisations
Pieter van der Zwan

l identify and describe types of shares issued by a company
l determine and calculate the tax implications when a company issues shares or
changes the rights attached to issued shares
l determine and calculate the tax implications when a company buys its own shares
back from shareholders
l determine and calculate the tax implications when shares are disposed of without
roll-over relief
l determine and calculate the tax implications when a business is sold or acquired
without roll-over relief
l identify transactions that qualify for roll-over relief
l determine and calculate the tax implications of a transaction that qualifies for roll-
over relief
l identify the possible application and calculate the impact of anti-avoidance provi-
sions that apply as a result of a transaction that qualified for roll-over relief.
Contents
Page
20.1 Overview ........................................................................................................................... 763
20.2 Shares and changes in shareholding (definition of ‘equity share’ and ‘share’ in s 1) ......... 763
20.2.1. Shares ............................................................................................................... 763
20.2.1.1 Equity shares (definition of ‘equity share’ in s 1) ............................ 764
20.2.1.2 Listed shares (definitions of ‘listed share’ and ‘listed company’
in ss 1 and 9K) ................................................................................ 765
20.2.2 Share issues and changes in rights ................................................................. 765
20.2.2.1 Shares issued for consideration other than cash (s 40CA) ............ 766
20.2.2.2 Shares issued for consideration that does not equal the value of
the shares (s 24BA and definition of ‘value shifting arrangement’
in the Eighth Schedule) ................................................................... 767
20.2.2.3 Capitalisation share issues ............................................................. 769
20.2.2.4 Conversions and changes in rights attaching to an issued share.... 770
20.2.3 Disposal of shares ............................................................................................ 770
20.2.4 Share buyback transactions ............................................................................. 771
20.2.5 Realisation of the value of shares through dividends (s 22B and par 43A of
the Eighth Schedule) ........................................................................................ 773
20.3 Acquisition or disposal of a business ............................................................................... 777
20.4 Corporate rules: Introduction and concepts .................................................................... 779
20.4.1 Group of companies ......................................................................................... 780
20.4.2 Asset classification for purposes of the corporate rules .................................. 782
20.4.2.1 Trading stock .................................................................................. 782
20.4.2.2 Capital asset ................................................................................... 782
20.4.2.3 Allowance asset .............................................................................. 782
20.4.3 Steps to liquidate, wind up or deregister.......................................................... 783
20.4.4 Common relief mechanisms employed in the corporate rules ......................... 783
20.4.4.1 Roll-over of tax values and characteristics ..................................... 783
20.4.4.2 Interaction between the corporate rules and anti-dividend
stripping rules (s 22B(3) and par 43A(3) of the Eighth Schedule) ... 786
20.4.5 Common anti-avoidance mechanisms employed in the corporate rules ......... 787
761
Page
20.5 Special rules: Asset-for-share transactions (s 42)............................................................ 789
20.5.1 Definition and scope ......................................................................................... 790
20.5.1.1 Domestic asset-for-share transaction (par (a) of the definition of
‘asset-for-share transaction’ in s 42(1)) .......................................... 790
20.5.1.2 Cross-border asset-for-share transaction (par (b) of the
definition of ‘asset-for-share transaction’ in s 42(1))....................... 793
20.5.1.3 Exclusions from the scope of s 42 (s 42(8A)) ................................. 793
20.5.2 Relief.................................................................................................................. 794
20.5.2.1 Person who transferred the asset and acquired equity shares in
the company ................................................................................... 794
20.5.2.2 Company that acquired the asset ................................................... 794
20.5.2.3 Asset-for-share transactions involving elements of consideration
other than equity shares (s 42(4) and 42(8)) .................................. 795
20.5.3 Anti-avoidance rules (s 42(5) to 42(7)) ............................................................. 797
20.6 Special rules: Substitutive share-for-share transactions (s 43) ........................................ 799
20.6.2 Relief ................................................................................................................. 799
20.7 Special rules: Amalgamation transactions (s 44) ............................................................. 800
20.7.1.1 Domestic amalgamation transaction (par (a) of the definition of
‘amalgamation transaction’ in s 44(1)) ............................................ 800
20.7.1.2 Cross-border amalgamation transactions (paras (b) and (c) of
the definition of ‘amalgamation transaction’ in s 44(1)) .................. 801
20.7.1.3 Exclusions from the scope of s 44 (s 44(13) and 44(14)) .............. 801
20.7.2 Relief ................................................................................................................. 802
20.7.2.1 Amalgamated company.................................................................. 802
20.7.2.2 Resultant company ......................................................................... 803
20.7.2.3 Shareholders of the amalgamated company ................................. 803
20.7.3 Anti-avoidance rules (s 44(5))........................................................................... 805
20.8 Special rules: Intra-group transactions (s 45) .................................................................. 805
20.8.1.1 Domestic intra-group transaction (par (a) of the definition of
‘intra-group transaction’ in s 45(1)) ................................................. 805
20.8.1.2 Cross-border intra-group transaction (par (b) of the definition of
‘intra-group transaction’ in s 45(1)) ................................................. 806
20.8.1.3 Exclusions from the scope of s 45 (s 45(6)) ................................... 807
20.8.2 Relief ................................................................................................................. 807
20.8.2.1 Transferor company ........................................................................ 807
20.8.2.2 Transferee company ....................................................................... 807
20.8.3 Anti-avoidance rules (s 45(3A), (4), (4A), (4B), (5)).......................................... 808
20.9 Special rules: Unbundling transactions (s 46) ................................................................. 811
20.9.1.1 Domestic unbundling transaction (par (a) of the definition of
‘unbundling transaction’ in s 46(1)) ................................................ 812
20.9.1.2 Cross-border unbundling transaction (par (b) of the definition of
‘unbundling transaction’ in s 46(1)) ................................................ 813
20.9.1.3 Exclusions from the scope of s 46 (s 46(6A), 46(7) or 46(8)) ......... 813
20.9.2 Relief ................................................................................................................. 813
20.9.2.1 Unbundling company ..................................................................... 813
20.9.2.2 Shareholder of the unbundling company ....................................... 814
20.10 Special rules: Liquidation, winding-up and deregistration (s 47) .................................... 816
20.10.1.1 Domestic liquidation distribution (par (a) of the definition of
‘liquidation distribution’ in s 47(1)) .................................................. 816
20.10.1.2 Cross-border liquidation distribution (par (b) of the definition of
‘liquidation distribution’ in s 47(1)) .................................................. 817
20.10.1.3 Exclusions from the scope of s 47 (s 47(6)) ................................... 817
20.10.2 Relief ................................................................................................................. 818
20.10.2.1 Liquidating company ...................................................................... 818
20.10 2.2 Holding company ............................................................................ 818
20.10.3 Anti-avoidance rules (s 47(4))........................................................................... 819
762
20.1–20.2 Chapter 20: Companies: Changes in ownership and reorganisations
20.1 Overview
Businesses are dynamic. Their operations expand internally as a result of innovation or the introduction
new lines of business. A business can also grow externally by acquiring existing businesses that
complement or expand its existing operations or eliminate competition. Such acquisitions can either be
the acquisition of the assets and liabilities of the target business or shares of a company that houses the
business. These acquisitions and disposals have tax consequences.
The ownership structure of companies often also change during their life cycle. In some instances,
this may be a disposal of all the shares of a company to a new shareholder. In others, it could only be
a disposal of some of the issued shares to
l introduce a new shareholder (for example, a share subscription to introduce a new equity investor
or shareholders who comply with the requirements of B-BBEE legislation), or
l allow an existing owners to disinvest (for example, a specific shareholder wishes to exit the
business and liquidate the value that his shares accumulated over time).
Not all internal restructurings result in an effective change in ownership. In some instances, they merely
change the way that existing owners hold their existing ownership interests (for example, a capitalisation
share issue or the introduction of an intermediate holding company into a group structure).
This chapter discusses the tax consequences of changes in ownership and reorganisation of busi-
nesses, with a specific focus on businesses housed in companies. The structure of the discussion of
the elements of the transactions is as follows:
Shareholders Changes in shareholding (20.2)
Roll-over relief
available
(20.4–20.10)
Company that houses Acquisition or disposal of business

a business assets and liabilities (20.3)
Remember
Various legal and regulatory requirements, other than tax, may apply to the transactions consid-
ered in this chapter. These include
l Companies Act (71 of 2008)
l Competition Act (89 of 1998)
l Exchange Control Regulations
l Securities Services Act (36 of 2004)
l Listing requirements of exchanges
l Industry specific legislation and regulations, for example, regulations in the banking or mining
industry.
20.2 Shares and changes in shareholding (definition of ‘equity share’ and ‘share’ in s 1)
Reorganisation transactions often involve the issuance or transfer of shares. This section considers
the characteristics of shares and the classification of shares in the Income Tax Act. The tax implica-
tions of the most common transactions that result in changes in shareholding are discussed in 20.2.2.
to 20.2.5.
20.2.1 Shares
The Companies Act 71 of 2008 defines a share as one of the units into which the proprietary interest in a
profit company is divided (definition of share in s 1 of the Companies Act). A company may issue different
classes of shares. Each class has certain preferences, rights, limitations and other terms associated with
it. The Companies Act does not prescribe the designation of the class of shares that a company should
use. One often encounters ordinary shares, common shares, preference shares or Class A or B shares as
different classes of shares. The company’s memorandum of incorporation normally describes the prefer-
ences, rights, limitations and other terms associated with a specific class of shares of a company (s 36 of
the Companies Act).
763
For income tax purposes, the term ‘share’ refers to any unit into which the proprietary interest in a
company is divided (definition of ‘share’ in s 1(1)). Since this definition is aligned with that of the
Companies Act, one would expect any share described in a company’s memorandum of incorpor-
ation to generally also be a share for income tax purposes.
20.2.1.1 Equity shares (definition of ‘equity share’ in s 1)

The rights attached to certain shares may be so limited that it becomes questionable whether holders
of these shares truly participate in the ownership of the company. The Act distinguishes between
equity shares and shares that are not equity shares. An ‘equity share’ is any share in a company
other than a share that does not carry rights to participate beyond a specified amount in respect of
dividends and returns of capital (definition of ‘equity share’ in s 1(1)). A share that presents its holder
with a limited right to participate in return of capital and dividends is similar to a debt instrument in
many respects. These shares are not equity shares.
Example 20.1. Classification of shares
Zebra Ltd’s memorandum of incorporation provides for the following classes of shares to be
issued by the company:
l Ordinary shares: Each ordinary share entitles the shareholder to one vote. The ordinary
shareholders are entitled to receive dividend distributions and returns of capital without any
limitation after all other classes of shares have received their distributions.
l Preference shares: A preference share does not entitle the shareholder to any voting rights
except in relation to matters that directly affect their entitlement to dividends. Each pref-
erence share will be issued for R100 000. Each shareholder is entitled to a return of capital to
a maximum amount of the R100 000 initially contributed when the share was issued. In
addition, the preference shareholders are entitled to an annual cumulative dividend equal to
8% of the issue price of the preference share (i.e. R100 000 × 8%).
l Class B shares: Each Class B shareholder has one vote in relation to affairs affecting
Zebra Ltd’s manufacturing division. Each Class B share will be issued for R100 000. The
shareholders are entitled to returns of capital to a maximum amount of the R100 000 initially
contributed when the share was issued. Class B shareholders are entitled to annual divi-
dends based on the profits of Zebra Ltd’s manufacturing division for the period.
Which of the shares that Zebra Ltd is authorised to issue will be equity shares?
SOLUTION
A share is not an equity share if it does not have the right to participate in dividend distributions
or returns of capital beyond a specified amount. All other shares are equity shares. Voting rights
do not affect the classification of shares as equity shares.
Ordinary shares
An ordinary shareholder is entitled to dividend distributions or returns of capital from any profits
remaining after distributions have been made in respect of other classes of shares. Neither of
these distributions is limited to a specified amount. The ordinary shares are equity shares.
Preference shares
The preference shareholders may not receive returns of capital beyond the initial issue price of
R100 000. They are also not entitled to receive dividends beyond an amount of R8 000 per
annum. As the rights to participate in both dividends and returns of capital are limited to speci-
fied amounts, the preference shares are not equity shares.
Class B shares
The Class B shareholders may not receive returns of capital beyond the initial issue price of
R100 000. The dividend distributions to which they are entitled are not limited to a specified
amount, but rather depend on the profits of the manufacturing division. As these profits vary, the
amount of distributions to Class B shareholders vary without any limitation on the amount. The
Class B shares are equity shares.
The outcome would have been similar had the Class B shares carried a fixed or limited right to
dividends, but had the right to participate in returns of capital beyond a specified amount.
764
20.2 Chapter 20: Companies: Changes in ownership and reorganisations
Remember
The distinction between equity shares and shares that are not equity shares is relevant in the
following instances:
l Application of anti-avoidance provisions to deny persons who do not hold true ownership
interests in a company from enjoying the tax benefits of ownership. An example of this
includes the anti-avoidance rules aimed at equity instruments with debt characteristics (ss 8E
and 8EA) (see chapter 16).
l Persons who hold or acquire a true ownership interest (equity share) in a company may be
entitled to favourable tax treatment. The converse is also true in the sense that this favourable
tax treatment is denied for shares that are not equity shares. Examples of instances where
favourable tax treatments depend on the classification of shares as equity shares include:
– Classification of companies as forming a group of companies (see 20.4.1). This entitles
the companies to the benefits of roll-over treatment when undertaking certain reorganisa-
tion transactions (see 20.4 to 20.10) or exclusion from the rules that apply to concessions
and compromises when restructuring debt obligations within the group (s 19 and par 12A
of the Eighth Schedule) (see chapters 13 and 17).
– Roll-over relief that is only available to transactions involving equity shares (ss 42, 44 and
46) (see 20.4 to 20.10).
– The participation exemption in respect of yields derived from substantial ownership of
foreign companies (s 10B and par 64B of the Eighth Schedule) (see chapter 21).
– Tax concessions based on the acquisition of an ownership interest in the underlying busi-
ness and related risks when acquiring equity shares in a company (for example s 24O) (see
chapter and 16).
20.2.1.2 Listed shares (definitions of ‘listed share’ and ‘listed company’ in ss 1 and 9K)
There are provisions in the Act that distinguish between listed companies (or shares of listed com-
panies) and unlisted companies. For example, in the corporate rules, listed companies are generally
more eligible to qualify for relief.
A listed share is any share listed on an exchange as defined in s 1 of the Financial Markets Act and
licensed under s 9 of that Act (definition of ‘listed share’ in s 1). A listed company is a company
whose shares or depository receipts in respect of its shares are listed on: (definitions of ‘listed
company’ in s 1 and ‘recognised exchange’ in par 1 of the Eighth Schedule)
l an exchange as defined in s 1 of the Financial Markets Act and licensed under s 9 of that Act (a
domestic exchange), or
l a stock exchange in another country which has been recognised by the Minister as being similar
to a domestic exchange by notice in the Gazette (a recognised foreign exchange).
The listing and delisting of a company or its shares have historically not had a direct tax implication.
However, with effect from 1 March 2021, where a resident natural person or trust holds a security in a
company and that security is delisted on a domestic exchange and subsequently listed on a foreign
exchange, this triggers a deemed disposal. The person must be deemed to have disposed of the
security for an amount received or accrued equal to its market value on the day that the security is
listed on the foreign exchange (s 9K(a)). The person is further deemed to have reacquired the
security on that same day for an amount of expenditure equal to this market value (s 9K(b)). This
deemed disposal and reacquisition seems to be part of the overall trend of taxing the shifts of value
offshore (as a substitute of the relaxation of Exchange Controls).
20.2.2 Share issues and changes in rights

A company may issue its authorised shares. This is governed by ss 38 to 41 of the Companies Act.
Shares must generally be issued for adequate consideration, whether in cash or otherwise. There are
exceptions for capitalisation shares or shares issued in terms of conversion rights associated with
previously issued securities.
The issuance of shares by a company does not attract tax. The amount that accrues to or is received
by the company from the subscribing shareholder is of a capital nature and not included in the
company’s gross income. This amount increases the company’s contributed tax capital attributable
to that class of share (par (b)(ii) of the definition of ‘contributed tax capital’ in s 1). The disposal that
results from the creation and transfer of the rights attached to the share to the shareholder is not a
disposal by the company for capital gains tax purposes (par 11(2)(b) of the Eighth Schedule). A
share issue does not attract Securities Transfer Tax (STT) since is not a transfer of securities for STT
purposes (see chapter 29). When a shareholder subscribes for shares in a company, the value of the
consideration given by the shareholder establishes a cost for the shares in its hands. This cost is
relevant when the shareholder subsequently disposes of the shares.
765
Remember
When a company issues shares or grants options or other rights in respect of shares to a person
for no consideration, that person is deemed to have incurred no expenditure to acquire those
shares, options or rights (s 40C).
The fact that a share issue does not have any immediate tax implications creates unintended out-
comes and may present opportunities for tax-free value transfers. A number of provisions deal with
specific matters that relate to the issuance of shares or prevent persons from obtaining improper tax
benefits from it.
20.2.2.1 Shares issued for consideration other than cash (s 40CA)

C:SARS v Labat Africa Ltd 74 SATC 1, 2011 (SCA) dealt with the acquisition of assets (trademarks)
by the company in exchange for issuing its own shares. The court held that the company was not
entitled to allowances in respect of the trademarks since it does not incur expenditure when it issues
its own shares as consideration to another person. This view is premised on the fact that the com-
pany’s net assets do not diminish when it issues shares. This means that a company is generally not
entitled to a deduction when it issues its own shares as consideration to a counterparty to a
transaction, for example, when it issues shares to employees in an incentive scheme.
Remember
The mere fact that the company may not deduct expenditure does not alter the position of the
counterparty, who may well be taxed on the shares received as consideration. If a company
issues shares to a person by virtue of that person’s employment or holding of an office as
director, the value of the shares could be subject to tax in the hands of the employee or director
(s 8C). Chapter 8 considers the provisions of s 8C.
Following the Labat Africa case, specific provisions were introduced to avoid a situation where the
lack of a tax cost for assets paid for by share issues could hinder company formations and share-
based asset acquisitions.
If a company acquires any asset and issues shares as consideration:
l The company is deemed to have actually incurred an amount of expenditure equal to the market
value of the shares immediately after the acquisition of the asset unless the corporate rules
determine otherwise (s 40CA(a)(i) read with s 41(2)).
l If a person transfers an asset to a company in exchange for the issuance of the shares, the value
mismatch rules in s 24BA (discussed below) may come into play. If they apply, the company
must increase the expenditure to acquire the asset by the deemed capital gain that results from
the application of those rules (s 40CA(a)(ii)). From 1 January 2022 onwards, the company must
make a similar adjustment if it acquires an asset in terms an asset-for-share transaction, substitu-
tive share-for-share transaction and amalgamation transaction. In that case, the company should
add this amount to the expenditure that it is deemed to have incurred in respect of the asset in
terms of the relevant corporate rules (s 40CA(b) read with s 41(2)). If any other person acquires
the asset from the company in terms of a transaction to which the corporate rules apply, that
person also benefits from the increase in the expenditure incurred in respect of that asset by this
deemed capital gain.
This expenditure represents the cost of the assets held as trading stock or capital assets. It also
forms the basis for any allowances or deductions in respect of the asset.
The general principles, as opposed to s 40CA, apply of the person who transfers the asset to the
company. The value of the outflow (i.e. the value of the asset transferred to the company in exchange
for the shares) should be the amount of the expenditure incurred by the person. The value of the
shares represents the amount that accrues to or is received by that person.
The tax implications of debt issued by a company in exchange for the acquisition of any asset are no
longer addressed in s 40CA. The legislator scrapped this provision with effect from 1 January 2021
due to misuse. The amount of expenditure incurred in respect of assets acquired in exchange for the
issuance of a debt must be determined in accordance with the principles discussed in chapter 6.
Remember
When a company issues its own shares to another company in exchange for it issuing shares to
the company (a cross share issue), the above principles also apply.
766
Example 20.2. Acquisition of an asset in exchange for issuing shares

Lithole (Pty) Ltd owns a factory building. It acquired the building 10 years ago at a cost of
R10 million. Lithole (Pty) Ltd deducted allowances on the building in terms of s 13. The total
allowances deducted to date amount to R5 million., The market value of the property has
appreciated to R12 million immediately before the transaction due to its location.
Ingonyama Ltd wants to purchase the property to expand its manufacturing operations. Lithole
(Pty) Ltd sells the factory building to Ingonyama Ltd. As consideration for the factory building,
Ingonyama Ltd issues 1 000 ordinary shares (2% of the issued shares of Ingonyama Ltd) to
Lithole (Pty) Ltd. The value of the shares issued to Lithole (Pty) Ltd is R12 million immediately
after the transaction.
Ingonyama Ltd’s shares are not listed on any exchange.
What are the tax implications of the transaction for Ingonyama Ltd and Lithole (Pty) Ltd?
SOLUTION
Ingonyama Ltd is not a listed company and Lithole only acquires 2% of its issued ordinary shares.
The transaction is not an asset-for-share transaction, as contemplated in s 42. No roll-over relief
applies to the transaction.
Ingonyama Ltd
Ingonyama Ltd is deemed to have incurred expenditure amounting to R12 million (market value of
the shares issued immediately after the transaction) to acquire the factory building (s 40C(a)(i)).
This amount is the basis for:
l any allowances available to Ingonyama Ltd in respect of the building (allowances in terms of
s 13 since Ingonyama Ltd will conduct manufacturing activities in the building), and
l the determination of the base cost of the building in the hands of Ingonyama Ltd.
Ingonyama Ltd must add the market value of the property received as consideration for issuing
the ordinary shares to its contributed tax capital attributable to ordinary shares (par (b)(ii) of the
definition of ‘contributed tax capital’ in s 1).
Lithole (Pty) Ltd
No specific provision of the Act prescribes Lithole (Pty) Ltd’s tax implications as a result of the
transaction. The general principles as discussed in chapters 3 and 6 apply. Lithole (Pty) Ltd
receives an amount equal to the market value of the shares received. This amount results in
recoupments of previously deducted allowances of R5 million. This amount is also taken into
account in the calculation of Lithole (Pty) Ltd’s proceeds for capital gains tax purposes. The pro-
ceeds are calculated as follows:
Proceeds on disposal of asset (market value of shares received) (par 35 of Eighth
Schedule) ........................................................................................................................ R12 million
Less: Recoupment included in gross income (par 35(3) of the Eighth Schedule) .......... (R5 million)
Proceeds ......................................................................................................................... R7 million
Base cost (R10 million less allowances amounting to R5 million) ................................... (R5 million)
Capital gain ..................................................................................................................... R2 million
The expenditure incurred by Lithole (Pty) Ltd to acquire the Ingonyama Ltd shares is equal to the
value of the property given up to acquire the shares (R12 million). This forms the basis for the
base cost of the Ingonyama Ltd shares when Lithole (Pty) Ltd sells it in future.
20.2.2.2 Shares issued for consideration that does not equal the value of the shares (s 24BA
and definition of ‘value shifting arrangement’ in the Eighth Schedule)
When shares are issued, the percentage shareholding of one shareholder in the company increases
while that of other pre-existing shareholders dilutes. If the share is not issued for proper value, this
may implicitly transfer value between persons. This value could potentially be shifted between
connected persons, for example between family members or from a natural person to a connected
trust. A number of anti-avoidance rules ensure that these hidden value transfers re taxed.
Value mismatch involving shares issued in exchange for assets (s 24BA)

The following anti-avoidance rules apply when a company acquires an asset from a person, issues
shares to the person as consideration and this consideration differs from what independent persons
dealing at arm’s length would have agreed to: (s 24BA(2)):
l Where the market value of the asset, immediately before the transaction, exceeds the market
value of the shares issued after the transaction, this implies a transfer of value between the
767
person who transferred the asset to the company and the other shareholders. The excess market
value of the asset over the value of the shares is deemed to be a capital gain for the company
(s 24BA(3)(a)(i)). The company must add this capital gain to the expenditure that it is deemed to
have incurred to acquire the asset (s 40C(a)(ii) or s 40CA(b) read with s 41(2), depending on
whether the corporate rules apply to the transaction). The person who transferred the asset must
reduce the expenditure incurred to acquire the shares of the company by the excess amount
(s 24BA(3)(a)(ii)).
l If the market value of the shares immediately, after the issue, exceeds the market value of the
asset immediately before the disposal, this implies that value was extracted from the company.
The excess of the value of the shares issued over the value of the asset, is deemed, for purposes
of dividends tax, to be a dividend in specie paid by the company on the date when the shares are
issued (s 24BA(3)(b)). The value extracted in this manner is subject to dividends tax (see
chapter 19).
Remember
Value mismatch may be subject to further tax consequences in addition to those in s 24BA. For
example, a deemed donation may arise if the Commissioner is of the opinion that property was
disposed of for consideration that is not adequate (see s 58(2)).
There are exclusions from the scope of s 24BA for transactions that do not pose a significant risk of a
value mismatch or where the avoidance has already been countered by another provision. The anti-
avoidance rules in s 24BA do not apply in the following instances:
l Where a company acquires an asset from a company that forms part of the same group of com-
panies immediately after the acquisition of the asset (s 24BA(4)(a)(i)).
l Where the person that transfers the asset(s) to the company holds all the shares in the company
immediately after the acquisition (s 24BA(4)(a)(ii)). This rule applies to companies, trusts or
natural persons that transfer assets to wholly-owned companies.
l Where the transferor of the asset was deemed to have disposed of the asset for an amount
received or accrued equal to the market value of the asset (par 38 of the Eighth Schedule)
(s 24BA(4)(b)). This provision (par 38 of the Eighth Schedule) does not apply when roll-over relief
(for example the relief afforded in respect of asset-for-share transactions in s 42) applies.
Section 24BA therefore mostly applies to transactions that qualify for relief under the corporate
rules.
The value mismatch rules apply notwithstanding the fact that the issue of shares is
Please note! not a disposal by a company. The above anti-avoidance rules apply, even if the
transaction qualifies for roll-over relief (see 20.4 to 20.10) (s 41(2)).
Example 20.3. Share transactions involving a value mismatch
Peter Roux owns all the shares of Crane (Pty) Ltd. He established the company and its business
in 2002. He subscribed for all the shares at a cost of R100 when Crane (Pty) Ltd was incor-
porated. The business has grown successfully. The current market value of the Crane (Pty) Ltd
shares is R30 million.
Peter now wishes to transfer the shares to his family trust, the Roux Family Trust, to ensure that
his legacy remains protected for future generations. He will transfer the shares to a new com-
pany, Newco (Pty) Ltd. Before the share transfer, the Roux Family Trust owned all the issued
shares of Newco (Pty) Ltd. The Roux Family Trust acquired the shares of Newco (Pty) Ltd for a
subscription price of R100.
Peter Roux transfers all his shares in Crane (Pty) Ltd to Newco (Pty) Ltd in exchange for NewCo
(Pty) Ltd issuing shares to him. Following the transaction, Peter will hold 15% of the Newco (Pty)
Ltd shares and the Roux Family Trust the remaining 85%.
What are the tax implications of the transaction, assuming that the transfer is an asset-for-share
transaction as contemplated in s 42 and occurs after 1 January 2022?
768
SOLUTION
Peter Roux
As the transfer of the Crane (Pty) Ltd shares to Newco (Pty) Ltd is an asset-for-share transaction,
Peter is deemed to have disposed of the Crane (Pty) Ltd shares to Newco (Pty) Ltd for an amount
equal to the base cost of the Crane (Pty) Ltd shares (i.e. R100) (s 42(2)(a)(i)(aa)). There is no
capital gain. The Newco (Pty) Ltd shares acquired by Peter have a base cost of R100
(s 42(2)(a)(ii)(aa)).
If NewCo (Pty) Ltd’s only significant asset is the shares of Crane (Pty) Ltd, the shares of NewCo
(Pty) Ltd derive their value from the Crane (Pty) Ltd shares. Peter contributes an asset (Crane
(Pty) Ltd shares) with a value of R30 million to Newco (Pty) Ltd and receives shares with a value
of R4,5 million (R30 million × 15%) as consideration. Peter would arguably not have agreed to
this consideration had the Crane (Pty) Ltd shares been disposed of to an independent person
with whom he dealt with at arm’s length. He is likely to only do so where a connected person (the
Roux Family Trust) owns the remaining 85% of the shares. Section 24BA therefore applies to the
transaction.
The excess amount of R25,5 million (i.e. the difference between the market value of the asset
(Crane (Pty) Ltd shares) immediately before the transaction (R30 million) and the market value of
the consideration shares issued to Peter immediately after the transaction (R4,5 million)) reduces
the expenditure that Peter is deemed to have incurred to acquire the Newco shares
(s 24BA(3)(a)(ii)). The Act does not explicitly deal with a situation where the cost is reduced by a
greater amount than the expenditure incurred. The cost can presumably not be reduced to an
amount below nil. This adjustment leaves the Newco (Pty) Ltd shares with a nil cost in his hands
because the reduction exceeds the expenditure incurred to acquire the shares.
Newco (Pty) Ltd
Newco (Pty) Ltd is deemed to have acquired the Crane (Pty) Ltd shares from Peter at the base
cost of the Crane (Pty) Ltd shares in his hands (i.e. R100) (s 42(2)(a)(i)(aa)).
A capital gain is deemed to arise in the hands of Newco (Pty) Ltd from the share issue in terms of
s 24BA. The excess of the market value of the asset, immediately before the disposal, over the
market value of the shares issued to Peter, immediately after the issue, amounts to R25,5 million
(R30 million – R4,5 million). This amount is deemed to be a capital gain in the hands of Newco
(Pty) Ltd (s 24BA(3)(a)(i)). Newco must add this deemed capital gain to the expenditure that it is
deemed to have incurred in respect of the Crane (Pty) Ltd shares (s 40CA(b) read with s 41(2)).
Value shifting arrangements

The provisions of the Eighth Schedule that apply to value shifting arrangements (see chapter 17)
apply, amongst others, to value shifted through share issues.
The following simple scenario illustrates a value shifting arrangement: A natural person holds all the
shares in a company. The person wishes to transfer his shareholding to a trust that is connected
person. In order to achieve this, the company issues shares with rights to the distribution of 99% of
the company’s profits and assets (i.e. 99% of the value of the company) to the trust, as shareholder,
for a nominal consideration that is significantly less than the value of the shares of the company. This
transaction results in a dilution of the value of the natural person’s shareholding, while the trust
acquires an interest in the company. As the shares are issued to the trust for a nominal consideration,
the transaction does not take place at arm’s length terms if the shares have value in excess of the
nominal subscription amount.
The effect of a value shifting arrangement is that the person who retains an interest in the company is
deemed to have disposed of the shares (par 11(1)(g) of the Eighth Schedule). The proceeds in
respect of this deemed disposal equals the amount by which the market value of the person’s interest
in the company decreased (par 35(2) of the Eighth Schedule). The base cost of the shares in the
company is partially allocated to the deemed disposal (par 23 of the Eighth Schedule).
20.2.2.3 Capitalisation share issues

A capitalisation share issue occurs when a company issues shares on a pro rata basis to the share-
holders of one or more classes of shares. Shares of one class may be issued as capitalisation shares
in respect of shares of another class (s 47 of the Companies Act).
769
The Act does not explicitly refer to capitalisation share issues. The following principles are relevant to
these share issues:
l The receipt of capitalisation shares does not represent gross income. The judgment in CIR v
Collins (32 SATC 211) (1923 AD 347) provides authority in support of this view.
l When a company transfers or applies shares in that company to a person in respect of a share in
that company, this is not a dividend or a return of capital (par (ii) of the definition of ‘dividend’ in
s 1, par (i) of the definition of ‘return of capital’ in s 1).
l When a company issues a share to a person for no consideration, that person is deemed to have
incurred expenditure of nil to acquire that share (s 40C). SARS indicates that it is an implicit con-
sequence of this treatment that the recipient must disregard the disposal of its personal right to
receive capitalisation shares upon receipt of these shares (par 6.1.3.14. of the Comprehensive
Guide to Capital Gains Tax (Issue 9)).
20.2.2.4 Conversions and changes in rights attaching to an issued share

A variation of an asset, including a conversion of an asset, may result in a disposal for capital gains
tax purposes (par 11(1)(a) of the Eighth Schedule). A share represents a bundle of rights. A change
in that bundle of rights, or the conversion from one class of share to another class with substantially
different rights, could result in a disposal or a part-disposal of the original shares. If a disposal or
part-disposal arises, this has capital gains tax implications in the hands of the shareholder.
Several exceptions exist. The following conversions of shares do not result in a disposal:
l the change in interest when a co-operative is converted to a company (s 40B)
l the conversion of a member’s interest in a close corporation to shareholding in a company when
the close corporation is converted into a company (s 40A)
l the conversion of shares of par value to shares of no par value (or vice versa), provided that the
conversion is solely in substitution of the shares held by the person, the person’s proportionate
participation rights and interests remain unchanged and no consideration passes to the person
as a result of the conversion (par 11(2)(l) of the Eighth Schedule).
20.2.3 Disposal of shares

A shareholder can disinvest from or reduce its interest in a company by disposing of the shares in the
company to another person. If the shares are disposed of to any person other than the company
itself, the tax implications of the disposal are similar to those of the disposal of any other asset. The
purpose and intention with which the shareholder holds the shares, as discussed in chapter 3, deter-
mine whether the proceeds received upon disposal are income or of a capital nature.
If the shareholder held the shares as a long-term investment, the disposal is subject to capital gains
tax. Chapter 17 considers capital gains tax comprehensively. The following aspects are particularly
relevant in the context of a disposal of shares:
l Stamp duties and STT incurred when the shares were acquired are included in the base cost of
the shares (par 20(1)(c)(iii) of the Eighth Schedule).
l Shares are identical assets. There are specific methods to determine the base cost of identical
assets. The method selected affects the timing and amount of capital gains or losses arising on
disposal (par 32 of the Eighth Schedule).
l Returns of capital received prior to the disposal of the shares reduce the base cost of the shares.
This ultimately increases the gain that arises upon the disposal of the shares (par 76B of the Eighth
Schedule).
l Small businesses are often incorporated with a very low amount of share capital (for example,
R100, which represents the base cost of the shares, while the remaining capital is advanced in
the form of a shareholder loan). If the value of the business grows significantly, the capital gain
from the disposal may be significant due to the low base cost. A valuation date value must be
determined for shares acquired before 1 October 2001 (par 32 of the Eighth Schedule). A person
who holds shares in a small business may qualify for the partial exclusion from capital gains tax
on the disposal of small business assets if the shares are disposed of (par 57 of the Eighth
Schedule).
l There are specific anti-avoidance rules to avoid the artificial realisation of losses on financial
instruments, including shares (par 42 of the Eighth Schedule). There are also specific rules to
counter the conversion of taxable proceeds into exempt dividends to consider when shares are
disposed of (par 43A of the Eighth Schedule, see 20.2.5).
770
If the person acquired and held the shares with the intention to sell as part of a scheme of profit-
making, the shares are trading stock. The proceeds that accrue to the seller are included in the
seller’s gross income.
Remember
If a taxpayer holds certain equity shares for a period of three years or longer, the proceeds on
disposal could be deemed to be of a capital nature (s 9C). Refer to chapter 14 for a detailed
explanation of this deeming rule.
The sale of shares is a transfer of securities and is subject to STT (see chapter 29).
The purchaser of the shares establishes a tax cost. If the shares are held as capital assets, the cost
is reflected in the base cost of the shares when they are eventually sold. If the shares are held as
trading stock, this expenditure is taken into account in taxable income as the cost of trading stock
(see chapter 14).
20.2.4 Share buyback transactions

If the shareholder sells shares to the company that issued the shares, the transaction is a share buy-
back (also referred to as share repurchase transactions). This relationship between the company and
its shareholder is different from that when the shareholder disposes of the shares to any other person.
Practically, a share buyback transaction reduces the shareholding of a specific shareholder. It
reduces the number of issued shares, which effectively increases the proportionate percentage of
shares held by all the remaining shareholders. For example, Company A has 500 shares. Share-
holder X and Y each hold 100 (20% each) shares and Shareholder Z the remaining 300 shares
(60%). If Company A buys the shares held by Shareholder X back from him, Shareholder Y now holds
100 of the remaining 400 issued shares (25%) and Shareholder Z 300 of the remaining 400 issued
shares (75%). The value of the shares of the remaining shareholders does, however, not necessarily
increase since the net asset value of the company is reduced by the share buyback consideration
paid to the person whose shares are bought back.
Share buyback transactions are governed by s 48 of the Companies Act. The same requirements that
apply to any other distribution by the company also apply to a share buyback (s 46 of the Companies
Act). This includes that the share buyback must be authorised and the company should, amongst
others, meet the liquidity and solvency tests after the share buyback. Additional requirements apply if
significant interests (5% or more of the issued shares of a particular class) are repurchased.
A share buyback transaction results in a transfer of value from the company to its shareholder. This
transaction therefore has the characteristics of a distribution by the company. From a tax perspect-
ive, the repurchase by a company of its own shares therefore, similarly to any other distribution,
generally gives rise to a dividend or a return of capital. If, and to the extent that, the repurchase
results in a reduction of the contributed tax capital of the company, the share buyback transaction is
a return of capital. The remainder of the consideration paid by the company to repurchase its shares
is a dividend. Chapter 19 explains the tax implications of dividends and returns of capital in detail.
In summary, the tax implications of a share buyback transaction are:
l The repurchase of the shares by the company results in a disposal of the shares by the share-
holder. This disposal may result in a capital loss (or gain) for the shareholder.
l The amount of the share buyback consideration that is a dividend:
– Is included in the shareholder’s gross income (par (k) of the definition of gross income). It is
generally exempt from normal tax (s 10(1)(k)(i)). Because this component of the share buyback
price was included in gross income (see above), it must be excluded from the proceeds on the
disposal (par 35(3)(a) of the Eighth Schedule).
– Should be considered for dividends tax purposes. It may be subject to dividends tax at a rate
of 20%. The exemptions from dividends tax or reduced rates of tax, as discussed in chap-
ter 19, may, however, apply to this component of the share buyback price.
771
– Certain exempt dividends that were received by or accrued to a shareholder company within
the 18-month period prior to the disposal of shares, or as part of the disposal of the shares, are
taxed similarly to sales proceeds in terms of the anti-avoidance rules that address dividend-
stripping (s 22B and par 43A of the Eighth Schedule) (see 20.2.5).
l The amount of share buyback consideration that is the return of capital is treated the same as any
other proceeds from the disposal of the shares by the shareholder. If the shares are held as
capital assets, this amount is proceeds for capital gains tax purposes. If the shares are held as
trading stock, the amount is included in gross income. With effect from 1 January 2023, no
amount of the share buyback consideration will be a return of capital unless the share buyback is
a general share repurchase of listed shares or the shares of all shareholders of a class of shares
are repurchased at the same time (further proviso to the definition of contributed tax capital).
l If a capital loss arises on a share buyback transaction, this loss may stem from the fact that the
return of capital amount is less than the base cost of the shares. This capital loss is disregarded
if, and to the extent that, the dividend component of the repurchase price was exempt from both
normal tax and dividends tax (par 19 of the Eighth Schedule). The circumstances in which the
capital loss is disregarded are explained in detail in chapter 17.
l The redemption or cancellation of a security is a transfer of the security and is subject to STT at a
rate of 0,25% on the share buyback price.
Example 20.4. Share buyback transaction

Teko Ltd has various ordinary shareholders. This includes, Karabo, a natural person, and Linoko
(Pty) Ltd. Karabo and Linoko (Pty) Ltd each hold 10% of Teko Ltd’s issued ordinary shares.
Karabo purchased the shares for R100 000 in 2012, while Linoko (Pty) Ltd acquired its 10%
shareholding in 2015 at a cost of R500 000.
Teko Ltd has excess cash reserves available. Its management decided that it is in the best
interest of the company and remaining shareholders to use these funds to buy back some of the
issued shares during January 2022. Karabo and Linoko (Pty) Ltd are the two shareholders who
took up the offer for Teko Ltd to buy their shares back from them. Each of them will receive
R900 000 from Teko Ltd as consideration for their shareholding in Teko Ltd. Teko Ltd has
contributed tax capital of R2 million. The directors of the company informed Karabo and Linoko
(Pty) Ltd that R200 000 of the total consideration of R900 000 paid to each of them reduced Teko
Ltd’s contributed tax capital.
What are the implications of the share buyback transactions for Teko Ltd, Karabo and Linoko
(Pty) Ltd? All persons involved are residents of South Africa for tax purposes.
SOLUTION
The amount received in respect of the disposal of the shares by Karabo and Linoko (Pty) Ltd,
respectively, is classified as follows from a tax perspective:
To the extent that the amount reduces contributed tax capital, this is a return of
capital ....................................................................................................................... R200 000
Remaining amount transferred to the shareholder in respect of the acquisition of
shares in Teko Ltd is a dividend ............................................................................... R700 000
Total consideration paid to shareholder for acquiring shares in Teko Ltd................ R900 000
Karabo
The dividend received by Karabo is exempt from normal tax (s 10(1)(k)(i)). The
dividend is subject to dividends tax at a rate of 20% (R700 000 × 20%) ................. R140 000
Karabo disposes of the shares in Teko Ltd. The capital gain or loss on this disposal is deter-
mined as follows:
Total amount received in respect of the disposal ............................................ R900 000
Less: Amount included in gross income (dividend included in terms of par (k) of
the definition of gross income) (par 35(3) of the Eighth Schedule) .......................... (R700 000)
Proceeds (as defined in par 35 of the Eighth Schedule) .......................................... R200 000
Less: Base cost (expenditure incurred to acquire the Teko Ltd shares) .................. (R100 000)
Capital gain on disposal ........................................................................................... R100 000
Note
If the base cost of the Teko Ltd shares in Karabo’s hands was R500 000 (as is the case in the hands
of Linoko (Pty) Ltd), a capital loss of R300 000 would have arisen. This capital loss arises mainly as a
result of the fact that a large portion of the consideration was received in the form of a dividend. As
this dividend was, however, subject to dividends tax, it is not an exempt dividend as contem-
plated in par 19 of the Eighth Schedule. This capital loss should not be disregarded by Karabo.
continued
772
Linoko (Pty) Ltd

The dividend received by Linoko (Pty) Ltd is exempt from normal tax (s 10(1)(k)(i)).
The dividend is also exempt from dividends tax (s 64F(1)(a)) ................................. –
Linoko (Pty) Ltd disposes of the shares in Teko Ltd. The capital gain or loss on this
disposal is determined as follows:
Proceeds on the disposal, calculated in a similar manner as the calculation for
Karabo above ........................................................................................................... R200 000
Less: Base cost (expenditure incurred to acquire the Teko Ltd shares) .................. (R500 000)
Capital loss on disposal............................................................................................ (R300 000)
This capital loss arises mainly as a result of the fact that a large portion of the consideration was
received in the form of a dividend. The dividend was exempt from both normal tax and dividends
tax (see above). It is therefore an exempt dividend, as defined in par 19(3)(b) of the Eighth
Schedule. As a result, the capital loss is limited. The capital loss is disregarded by Linoko (Pty)
Ltd to the extent that the capital loss does not exceed the exempt dividends (par 19(1)(a) of the
Eighth Schedule).
Capital loss (as calculated) ...................................................................................... R300 000
Exempt dividend (see above) ................................................................................... R700 000
As a result of the fact that the exempt dividend exceeds the capital loss, Linoko (Pty) Ltd
disregards the full capital loss. The anti-dividend stripping rules, as discussed in 20.2.5, do not
apply. Linoko (Pty) Ltd’s 10% shareholding is not a qualifying interest.
When shares are cancelled and the reserves of the company are distributed upon the liquidation,
deregistration or winding-up of the company, the tax implications of those distributions are similar to
those of a share buyback. The cancellation or redemption of a security in the event of the liquidation,
deregistration or winding-up of the company is not a transfer for purposes of STT (par (c) of the
definition of ‘transfer’ in s 1 of the STT Act).
Remember
A subscription for shares by a new shareholder and a simultaneous share buyback from a dis-
posing shareholder can have the same economic result as a sale of the shares by the disposing
shareholder to the new shareholder. Unlike a disposal of the shares, a subscription and share
buyback arrangement may, in some circumstances, not attract capital gains tax or dividends
tax. If the transaction is solely or mainly structured in this manner to obtain the tax benefit, the
transaction is susceptible to the application of the general anti-avoidance rules by SARS or of
being viewed as a simulated transaction by the courts if it does not reflect the real intention of
the parties (see chapter 32).
The parties to such an arrangement must disclose it to SARS as a reportable arrangement (see
chapter 33) if
l a company buys back shares from one or more shareholders for an aggregate amount
exceeding R10 million, and
l issued or is required to issue any shares within 12 months of entering into that arrangement
or from the date of any share buyback in terms of that arrangement.
The anti-dividend stripping rules, which apply to amongst others share buyback transactions,
were introduced to curb these practices.
20.2.5 Realisation of the value of shares through dividends (s 22B and par 43A of the Eighth
Schedule)
Shareholders can realise the value of their shares in a company by way of
l distributions of the underlying assets of the company from which the shares derive their value
reserves by the company (dividends or returns of capital), or
l selling the shares to another person for proceeds equal to the value of the shares, which
inherently reflects the value of undistributed assets held by the company.
The tax consequences of these two methods of realisation differ significantly. Distributions in the form
of dividends are subject to dividends tax. Proceeds from the sale of shares attract capital gains tax (if
the shares were held on capital account) or are taxed as income (if the shares were held as trading
stock).
The exemption of dividends paid by one resident company to another from dividends tax presented
taxpayers with an opportunity to structure the realisation of the value of shares in the form of an
exempt dividend, rather than as taxable sales proceeds. Some arrangements involved that a pro-
spective purchaser would fund the dividend paid by the company to the exiting shareholder. This
prompted the legislature to introduce anti-dividend stripping rules to curb these practices.
773
These rules target exempt dividends received by a shareholder as part of or in the period leading up
to the disposal of shares. These dividends may be disguised sales proceeds.
The anti-dividend stripping rules apply to shares held as trading stock (s 22B) as well as shares held
on capital account (par 43A of the Eighth Schedule). They apply when a company (the shareholder
company) disposes of any shares that it holds in another company (the investee company), and the
shareholder company held a qualifying interest in that investee company at any time during the
18 months prior to the disposal. A qualifying interest is any of the following interests held by the
shareholder company, alone or with its connected persons, in the investee company:
l if the investee company is not a listed company
– at least 50% of the equity shares or voting rights in that company, or
– at least 20% of the equity shares or voting rights in that company if no other person (alone or
with connected persons) holds the majority of its equity shares or voting rights
l if the investee company is a listed company, at least 10% of the equity shares or voting rights in
that company (definition of ‘qualifying interest’ in s 22B(1) and par 43A(1) of the Eighth Sched-
ule).
Remember
The anti-dividend stripping rules do not apply where the shares are disposed of in a deferral
transaction (s 22B(2) and par 43A(2) of the Eighth Schedule). The anti-dividend stripping rules
should not hinder or obstruct transactions that otherwise qualify for roll-over relief, as discussed
in 20.4. to 20.10. The interaction between the anti-dividend stripping rules and roll-over relief is
further explained in 20.4.4.2.
When the disposal of shares is subject to the anti-dividend-stripping rules, the amount of any exempt
dividends received by or that accrued to the shareholder company in respect of the shares disposed
must be
l included in the shareholder company’s income, if the shares were held as trading stock
(s 22B(2)), or
l taken into account as proceeds from the disposal of the shares for capital gains tax purposes, if
the shares were held as capital assets (par 43(2) of the Eighth Schedule)
to the extent that it is an exempt extraordinary dividend. This inclusion in income or proceeds may be
in the year of assessment during which the shares are disposed of, or in a subsequent year of
assessment if the dividends are only received or accrued then.
A dividend or foreign dividend is exempt if it is not subject to dividends tax and is also exempt from
normal tax (definition of ‘exempt dividend’ in s 22B(1) and par 43A(1) of the Eighth Schedule).
Whether an exempt dividend is an extraordinary dividend depends on the type of share from which
the dividend was derived. An exempt dividend is an extraordinary dividend in the following circum-
stances:
l In the case of a preference share, any dividends received or accrued in respect of that share, in
excess of the dividends that would have been received by or accrued had these dividends been
determined by applying a rate of 15% per annum to the consideration for which the share was
issued are considered to be extraordinary dividends (par (a) of the definition of ‘extraordinary
dividend’ in s 22B(1) and par 43A(1) of the Eighth Schedule). In this context, a preference share
refers to any share that is not an equity share or an equity share, where the amount of any
dividend or foreign dividend is based on, or determined with reference to, a specified rate of
interest or the time value of money (definition of ‘preference share’ in s 8EA(1), as referred to in
the definition of ‘preference shares’ in s 22B(1) and par 43A(1) of the Eighth Schedule).
l In the case of any other share, the dividends received or accrued in respect of that share
– within the 18 months prior to its disposal, or
– in respect of, by reason or in consequence of that disposal,
as exceeds 15% of the higher of the market value of the share at the beginning of the 18-month
period prior to the disposal or at the date of the disposal are extraordinary dividends (definition of
‘extraordinary dividends’ in s 22B(1) and par 43A(1) of the Eighth Schedule).
Dividends in specie made in terms of domestic unbundling transactions (see 20.9.1.1) or domestic
liquidation distributions (see 20.10.1.1) must be disregarded for purposes of determining the amount
of any extraordinary dividends.
774
Example 20.5. Application of the anti-dividend stripping rules

Prosper Ltd holds 80% of the ordinary shares of Ukukhula Ltd. A passive investor holds the
remaining 20% of the shares. Prosper Ltd acquired its shareholding for an amount of R1 000 on
the date that Ukukhula Ltd was incorporated. Ukukhula Ltd has grown significantly in value over
the past 5 years since incorporation. Ukukhula Ltd has paid regular dividends to its
shareholders. Prosper Ltd received dividends amounting to R1 000 000 on 30 June 2021 and
R1 200 000 on 30 June 2022.
Imali Ltd has agreed to purchase the shares that Prosper Ltd currently holds in Ukukhula Ltd.
The parties have agreed that Imali Ltd will contribute R5 000 000 to Ukukhula Ltd by subscribing
for shares. Ukukhula Ltd will use the subscription price to repurchase the shares currently held
by Prosper Ltd on 30 September 2022 at its current market value of R5 000 000. Ukukhula Ltd’s
directors have not determined that any portion of the repurchase price will reduce the company’s
contributed tax capital.
It is estimated that the market value of Prosper Ltd’s shareholding in Ukukhula Ltd was
R4 000 000 on 1 March 2021.
Both Prosper Ltd and Ukukhula Ltd are residents.
What are the tax implications of the transaction for Prosper Ltd?
SOLUTION
Prosper Ltd held the shares in Ukukhula Ltd for more than 3 years. Any amounts
received in respect of the shares, other than dividends, are deemed to be of a
capital nature (s 9C(2)).
The amount of R5 million transferred to Prosper Ltd by Ukukula Ltd to acquire its
own shares is a dividend (par (b) of the definition of a ‘dividend’). As this dividend
is paid by a resident company (Ukukhula Ltd) to another (Prosper Ltd), the
dividend is exempt from dividends tax (s 64F(1)(a)). This dividend is also exempt
from normal tax (s 10(1)(k)(i)). The dividend is an exempt dividend as defined in
par 43A(1) of the Eighth Schedule.
Prosper Ltd holds at least 50% of the equity shares of Ukukhula Ltd. It therefore
holds a qualifying interest in Ukukhula Ltd. When Prosper Ltd disposes of shares,
the anti-dividend stripping rules apply (par 43A(2) of the Eighth Schedule).
The exempt dividends received by or accrued to Prosper Ltd during the
18 months prior to the disposal of the Ukukhula Ltd shares or as a result of the
disposal are:
Dividends received on 30 June 2021 ........................................................... R1 000 000
Dividends received on 30 June 2022 ........................................................... R1 200 000
Dividend received on 30 September 2022 in the form of the repurchase price ....... R5 000 000
Total dividends R7 200 000
These dividends are extraordinary dividends to the extent that they exceed the
higher of R600 000 (being 15% of R4 000 000, the market value of the Ukukula Ltd
shares at the beginning of the 18-month period prior to the disposal by Prosper
Ltd) or R750 000 (being 15% of R5 000 000, the market value of the Ukukula Ltd
shares at the time of disposal). The extraordinary dividends in this case amount to
R6 450 000 (R7 200 000 less R750 000). This amount is treated as proceeds from
the disposal of the Ukukhula Ltd shares by Prosper Ltd.
Prosper Ltd therefore realises the following capital gain on the disposal of the
shares:
Proceeds determined in accordance with the anti-dividend stripping rules ............ R6 450 000
Base cost ................................................................................................................. R1 000
Capital gain on the disposal of the Ukukhula Ltd shares R6 449 000
Certain dilutive arrangements are also subject to the anti-dividend stripping rules. Essentially these
arrangements involve the declaration of substantial exempt dividends to a shareholder company by
an investee company. The investee company then issues shares to another person. This dilutes the
existing shareholder company’s interest in the investee company. The shareholder company may
disinvest from an investee company in a commercial sense. This arrangement previously escaped
the initial anti-dividend stripping rules since the shareholder company did not dispose of the shares
in respect of which the dividends accrued. To counter this practice, a shareholder company must, for
purposes of the anti-dividend stripping rules, be deemed to have disposed of equity shares that it
holds in an investee company if
l the investee company issues shares to any person other than the shareholder company on or
after 20 February 2019, and
l this share issue reduces the effective interest of the shareholder company in the equity shares of
the investee company (s 22B(3A) and par 43A(3A) of the Eighth Schedule).
775
Unfortunately, the concept of effective interest in the equity shares of an investee

company, which is central to the application of the anti-dividend stripping rules to
dilutive arrangements, is not defined in the legislation. It can arguably be
interpreted to refer to either the value of the equity shares that the shareholder
company holds in the investee company, or to the absolute percentage of equity
shares issued by the investee company that the shareholder company holds. The
National Treasury indicated that it depends on a facts and circumstances analysis
Please note! whether a share issue reduces a shareholder company’s effective interest in the
equity shares of a target company. It suggested that where a single class of shares
is involved, the percentage of issued shares may be an appropriate measure of
effective interest, while a value-based measure may be more appropriate if
different classes of shares are involved. The only guidance provided in the legisla-
tion is that where shares, which are convertible into equity shares, are issued,
these are treated as equity shares when determining its effect on the shareholder
company’s effective interest in the equity shares of the investee company.
In a dilutive arrangement, the shareholder company is deemed to have disposed of so many of its
equity shares in the investee company as the percentage by which its effective interest in the equity
shares of the investee company was reduced as a result of the share issue. The deemed disposal
occurs immediately after the share issue. The anti-dividend stripping rules apply to extraordinary
dividends in respect of the shares that are deemed to be disposed of in this manner by the share-
holder company.
Where a taxpayer subsequently disposes of the shares that it was deemed to have disposed of pre-
viously, the extraordinary dividend should only be taken into account as income, or as proceeds, to
the extent that it was not done so as a result of the deemed disposal (s 22B(2) and par 43A(2) of the
Eighth Schedule).
Example 20.6. Application of anti-dividend stripping rules to dilutive arrangements
Ingozi (Pty) Ltd acquired all of the issued equity shares of Ithuba (Pty) Ltd (1000 shares) on
1 March 2016 as a long-term investment for an amount of R5 000 per share. The market value of
each share on 1 October 2020 was R8 000.
On 31 March 2022 Ithuba (Pty) Ltd declared a dividend of R9 000 per share (R9 million in total)
to Ingozi (Pty) Ltd. Ithuba (Pty) Ltd did not reduce its contributed tax capital. The dividend
remained outstanding on a loan account owing by Ithuba (Pty) Ltd to Ingozi (Pty) Ltd. The market
value of each Ithuba (Pty) Ltd share before the dividend was R10 000.
On 1 April 2022 Ithuba (Pty) Ltd issued 9 000 shares to Unity (Pty) Ltd for a subscription amount
of R9 million. Ithuba (Pty) Ltd used the subscription proceeds to settle the loan that it owed to
Ingozi (Pty) Ltd as a result of the dividend declaration. Following the subscription, the market
value of each issued Ithuba (Pty) Ltd share was R1 000. Unity (Pty) Ltd now holds 90%
(9 000/10 000) of the issued shares of Ithuba (Pty) Ltd and Ingozi (Pty) Ltd holds the remaining
10% (1 000/10 000).
What are the tax implications of these transactions for Ingozi (Pty) Ltd, assuming that it is a South
African resident company?
SOLUTION
Dividend received
The full amount of R9 million distributed is a ‘dividend’ as defined in s 1, as there is no reduction
in the contributed tax capital of Ithuba (Pty) Ltd. This dividend is exempt from dividends tax
since the beneficial owner of the dividend, Ingozi (Pty) Ltd, is a resident company (s 64F(1)(a)).
The dividend is included in Ingozi (Pty) Ltd’s gross income (par (k) of the definition of ‘gross
income’ in s 1) but is exempt (s 10(1)(k)(i)).
Application of the anti-dividend stripping rules
The dividend of R9 000 000 is an exempt dividend (definition of ‘exempt dividend’ par 43A(1) of
the Eighth Schedule). Ingozi (Pty) Ltd holds 100% and therefore a qualifying interest in Ithuba
(Pty) Ltd, an unlisted company (definition of ‘qualifying interest’ in par 43A(1) of the Eighth
Schedule). When Ithuba (Pty) Ltd issues 9 000 shares to Unity (Pty) Ltd, this results in a dilution
of Ingozi (Pty) Ltd’s interest in Ithuba (Pty) Ltd, based on the percentage of the issued equity
shares that it holds (reduction from 100% before the subscription to 10% after the subscription).
It is evident from the timing of the dividend and subsequent subscription that the subscription by
Unity (Pty) Ltd funds the payment of the dividend paid to Ingozi (Pty) Ltd. This is precisely the
type of arrangement that the anti-dividend stripping rules target. It is submitted that, based on a
facts and circumstances analysis, the reduction in Ingozi (Pty) Ltd’s percentage shareholding in
the issued equity shares of Ithuba (Pty) Ltd is a reduction in its effective interest in the equity
shares of Ithuba (Pty) Ltd, as contemplated in par 43A(3A) of the Eighth Schedule.
continued
776
Ingozi (Pty) Ltd is treated as having disposed of a percentage equity shares that is equal to this
reduction of the effective interest held in the equity shares of Ithuba (Pty) Ltd (par 43A(3A) of the
Eighth Schedule). Based on the facts and circumstances analysis above, it is submitted that the
reduction in the effective interest is 90% (100% prior to the share issue less 10% after the share
issue). Ingozi (Pty) Ltd is therefore treated as if it disposed of 900 (1 000 × 90%) of the Ithuba
(Pty) Ltd shares that it holds. Any extraordinary dividends received by Ingozi (Pty) Ltd in respect
of these shares are taken into account as a capital gain (par 43A(2) of the Eighth Schedule).
Extraordinary dividends are those dividends received within the 18 months prior to the deemed
disposal, to the extent that it exceeds 15% of the higher of the market value of the shares at the
beginning of the 18-month period or at the date of the disposal (definition of ‘extraordinary divi-
dend’ in par 43A(1) of the Eighth Schedule). As the market value of the shares on 1 October
2020 (R8 000) was greater than on 1 April 2022 (R1 000), being the date when the deemed
disposal occurred, any dividend in excess of R1 200 (R8000 × 15%) is an extraordinary
dividend. The extraordinary dividend amounts to R7 020 000 ((R9 000 – R1 200 per share) × 900
shares deemed to be disposed of). This amount is deemed to be a capital gain in respect of the
shares. Since the extraordinary dividend is deemed to be a capital gain, rather than proceeds,
the base cost of the shares (R5 000 per share) must not be taken into account to reduce this
gain. If Ingozi (Pty) Ltd actually disposes of the 900 shares and the anti-dividend stripping rules
apply to this disposal, the extraordinary dividend of R7 800 per share (R9 000 – R1 200) will not
be subject to the anti-dividend stripping rules again.
Extraordinary dividends are those dividends received within the 18 months prior to the deemed
disposal, to the extent that it exceeds 15% of the higher of the market value of the shares at the
beginning of the 18-month period or at the date of the disposal.
20.3 Acquisition or disposal of a business

The sale of a business generally occurs in two ways. The current owner can sell the shares of the
company that houses the business to the purchaser (a share transaction). The tax implications of this
have been discussed in 20.2.3 above. Alternatively, the company can sell the collection of assets that
constitute the business to the purchaser (an asset transaction). The assets of a business sold as a
going concern may include
l trading stock on hand at the date of sale
l trade receivables outstanding at the date of sale
l capital assets in respect of which allowances were deducted, for example manufacturing equip-
ment that qualified for s 12C allowances or office furniture that qualified for a wear-and-tear allow-
ance in terms of s 11(e)
l capital assets that did not qualify for any allowances, for example administrative buildings acquired
before the introduction of s 13quin, and
l goodwill.
When a business is disposed of as a going concern, the purchaser often also assumes the liabilities
associated with the business, for example outstanding trade payables at the date of sale.
The purchaser can also assume contingent liabilities associated with the business
(for example, warranty or leave pay liabilities, the realisation of which depends on
Please note! future returns of products or continued employment of employees). Interpretation
Note No. 94 deals with the treatment of contingent liabilities assumed in the hands
of the seller and purchaser.
The consideration that the purchaser pays to acquire the business can consist of a cash consid-
eration, consideration other than cash (for example issuing shares) as well as the assumption of the
seller’s obligations. The total consideration, also often referred to as the purchase price, must be
allocated to the assets of the business. The purchase price allocation is relevant from the seller’s
perspective as the proceeds may
l be taxed as income (for example, the amount received in respect of trading stock)
l result in a recoupment of allowances previously deducted (for example, the amount received in
respect of manufacturing equipment) (see chapter 13)
l be subject to capital gains tax (for example, the amount received in respect of capital assets,
such as goodwill) (see chapter 17), or
l not have any tax implications (for example, the amount received for the transfer of trade receiv-
ables that consist of amounts already taxed).
The purchase price allocation is also relevant to the purchaser as this determines the amounts in
respect of which deductions are available (either in terms of s 11(a) or capital allowances) and those
777
in respect of which no deduction is allowed (for example, amounts incurred to acquire goodwill,
which is of a capital nature and does not qualify for any allowances).
Example 20.7. Sale of business without roll-over relief
Pepper Ltd wishes to dispose of its retail business line to focus on its manufacturing operations.
Pepper Ltd’s management concludes a transaction with Salt Ltd to sell the retail business for
R10 million in cash and the assumption of the liabilities associated with that business.
The balance sheet of the retail business is as follows on the date of the sale:
Tax Value
Original cost allowances or (if sold as part of a
deductions going concern)
Administrative building (acquired in 2002) R2 000 000 R nil R3 000 000
Retail store building (acquired in 2010) ... R3 000 000 R900 000 R3 500 000
Trade receivables ..................................... R1 000 000 R nil R1 000 000
Trading stock ............................................ R2 000 000 R2 000 000 R2 000 000
Trade payables......................................... (R1 500 000) R nil (R1 500 000)
Goodwill .................................................... R nil R nil R2 000 000
Total value of the retail business .............. R 10 000 000
Discuss the normal tax implications of the transaction for Pepper Ltd and Salt Ltd.
SOLUTION
Pepper Ltd (Seller)
The consideration received in respect of the disposal of assets consists of:
Cash consideration .............................................................................................. R10 000 000
Obligations assumed by the purchaser (par 35(1)(a) of the Eighth
Schedule) ............................................................................................................ R1 500 000
Total consideration to be allocated to assets disposed of .................................. R11 500 000
Consideration received in respect of the disposal of:
Administrative building (note 1) ........................................................................... R3 000 000
Retail store building (note 2) ................................................................................ R3 500 000
Trade receivables (note 3)................................................................................... R1 000 000
Trading stock (note 4).......................................................................................... R2 000 000
Goodwill (note 5) ................................................................................................. R2 000 000
Note 1
No recoupments arise when the administrative building is disposed of. No allowances were
deducted in respect of this building (it was acquired prior to the introduction of s 13quin in
2007). The capital gain or loss on disposal is calculated as:
Proceeds .................................................................................................................. R3 000 000
Base cost .................................................................................................................. R2 000 000
Capital gain on the disposal of the administrative building .............................. R1 000 000
Note 2
A recoupment of the allowances previously deducted in respect of the retail store
building arises when recovered through the sale of the property ............................ R900 000
The capital gain or loss on disposal is:
Proceeds (R3 500 000 – R900 000) .......................................................................... R2 600 000
Base cost (R3 000 000 – R900 000) ......................................................................... R2 100 000
Capital gain on the disposal of the retail store building............................................ R500 000
Note 3
The proceeds received in respect of the disposal of trade receivables are not included in gross
income. The income from the sales transactions that the receivables relate to were already
included in gross income when it accrued to the taxpayer. No capital gain or loss arises in
respect of trade receivables sold at face value.
continued
778
Note 4
The calculation of Pepper Ltd’s taxable income includes a deduction in respect
of the cost of the trading stock (either in terms of s 11(a) if the stock was pur-
chased in the current year of assessment or s 22 if the stock was purchased in a
prior year and was included in opening stock) ........................................................ (R2 000 000)
Proceeds upon disposal of trading stock included in gross income ........................ R2 000 000
SARS indicates in Interpretation Note No. 65 (at par 4.3.2) that all circumstances surrounding the
disposal of trading stock must be taken into account to determine whether the stock is disposed
of at market value when considering whether an additional recoupment arises in terms of
s 22(8)(b)(ii). SARS indicates that various factors, such as the fact that all stock on hand is being
disposed of, may have a bearing of the price of the stock. In such cases, the book value of the
stock, rather than the retail market value, may represent the market value.
Note 5
The proceeds received in respect of the disposal of goodwill is of a capital nature. The disposal
of goodwill gives rise to the following capital gain:
Proceeds .................................................................................................................. R2 000 000
Base cost .................................................................................................................. R nil
Capital gain on the disposal of goodwill ................................................................... R2 000 000
Salt Ltd (Purchaser)
The administrative and retail store buildings are no longer new and unused when Salt Ltd
acquires them. Salt Ltd is not entitled to deduct allowances in respect of the purchase price of
the properties. The purchase price allocated to the buildings (R3 000 000 and R3 500 000
respectively) is relevant in determining the base cost of the properties when Salt Ltd disposes of
them.
Salt Ltd’s position in respect of the purchase price paid for goodwill (R2 000 000) is similar to
that of the properties above.
Salt Ltd is not entitled to deduct the purchase price paid for the trade receivables (R1 000 000).
In addition, it is not entitled to deductions for bad debt (s 11(i)) or allowances for doubtful debt
(s 11(j)) in respect of these receivables as the income that it relates to was not included in its
income.
Salt Ltd is entitled to deduct the cost of the trading stock (s 11(a)) ................... (R2 000 000)
Salt Ltd is not entitled to deduct the amounts paid to settle the trade payables as it assumed this
debt as part of the consideration incurred by it to acquire the above assets and is already
reflected in their tax costs.
Remember
The sale of business assets may also have VAT and transfer duty implications. These are discus-
sed in detail in chapters 28 and 31.
20.4 Corporate rules: Introduction and concepts

When capital gains tax was introduced in 2001, it was necessary to also introduce of a set of relief
measures to ensure that capital gains tax did not obstruct businesses from structuring their affairs in
the most efficient economic manner. Certain transfers take place on a tax-neutral basis. The
corporate rules in Part III of Chapter II of the Act (ss 41 to 47) achieve this. Practically, this means that
the tax consequences of some of the transactions discussed up to this point may be deferred in
terms of these rules when assets are transferred in a manner where the same persons substantially
retain their interests in them.
779
The corporate rules generally override any provision to the contrary contained in
the Act. A number of provisions, mostly anti-avoidance provisions, however, still
apply despite the application of the corporate rules to a transaction. These are
l s 24BA (see 20.2.1.2)
l s 24I (see chapter 15)
l the determination of adjusted gains or losses on the transfer or redemption of
instruments, as defined in s 24J(1) (see chapter 16)
l s 25BB(5), which requires that capital gains or losses from the disposal of
immovable property or certain shares must be disregarded by REITs and
controlled companies (see chapter 19)
Please note!
l s 40CA(b) (see 20.2.2.1.)
l provisions governing value-shifting arrangements (see 20.2.1.2 and chap-
ter 17)
l the general anti-avoidance rules in s 103 and Part IIA of Chapter III of the Act
(see chapter 32).
The implication of the last bullet is that transactions, to which the corporate rules
apply that are entered into solely or mainly to obtain a tax benefit, may be
susceptible to be challenged in terms of the general anti-avoidance rules (GAAR)
by SARS.
The corporate rules do not necessarily provide relief from all taxes that may apply
to a transaction. As an example, transactions could still be subject to donations tax
even if the corporate rules apply.
Some concepts are central to the application of these relief measures. In many instances the corpor-
ate rules employ the same mechanism to defer the tax implications of a disposal. Various corporate
rules also employ similar anti-avoidance provisions. The section below discusses the central con-
cepts and common features encountered in the corporate rules.
20.4.1 Group of companies

Where the Act affords relief on the basis that entities form part of the same economic unit, it uses the
concept of a group of companies. This includes the corporate rules as well as other relief measures,
for example
l the exclusion from the value mismatch provisions in s 24BA, if the parties involved form part of
the same group of companies immediately after the transaction (see 20.2.1.2)
l the exemption from donations tax on donations between companies that form part of the same
group of companies (s 56(1)(r)) (see chapter 26)
l the deductibility of interest incurred in respect of debt to acquire equity shares to become the
controlling company in relation to another company (s 24O) (see 16.2.3.4)
l the relief from the provisions that apply to debt concessions or compromises between persons
that form part of the same group of companies (s 19 and par 12A of the Eighth Schedule) (see
chapters 13 and 17).
Remember
The fact that persons who are related to each other enter into transactions may pose certain risks
for the fiscus from a tax planning perspective. Many anti-avoidance rules apply where
connected persons transact with each other. Chapter 13 explains the concept of connected
persons, as used in these anti-avoidance rules, in more detail. Companies that form part of the
same group of companies are normally connected persons in relation to each other. The defini-
tion of a group of companies is narrower than the definition of a connected person. Group treat-
ment generally affords taxpayer relief, whereas the broader connected person rules are mostly
associated with measures to curb tax avoidance.
The Act contains two definitions of a group of companies. The first definition is a broader definition in
s 1. The second version is a narrower version, which is based on the definition in s 1 but is subject to
several further exclusions. This second version is defined in s 41(1). When dealing with legislation
applicable to companies that form part of the same group of companies, it is important to establish
which one of the two definitions applies.
Section 1 definition of a group of companies

A group of companies exists where
l a company (controlling group company) directly holds at least 70% of the equity shares of at
least one other company (controlled group company), and
780
l the controlling group company, alone or together with other controlled group companies, holds at
least 70% of the equity shares in another company (also referred to as a controlled group com-
pany).
A group of companies consists of two or more companies.
The following is an example of a group of companies that consists of three companies:
Company A
Controlling group company
100% 50%
Company B 20% Company C
Controlled group company Controlled group company
Companies A and B form part of the same group of companies, as Company A directly holds at least
70% of the equity shares of Company B. Companies A, B and C also form a group of companies as
Company A, together with another controlled group company (Company B), holds at least 70% of
Company C’s equity shares (50% (Company A’s interest) + 20% (Company B’s interest) = 70%).
Section 41 definition of a group of companies

The definition of a group of companies in s 41 is mainly used for purposes of allowing taxpayers to
benefit from the corporate rules, but also appears elsewhere in the Act (for example in the debt relief
rules in s 19 and par 12A of the Eighth Schedule). This definition is narrower than the definition in s 1
and excludes certain entities and shares from the determination of a group of companies. This is
necessary to ensure that the corporate rules are not used to shift tax implications into an entity that is
not subject to tax or applied to a temporary grouping. If this was possible, the corporate rules could
be used to avoid paying tax, as opposed to deferring the tax implications until the gains are realised
outside the economic unit at a later stage.
The following entities, that all have specific tax characteristics that differ from normal resident com-
panies, are excluded from being part of a group of companies, as contemplated in s 41:
l a co-operative
l an association formed in the Republic to serve a specified purpose beneficial to the public or a
section of the public
l a foreign collective investment scheme
l a non-profit company as defined in s 1 of the Companies Act, 2008
l a company whose gross income is exempt from tax in terms of s 10
l a company that is a public benefit organisation or a recreational club approved by the Commis-
sioner in terms of s 30 and 30A
l a company formed under the laws of a country other than South Africa, unless the company has
its place of effective management in South Africa, and
l a company that has its place of effective management outside South Africa.
The last two bullets exclude companies that are not South African tax residents. This significantly
limits the extent to which roll-over relief applies in cross-border groups. This does, however, not mean
that roll-over relief is not available in a cross-border context. Each of the corporate rules contains a
specific, though narrow, definition of a cross-border arrangement(s) to which it applies.
A share that would have been an equity share (and which, in turn, could have resulted in companies
to form a group of companies) is, for purposes of the definition of ‘group of companies’ in s 41,
deemed not to be an equity share, if:
l the share is held as trading stock, or
l any person is under a contractual obligation to sell or purchase the share or has an option to sell
or purchase the share (unless the obligation or option provides for a sale or purchase of the
share at its market value).
781
Shares held as trading stock or that are subject to an obligation or option to be disposed of, may only
be held in the short term. It is therefore not appropriate to base the assessment of the group of com-
panies on such shares, since this economic relationship is likely of a temporary nature.
Example 20.8. Group of companies
US Co, a company incorporated and effectively managed in the United States directly holds
100% of the equity shares in SA Co1 and SA Co2. SA Co2 holds 100% of the equity shares in
SA Co3. SA Co1, SA Co2 and SA Co3 are all incorporated and effectively managed in South
Africa. All of the shares are held on capital account. There are no contractual obligations, rights
or options to purchase or sell the shares under particular circumstances.
Does US Co, SA Co1, SA Co2 and SA Co3 form part of the same group of companies as defined
in s 1 and in s 41(1)?
SOLUTION
Group of companies as defined in s 1:
US Co, SA Co1, SA Co2 and SA Co3 meet the requirements of the definition of group of
companies in s 1 because US Co directly holds at least 70% of the equity shares in SA Co1 and
SA Co2. As such, SA Co1 and SA Co2 are ‘controlled group companies’ as defined. US Co
indirectly holds at least 70% of the equity shares in SA Co3 through SA Co2 (controlled group
company).
SA Co2 and SA Co3 also form part of a group of companies as defined in s 1 because SA Co2
holds at least 70% of the equity shares in SA Co3.
Group of companies as defined in s 41(1):
Since US Co is a foreign company it is excluded from the definition of ‘group of companies’ for
purpose of the corporate roll-over relief provisions. SA Co1 and SA Co2 do not form part of a
group of companies as contemplated in s 41. This is because there is no permitted company
which alone or together with other permitted companies holds 70% or more of the equity shares
in SA Co1 or SA Co2.
SA Co2 and SA Co3 form part of a group of companies as defined in s 41(1) because SA Co2
holds at least 70% of the equity shares in SA Co3 and the companies are not excluded from the
definition of ‘group of companies’ in s 41(1).
(Adapted from Example 1 in Interpretation Note No. 75 (Issue 4))
20.4.2 Asset classification for purposes of the corporate rules

The corporate rules apply to various transfers of assets described in detail in each of the provisions
in ss 42 to 47. For purposes of all these provisions, an asset refers to an asset as defined for capital
gains tax purposes (see chapter 17).
The classification of assets transferred is important for various reasons. Firstly, the definition of the
transaction that qualifies for relief often requires that the nature of the assets involved be considered
(i.e. trading stock or capital assets) to determine whether the relief is available. Secondly, the nature
of the assets involved determines the roll-over relief, as discussed in 20.4.4.
20.4.2.1 Trading stock

The term ‘trading stock’ has its meaning, as described in the definition in s 1 (see chapter 14). For
purposes of an asset-for-share transaction, amalgamation transaction, intra-group transaction and
liquidation distribution, the ‘term trading stock’ also includes livestock or produce, as contemplated in
the First Schedule to the Act (see chapter 22) (definition of ‘trading stock’ in s 41(1)).
20.4.2.2 Capital asset

In the context of the corporate rules, an asset is a capital asset if that asset is not trading stock (def-
inition of ‘capital asset’ in s 41(1)). The purpose and the intention with which a person holds or
acquires the asset determines the classification of an asset as a capital asset.
20.4.2.3 Allowance asset

A capital asset is an allowance asset if the taxpayer claimed deductions or allowances in respect of
that asset. An example of an allowance asset is a building that qualified for allowances in terms of
s 13quin. If, however, the building was acquired before 2007 and did not qualify for s 13quin allow-
ances, the building is a capital asset but not an allowance asset.
782
Debts contemplated in s 11(i) or (j), in respect of which a bad debt deduction or doubtful debt allow-
ance may be deducted, are allowance assets. This means that the transferor and transferee may be
deemed to be one and the same person for purposes of bad or doubtful debt allowances if the
corporate rules apply.
Remember
Adjusted gains or losses in respect of the transfer or redemption of instruments must be taken
into account in terms of s 24J, despite the application of the corporate rules (s 41(2)). This
complicates the application of the corporate rules to debt assets. It is necessary to determine
whether a debt is an instrument, as defined in s 24J, before considering the application of the
corporate rules to this asset.
20.4.3 Steps to liquidate, wind up or deregister

Several corporate rules require that the existence of an entity that is a party to the arrangement
should be terminated. This can be done by liquidation, winding-up or deregistration of that company.
To qualify for the relief in terms of the corporate rules, steps must be taken to liquidate, wind up or
deregister that company within a specified period (currently 36 months). The relief is retracted if this
is not done.
The steps to be taken to liquidate, wind up or deregister a company depend on whether the com-
pany is liquidated, wound up or deregistered. The steps are (s 41(4))
l the company must
– in the case of a liquidation or winding-up, lodge a resolution authorising the voluntary winding
up of the company in terms of its governing legislation
– in the case of deregistration of the company, lodge a request for the deregistration of the
company in terms of s 82(3)(b)(ii) of the Companies Act or file a notice of amalgamation or
merger in terms of s 116 of the Companies Act with the CIPC (or lodged or filed an equivalent
request or notice, in the case of a foreign company)
l the company must submit a copy of the resolution, request or notice to SARS
l in the case of a liquidation or winding-up, the company must dispose of all assets and settle its
liabilities, with the exception of assets required to satisfy liabilities reasonably expected to arise to
any sphere of government and the costs of liquidation or winding-up, and
l all returns or information required to be submitted or furnished to SARS by the end of the relevant
period during which these steps must be taken, must be submitted or furnished, or arrangements
for the submission of outstanding returns or information at a later date must have been made with
SARS.
20.4.4 Common relief mechanisms employed in the corporate rules

The corporate rules defer the tax implications that would otherwise result from the disposal of an
asset. They are not intended to exempt the gains from being taxed at all.
20.4.4.1 Roll-over of tax values and characteristics

The rules often achieve this outcome by deeming the asset to be disposed of by the transferor at an
amount equal to the cost of the asset for tax purposes. This effectively places the transferee in the
shoes of the transferor in relation to the asset. More specifically, this mechanism entails the following:
l An asset that is trading stock is deemed to be disposed of at the amount taken into account in
the transferor’s taxable income in respect of that stock (either as a deduction in terms of s 11(a)
or as opening stock in terms of s 22, depending on whether the asset was acquired in the current
or a previous year of assessment). The deemed amount received upon the disposal is equal to
the deduction. This results in no gain or loss being included in the taxable income of the trans-
feror. The transferee is deemed to acquire the trading stock for expenditure equal to this amount.
If the trading stock is sold by the transferee, the full gain between the selling price and the cost of
the stock in the hands of the transferor arises, and is taxed, in the hands of the transferee.
783
Example 20.9. Roll-over relief in respect of trading stock

A transferor transfers trading stock to a transferee in terms of a transaction that qualifies for roll-
over relief.
The transferor purchased the trading stock for an amount of R1 million. The stock has a market
value of R1,5 million at the time of the transaction that qualifies for roll-over relief.
The effect of the roll-over relief for the respective parties is:
Transferor
Deduction of the purchase price of the stock (s 11(a) or s 22) ................................ (R1 000 000)
Income: deemed disposal at cost taken into account for s 11(a) or s 22 ................ R1 000 000
Effect on taxable income .......................................................................................... –
Transferee
Deemed to have acquired the stock at an amount equal to the cost taken into
account by the transferor for purposes of s 11(a) or s 22 ........................................ (R1 000 000)
If the transferee sells the stock to an independent person at market value,
this amount should be included in gross income..................................................... R1 500 000
Effect on taxable income .......................................................................................... R500 000
This taxable gain in the hands of the transferee represents the gain that would have arisen in the
hands of the transferor, but that was deferred in terms of the roll-over relief until such time as the
transferee disposed of the trading stock to an external party. Most of the corporate rules ring-
fence the gain from being set-off against losses of the transferee if the asset is sold within
18 months of the transaction that qualified for roll-over relief. This anti-avoidance rule is dis-
cussed in more detail below.
l A capital asset is deemed to be disposed of for an amount equal to its base cost (as determined
for capital gains tax purposes (see chapter 17)). Because the proceeds and base cost amounts
are equal upon disposal, no capital gain or loss arises. The transferee is deemed to have
acquired the capital asset for an amount equal to this base cost. If the transferee disposes of the
capital asset, the full gain between the proceeds upon the disposal and the base cost of the
asset in the hands of the transferor arises, and will be taxed, in the hands of the transferee.
Example 20.10. Roll-over relief in respect of capital assets that do not qualify for
allowances
A transferor transfers a building that did not qualify for any allowances to a transferee in terms of a
transaction that qualifies for roll-over relief. The transferor purchased the building for an amount of
R1 million during 2005. The building’s market value has appreciated to R1,5 million at the date of
the transaction.
Transferor
As the building did not qualify for allowances, no recoupment arises in the hands of the transferor.
The disposal of an asset results in a capital gain or loss:
Proceeds: Deemed to be equal to the base cost...................................................... R1 000 000
Base cost .................................................................................................................. (R1 000 000)
Capital gain or loss in the hands of the transferor..................................................... –
Transferee
Assuming that the transferee does not use the property in a manner that qualifies for any allow-
ances, no deduction is granted in respect of it. If the transferee were to sell the property in
10 years’ time at its then market value of R5 million, the capital gains tax implications are:
Proceeds ................................................................................................................... R5 000 000
Base cost: Deemed to have acquired from transferor at an amount equal to
expenditure incurred by the transferor to acquire the building ................................. (R1 000 000)
Capital gain on disposal ........................................................................................... R4 000 000
This capital gain consists of two components, namely:
The capital gain that would have arisen in the hands of the transferor that was
deferred in terms of the roll-over relief until the transferee disposed of the asset to
an external party (R1 500 000 – R1 000 000) ............................................................ R500 000
The capital gain relating to the appreciation in the value of the property after the
date of the transaction that qualified for roll-over relief (R5 000 000 – R1 500 000) . R3 500 000
784
l If the capital asset is an allowance asset, a provision that states that there is no recoupment of
allowances deducted by the transferor complements the above roll-over mechanism. The
transferee may not deduct any amounts previously deducted by the transferor. This would result
in a duplication of the deduction of the amount already deducted by the transferor in the hands of
the transferee. The two persons involved are deemed to be one and the same person for
purposes of determining whether the transferee qualifies for a deduction or allowances in respect
of the asset.
Some roll-over relief provisions only apply if an asset that was held by the trans-
feror as an allowance asset is acquired by the transferee as a capital asset,
allowance asset or trading stock (depending on the circumstances). If an REIT (or
controlled company), as the transferee, acquires immovable property it will not be
Please note!
entitled to allowances in respect of this property (see s 41(2) read with s 25BB(4)
and chapter 19). The same roll-over treatment as described above applies to
these assets in the hands of the transferor of the asset despite the fact that the
REIT does not acquire the asset as an allowance asset.
If the transferee disposes of the asset, the transferee and transferor are also deemed one and the
same person for purposes of determining the amount of allowances to be recouped or recovered.
This means that the transferee is required to not only take into account a recoupment of amounts
deducted in respect of the asset by itself, but also the amounts previously deducted by the trans-
feror.
If an asset is transferred to an REIT (or controlled company), the allowances

Please note!
claimed by the transferor will be recouped if the REIT disposes of the asset.
Example 20.11. Roll-over relief in respect of capital assets that qualified for allowances
A transferor transfers a building in respect of which allowances were deducted in terms of

s 13quin to a transferee. The transaction qualifies for roll-over relief. The transferor purchased the
building for an amount of R1 million during 2010. It has deducted allowances amounting to
R400 000 up to the date of the transfer. The building’s market value has appreciated to
R1,5 million at the date of the transaction.
Transferor
The transferor does not recover or recoup the allowances claimed in its taxable income.
The disposal of an asset results in a capital gain or loss:
Proceeds: Deemed to be equal to the base cost...................................................... R600 000
Base cost (R1 000 000 – R400 000).......................................................................... (R600 000)
Capital gain or loss in the hands of the transferor..................................................... –
Transferee
The transferee and transferor are deemed to be one and the same person for purposes of
determining the allowances available to the transferee. The transferee is entitled to allowances in
terms of s 13quin even though the property was not new and unused when transferred to it. This
allowance is available on the basis that the property was new and unused when the transferor
acquired it.
If the transferee were to sell the property in 15 years’ time, after having deducted the remaining
R600 000 as allowances in terms of s 13quin, at its then market value of R5 million, the tax impli-
cations are:
Recoupment of allowances deducted by the transferor and transferee ................... R1 000 000
The recoupment consists of:
Recoupment of allowances deducted by the transferor that would have been
recouped in its hands if roll-over relief was not available ......................................... R400 000
Recoupment of allowances deducted by the transferee since acquiring the
property ..................................................................................................................... R600 000
The capital gains tax implications of the disposal are:
Proceeds (R5 000 000 – R1 000 000) ....................................................................... R4 000 000
Base cost: Deemed to have been acquired by incurring the expenditure incurred
by the transferor (R1 000 000) less allowances deducted by transferor and
transferee (R1 000 000) ............................................................................................ –
Capital gain on disposal ........................................................................................... R4 000 000
]
continued
785
This capital gain consists of two components, namely:

The capital gain that would have arisen in the hands of the transferor that was
deferred in terms of the roll-over relief until the transferee disposed of the asset to
an external party ((R1 500 000 – R400 000) – (R1 000 000 – R400 000)) ................. R500 000
The capital gain relating to the appreciation in the value of the property after the
date of the transaction that qualified for roll-over relief ............................................. R3 500 000
]
Remember
For the remainder of this chapter, the term ‘tax cost’ refers to
l the purchase price (for purposes of s 11(a)) or value of stock on hand (for purposes of s 22)
of trading stock
l the base cost of a capital asset, as contemplated in par 20 of the Eighth Schedule (see
chapter 17).
l If a business, which is disposed of as a going concern, includes a contract that involved

– amounts that accrued to the transferor that qualified for allowances in terms of s 24 in respect
of amounts not yet received (see chapter 12)
– amounts received by the transferor in terms of a contract that in respect of which it is entitled
to an allowance for future expenditure in terms of s 24C (see chapter 12), or
– amounts deducted in respect of future repairs to ships in terms of s 24P (see chapter 13)
in the preceding year of assessment, or that would have been allowed had the contract not been
transferred, the following roll-over mechanisms apply:
– the allowances previously granted to the transferor must not be included in the transferor’s
income, and
– the persons are deemed to be one and the same person for purposes of determining whether
the transferee is entitled to an allowance and for determining the income to be included in the
transferee’s income.
The following characteristics of the assets for the transferor are also deemed to be the same for the
transferee:
l The date of acquisition of the asset as well as the amounts and dates of expenditure incurred in
respect of the asset. If the asset is acquired as a capital asset, this refers to amounts included in
its base cost (par 20 of the Eighth Schedule). This transfer of the characteristics enables the
transferee to determine the valuation date value of an asset in the same manner as the transferor
would have determined the value (see chapter 17). In the case of trading stock, this refers to
amounts that have been deducted in respect of the trading stock.
l Any valuation of the asset effected by the transferor for valuation date value purposes is deemed
to have been obtained by the transferee (see chapter 17).
20.4.4.2 Interaction between the corporate rules and anti-dividend stripping rules (s 22B(3) and
par 43A(3) of the Eighth Schedule)
The anti-dividend stripping rules apply to certain disposals or deemed disposals of shares (as dis-
cussed in 20.2.5). The corporate rules may, however, afford roll-over relief to some of those
disposals. The anti-dividend stripping rules do not apply to the disposal of shares in terms of a
deferral transaction. Deferral transactions simply refer to transactions to which the corporate rules
apply (definition of ‘deferral transaction’ in s 22B(1) and par 43A(1) of the Eighth Schedule).
This exclusion presents taxpayers with the opportunity to circumvent the anti-dividend stripping rules
by entering into a deferral transaction after a dividend has been declared and disposing of the
shares acquired in that deferral transaction, rather than the shares in respect of which the dividend
accrued. To prevent this, the anti-dividend stripping rules apply to certain dividends that accrued to
or were received by another person or in respect of shares other than those that are disposed of if
the taxpayer acquired the shares in terms of a deferral transaction and disposes of any of those
shares within 18 months in a transaction that is not a deferral transaction. The legislation distin-
guishes between two scenarios in this regard:
l The first scenario applies where a company disposes of shares that it acquired in a deferral trans-
action from a person (previous shareholder) who is, or was, a connected person in relation to the
company
– at any time during 18 months prior to the disposal of the shares by the company, or
786
– immediately after the deferral transaction.

If the company disposes of such shares, any exempt dividends that accrued to or were received
by the previous shareholder during the 18 months before company disposed of the shares, must,
for purposes of the anti-dividend stripping rules, be treated as if it accrued to the company in
respect of the shares disposed of, rather than to the previous shareholder (s 22B(3)(a) and
par 43A(3)(a) of the Eighth Schedule).
l The second scenario deals with a situation where a company disposes of shares that it acquired
in a deferral transaction (new shares) in exchange for, or by reason of, any other shares that it
previously held and disposed of in that deferral transaction (old shares). Any exempt dividends
received in respect of the old shares during the 18 months prior to the disposal of the new shares
(other than dividends in the form of the new shares) must, for purposes of the anti-dividend
stripping rules, be treated as dividends that accrued to the company in respect of the new shares
(s 22B(3)(b) and par 43A(3)(b) of the Eighth Schedule).
These dividends are considered together with the dividends actually received by or accrued to that
company since acquisition when the anti-dividend stripping rules are applied to the disposal of the
shares.
20.4.5 Common anti-avoidance mechanisms employed in the corporate rules

Each corporate rule has its own anti-avoidance provisions. These provisions are considered in the
detailed discussion of each corporate rule in 20.5 to 20.10.
A number of the corporate rules however use the same ring-fencing anti-avoidance mechanism. The
roll-over mechanism described in 20.4.4 essentially transfers unrealised gains in respect of the asset
to the transferee. The transferee may have access to losses or deductions against which the gain can
be offset when it is realised. The ring-fencing rule prevents gains on the asset transferred to the
transferee from being set off against such losses or deductions of the transferee. These following
rules often apply where an asset that was acquired in terms of a transaction that qualified for roll-over
relief is disposed of by the transferee within 18 months of the transaction:
l The portion of any capital gain that arises when the transferee disposes of a capital asset that
does not exceed the gain that would have arisen had the asset been disposed of at its market
value at the time of the transaction that qualified for relief (i.e. the beginning of the 18-month
period), may not be set off against any assessed capital loss or in determining of the transferee’s
net capital gains (which may include capital losses in respect of other assets). This gain must be
included separately as a taxable capital gain in the transferee’s taxable income at the relevant
inclusion rate and may not be set off against any assessed loss or balance of assessed loss of
the transferee.
Example 20.12. Ring-fencing anti-avoidance rule – capital gains

A transferor transferred a building in respect of which no allowances were deducted to the trans-
feree. Both the transferor and transferee hold the building as a capital asset. The transaction
qualified for roll-over relief. The transferor purchased the building for an amount of R1 million
during 2010. At the time of the transaction that qualified for roll-over relief, the building had a
market value of R1,5 million.
The transferee owns a portfolio of shares, held as capital assets. The value of this portfolio
depreciated significantly over the past year. The shares were acquired at a cost of R2 million, but
only has a market value of R1,2 million at present.
Three months after the transfer of the building to it, the transferee sells the building for an amount
of R1,6 million. It simultaneously sells the portfolio of shares and realises a capital loss.
continued
787
The tax implications of the two transactions for the transferee before application of the ring-
fencing anti-avoidance rule are:
Sale of the building
Proceeds ................................................................................................................... R1 600 000
Base cost: Deemed to have acquired the building for expenditure incurred by the
transferor ................................................................................................................... (R1 000 000)
Capital gain ............................................................................................................... R600 000
Sale of the portfolio of shares
Proceeds ................................................................................................................... R1 200 000
Base cost .................................................................................................................. (R2 000 000)
Capital loss................................................................................................................ (R800 000)
Application of the ring-fencing anti-avoidance rule

The ring-fencing rule applies to so much of the capital gain that would have arisen had the
building been disposed of at its market value at the time of the transaction that qualified for roll-
over relief. This gain would have been:
Proceeds if the property was disposed of at market value at the time of the
transaction that qualified for roll-over relief ............................................................... R1 500 000
Base cost of the asset at the time of the transaction that qualified for roll-over
relief .......................................................................................................................... (R1 000 000)
Capital gain that the ring-fencing rule applies to ...................................................... R500 000
The effect of the ring-fencing rule is that R500 000 of the capital gain of R600 000 that arises
when the transferee disposes of the building cannot be set off against the capital loss that arose
on the disposal of the shares. The remaining capital gain of R100 000 on the sale of the building
can be set off against the capital loss of R800 000 suffered on the sale of the shares. A capital
loss of R700 000 is carried forward by the transferee. The ring-fenced capital gain of R500 000 is
included in its taxable income at an inclusion rate of 80% (i.e. R400 000 included as a taxable
capital gain). This gain may also not be set off against any assessed losses that the transferee
may have available.
l If the corporate roll-over rule allows for losses to be rolled over (in other words, the tax cost of the
asset transferred exceeds the market value at the time of the transaction), an additional rule
normally prevents capital losses in respect of assets transferred from being used against capital
gains arising from the disposal of other assets by the transferee. This rule determines that so
much of a capital loss in respect of the disposal of an asset, as does not exceed the loss that
would have arisen had the asset been disposed of at its market value at the time of the
transaction (i.e. the beginning of the 18-month period), must be disregarded in determining the
transferee company’s aggregate capital gain or loss. This capital loss may only be deducted
from a capital gain determined in respect of the disposal of another asset acquired in terms of the
transaction through which the loss was transferred.
l Any recoupment that arises on the disposal of an allowance asset that does not exceed the
recoupment that would have arisen had the allowance asset been disposed of at its market value
at the time of the transaction that qualified for relief (i.e. the beginning of the 18-month period) is
similarly ring-fenced. This recoupment is deemed to be attributable to a separate trade, where the
taxable income of this trade may not be set off against any assessed loss or balance of assessed
loss of the transferee.
788
Example 20.13. Ring-fencing anti-avoidance rule – income
A transferor transferred a machine in respect of which allowances were deducted in terms of

s 12C to a transferee. The transaction qualified for roll-over relief. The transferor purchased the
machine for an amount of R1 million and deducted allowances of R600 000 before the transfer. At
the time of the transaction that qualified for roll-over relief, the machine had a market value of
R800 000.
The transferee deducted further allowances of R200 000 in respect of the machine in terms of
s 12C before it sold the machine for R700 000 six months after the transaction that qualified for
roll-over relief.
The transferee has been in an assessed loss position for a number of years. It has a balance of
assessed loss of R20 million and an assessed loss for the current year (excluding the recoupment
on the sale of the machine) of R5 million.
The tax implications of the sale of the machine for the transferee, before application of the ring-
fencing anti-avoidance rule, are
Proceeds ................................................................................................................... R700 000
Tax value of the machine (R1 million – R600 000 – R200 000) ................................. R200 000
Recoupment (s 8(4)(a)) ............................................................................................. R500 000
Application of the ring-fencing anti-avoidance rule

The ring-fencing rule applies to so much of the recoupment that would have arisen had the
machine been disposed of at its market value at the time of the transaction that qualified for roll-
over relief. This recoupment would have been:
Proceeds if the machine was disposed of at market value at the time of the trans-
action that qualified for roll-over relief ....................................................................... R800 000
Tax value if the machine was disposed of at the time of the transaction that
qualified for roll-over relief (R1 000 000 – R500 000) ................................................ (R500 000)
Recoupment that the ring-fencing rule applies to ..................................................... R300 000
The effect of the ring-fencing rule is that the portion of the recoupment that relates to the recoup-
ment deferred under the roll-over relief (R300 000) cannot be set off against assessed losses or
the balance of the assessed loss of the transferee. The transferee is liable for normal tax on this
amount despite its assessed loss position.
The recoupment that relates to the allowances of R200 000 that the transferee deducted in
respect of the machine may be set off against such assessed losses or balance of assessed
losses.
l The portion of any gain on the disposal of trading stock transferred in terms of a transaction that
qualifies for relief that does not exceed the gain that would have arisen had the trading stock
been disposed of at its market value at the time of the transaction (i.e. the beginning of the 18-
month period) is ring-fenced in a similar manner as the recoupments described above. This ring-
fencing does normally not apply to trading stock that is regularly and continuously disposed of by
the transferee. It is often not practically possible to distinguish trading stock acquired in a trans-
action to which the corporate rules applied from trading stock acquired subsequently in the
normal course of business.
The ring-fencing provisions do not apply in respect of

l allowance assets acquired by an REIT, or controlled company, in terms of a
Please note! transaction that qualified for roll-over relief, or
l the disposal of assets contemplated in s 25BB(5) by an REIT or controlled
company.
20.5 Special rules: Asset-for-share transactions (s 42)

If a person transfers an asset to a company and retains an indirect interest in the asset through
substantial ownership in the company, this transaction may qualify for relief. This relief was initially
afforded to company formations, with a separate provision that applied to transactions where the
shares of one company were contributed to another (share-for-share transactions). These two sets of
rules were, however, later combined into a single relief measure that applies to a transaction in terms
of which an asset (shares or any other assets) is transferred to a company in exchange for an
ownership interest in the company.
789
20.5.1 Definition and scope

The relief measures in s 42 apply to asset-for-share transactions. The definition of an asset-for-share
transaction consists of two parts. The first part, in par (a), generally applies to domestic transactions.
The second part, in par (b), facilitates certain cross-border asset-for-share transactions.
20.5.1.1 Domestic asset-for-share transaction (par (a) of the definition of ‘asset-for-share

transaction’ in s 42(1))
A transaction is an asset-for-share transaction if it meets all the following requirements:
l A person transfers an asset, other than a restraint of trade or personal goodwill, to a company.
Remember
The definition of an asset-for-share transaction does not place any restriction on the type of the
person who transfers the asset to the company. A trust can therefore transfer an asset to a com-
pany and qualify for the relief if the transaction meets all the other requirements.
l The market value of the asset equals or exceeds its tax cost.
l The company to which the asset is transferred is a resident company.
l The company issues an equity share in that company to the person as consideration for the
asset.
Remember
Roll-over treatment is available in respect of assets transferred to a company in exchange for the
assumption of certain debts by that company (see 20.5.2.3 below).
l The person who transferred the asset

– holds a qualifying interest in the company at the close of the day of the disposal, or
The following interests in the company are qualifying interests as contemplated in the
definition of an asset-for-share transaction: (definition of ‘qualifying interest’ in s 42(1))
l an equity share held in a company listed on a South African exchange or a
company that will be listed within 12 months after the transaction as a result of
which the person holds the share
l an equity share held by that person in a company that forms part of the same
group of companies as the person, or
Please note!
l the person holds equity shares in a company, where those shares constitute at
least 10% of the equity shares of that company and confer at least 10% of the
voting rights in the company to the person.
The definition of asset-for-share transaction also provides for certain restructuring of
interests held in portfolios of collective investment schemes in securities or hedge
funds. An equity share held by a person in such a portfolio can also be a qualifying
interest.
– is a natural person who will be engaged on a full-time basis in the business of the company (or
a controlled group company in relation to the company) of rendering a service.
This requirement was introduced as an alternative to holding a qualifying interest

in order to assist professional partnerships to use the rollover relief when incorpor-
ating their businesses. This alternative requirement was necessary where a large
Please note! number of partners in professional service businesses acquired shareholding in
the incorporated business, but each held less than the threshold required for a
qualifying interest. It is often useful in practice where restructurings occur if
members of the service company’s management do not hold substantial share-
holdings.
790
l The purpose and intention with which the asset was held and is acquired fall within one of the
following combinations:
Nature in the hands of the Nature in the hands of the Circumstances where applied
person who transferred it company that acquired it
Trading stock Trading stock Any
Capital asset Capital asset Any
Only if the person and company do not
Capital asset Trading stock form part of the same group of com-
panies
If listed company shares are disposed of to a company and, following a series of

asset-for-share transactions within a 90-day period, the company holds a
substantial interest in the listed company, the requirements in the above table do
not apply (proviso to par (ii) to par (a) of the definition of ‘asset-for-share trans-
action’ in s 42(1)). This exception caters for the fact that a company that acquires
a substantial shareholding in a listed company, may be required to acquire the
Please note! shares from a number of shareholders of the listed company. It is often impractical
for the acquirer to ascertain and trace the purpose and intention of each of these
shareholders from whom it acquires the listed shares. A similar exception applies
to equity shares in portfolios of a collective investment scheme in securities or a
hedge fund collective investment scheme. The requirements do furthermore not
apply where any asset is disposed by a person to a portfolio of a hedge fund
collective investment scheme.
Example 20.14. Asset-for-share transactions
Discuss whether each of the following transactions is an asset-for-share transaction as contem-

plated in s 42:
l Scenario A: Thabo Dlamini owns a property in his own name as an investment property. He
intends to transfer the property to a South African company (Newco (Pty) Ltd) in exchange
for all the issued ordinary shares of Newco (Pty) Ltd and a cash amount of R500 000. Newco
(Pty) Ltd raised the cash by borrowing this amount from a financial institution to fund the
acquisition of the property. Newco (Pty) Ltd will continue to hold the property as an invest-
ment property.
l Scenario B: Thandi Dlamini speculates with properties. She intends to transfer her current
stock of properties to a South African company (Newco (Pty) Ltd) in exchange for all the
issued ordinary shares of Newco (Pty) Ltd. She intends to hold the Newco (Pty) Ltd shares
as a capital investment and carry on the property speculation business in Newco (Pty) Ltd
as opposed to in her personal capacity.
l Scenario C: Nobomi Ngwanya owns a number of properties in her own name as investment
properties. She intends to sell the properties to a property-owning company, Property Ltd.
Property Ltd will issue 25% of its issued preference shares to Nobomi as consideration. The
preference shares have a capital value of R1 500 000, at which it can be redeemed at any
time, and bear preference dividends at a fixed rate of 10% per annum. The intention of the
parties is that Property Ltd will use the rental income generated by the properties to redeem
the preference shares held by Nobomi.
l Scenario D: Johan Botha holds all the shares of Broker (Pty) Ltd, a small insurance
brokerage business. He received an offer from Insure Ltd, a listed company, to sell the
shares in Broker (Pty) Ltd to it in exchange for an equity interest in Insure Ltd. Insure Ltd will
issue 0,25% of its issued shares, with a value of R3 million, to Johan as consideration for the
Broker (Pty) Ltd shares.
l Scenario E: Piet du Toit holds all the shares of Tyres (Pty) Ltd, a retail tyre business. He
received an offer from a larger company, Car Ltd, that carries on a vehicle spare part retail
business, to sell the shares in Tyres (Pty) Ltd to Car Ltd. Car Ltd will issue one of its issued
shares to Piet as consideration for the Tyres (Pty) Ltd shares. These shares have a market
value of R2 million. One of the conditions of the transaction is that Piet will be in the full-time
employment of Car Ltd for a period of three years following the transaction.
continued
791
l Scenario F: The Khumalo Family Trust holds all the shares of Red Investments (Pty) Ltd, a
company that owns a paint business. The trustees of the Khumalo Family Trust wish to inter-
pose a holding company between the trust and Red Investments (Pty) Ltd. The Khumalo
Family Trust will transfer the Red Investments (Pty) Ltd shares to Holdco (Pty) Ltd in
exchange for all the issues shares of Holdco (Pty) Ltd.
You may assume that the market value of the assets transferred to the respective companies
exceeds the tax cost in all instances. You may furthermore assume that all ordinary shares
referred to may participate in dividend distributions and returns of capital to the extent of the
company’s profits or available distributable reserves. All persons are residents of South Africa for
tax purposes.
SOLUTION
Scenario A
Thabo transfers the property (asset) to a resident company (Newco (Pty) Ltd). The ordinary
shares issued by Newco are equity shares. Thabo will have a qualifying interest in Newco (Pty)
Ltd at the close of the day of the transaction if he holds all the shares in Newco (Pty) Ltd. Thabo
held the property as a capital asset and Newco (Pty) Ltd will continue to hold it for this purpose.
This is an asset-for-share transaction. As illustrated in Example 20.16 below, the relief in terms of
s 42 will only apply to the extent that the consideration for the transaction consists of equity
shares. The roll-over relief does not apply to the extent that Thabo became entitled to considera-
tion other than equity shares. He is therefore taxed on the cash consideration.
Scenario B
Thandi transfers the properties (assets) to a resident company (Newco). The ordinary shares
issued by Newco are equity shares. Thandi will have a qualifying interest in Newco at the close of
the day of the transaction if she holds all the shares in Newco (Pty) Ltd. Thandi held the prop-
erties as trading stock and Newco (Pty) Ltd continues to hold them for this purpose. This is an
asset-for-share transaction. The fact that Thandi will hold the Newco shares for long-term invest-
ment is irrelevant to the question whether the transaction is an asset-for-share transaction.
Scenario C
Nobomi transfers the properties (assets) to a resident company (Property Ltd). The preference
shares issued by Property Ltd are not equity shares as the right to participate in returns of capital
is limited to an amount of R1 500 000 and the right to participate in dividends to an annual
dividend of 10% of the outstanding capital value of the preference shares. Nobomi will divest
herself from the properties through this transaction, as opposed to retaining an ownership
interest. This is not an asset-for-share transaction.
Scenario D
Johan transfers the shares in Broker (Pty) Ltd (assets) to a resident company (Insure Ltd). The
ordinary shares issued by Insure Ltd are equity shares. As the shares of Insure Ltd are listed,
Johan will hold a qualifying interest despite not holding at least 10% of the issued equity shares
of Insure Ltd. Johan held the Broker (Pty) Ltd shares as capital assets. This is an asset-for-share
transaction irrespective of whether Insure Ltd intends to hold the shares as capital assets or
trading stock (Johan and Insure Ltd are not part of the same group of companies).
Scenario E
Piet transfers the shares in Tyres (Pty) Ltd (assets) to a resident company (Car Ltd). The ordinary
shares issued by Car Ltd are equity shares. Piet will hold less than 10% of the issued equity
shares of Car Ltd and therefore will not hold a qualifying interest at the close of the day of the
transaction. Even though he will be employed by Car Ltd on a full-time basis, the transaction is
not an asset-for-share transaction since Car Ltd’s business in which Piet is employed does not
appear to be that of rendering services. If, however, Car Ltd carried on a service business as
opposed to a spare parts retail business, the transaction could have been an asset-for-share
transaction.
Scenario F
The Khumalo Family Trust transfers the shares in Red Investments (Pty) Ltd (assets) to a resident
company (Holdco (Pty) Ltd). The ordinary shares issued by Holdco (Pty) Ltd are equity shares.
The Khumalo Family Trust will hold all of the issued equity shares of Holdco (Pty) Ltd and there-
fore a qualifying interest at the close of the day of the transaction. The Khumalo Family Trust held
the Red Investments (Pty) Ltd shares as capital assets and it appears as if the intention is that it
will continue to be held for this purpose by Holdco (Pty) Ltd. This is an asset-for-share trans-
action. This type of transaction is sometimes referred to as a share-for-share transaction.
792
20.5.1.2 Cross-border asset-for-share transaction (par (b) of the definition of ‘asset-for-share

In a cross-border context, a transaction is an asset-for-share transaction if all the following require-
ments are met:
l A company (transferor company) transfers an equity share in a foreign company that is held as a
capital asset to another foreign company (transferee company).
Remember
The definition does not have a specific requirement in respect of the residence of the transferor
company. The residence status of the transferor company is not relevant.
l The market value of the equity shares transferred equals or exceeds its base cost.
l The transferee company issues equity shares to the transferor company as consideration for the
asset.
l Immediately before the equity shares are disposed of:
– the transferee and transferor companies form part of the same group of companies (s 1
definition – see 20.4.1), and
– the transferee company is a controlled foreign company in relation to a resident company that
forms part of this group of companies.
l At the close of the day of the disposal, one of the following requirements is met:
– more than 50% of the equity shares of the foreign company (of which the equity shares are
disposed of) are directly or indirectly held by a resident (alone or with any company that
forms part of the same group of companies as the resident), or
– at least 70% of the equity shares in the transferee company are directly or indirectly held by a
resident (alone or with any company that forms part of the same group of companies as the
resident).
The scope of this definition is significantly narrower than that its domestic counterpart in par (a). This
definition only allows for roll-over treatment in respect of the restructuring of shareholdings in foreign
companies between companies in the same group of companies.
20.5.1.3 Exclusions from the scope of s 42 (s 42(8A))

No relief applies for asset-for-share transactions, even if the transaction meets the definition of an
‘asset-for-share transaction’, where
l Both parties to the transaction agree in writing that the relief does not apply. The parties can
make this election if they do not wish for the tax implications to be rolled-over to the company.
The reasons for this decision may be based on the tax position of the person who transfers the
asset (for example, if this person has tax losses against which the resulting gains can be set off).
Alternatively, the purchasers may wish to obtain the benefit of a tax cost equal to the purchase
price.
Remember
The relief measures in s 42 apply automatically to a transaction that meets the definition of an
asset-for-share transaction unless the parties elect for it not to apply.
l The disposal is not taken into account for purposes of determining the taxable income or assess-
ed loss of the person who disposes of the asset.
l The disposal is not taken into account for purposes of determining the proportional amount of the
net income of a controlled foreign company that is included in the income of a resident.
l The asset is a debt owing by the company or a share of the company to which it is disposed. The
relief in s 42 is therefore not available to share buyback transactions or the capitalisation of debts
owing by the company.
793
20.5.2 Relief
20.5.2.1 Person who transferred the asset and acquired equity shares in the company
The income tax implications of an asset-for-share transaction for the person that disposes of an asset
and acquires equity shares in a company are:
l No gain (trading stock), capital gain (capital asset) or recoupment (allowance asset) arises. The
roll-over mechanism described in 20.4.4 applies (ss 42(2)(a)(i) and s 42(3)).
l The person is deemed to have acquired the equity shares in the company at a tax cost equal to
the tax cost of the assets transferred (s 42(2)(a)(ii)).
l The person is deemed to have acquired the equity shares on the same date that the person
acquired the assets transferred (s 42(2)(a)(ii)).
When determining whether the person has held the equity shares for a period of at
least three years for the purposes of applying s 9C, the date of acquisition of the
consideration shares (and therefore the date from which the shares have been
Please note! held) must be the actual date when the equity shares were acquired, unless the
assets transferred by the person were equity shares. For all other purposes, for
example determining the valuation date value of the equity shares, the person
must be deemed to have acquired the consideration equity shares on the date
that the person acquired the asset that was transferred to the company.
l Any valuation that the person obtained in respect of the asset for purposes of determining its
valuation date value for capital gains tax must be deemed to have been obtained in respect of
the equity shares that the person now holds (s 42(2)(c)).
20.5.2.2 Company that acquired the asset

The income tax implications of an asset-for-share transaction for the company that acquires an asset
and that issues its own equity shares are:
l The tax cost of the asset in the hands of the company is based on the tax cost of the asset in the
hands of the person. The characteristics of the asset in the hands of the person are transferred to
the company. The roll-over mechanism described in 20.4.4 applies (ss 42(2)(b) and 42(3)).
l The amount that the company received for issuing the shares, for purposes of calculating its con-
tributed tax capital, is deemed to be the tax cost of the assets acquired where
– the person holds at least 10% of the equity shares in the company and these shares confer at
least 10% of the voting rights in the company to the person, or
– the natural person is engaged on a full-time basis in the business of the company (or con-
trolled group company) of rendering a service. (s 42(3A))
The above rules do not apply to certain transactions where listed company shares
are disposed of to a company and, following a series of asset-for-share
transactions within a 90-day period, the company holds a substantial interest in
the listed company (proviso to s 42(2)(b) and proviso to s 42(3A)). Practical diffi-
culties exist in tracing the tax costs of listed shares acquired from a number of
different previous shareholders. The tax cost of the listed shares acquired is
Please note! based on its market value. Similarly, the amount added to contributed tax capital
is based on the market value of the listed shares.
The same rules apply in respect of equity shares acquired in a portfolio of a
collective investment scheme in securities. The exception to the contributed tax
capital rule also applies where the asset is disposed of to a portfolio of a hedge
fund collective investment scheme.
794
Thandi Dlamini speculates with properties. She intends to transfer her current stock of properties
to a South African company (Newco (Pty) Ltd) in exchange for all the issued ordinary shares of
Newco (Pty) Ltd. She intends to hold the Newco (Pty) Ltd shares as a capital investment and
carry on the property speculation business in Newco (Pty) Ltd as opposed to in her personal
capacity. The proposed transaction will meet the definition of an asset-for-share transaction
(Scenario B in Example 20.14. explains the application of this definition to the transaction).
Thandi incurred expenditure of R5 million to acquire the four properties. The properties were
acquired between 2014 and 2017. The four properties, and therefore also the Newco (Pty) Ltd
shares, are currently valued at R9 million.
Discuss and calculate the application of the relief measures in terms of s 42 to the transaction for
Thandi and Newco (Pty) Ltd.
SOLUTION
Thandi Dlamini
Thandi is deemed to have disposed of the properties at an amount equal to the cost taken into
account in her taxable income in respect of the trading stock (R5 million). As a result, no gain is
included in her taxable income (s 42(2)(a)(i)).
Thandi is deemed to have acquired the Newco (Pty) Ltd shares for expenditure equal to
R5 million (s 42(2)(a)(ii)). This forms the base cost when the shares are disposed of in future.
Although not explicitly stated in s 42, it is presumed that each share would have a pro rata
portion of the base cost amount. Thandi is deemed to have acquired the shares in respect of
each property on the date that she acquired that property (s 42(2)(a)(ii)). As the properties are
not equity shares, the date from which she has held the Newco (Pty) Ltd shares for purposes of
the three-year holding requirement in s 9C will be the date on which she disposed of the prop-
erties to Newco (Pty) Ltd.
Newco (Pty) Ltd
Newco (Pty) Ltd is deemed to have acquired the properties at expenditure equal to the expendi-
ture incurred by Thandi to acquire each property and on the same dates that she incurred the ex-
penditure (ss 42(2)(b) and 42(3)). This expenditure is added to Newco (Pty) Ltd’s contributed tax
capital (s 42(3A)).
Note
Section 42 applies to each asset disposed of to Newco (Pty) Ltd. Thandi and Newco (Pty) Ltd
may agree in writing that the relief provisions do not apply to certain of the properties. They may
wish to do so if the market value and tax cost are relatively close to each other and it would be
unnecessarily onerous to take the anti-avoidance rules in s 42 into account if the relief was used.
20.5.2.3 Asset-for-share transactions involving elements of consideration other than equity

shares (s 42(4) and 42(8))
The consideration paid by the company for the asset(s) acquired may include consideration other
than the equity shares issued to the counterparty. This can include cash consideration, consideration
that remains outstanding on a loan account, the issuing of shares that are not equity shares or the
assumption of debt from that person by the company.
Where a person disposes of an asset to a company in terms of an asset-for-share transaction and
also becomes entitled to consideration, other than the equity shares issued to it by the company, the
disposal of the assets by the person is apportioned. The transaction is separated into a part that is
deemed to be disposed of in terms of an asset-for-share transaction, which qualifies for relief, and a
part that is deemed to not be an asset-for-share transaction. This apportionment must be done on the
basis of the relative market values of the elements of the consideration. If a person disposes of an
asset to a company in terms of an asset-for-share transaction and receives equity shares, which
constitute 80% of the market value of the consideration, and cash for the remaining 20%, the roll-over
relief measures described above therefore only apply in respect of the disposal of 80% of the assets.
The other 20% of the assets are deemed to be disposed of other than in terms of an asset-for-share
transaction. The normal tax implications apply to this disposal (s 42(4)).
795
Thabo Dlamini owns an investment property. He intends to transfer the property to a South
African company (Newco (Pty) Ltd) in exchange for all the issued ordinary shares of Newco (Pty)
Ltd and a cash amount of R500 000. Newco (Pty) Ltd raised the cash by borrowing this amount
from a financial institution to fund the acquisition of the property. Newco (Pty) Ltd will continue to
hold the property as an investment property. This transaction is an asset-for-share transaction
(Scenario A in Example 20.14. explains the application of this definition to the transaction).
Thabo incurred expenditure amounting to R900 000 to acquire the property in 2010. The prop-
erty did not qualify for any allowances. The property is currently valued at R1,5 million. The ordin-
ary shares issued by Newco (Pty) Ltd to Thabo are valued at R1 million.
Discuss and calculate the application of the relief measures in terms of s 42 to the transaction for
Thabo and Newco (Pty) Ltd.
SOLUTION
Thabo Dlamini
Thabo is deemed to have disposed of the property for an amount equal to its base cost to the
extent that he receives equity shares in Newco (Pty) Ltd. The portion of the property deemed to
be disposed of in this manner is:
R900 000 × (R1 000 000)/(R1 000 000 + R500 000) = R600 000
Thabo does not realise any capital gain on the disposal of this portion of the disposal.
He realises a capital gain on the disposal of the remaining portion of the property that does not
qualify for roll-over relief. This capital gain is determined as follows:
Proceeds on disposal ................................................................................................. R500 000
Base cost of the property that does not qualify for relief (R900 000 – R600 000) ....... (R300 000)
Capital gain on disposal.............................................................................................. R200 000
Thabo is deemed to have acquired the Newco (Pty) Ltd shares for expenditure equal to
R600 000 (s 42(2)(a)(ii)). This forms the base cost when the shares are disposed of in future.
Thabo is deemed to have acquired the shares on the date that he acquired that property
(s 42(2)(a)(ii)).
Newco (Pty) Ltd
To the extent that the relief applied, Newco (Pty) Ltd is deemed to have acquired the property at
expenditure equal to the expenditure incurred by Thabo to acquire each property and on the
same dates that he incurred the expenditure (s 42(2)(b) and 42(3)). Newco (Pty) Ltd’s expen-
diture incurred to acquire the property is:
Expenditure deemed to be expenditure incurred by Thabo to the extent that the
transaction qualified for relief .................................................................................... R600 000
Expenditure incurred in cash by Newco (Pty) Ltd ..................................................... R500 000
Expenditure incurred by Newco (Pty) Ltd to acquire the property............................ R1 100 000
The expenditure that relates to the issued shares and to which the relief applied (R600 000) is
added to Newco (Pty) Ltd’s contributed tax capital (s 42(3A))
Despite the above rules, roll-over treatment applies when the company assumes certain debts from
the person, even though these debts are not equity share consideration (s 42(8)). If the company
assumes the following debts, roll-over treatment still applies to the disposal of the asset to the com-
pany, provided that the transaction meets the definition of an asset-for-share transaction:
l A debt secured by the asset that is disposed of by the person in terms of the asset-for-share
transaction, if this debt was incurred (s 42(8)(a))
– more than 18 months before the asset-for-share transaction, or
– within the period of 18 months before the asset-for-share transaction at the same time when
the asset was acquired, or
– within the period of 18 months before the asset-for-share transaction if it represents a re-
financing of either of the above debts.
The roll-over relief applies if the company assumes the secured debt or an equivalent amount of
debt.
796
l Any amount of debt attributable to and that arose in the normal course of business, where any
business undertaking is disposed of as a going concern to the company in terms of an asset-for-
share transaction (s 42(8)(b)).
If the company assumed these debts and roll-over treatment applied to the disposal of the asset, the
person must, upon the subsequent disposal of the equity shares in the company, treat the face value
of the debt so assumed as
l a return of capital in respect of the equity share immediately before the disposal, if the equity
share is held as a capital asset (s 42(8)(A)). For disposals prior to 1 January 2022, this amount
was treated as proceeds in respect of the disposal.
l an amount included as income immediately before the disposal of the equity share, if the equity
shares are held as trading stock (s 42(8)(B)).
This means that the person is ultimately taxed when a realisation event (disposal of the equity shares)
takes place. The effect of the amendments that take effect from 1 January 2022 is that the return of
capital or inclusion in income, as the case may be, occurs irrespective of whether the disposal of the
equity shares is subject to the corporate rules or not. This implies that where a taxpayer enjoyed relief
under s 42(8) previously, the subsequent disposal of the shares is unlikely to be tax neutral, even if
that subsequent disposal qualifies for relief under the corporate rules.
This treatment applies even if the person still has potential exposure to the debt as a result of being
liable as surety for its settlement.
Remember
In the context of the corporate rules, debt includes contingent liabilities (definition of ‘debt’ in
s 41). Although a contingent liability has not yet been incurred, it is deemed to be a debt incurred
for roll-over relief purposes.
20.5.3 Anti-avoidance rules (s 42(5) to 42(7))

The relief in respect of asset-for-share transactions is subject to a number of anti-avoidance rules.
Ring-fencing of gains in respect of the asset upon subsequent disposal

Gains in respect of the assets transferred are ring-fenced if realised by the company within
18 months of the asset-for-share transaction (s 42(7)). This rule employs the mechanism described in
20.4.5. Since an asset-for-share transaction requires that the market value of the asset transferred
must be equal to or exceed its tax cost, the capital loss ring-fencing mechanism does not apply.
Prevention of conversion of revenue gains into capital gains

The second anti-avoidance rule prevents the use of asset-for-share transactions to convert gains that
would have been income in nature into being capital in nature. This risk exists if assets, which if
disposed of by the person would have resulted in income or recoupments, are transferred to a
company in terms of an asset-for-share transaction. If the person acquires the equity shares in the
company as capital assets, it may be possible to facilitate the disposal of the assets by the disposing
of the equity shares in the company. In the absence of an anti-avoidance rule, the full gain arising on
the disposal of the equity shares could be capital in nature, even though the shares derive their value
from these assets with income gains attaching to it.
To counter this, the disposal of any equity share in a company acquired by a person in terms of an
asset-for-share transaction within 18 months from the date of the transaction may give rise to income
(s 42(5)). This is the case where more than 50% of the market value of the assets disposed of by the
person to the company in terms of a transaction to which the corporate rules applied consisted of
allowance assets or trading stock. In such a case, the amount received by or accrued to the person
in respect of the disposal of equity shares is included in income to the extent that it is less than, or
equal to, the market value of that equity share at the beginning of the 18-month period. Any excess in
the amount received by or accrued to the person upon disposal of the equity share is taxed in
accordance with the person’s intention and purpose for which the share is held.
797
Example 20.17. Disposal of shares within 18 months

Thandi Dlamini speculates with properties. She intends to transfer her current stock of properties
to a South African company (Newco (Pty) Ltd) in exchange for all the issued ordinary shares of
Newco (Pty) Ltd. She intends to hold the Newco (Pty) Ltd shares as a capital investment and
carry on the property speculation business in Newco (Pty) Ltd as opposed to in her personal
capacity. The transaction was an asset-for-share transaction (Scenario B in Example 20.13.
explains the application of this definition to the transaction).
Thandi incurred expenditure amounting to R5 million to acquire the four properties. The prop-
erties were acquired between 2014 and 2017. The four properties, and therefore also the Newco
(Pty) Ltd shares, are currently valued at R9 million (Example 20.15. illustrates the application of
the relief measures in s 42 to this transaction).
A year after the transaction, Thandi received an unexpected opportunity to sell all the Newco
(Pty) Ltd shares. She sold all the Newco (Pty) Ltd shares for an amount of R15 million.
Discuss the tax implications of the disposal of the Newco (Pty) Ltd shares for Thandi.
SOLUTION
Assuming that Thandi can discharge the burden of proving that the Newco (Pty) Ltd shares were
not held as part of a scheme of profit-making, but rather with a long-term investment intention,
the proceeds are of a capital nature. As explained in Example 20.13, the provisions of s 9C do
not deem the proceeds to be of a capital nature if Thandi only held the Newco (Pty) Ltd shares
for a period of one year.
The anti-avoidance rule in s 42(5) applies as all four properties transferred to Newco (Pty) Ltd
were held as trading stock by Thandi. The extent to which the amount that Thandi received from
the disposal of the Newco (Pty) Ltd shares is equal to the market value of the Newco (Pty) Ltd
shares at the date of the transfer of the properties (R9 million), it is included in her income.
The capital gain on the disposal of the shares is calculated as follows:
Amount received on disposal of Newco (Pty) Ltd shares .......................................... R15 000 000
Less: Amount included in income (par 35(3) of the Eighth Schedule)....................... (R9 000 000)
Proceeds .................................................................................................................... R6 000 000
Base cost of the Newco (Pty) Ltd shares (see Example 20.14.) ................................ (R5 000 000)
Capital gain on disposal ............................................................................................ R1 000 000
Person ceases to be sufficiently interested or involved in the company

Asset-for-share transactions benefit from relief on the basis that the person remains sufficiently
interested in the ownership of the asset after the transaction. The legislation achieves this by
requiring that the person must hold a qualifying interest in the company or be employed in its
business, as discussed in 20.5.1.2.
If this ownership interest ceases to exist within a period of 18 months from the date of the asset-for-
share transaction, the relief is forfeited. This occurs when
l the person ceases to hold at least 10% of the equity shares of the company that confers at least
10% of the voting rights in the company to it
l the person ceases to hold an equity share in a company that forms part of the same group of
companies as the person, or
l the person ceases to be engaged on a full-time basis in the business of the company or a
controlled group company, as contemplated in the definition of an asset-for-share transaction.
If any of the above events occur, the person is deemed to have disposed of all the equity shares
acquired in terms of the asset-for-shares transaction that are still held when the event takes place.
This disposal is deemed to be made for an amount equal to its market value at the date of the asset-
for-share transaction (s 42(6)(a)(aa)). The person is deemed to immediately thereafter re-acquire the
shares for the same amount (s 42(6)(a)(bb)). The effect of this deemed disposal and re-acquisition is
that the gains, in respect of which the tax implications have been deferred because the transaction
qualified for roll-over relief, are now taxed when it becomes evident that the relief should not have
been granted.
A similar provision exists for cross-border asset-for-share transactions when the person and the
foreign company (transferee) cease to form part of the same group of companies, or the foreign
company (transferee) ceases to be a controlled foreign company in relation to a resident that forms
part of the same group of companies (s 42(6)(b)).
798
The anti-avoidance rules in ss 42(5) and 42(6) do not apply when the equity shares
are disposed of, or the person ceases to hold a qualifying interest in the company,
as a result of
l an intra-group transaction, as contemplated in s 45 (see 20.8)
Please note! l an unbundling transaction, as contemplated in s 46 (see 20.9)
l a liquidation distribution, as contemplated in s 47 (see 20.10)
l an involuntary disposal, as contemplated in par 65 of the Eighth Schedule (see
chapter 17)
l a deemed disposal upon the death of the person (see chapter 25).
Remember
In addition to the specific anti-avoidance rules contained in s 42, the application of s 42 is sub-
ject to the application of s 24BA (see 20.2.1.2), the value shifting rules in the Eighth Schedule
(see chapter 17) and the general anti-avoidance rules (see chapter 32). Example 20.3 illustrates
this interaction.
20.6 Special rules: Substitutive share-for-share transactions (s 43)

An exchange or conversion of shares is a disposal event and has tax implications (see 20.2.2.4).
Section 43 was initially introduced to allow a shareholder to swap shares in a single company.
Following the enactment of s 43 in 2012 with a relatively wide scope, the definition of a substitutive
share-for-share transaction was significantly narrowed in 2013 due to tax avoidance concerns. The
narrowed s 43 only applies to linked units in property loan stock companies that are exchanged for
shares. This facilitates conversions by REITs.

A substitutive share-for-share transaction refers to a transaction between a person and company in
terms of which
l a person disposes of an equity share in the form of a linked unit in the company, and
l acquires an equity share, other than a linked unit in the company (definition of ‘substitutive share-
for-share transaction’ in s 43(1)).
A ‘linked unit’ is defined in s 1 as a unit comprising a share and a debenture in a

Please note! company, where that share and that debenture are linked and are traded together
as a single unit. These linked units typically exist in a property loan stock (PLS)
structure.
The provision facilitates the tax neutral conversion of linked units in a company into equity shares.
The conversion of linked units in a PLS structure into equity shares in an REIT is a substitutive share-
for-share transaction.
20.6.2 Relief
If a person disposes of a linked unit and acquires another equity share in the company in terms of a
substitutive share-for-share transaction, the person is deemed to (s 43(2))
l have disposed of the linked unit at its tax cost (in the manner discussed in 20.4.4)
l have acquired the equity share on the latest date that a linked unit, which was disposed of, was
acquired by the person
l acquired the equity share at a tax cost equal to that of the linked unit.
If a person disposes of a linked unit that was acquired before 1 October 2001,
which is a pre-valuation date asset, and acquires an equity share other than a
linked unit in terms of a substitutive share-for-share transaction, a disposal at
Please note!
market value is deemed to take place at the time of the conversion. This deemed
disposal does not trigger any immediate tax implications. It is only deemed to
occur for purposes of establishing a cost and date of acquisition of the equity
shares acquired by the person (s 43(1A)).
799
If a company issues an equity share in terms of a substitutive share-for-share transaction, the issue
price of the linked unit that the counterparty disposes of is deemed to be the contributed tax capital
in respect of the class of equity share issued (s 43(4A)).
If a person that disposes of a linked unit becomes entitled to an equity share in the company and
consideration other than a dividend, foreign dividend or equity share, the relief only applies partially
to the transaction (ss 43(4)(a) and 43(4)(b)(i)). The tax cost of the part of the transaction to which the
relief applies is based on the ratio of the market value of the equity shares to the total consideration
received by the person (s 43(4)(b)(i)).
20.7 Special rules: Amalgamation transactions (s 44)

Two or more companies may merge their businesses into a single entity for a number of reasons,
including synergy benefits and cost savings. If the amalgamation complies with s 44, this outcome
can be achieved in a tax neutral manner.

The relief available to merger or amalgamation transactions applies to amalgamation transactions, as
defined in s 44(1). The definition of an amalgamation transaction has three components. The first
component is mainly aimed at domestic transactions (par (a) of the definition). The last two compo-
nents are aimed at cross-border transactions (paras (b) and (c) of the definition).
20.7.1.1 Domestic amalgamation transaction (par (a) of the definition of ‘amalgamation

A transaction is an amalgamation transaction if all the following requirements are met:
l A resident company (amalgamated company) disposes of all its assets.
The amalgamated company does not have to dispose of assets that it elects to
use:
Please note!
l to settle debts incurred in the ordinary course of its business, or
l to satisfy any reasonably anticipated liability to any sphere of government of
any country and the costs of administration of the liquidation or winding-up.
l The assets are disposed of to another resident company (the resultant company).
l The disposal is done by means of an amalgamation, conversion or merger transaction.
l The existence of the amalgamated company must be terminated as a result of the transaction.
Example 20.18. Amalgamation transactions
Discuss whether each of the following transactions is an amalgamation transaction as contem-

plated in s 44:
l Scenario A: Sweetzy (Pty) Ltd is a company that manufactures sweets. It has 10 shareholders
who are all natural persons. An opportunity exists to merge its business into that of Chocie
Ltd, a large company also involved in the same industry. Sweetzy (Pty) Ltd will transfer its
whole business to Chocie Ltd in exchange for 10% of the shares of Chocie Ltd. Sweetzy
(Pty) Ltd will distribute the Chocie Ltd shares to the 10 shareholders, following which the
existence of Sweetzy (Pty) Ltd will be terminated. Each Sweetzy (Pty) Ltd shareholder will
hold between 0,25% and 1,5% of the issued shares of Chocie Ltd after the transaction.
l Scenario B: Shoes Ltd is a company that primarily manufactures shoes but has also devel-
oped a clothing line in recent years. It identified an opportunity to merge its clothing line with
that of Shirt Ltd, a large company that is also involved in the clothing industry. Shoes Ltd will
transfer its clothing line business to Shirt Ltd in exchange for 20% of the shares of Shirt Ltd.
You may assume that all shares referred to may participate in dividend distributions and returns
of capital from company’s profits or available distributable reserves and are therefore equity
shares. All persons are residents of South Africa for tax purposes.
800
SOLUTION
Scenario A
Sweetzy (Pty) Ltd, a resident company, will dispose of all its assets to Chocie Ltd, also a resident
company. The transaction is in the form of a merger of the two businesses. Sweetzy (Pty) Ltd’s
existence will be terminated following the transaction. The transaction will be an amalgamation
transaction as contemplated in s 44. Sweetzy (Pty) Ltd is the amalgamated company and Chocie
Ltd the resultant company. Unlike an asset-for-share transaction in terms of s 42, there is no
qualifying interest requirement for the amalgamated company shareholders in terms of their
ownership in the resultant company.
Scenario B
Shoes Ltd, a resident company, will only dispose of some of its assets to Shirt Ltd, also a
resident company. Shoes Ltd’s existence will not be terminated as a result of the transaction. The
transaction is not an amalgamation transaction as contemplated in s 44. It may be possible to
structure the transaction in terms of which Shoes Ltd’s clothing business is transferred to Shirt
Ltd as an asset-for-share transaction.
20.7.1.2 Cross-border amalgamation transactions (paras (b) and (c) of the definition of
‘amalgamation transaction’ in s 44(1))
The first cross-border transaction that is an amalgamation transaction for purposes of s 44 is one
where all the following requirements are met: (par (b) of the definition of ‘amalgamation transaction’ in
s 44(1)):
l A foreign company (amalgamated company) disposes of all its assets, other than those used to
settle debts that arose in the ordinary course of its business, and anticipated liabilities and
administration costs relating to its liquidation or winding-up.
l The assets are disposed of to a resident company (the resultant company).
l The disposal is done by means of an amalgamation, conversion or merger transaction.
l Immediately before the transaction, any shares in that amalgamated company are held as capital
assets.
This definition refers to an inbound amalgamation where the assets of a foreign company are trans-
ferred to a resident company, and therefore into the South African tax net.
The second cross-border transaction that meets the definition of an amalgamation transaction in
s 44(1) is a transaction that complies with all the following requirements (par (c) of the definition of
‘amalgamation transaction’ in s 44(1)):
l A foreign company (amalgamated company) disposes of all its assets, other than those used to
settle debts that arose in the ordinary course of its business, and anticipated liabilities and
administration costs relating to its liquidation or winding-up.
l The assets are disposed of to another foreign company (the resultant company).
l This disposal is done by means of an amalgamation, conversion or merger transaction.
l Immediately before the transaction, the following requirements are met:
– the amalgamated company and resultant company form part of the same group of companies
– the resultant company is a controlled foreign company in relation to a resident that forms part
of the same group of companies, and
– any shares in that amalgamated company that are directly or indirectly held by the resultant
company are held as capital assets.
l Immediately after the transaction, more than 50% of the equity shares of the resultant company
are directly or indirectly held by a resident (alone or with companies that form part of the same
group of companies).
20.7.1.3 Exclusions from the scope of s 44 (s 44(13) and 44(14))

The following transactions do not enjoy relief under s 44, despite the fact that the transaction meets
the definition of an amalgamation transaction:
l The parties to an amalgamation transaction formed part of the same group of companies imme-
diately before and after the transaction, and elected for the relief not to apply (s 44(14)(g)).
l Any transaction that is a liquidation distribution, as defined in s 47 (see 20.10) (s 44(14)(a)). This
exclusion avoids any overlap that may exist between the two relief measures.
801
l Any transaction, where the resultant company is any of the following entities in whose hands the
tax treatment of the assets may differ from the treatment in the hands of the amalgamated com-
pany:
– a co-operative (s 44(14)(b))
– any association (other than an incorporated association or close corporation) formed in South
Africa to serve a specified purpose, beneficial to the public or a section of the public
(s 44(14)(b))
– a non-profit company as defined in s 1 of the Companies Act (s 44(14)(c))
– a public benefit organisation or recreational club approved as such by SARS (s 44(14)(f))
– a company in whose hands any amount that is gross income is exempt from tax (s 44(14)(e))
– a portfolio of a collective investment scheme in securities (unless the amalgamated company is
also a portfolio of a collective investment scheme in securities) (s 44(14)(bA))
– a portfolio of a hedge fund investment scheme (unless the amalgamated company is also a
portfolio of a hedge fund collective investment scheme) (s 44(14)(bB)).
In addition, the relief measures in s 44 do not apply where the amalgamated company has not taken
steps to liquidate, wind up or deregister (see 20.4.3) within 36 months after the transaction. SARS
may allow an extension of this period (s 44(13)(a)). If the steps have been taken, but are subse-
quently withdrawn or anything has been done to invalidate any step taken, which results in the com-
pany not being liquidated, wound up or deregistered, the relief is also forfeited (s 44(13)(b)). Any tax
that becomes payable due to the required steps not being taken within the prescribed period or
being withdrawn or invalidated subsequently, may be recovered from the resultant company.
20.7.2 Relief
The relief for amalgamation transactions affect three parties, namely the amalgamated company, its
shareholders and the resultant company.
20.7.2.1 Amalgamated company

The income tax implications for the amalgamated company that disposes of its assets are the
following:
l No gain (trading stock), capital gain (capital asset) or recoupment (allowance asset) arises. The
roll-over mechanism described in 20.4.4 applies (ss 44(2) and 44(3)). In the case of a cross-
border amalgamation, this relief only applies if the market value of the asset is equal to or
exceeds its tax cost. This prevents tax losses from being brought into the South African tax net
using an amalgamation transaction.
The above relief only applies to the extent that the amalgamated company dis-
poses of its assets to the resultant company in exchange for any of the following
consideration (s 44(4)):
l any equity share(s) in the resultant company
l the assumption of debts of the amalgamated company by the resultant com-
pany, where those debts were incurred by the amalgamated company
– more than 18 months before the disposal
– within 18 months before the disposal, but only if
• the debt represents a refinancing of the above debt, or
• arose in the ordinary course of the amalgamated company’s business
Please note! which is disposed of as a going concern to the resultant company.
Debt includes contingent liabilities (definition of ‘debt in s 41).
In all these instances, the debt must not have been incurred by the amalgamated
company for the purpose of procuring, enabling, facilitating or funding the acqui-
sition of any asset in terms of the amalgamation transaction by the resultant com-
pany. If this is the case, this may represent a divestment transaction, which should
not qualify for roll-over relief.
If the consideration paid to the amalgamating company by the resultant company
includes any other components (for example cash consideration) the roll-over relief
does not apply to the transaction to the extent of this consideration. The relief is
also not afforded to the shareholders of the amalgamating company if this con-
sideration is subsequently distributed to them.
802
l The amalgamated company must disregard the disposal of any equity shares in the resultant
company for purposes of determining its taxable income or assessed loss (s 44(8)).
20.7.2.2 Resultant company

The income tax implications for the resultant company, which acquires the assets from the amal-
gamated company, are:
l The tax cost of the asset in the hands of the resultant company is based on the tax cost of the
asset in the hands of the amalgamated company. The characteristics of the asset in the hands of
the amalgamated company are also transferred to the resultant company. The roll-over
mechanism described in 20.4.4 applies (s 44(2) and 44(3)). This treatment only applies to the
extent that the resultant company acquires the assets in exchange for equity shares in the
resultant company or the assumption of debts indicated in 20.7.2.1 above.
l The resultant company’s contributed tax capital is increased when it issues shares in exchange
for the assets acquired in an amalgamation transaction. The amount is determined with reference
to the contributed tax capital of the amalgamated company. It is calculated as the contributed tax
capital of the amalgamated company at the time of termination of its existence multiplied by the
ratio of the value of the amalgamated company shares held by shareholders, other than the
resultant company, divided by the total value of all its shares (s 44(4A)). The contributed tax
capital of the amalgamated company, to the extent not already attributable to the resultant
company, is effectively transferred to the resultant company’s contributed tax capital when an
amalgamation transaction takes place.
20.7.2.3 Shareholders of the amalgamated company

The shareholders of the amalgamated company exchange their shares in the amalgamated company
for shares in the resultant company, which they receive by virtue of the shares held in the amalgam-
ated company and in pursuance of the amalgamation transaction. The availability of the relief meas-
ures to these shareholders depends on the purpose with which they hold the shares of the amal-
gamated company and will hold the shares of the resultant company in future. The relief only applies
in the following circumstances (s 44(6)(a)(i) and (ii)):
Nature of the amalgamated company share in Nature of the resultant company share in the
the hands of the shareholder hands of the shareholder
Capital asset Capital asset or trading stock
Trading stock Trading stock
The relief available to shareholders who meet the above requirements is:
l The shareholder is deemed to have disposed of the equity shares held in the amalgamated
company for an amount equal to its tax cost (s 44(6)(b)(i)). No gain or loss arises on the disposal
of the amalgamated company shares.
l The shareholder is deemed to have acquired the equity shares in the resultant company on the
same date that it acquired the shares in the amalgamated company and for cost equal to the
expenditure incurred in respect of the tax cost of those shares in the amalgamated company
(s 44(6)(b)(ii)). These costs are deemed to have been incurred on the same date that it incurred
such expenditure in respect of the amalgamated company shares (s 44(6)(b)(iii)).
l The shareholder is deemed to have performed any valuation of the amalgamated company
shares for purposes of establishing its valuation date value for capital gains tax in respect of the
equity shares acquired in the resultant company (s 44(6)(b)(iv)).
l No amount is deemed to be transferred or applied for the benefit of the shareholder by the amal-
gamated company when it distributes the equity shares in the resultant company (s 44(6)(c)). No
dividend or return of capital arises.
803
If the shareholder becomes entitled to any consideration other than equity shares
in the resultant company, the above relief provisions only apply to the extent of the
equity shares in the resultant company. This is determined using the ratio between
the value of the equity shares in the resultant company to the total consideration
received by the shareholder. (s 44(6)(d))
To the extent that the other consideration does not exceed the market value of all
Please note! the assets of the amalgamated company less its liabilities and contributed tax
capital of all classes of shares immediately before the amalgamation, it must be
deemed to be an amount transferred or applied for the benefit of a person in
respect of a share by the amalgamated company for purposes of determining
whether a dividend or return of capital is made by the amalgamated company.
(s 44(6)(e))
Example 20.19. Amalgamation transactions – relief
Sweetzy (Pty) Ltd is a company that manufactures sweets. It has 10 shareholders who are
natural persons. It identified an opportunity to merge its business into that of Chocie Ltd, a large
company also involved in the same industry. Sweetzy (Pty) Ltd will transfer its whole business to
Chocie Ltd in exchange for 10% of the shares of Chocie Ltd. The Chocie Ltd shares will be
distributed to the 10 shareholders, following which Sweetzy (Pty) Ltd’s existence will be termin-
ated. Each Sweetzy (Pty) Ltd shareholder will hold between 0,25% and 1,5% of the issued
shares of Chocie Ltd after the transaction. This transaction meets the definition of an amalgam-
ation transaction in s 44 (Scenario A in Example 20.18. explains of the application of this defini-
tion to the transaction).
The business that Sweetzy (Pty) Ltd disposes of consists of manufacturing equipment, goodwill
and a number of retail properties.
One of the shareholders of Sweetzy (Pty) Ltd is Mr Ushukela. He holds 15% of the issued shares
of Sweetzy (Pty) Ltd. He acquired the shares in 1996 at a cost of R60 000. He obtained a valu-
ation for purposes of determining the valuation date value of R500 000 in respect of the Sweetzy
(Pty) Ltd shares during 2002. He intends to hold the Chocie Ltd shares in the long term.
Discuss the tax implications of the amalgamation transaction for Sweetzy (Pty) Ltd, Chocie Ltd
and Mr Ushukela.
SOLUTION
Sweetzy (Pty) Ltd
The roll-over mechanism described in 20.4.4 applies when Sweetzy (Pty) Ltd transfers the assets
of its business to Chocie Ltd in terms of an amalgamation transaction (ss 44(2) and 44(3)). As a
result, the transfer does not affect its taxable income or taxable capital gains. As Chocie Ltd only
issues equity shares to Sweetzy (Pty) Ltd as consideration for the transfer, the relief applies to the
full value of the assets transferred (s 44(4)) (see note below).
Sweetzy (Pty) Ltd must disregard any recoupments or capital gains that may have arisen on the
distribution of the Chocie Ltd shares to Sweetzy (Pty) Ltd’s shareholders (s 44(3)).
Note
If Sweetzy (Pty) Ltd received the 10% equity shares in Chocie Ltd (assume value R6 million) as
well as R2 million in cash for transferring its business to Chocie Ltd, the above relief would only
have applied to 75% (R6 million/(R6 000 000 + R2 000 000) of the tax cost of the respective
assets transferred (s 44(4)(a)). The 25% of the assets transferred in exchange for the cash con-
sideration would not have qualified for the relief. The calculation of the effect of this apportion-
ment is similar to the calculation in Example 20.16.
Chocie Ltd
The assets acquired by Chocie Ltd are subject to the roll-over treatment as described in 20.4.4.
Any gains deferred by Sweetzy (Pty) Ltd will be realised by Chocie when it disposes of the
assets. Chocie Ltd steps into the shoes of Sweetzy (Pty) Ltd as far as allowances in respect of the
assets are concerned.
The tax cost of the assets acquired by Chocie Ltd increases its contributed tax capital.
continued
804
Mr Ushukela
As Mr Ushukela held the Sweetzy (Pty) Ltd shares as capital assets and will also hold the
Chocie Ltd shares as capital assets, he qualifies for the relief in s 44. He is deemed to have dis-
posed of the Sweetzy (Pty) Ltd shares at an amount equal to the expenditure incurred to acquire
it, resulting in no capital gain or loss in his hands. He is deemed to have acquired the Chocie Ltd
shares for the same expenditure (R60 000) and on the same date (date in 1996) as he acquired
the Sweetzy (Pty) Ltd shares. The valuation he obtained in respect of the Sweetzy (Pty) Ltd
shares (R500 000) for purposes of determining the valuation date value also applies in respect of
the Chocie Ltd shares when he disposes of these in future.
He disregards the distribution of the Chocie Ltd shares to him.
20.7.3 Anti-avoidance rules (s 44(5))

The relief in respect of amalgamation transactions is subject to a ring-fencing provision that applies
to gains and losses arising on the transferred assets that are realised in the hands of the resultant
company, if the resultant company disposes of the assets within 18 months of the amalgamation
transaction (s 44(5)). This ring-fencing rule employs the mechanism described in 20.4.5.
20.8 Special rules: Intra-group transactions (s 45)

Entities within a group of companies are parts of the same economic unit. The relief in s 45 facilitates
transfers of assets within such a group without any immediate tax implications.

The definition of an intra-group transaction has two components. The first component (par (a) of the
definition) is aimed at domestic intra-group transactions, while the second component (par (b) of the
definition) caters for certain cross-border intra-group transactions.
20.8.1.1 Domestic intra-group transaction (par (a) of the definition of ‘intra-group transaction’
in s 45(1))
A transaction is an intra-group transaction if it meets all the following requirements:
l Any asset is disposed of by a company (transferor company).
Remember
The definition of a group of companies in s 41(1) excludes foreign companies that do not have
their place of effective management in South Africa. This implies that the transferor contem-
plated in this definition should be a resident company that forms part of the same group of com-
panies as the transferee company.
l The asset is disposed of to a resident company (transferee company).

l The transferor company and transferee company form part of the same group of companies at
the end of the day of the transaction.
l The transferee company acquires the asset from the transferor company with the following
purpose:
Nature of the asset in the hands of the transferor Nature of the asset in the hands of the transferee
Capital asset Capital asset
Trading stock Trading stock
805
Example 20.20. Intra-group transactions
Discuss whether each of the following transactions is an intra-group transaction as contemplated

in s 45:
l Scenario A: Barca Ltd owns all the shares of Messi Ltd and Neymar Ltd. Messi Ltd sells
manufacturing equipment that is used to produce soccer balls to Neymar Ltd on a loan
account. Neymar Ltd will also use the equipment to manufacture balls.
l Scenario B: The Chiefs Trust owns all the shares of Itumeleng Ltd and Siphiwe Ltd. Itume-
leng Ltd sells manufacturing equipment used by it to produce soccer balls to Siphiwe Ltd on
a loan account. Siphiwe Ltd will use the equipment in the same manner.
l Scenario C: SA Properties Ltd owns all the shares of Udonga Ltd and Uphahla Ltd. Udonga
Ltd sells a property that it held as trading stock to Uphahla Ltd on loan account. Uphahla Ltd
will use the property as a capital asset.
All entities or persons are residents of South Africa for tax purposes.
SOLUTION
Scenario A
The three companies form part of the same group of companies since Barca Ltd holds more than
70% of the equity shares of Messi Ltd and Neymar Ltd. The equipment is disposed of between
two companies within the group of companies. The equipment retains its nature as a capital asset
in the hands of Neymar Ltd. This transaction is an intra-group transaction.
Scenario B
The Chiefs Trust holds more than 70% of the equity shares of Itumeleng Ltd and Siphiwe Ltd. As
the Chiefs Trust is not a company and therefore not a controlling group company. The entities do
not form a group of companies. The transfer of the equipment between Itumeleng Ltd and
Siphiwe Ltd is not an intra-group transaction. The outcome would have been similar if a natural
person held the shares of Itumeleng Ltd and Siphiwe Ltd.
Scenario C
The three companies form part of the same group of companies since SA Properties Ltd holds
more than 70% of the equity shares of Udonga Ltd and Uphahla Ltd. The property is disposed of
between two companies within the group of companies. Udonga Ltd held the property as trading
stock but Uphahla Ltd will hold it as a capital asset going forward. This is not an intra-group
transaction. If this transaction qualified as an intra-group transaction, the taxpayers could have
benefitted from the reduced rate of tax applicable when capital assets are disposed of, instead of
trading stock, within a group in terms of a transaction that enjoyed roll-over relief.
20.8.1.2 Cross-border intra-group transaction (par (b) of the definition of ‘intra-group transaction’
in s 45(1))
A transaction is also an intra-group transaction if it meets all the following requirements :
l A company (transferor company) disposes of any equity share(s) in a foreign company that it
holds as a capital asset.
l The equity shares(s) is disposed of to another company (transferee company).
l The equity share is disposed of in exchange for the issuing of debt or shares that are not equity
shares by the transferee company.
l The transferee company acquires that equity share as a capital asset.
l Before the transaction and at the end of the day of the transaction, all the following requirements
are met
– both companies form part of the same group of companies (s 1 definition)
– the transferor company is a resident company or a controlled foreign company in relation to a
resident that forms part of the same group of companies
– the transferee company is a resident company or a controlled foreign company in relation to a
resident that forms part of the same group of companies.
806
20.8.1.3 Exclusions from the scope of s 45 (s 45(6))

The relief does not apply to the following transactions, despite the fact that the transaction meets the
definition of an intra-group transaction:
l At the time of the disposal, the transferor company and transferee company agree in writing that
s 45 should not apply to the disposal (s 45(6)(g)). The parties may base this election on the tax
position of the transferor company (for example, if it has tax losses which it can use against the
gains that arise on the disposal). In the context of intra-group transactions, the parties may
specifically wish to not apply the relief due to the onerous anti-avoidance rules, some of which
apply for up to six years from the date of the transaction (see 20.8.3).
l All the receipts and accruals of the transferee are exempt from tax on one of the following bases:
(s 45(6)(b))
– it is an entity contemplated in s 10(1)(cA)
– it is an approved public benefit organisation (s 10(1)(cN))
– it is an approved recreational club (s 10(1)(cO))
– it is a retirement fund, benefit fund or other entity contemplated in s 10(1)(d)
– it is an entity contemplated in s 10(1)(t).
l The asset was disposed of by the transferor company in exchange for equity shares issued by
the transferee company (s 45(6)(c)). This exclusion ensures that there is no overlap between the
relief in ss 42 and 45.
l The asset is a share that is distributed by the transferor company to the transferee company
(s 45(6)(d)). This exclusion ensures that there is no overlap between the relief in ss 45 and 46.
l The asset was disposed of by the transferor company to the transferee company in terms of a
liquidation distribution, as contemplated in s 47 (see 20.10). This exclusion applies irrespective of
whether the relief in s 47 applied or of the purpose for which the transferee company acquired
the asset (s 45(6)(e)). This exclusion ensures that there is no overlap between the relief in ss 45
and 47.
l The asset is a share in the transferee company (s 45(6)(f)). The relief in s 45 does therefore not
apply to a share buyback transaction.
20.8.2 Relief
The relief provisions in s 45 affect both the transferor company and transferee company in an intra-
group transaction.
20.8.2.1 Transferor company

The income tax implications of an intra-group transaction for the transferor company that disposes of
its assets are the following:
l No gain or loss (trading stock), capital gain or loss (capital asset) or recoupment (allowance
asset) arises for the transferor company. The roll-over mechanism described in 20.4.4 applies
(ss 45(2) and 45(3)). An exception exists in the context of a cross-border intra-group transaction
(par (b) of the definition of intra-group transaction) entered into between a transferor company,
that is a controlled foreign company in relation to a resident, and a transferee company that is a
resident. In the case of such a transaction, this treatment only applies if the market value of the
asset is equal to or exceeds the tax cost. This prevents tax losses being brought into the South
African tax net using an intra-group transaction.
20.8.2.2 Transferee company

The income tax implications of an intra-group transaction for the transferee company that acquires
the assets from the transferor company are the following:
l The tax cost of the asset in the hands of the transferee company is based on the tax cost of the
asset in the hands of the transferor company. The characteristics of the asset in the hands of the
transferor company are transferred to the transferee company. The roll-over mechanism
described in 20.4.4 applies (s 45(2) and 45(3)).
807
Example 20.21. Intra-group transactions – relief
Barca Ltd owns all the shares of Messi Ltd and Neymar Ltd. Messi Ltd sells manufacturing equip-
ment that is used to produce soccer balls to Neymar Ltd on a loan account. Neymar Ltd will use
the equipment for the same purpose. This transaction meets the definition of an intra-group trans-
action in s 45 (Scenario A in Example 20.20. explains the application of this definition to the
transaction).
Messi Ltd initially acquired the manufacturing equipment at a cost of R2 500 000 and claimed
allowances amounting to R2 000 000 in respect of it in terms of s 12C. It disposes of the
equipment for an amount of R3 000 000. This amount represents the market value of the equip-
ment, which increased due to the fact that the specific model is no longer produced by the
supplier.
Discuss the effect of the roll-over relief in terms of s 45 for Messi Ltd and Neymar Ltd.
SOLUTION
Messi Ltd
The roll-over relief mechanism described in 20.4.4 applies. This means that Messi Ltd is deemed
to have disposed of the equipment at its base cost of R500 000 (R2 500 000 – R2 000 000). No
capital gain arises in its hands. No allowances are recouped by Messi Ltd (s 45(2) and 45(3)).
Neymar Ltd
The roll-over relief mechanism described in 20.4.4 applies. Neymar Ltd is deemed to have
acquired the equipment at the same base cost that Messi Ltd is deemed to have disposed of it.
Neymar Ltd can only deduct allowances in respect of the remaining R500 000 of the cost of the
equipment. If Neymar Ltd were to dispose of the equipment, the recoupment would include the
allowances deducted by it (R500 000) as well as the allowances deducted by Messi Ltd
(R2 000 000) (s 45(2) and 45(3)).
20.8.3 Anti-avoidance rules (s 45(3A), (4), (4A), (4B), (5))

The relief available to intra-group transactions is subject to a number of anti-avoidance rules.
De-grouping rules (s 45(4))

The relief afforded to intra-group transactions is premised on the fact that the taxpayers form part of
the same economic unit. This, in turn, is based on them forming part of the same group of
companies. If either of the parties to the intra-group transaction ceases to form part of the same
group of companies, the relief is retracted. The term ‘de-grouping’ is commonly used to describe an
event that causes the companies to cease to form part of the same group of companies.
The de-grouping rule affects a transferee company that acquired an asset in terms of an intra-group
transaction (s 45(4)(a)(i)). It also applies to any transferee company that acquired an asset that was
initially disposed of in terms of an initial intra-group transaction and thereafter disposed, also using
the corporate rules, to the particular transferee that holds it at the time of de-grouping (s 45(4)(a)(ii)).
If the transferee company ceases to form part of the same group of companies as the transferor in
the initial intra-group transaction (or a controlling group company in relation to this transferor) within
six years from the date of the transaction, the de-grouping rule applies.
If the transferor company or the transferee company is liquidated, wound up or

deregistered and a resident company (holding company) holds at least 70% of the
equity shares of that company, the holding company and the company that is
Please note! liquidated, wound up or deregistered must be deemed to be one and the same
person. A de-grouping event only occurs if the holding company and remaining
counterparty to the intra-group transaction cease to form part of the same group of
companies (s 45(4)(c))
The effect of this rule for the transferee company that has not yet disposed of the asset acquired in
terms of a domestic intra-group transaction is that:
l A deemed capital gain equal to the greatest capital gain that would have been determined for
any disposal of the asset in terms of an intra-group transaction during the six years preceding the
de-grouping event, calculated as if the roll-over relief had not applied, must be established. This
requires that the market value of the asset should be determined at the time of each intra-group
transaction on which a capital gain would have arisen in the absence of roll-over relief. If the
market value of the asset at the time of the de-grouping event is lower than the greatest of such
808
market values at the time of the intra-group transactions, the deemed capital gain is based on the
market value at the time of the de-grouping event. The capital gain determined in this manner is
deemed to arise in the year of assessment during which the de-grouping event occurs.
The base cost of the asset in the hands of the transferee company is increased by this deemed
capital gain amount. This ensures that the gain is not taxed again when the transferee actually
disposes of the asset in future. If the asset is an allowance asset, its cost or the value on which
allowances are based is also increased by 80% of this amount (s 45(4)(b)(i)).
l In the case of allowance assets, a recoupment arises on the date of the de-grouping event. This
recoupment is calculated as the greater of:
– the greatest recoupment that would have been determined in respect of any disposal of the
asset in terms of an intra-group transaction during the six years preceding the de-grouping
event, calculated as if the roll-over relief had not applied, or
– the recoupment that would be included in the income of the transferee company if the asset
was disposed of at its market value on the date of the de-grouping event.
Again, the cost or the value of the asset for purposes of future allowances (other than industrial
policy project allowances (s 12I)) is increased by this amount in the hands of the transferee
company (s 45(4)(b)(ii)).
l Lastly, the taxable income of the transferee company must include an amount determined as the
greatest inclusion in taxable income that would have been determined in respect of any disposal
of the asset in terms of an intra-group transaction during the six years preceding the de-grouping
event, calculated as if the roll-over relief had not applied. If the market value of the asset at the
time of the de-grouping event is lower than the market value that gives rise to such greatest
inclusion in taxable income, the deemed inclusion in taxable income is based on the market value
of the asset at the time of the de-grouping event. Similarly to the above two rules, the cost of the
asset in the hands of the transferee company is increased by this amount to ensure that the gain
is not taxed again in future (s 45(4)(b)(iii)). This rule typically applies to trading stock acquired by
the transferee company in terms of an intra-group transaction. The de-grouping rules do not
apply to trading stock that is regularly and continuously disposed of by the transferee company.
It is likely to be impractical to distinguish between the items acquired in the intra-group trans-
action and those acquired subsequently.
Remember
The de-grouping rules do not apply to assets contemplated in s 25BB(5) that were acquired by
an REIT or controlled company.
Example 20.22. Intra-group transactions – de-grouping anti-avoidance rule
Barca Ltd owns all the shares of Messi Ltd and Neymar Ltd. Messi Ltd sells manufacturing equip-
ment that is used to produce soccer balls to Neymar Ltd on a loan account. Neymar Ltd will use
the equipment for the same purpose. This transaction meets the definition of an intragroup trans-
action in s 45 (Scenario A in Example 20.20. explains the application of this definition to the
transaction).
Messi Ltd initially acquired the manufacturing equipment at a cost of R2 500 000 and claimed
allowances amounting to R2 000 000 in respect of it in terms of s 12C. It disposes of the
equipment for an amount of R3 000 000. This amount represents the market value of the equip-
ment, which has increased due to the fact that the specific model is no longer produced by the
supplier. (Example 20.21. illustrates the application of the relief measures in s 45 to this trans-
action.)
Three years after the intragroup transaction, Messi Ltd introduces a new shareholder who obtains
51% of its issued shares. This is necessary to obtain B-BBEE credentials to supply soccer balls to
the government. As a result, Barca Ltd’s shareholding in Messi Ltd dilutes to 49% of its issued
shares. The current market value of the equipment is R1 500 000 on the date when this trans-
action takes place.
Discuss the impact of the above-mentioned events on the intra-group transaction that Messi Ltd
and Neymar Ltd entered into three years earlier.
809
SOLUTION
As a result of the transaction entered into by Messi Ltd, it no longer forms part of the same group
of companies as Barca Ltd and Neymar Ltd. This event triggers the application of the de-
grouping rules in s 45.
Messi Ltd
The de-grouping rules do not affect the transferor company.
Neymar Ltd
The effect of the de-grouping rules is that Neymar Ltd’s taxable income must include the greater
of
l recoupment that would have arisen had the equipment been disposed of at the time without
the roll-over relief (R2 000 000 recoupment of the allowances deducted by Messi Ltd)
l recoupment that would have arisen if the equipment is disposed of on the day of the de-
grouping event (R500 000 deducted by Neymar Ltd since the transaction and R1 000 000 of
the allowances deducted by Messi Ltd before the intra-group transaction (s 45(4)(b)(ii)).
The recoupment of R2 000 000 is the greater of these amounts and arises on de-grouping.
Neymar Ltd must furthermore take into account the lesser of
l greatest capital gain that would have arisen had the equipment been disposed of without roll-
over relief:
Market value at the time of the intra-group transaction ................................ R3 000 000
Less: Recoupment that would have arisen at this time ................................ (R2 000 000)
Proceeds at the time of the intra-group transaction ..................................... R1 000 000
Base cost of the equipment at this time (R2 500 000 – R2 000 000) ........... (R500 000)
Greatest capital gain at the time of an intra-group transaction if roll-over
relief did not apply ........................................................................................ R500 000
l the capital gain that would have arisen if the asset was disposed of at its market value on the
date of the de-grouping event:
Market value at the time of the de-grouping event....................................... R1 500 000
Less: Recoupment that would have arisen at this time ................................ (R1 500 000)
Proceeds at the time of the intra-group transaction ..................................... Rnil
Base cost of the equipment at this time (R2 500 000 – R2 500 000) ........... (Rnil)
Capital gain if equipment disposed of at the time of de-grouping ................. Rnil
The capital gain of R nil is the lesser amount. No capital gain therefore arises in the hands of
Neymar Ltd on de-grouping.
De-grouping charges, based on a similar mechanism as described above, apply to cross-border

intra-group transactions if the parties involved cease to form part of the same group of companies or
cease to be a controlled foreign company in relation to a resident that forms part of this group of
companies. The de-grouping charge only arises if the equity shares acquired in terms of the intra-
group transaction have not yet been disposed of at the time of the de-grouping event (s 45(4)(bA)
and 45(4)(d)).
Disguised sales transactions

Roll-over relief is afforded to intra-group transactions on the understanding that these transactions
are used to reorganise assets within a group rather than to sell the asset externally. A number of
schemes were devised to use the relief available for intra-group transactions to transfer assets to a
transferee company (either for cash or on loan account), following which the group divested itself of
its interest in the consideration.
To curb these arrangements, a de-grouping event is deemed to take place if the intra-group trans-
action forms part of a transaction, scheme or operation in terms of which
l the consideration received or accrued in respect of the intra-group transaction, or
l more than 10% of any amounts derived directly or indirectly from such consideration
is disposed of by the transferor (or other company that forms part of the same group of companies as
the transferor) to a person outside the group of companies for no consideration, non-arm’s length
consideration or in the form of a distribution (s 45(4B)). This anti-avoidance rule only applies if the
consideration is disposed of within two years from the date of the intra-group transaction.
The consideration obtained by the transferor company in an intra-group transaction also presented
an opportunity to realise some of the value transferred by the transferor company on a tax-free basis
using the roll-over relief, if the tax cost of the consideration is equal to its market value. This scenario
arose where, for example, a transferor company disposed of an asset with a market value of
810
R1 million and a tax cost of R300 000 to a transferee company on loan account in terms an intra-
group transaction. Even though the gain of R700 000 will be realised if the transferee company dis-
poses of the asset acquired, the transferor company is able to realise the R1 million value of the asset
transferred in cash by transferring the loan of R1 million to an external person in exchange for cash of
R1 million. If the loan has a tax cost of R1 million, this transfer has no tax implications for the trans-
feror. Similar arrangements were entered into using preference shares, rather than a loan.
To prevent this avoidance, the tax cost of the debt or preference shares is nil in the hands of the
transferor company if (s 45(3A)(a) and (b))
l the consideration by a transferee company in an intra-group transaction is funded directly or
indirectly by the issuing of debt or shares (not equity shares)
l this debt or these shares are issued by a company that forms part of the same group of com-
panies as the transferor or transferee company, and
l the debt or shares are used directly or indirectly for the purposes of facilitating or funding the
intra-group transaction.
The transferor in an intra-group transaction cannot subsequently dispose of the loan or preference
shares on a tax-free basis. Any consideration received from such a disposal will be considered a
gain, given the nil tax cost. The settlement of the debt, or redemption of the preference shares, by a
group company does, however, not result in adverse tax implications due to the nil tax cost
(ss 45(3A)(c) and (d)). If a de-grouping event occurs or is deemed to occur, the effect of the nil tax
cost must be reversed to place the transferor back in the position it would have been had the relief
not been afforded. For years of assessment commencing on or after 1 January 2021, the person who
holds the debt or shares will be deemed to incur expenditure equal to the face value of the debt or
subscription price of the shares on the day of the de-grouping event. This expenditure is reduced by
any repayments of the face value of the debt or subscription price of the shares made before the de-
grouping event (s 45(3B)). For years of assessment commencing on or after 1 January 2022, this
same reversal of the nil base cost also applies in instances where
l the transferee disposed of the asset and the ring-fencing rules in respect of early subsequent
disposals apply (s 45(3B)(a)(iii)), or
l the six-year period within which the de-grouping rules apply expires (s 45(3B)(a)(ii)).
Ring-fencing of gains or losses in respect of assets upon early subsequent disposal

A ring-fencing provision applies to gains and losses in respect of the assets when realised in the
hands of the transferee company if it disposes of the assets within 18 months of the intra-group trans-
action (s 45(5)). This ring-fencing rule employs the mechanism described in 20.4.5.
Remember
The ring-fencing rule does not apply to involuntary disposals as contemplated in par 65 of the
Eighth Schedule. It does also not apply to disposals that would have been involuntary disposals
if the asset had not been a financial instrument.
The ring-fencing provision does not apply if the de-grouping rules (see above) had already applied to
the asset. With effect from 1 January 2022, the ring-fencing rules do not apply in an instance where a
capital gain arises on the ultimate disposal of the asset, while a capital loss would have arisen had
the asset been disposed of at the beginning of the 18-month period. It, similarly, does not apply when
the disposal of the asset results in a capital loss, while a capital gain would have arisen had the asset
been disposed of at the beginning of the 18-month period (further proviso to s 45(5)).
20.9 Special rules: Unbundling transactions (s 46)

Where the value of shares is derived from shareholding by a company in another company, the
shareholders of the company may wish to unbundle the components that contribute to the value of
the shares into separate shareholdings. An unbundling transaction involves the distribution of value
to shareholders or the separation of different elements of the value from one another to create better
performing companies. Put differently, the sum of the parts of the group may be greater than the
whole, especially if the separate companies can independently focus on their own separate activities.
In some cases, regulators may require unbundlings. If a company distributes certain substantial
shareholdings in other companies to its shareholders, this transaction may qualify for relief if it is an
unbundling transaction, as contemplated in s 46.
811

The definition of an unbundling transaction has two parts. The first part deals with transactions that
mainly take place in a domestic context (par (a) of the definition of an unbundling transaction). The
second part describes an unbundling transaction in a cross-border context (par (b) of the definition
of unbundling transaction).
20.9.1.1 Domestic unbundling transaction (par (a) of the definition of ‘unbundling transaction’
in s 46(1))
An unbundling transaction occurs if it meets all the following requirements:
l A resident company (unbundling company) makes a distribution.
l The distribution consists of all the equity shares that the unbundling company holds in another
resident company (unbundled company).
l The distribution of the equity shares in the unbundled company is made to any shareholder of the
unbundling company in accordance with its effective interests in the unbundling company.
l The distribution is made in one of the following circumstances:
– all the equity shares of the unbundled company are listed on a South African exchange or will
be listed on a South African exchange within 12 months of the unbundling transaction
– the shareholder to which the distribution is made forms part of the same group of companies
as the unbundling company, or
– the distribution is made in pursuance of an order by the Competition Tribunal or the Competi-
tion Appeal Court.
l The equity shares in the unbundled company represents a substantial shareholding:
– In the case of an unbundled company that is not a listed company immediately before the dis-
tribution, the equity shares distributed represent more than 50% of the equity shares of the
unbundled company.
– In the case of an unbundled company that is a listed company immediately before the dis-
tribution, the threshold depends on whether any other person holds the same or more shares
than the unbundling company. If another person holds the same number of shares or more
than the unbundling company, the equity shares distributed must be more than 35% of the
equity shares of the unbundled company. If this is not the case, the threshold is that the equity
shares distributed must be more than 25% of the equity shares of the unbundled company.
Some unbundling transactions involve a distribution of unlisted shares by the

unbundling company to another company that forms part of the same group of
companies as the unbundling company as well as to minority shareholders that do
not form part of the group of companies. SARS indicates in Binding General Ruling
Please note! No. 54 that it holds the view that the unbundling transaction only comprises of the
distribution made to shareholders that form part of the same group of companies.
The distribution made to the minority shareholders that do not form part of the
same group of companies is not an unbundling transaction.
Example 20.23. Unbundling transactions
Discuss whether each of the following transactions is an unbundling transaction as contemplated

in s 46:
l Scenario A: Paper (Pty) Ltd holds all the shares of Concrete (Pty) Ltd. Concrete (Pty) Ltd
holds 80% of the shares in Wall (Pty) Ltd. A decision has been made that Concrete (Pty) Ltd
will distribute all of its shareholding in Wall (Pty) Ltd to Paper (Pty) Ltd.
l Scenario B: The shares of Sand (Pty) Ltd are widely held by a number of shareholders. The
largest shareholder holds 21% of the issued share capital. Sand (Pty) Ltd holds 80% of the
shares in Stone (Pty) Ltd. A decision has been made that Sand (Pty) Ltd will distribute all of
its shareholding in Stone (Pty) Ltd to the shareholders.
812
SOLUTION
Scenario A
Concrete (Pty) Ltd, a resident company, will distribute all the shares that it holds in another
resident company (Wall (Pty) Ltd) to its shareholders in accordance with the effective share-
holding in Concrete (Pty) Ltd. The distribution is made to Paper (Pty) Ltd, which holds all the
shares of Concrete (Pty) Ltd and therefore forms part of the same group of companies as
Concrete (Pty) Ltd. The shares distributed represent more than 50% of the issued equity shares
of Wall (Pty) Ltd. This is an unbundling transaction as contemplated in s 46. Concrete (Pty) Ltd is
the unbundling company and Wall (Pty) Ltd the unbundled company.
Scenario B
Sand (Pty) Ltd, as resident company, will distribute all the shares that it holds in another resident
company (Stone (Pty) Ltd) to its shareholders in accordance with their effective shareholding in
Sand (Pty) Ltd. The shares of Stone (Pty) Ltd are not listed and there is no indication that it will be
listed in the next 12 months. The distribution is not made to a company that forms part of the
same group of companies as Sand (Pty) Ltd. It is also not made in pursuance of an order by the
Competition Tribunal or the Competition Appeal Court. This is not an unbundling transaction.
20.9.1.2 Cross-border unbundling transaction (par (b) of the definition of ‘unbundling transaction’
in s 46(1))
In a cross-border context, a transaction is an unbundling transaction if it meets all the following
requirements:
l The equity shares in a foreign company (unbundled company) are held by
– a resident company, or
– a controlled foreign company (unbundling company).
l Immediately before the distribution (in the next bullet), the unbundling company holds more than
50% of the equity shares of the unbundled company and all the shares are held as capital assets.
l All the equity shares in the unbundled company that are held by the unbundling company are
distributed to any shareholder of the unbundling company in accordance with its effective
interests in the unbundling company.
l The shareholder to whom the distribution is made:
– is a resident and forms part of the same group of companies as the unbundling company (s 1
definition), or
– is not a resident, but is a controlled foreign company in relation to any resident that forms part
of the same group of companies as the unbundling company (s 1 definition).
20.9.1.3 Exclusions from the scope of s 46 (s 46(6A), 46(7) or 46(8))

The provisions of s 46 do not apply to the following transactions, despite the fact that the transactions
meet the definition of an unbundling transaction:
l If the shareholder and unbundling company agree in writing that s 46 does not apply to the distri-
bution of shares in an unlisted unbundled company by an unlisted unbundling company to a
shareholder, where the unbundled company is a controlled group company in relation to the
shareholder immediately before and after the transaction (s 46(8)).
l A distribution of shares in an unbundled company made by an unbundling company that is an
REIT or controlled company. A specific pass-through tax regime applies to REITs. This pass-
through treatment would be disrupted if these unbundling transactions were allowed (see 19.5.7).
20.9.2 Relief
An unbundling transaction normally has tax implications for the unbundling company and its share-
holders.
20.9.2.1 Unbundling company

The income tax implications for the unbundling company that distributes the shares it holds in the
unbundled company are the following:
l The unbundling company must disregard the distribution for purposes of determining its taxable
income, assessed loss or its net income if it is a controlled foreign company (s 46(2)). No
recoupment or capital gain arises for the unbundling company when it disposes of the shares in
the unbundled company.
813
l The contributed tax capital of the unbundling company is reduced proportionately to reflect the
value unbundled. Following an unbundling transaction, the contributed tax capital of the
unbundling company is adjusted by applying the ratio between the value of the unbundling
company shares immediately after the unbundling transaction relative to the value of its shares
immediately before the distribution (s 46(3A)(a)).
The contributed tax capital of the unbundled company is also adjusted accord-
ingly when an unbundling transaction takes place. The total contributed tax
capital of this company is deemed to be the total of (s 46(3A)(b)):
[Unbundling company CTC before transaction × (market value of the distributed
shares before the transaction / market value of the unbundling company shares
Please note! before the transaction)]
and
[Unbundled company CTC before the transaction × (shares held in the unbundled
company by persons other than the unbundling company before the transaction) /
(all shares held in that company before the transaction)]
l The unbundling company disregards the distribution made in terms of the unbundling transaction
for purposes of any dividends tax liability that may result from the distribution of the shares in
specie (s 46(5)).
Remember
The tax cost of the unbundled company shares in the hands of the unbundling company is not
transferred to the shareholder of the unbundling company. This tax cost is lost in the process of
the unbundling transaction since there is no increase in the tax cost of the shares in the hands of
the shareholder who now holds the unbundled company shares.
In a domestic unbundling transaction (20.9.1.1), the above relief is not available where any equity
share is distributed to a disqualified person who held at least 5% of the equity shares of the unbun-
dling company before the unbundling transaction (s 46(7)). The following persons are disqualified
persons (s 46(7)(b)):
l a person who is not a resident
l the government of the Republic in the national, provincial or local sphere
l an approved public benefit organisation
l an approved recreational club
l a retirement fund or benefit fund (as contemplated in s 10(1)(d)(i) or (ii))
l an exempt person contemplated in s 10(1)(cA) or 10(1)(t).
The relief does not apply to equity shares transferred to a person(s) in whose hands it would not be
subject to tax upon disposal using the relief afforded to unbundling transactions. As a practical
matter, this rule triggers partial taxation for many listed unbundling transactions, especially given the
large shareholdings in listed companies held by exempt pension funds.
20.9.2.2 Shareholder of the unbundling company

The income tax implications of an unbundling transaction in the hands of the shareholder that
acquires the shares in the unbundled company are:
l The shareholder must allocate a portion of the tax cost of the shares held in the unbundling
company to the unbundled company shares that it receives in terms of the unbundling trans-
action. When an unbundling company makes an unbundling distribution to disqualified share-
holders of the unbundling company, as discussed above, the distribution may have tax implica-
tions for the unbundling company. All shareholders of the unbundling company ultimately bear
this tax paid by the company. The tax cost of the shares in the unbundling company, in the hands
of a shareholder, must be increased for any tax suffered on the unbundling. This increase is
determined by applying the ratio of the number of equity shares of the unbundling company, held
by the shareholder, to the total number of issued equity shares of that company, to the tax paid
by the unbundling company on equity shares to which s 46(7) applied (par (iii) of the definition of
‘expenditure’ in s 46(3)(b)).
A similar apportionment of any valuation obtained for the unbundled company shares for capital
gains tax purposes is required.
814
This allocation has the effect that the tax cost of the unbundling company shares is transferred to
the tax cost of the unbundled company shares received. This portion allocated from the
unbundling company shares to the unbundled company shares is based on the following ratio
(s 46(3)(a)(i) and (v)):
(market value of the unbundled company shares at the end of the day after that distribution)
(sum of the market values of the unbundled company and
unbundling company shares at the end of the day after that distribution)
Binding General Ruling No. 29 (BGR29) provides guidance on the day on which the above values
are determined in a listed context. The prices of the respective shares on the last day to trade
(LDT) plus 1 are used.
If the unbundling company shares were acquired by the shareholder from a con-
nected person who was not subject to tax on the disposal of the shares within two
years before the unbundling, the expenditure to be allocated to shares as a result
Please note! of the unbundling transaction is limited (s 46A). This rule prevents opportunities for
artificial inflation of expenditure prior to an unbundling transaction.
l The expenditure related to the tax cost that has been allocated to the unbundled company shares
is deemed to be incurred on the same dates that it was incurred in respect of the unbundling
company shares (s 46(3)(a)(iv)).
l The unbundled company shares must be deemed to have been acquired on the same date that
the shareholder acquired the unbundling company shares. This does, however, not apply when
determining whether the unbundled company is a qualifying share for purposes of the three-year
holding period in s 9C (s 46(3)(a)(ii)).
l The unbundled company shares have the same nature as the unbundling company shares in the
hands of the shareholder. In other words, if the shareholder holds the unbundling company
shares as capital assets, the unbundled company shares are similarly held as capital assets. If
the unbundling company shares are held as trading stock, the unbundled company shares are
acquired as trading stock (s 46(3)(a)(iii)).
l The rules in respect of returns of capital received by or accrued to the shareholder do not apply
to the distribution (s 46(5A)).
If the shareholder holds the shares in the unbundling company in terms of a right
to acquire marketable securities to which s 8A applied (acquired in pre-2004
Please note! share scheme), the unbundling transaction results in a portion of the gain in
respect of the securities having to be included in the shareholder’s income
(s 46(4)).
Example 20.24. Unbundling transactions – relief
Paper (Pty) Ltd holds all the shares of Concrete (Pty) Ltd. Concrete (Pty) Ltd holds 80% of the
shares in Wall (Pty) Ltd. A decision has been made that Concrete (Pty) Ltd will distribute all of its
shareholding in Wall (Pty) Ltd to Paper (Pty) Ltd. This transaction meets the definition of an
unbundling transaction in s 46 (Scenario A in Example 20.23. explains the application of this
definition to the transaction).
Paper (Pty) Ltd acquired the Concrete (Pty) Ltd shares as capital assets for an amount of
R30 million during 2013. Concrete (Pty) Ltd acquired the 80% shareholding in Wall (Pty) Ltd for
an amount of R20 million in 2014. Concrete (Pty) Ltd held the Wall (Pty) Ltd shares as a capital
asset.
Prior to the distribution, the Concrete (Pty) Ltd shares were valued at R63 million and 80% share-
holding in Wall (Pty) Ltd was valued at R18 million. These values reflected a discount as a result
of the fact that the majority interest in Wall (Pty) Ltd was held in the Concrete (Pty) Ltd group
structure, which also included some loss-making operations.
Immediately after the distribution, the shares of Paper (Pty) Ltd will be valued at R100 million, the
shares of Concrete (Pty) Ltd at R45 million and the 80% shareholding in Wall (Pty) Ltd at
R20 million.
The contributed tax capital of Concrete (Pty) Ltd before the transaction was R5 million. The con-
tributed tax capital of Wall (Pty) Ltd before the transaction was R2 million.
Discuss the relief measures that will apply to the unbundling transaction for the parties involved.
815
SOLUTION
Wall (Pty) Ltd (unbundled company)
The unbundling transaction has no impact on the taxable income of Wall (Pty) Ltd as its shares
are the subject being transferred.
The unbundling transaction affects the unbundling company’s contributed tax capital (CTC).
After the transaction, Wall (Pty) Ltd’s CTC is equal to (s 46(3A)(b)):
Share of Concrete (Pty) Ltd’s CTC (R5 000 000 × (R18 000 000/R63 000 000)) ....... R1 428 571
Portion of Wall (Pty) Ltd’s own CTC (R2 000 000 × (20%/100%) ............................... R400 000
Wall (Pty) Ltd’s CTC after the transaction .................................................................. R1 828 571
Concrete (Pty) Ltd (unbundling company)

Concrete (Pty) Ltd must disregard the distribution of the Wall (Pty) Ltd shares for purposes of
determining its taxable income (s 46(2)). It must also disregard the distribution for purposes of its
liability to pay dividends tax in respect of the shares distributed (s 46(5)).
Concrete (Pty) Ltd’s CTC is adjusted after the transaction to R3 571 428 (R5 000 000 ×
(R45 000 000/R63 000 000).
Paper (Pty) Ltd (shareholder)
Paper Holdings (Pty) Ltd must apportion the expenditure it incurred to acquire the Con-
crete (Pty) Ltd shares between the Concrete (Pty) Ltd shares and the 80% shareholding in Wall
(Pty) Ltd after the transaction. This allocation is (s 46(3)(a)(i) and (v)):
Expenditure allocated to the Wall (Pty) Ltd shares ................................................... R9 230 769
(R30 000 000 × R20 000 000/(R45 000 000 + R20 000 000)
Expenditure allocated to the Concrete (Pty) Ltd shares ........................................... R20 769 231
(R30 000 000 – R9 230 769)
The characteristics (date of acquisition, purpose for which it was held and valuations obtained)
of the Concrete (Pty) Ltd shares also apply in respect of the Wall (Pty) Ltd shares (s 46(3)(a))
This example illustrates that the relief mechanism employed by s 46 has the following effects:
l The base cost of the Wall (Pty) Ltd shares of R20 million is not carried over to Concrete
Holdings (Pty) Ltd. This base cost is forfeited as a result of the relief.
l The combined CTC of the unbundled and unbundling companies after the transaction
(R5 971 428) may be less than the combined CTC of the entities before the transaction
(R7 000 000). The relief may result in an amount of CTC being forfeited.
20.10 Special rules: Liquidation, winding-up and deregistration (s 47)

Companies become redundant in a group structure. If this happens, the company can be liquidated
and its assets transferred to the shareholders of the company. If the transfer is made in terms of a
liquidation distribution, assets are transferred in a tax neutral manner in the liquidation, winding-up or
deregistration of a company.

The definition of a liquidation distribution has one part that deals with domestic liquidation distribu-
tions (par (a) of the definition of ‘liquidation distribution’ in s 47(1)) and another that deals with cross-
border liquidation distributions (par (b) of the definition of ‘liquidation distribution’ in s 47(1)).
20.10.1.1 Domestic liquidation distribution (par (a) of the definition of ‘liquidation distribution’
in s 47(1))
A transaction is a liquidation distribution if it meets all the following requirements:
l A resident company (liquidating company) disposes of all its assets.
The liquidating company is not required to dispose of assets that it elects to use to
Please note! l settle debts incurred in the ordinary course of its business
l satisfy any reasonably anticipated liability to any sphere of government of any
country and the costs of administration of the liquidation or winding-up.
l The assets are disposed of by the shareholders of the company in anticipation of or in the course
of the liquidation, winding-up or deregistration of the company.
816
The transaction is, however, only a liquidation distribution to the extent that the assets are disposed
of to another resident company (holding company) that forms part of the same group of companies
as the liquidating company on the date of the disposal.
Example 20.25. Liquidation distributions

Discuss whether each of the following transactions is a liquidation distribution as contemplated in
s 47:
l Scenario A: Ship Ltd owns all the shares of Sail Ltd. The layered group structure has
become redundant. The group wishes to liquidate Sail Ltd and transfer its business to Ship
Ltd. Ship Ltd will continue to operate the business in the same manner in which it was
operated by Sail Ltd.
l Scenario B: Mafungwashe Thole owns all the shares in a company. The company’s only
asset is a property in which Mafungwashe resides. She wishes to liquidate the company and
distribute the property to her, in her capacity as the sole shareholder of the company.
SOLUTION
Scenario A
The companies form part of the same group of companies since Ship Ltd holds more than 70% of
the equity shares of Sail Ltd. Sail Ltd will dispose of its assets to Ship Ltd in anticipation of the
liquidation of Sail Ltd. This transaction is a liquidation distribution transaction. Sail Ltd is the
liquidating company and Ship Ltd the holding company.
Scenario B
Mafungwashe is a natural person. There is only one company involved and therefore no group of
companies exists. This transaction is not a liquidation distribution transaction.
20.10.1.2 Cross-border liquidation distribution (par (b) of the definition of ‘liquidation distribution’
in s 47(1))
In a cross-border context, a transaction is a liquidation distribution if it meets all the following
requirements:
l A controlled foreign company in relation to a resident (liquidating company) disposes of all its
assets (other than those used to settle debts that arose in the ordinary course of its business and
anticipated liabilities and administration costs relating to its liquidation or winding-up).
l The assets are disposed of to the shareholders of the company in anticipation of or in the course
of the liquidation, winding-up or deregistration of the company, to the extent that the assets are
disposed of to one of the following companies (holding company):
– a resident company that forms part of the same group of companies (s 1 definition) as the liqui-
dating company on the date of the disposal, or
– a controlled foreign company in relation to any resident, where, immediately after the trans-
action, more than 50% of the equity shares of that holding company are held by a resident
(alone or with companies that form part of the same group of companies as the resident).
l Immediately before the disposal, the holding company(s) holds each of the shares in the
liquidating company as a capital asset.
The transaction is, however, only a liquidation distribution
20.10.1.3 Exclusions from the scope of s 47 (s 47(6))

No relief is afforded to the following transactions, despite the fact that the transaction meets the
definition of a liquidation distribution:
l if the holding company and liquidating company agree in writing that s 47 does not apply
(s 47(6)(b))
l if the holding company is one of the following exempt persons (s 47(6)(a)):
– an approved public benefit organisation
– an approved recreational club
– an exempt person contemplated in ss 10(1)(cA), 10(1)(cP), 10(1)(d), 10(1)(e) or 10(1)(t).
The relief measures do not apply where the liquidating company has not taken steps to liquidate,
wind up or deregister (see 20.4.3) within 36 months after the transaction. SARS may allow an exten-
sion of the period (s 47(6)(c)(i)). If the steps have been taken, but any step has subsequently been
817
withdrawn or anything has been done to invalidate any step taken, which results in the company not
being liquidated, wound up or deregistered, the relief is forfeited (s 47(6)(c)(ii)). Any tax that
becomes payable as a result of the required steps not being taken within the prescribed period or
being withdrawn or invalidated subsequently, may be recovered from the holding company.
20.10.2 Relief
The relief measures that apply to liquidation distributions affect the liquidating company and the hold-
ing company.
20.10.2.1 Liquidating company

The income tax implications for the liquidating company that disposes of its assets to the holding
company are the following:
l No gain or loss (trading stock), capital gain or loss (capital asset) or recoupment (allowance
asset) arises for the liquidating company. The roll-over mechanism described in 20.4.4 applies
(ss 47(2) and 47(3)). An exception exists in the context of a cross-border liquidation distribution
(par (b) of the definition of ‘liquidation distribution’) in terms of which an asset is disposed of by a
liquidating company to a holding company that is a resident. In the case of such a transaction,
this roll-over relief only applies if the market value of the asset is equal to or exceeds the tax cost.
This prevents tax losses being brought into the South African tax net using an intra-group
transaction.
The relief described above only applies to the extent that (s 47(3A))
l equity share(s) in the liquidating company held by the holding company are
disposed of as a result of the liquidation, winding-up or deregistration of the
liquidating company, or
l the holding company assumes debts incurred by the liquidating company
Please note! – more than 18 months before the disposal
– within 18 months before the disposal, but only if
Ɣ the debt represents a refinancing of the above debt, or
Ɣ arose in the ordinary course of the liquidating company’s business,
which is disposed of as a going concern to the holding company.
In this context, debt includes contingent liabilities (definition of ‘debt’ in s 41).
20.10.2.2 Holding company

The income tax implications for the holding company that acquires the assets from the liquidating
company and that disposes of its shares in the liquidating company when it is terminated are the
following:
l The tax cost of the asset in the hands of the holding company is based on the tax cost of the
asset in the hands of the liquidating company. The characteristics of the asset in the hands of the
liquidating company are transferred to the holding company. The roll-over mechanism described
in 20.4.4 applies (ss 47(2) and 47(3)). It is important to note that the roll-over treatment only
applies to the extent that the holding company disposes of its equity shares in the liquidating
company or assumes debts specified above.
l The holding company must disregard the disposal of the shares held in the liquidating company
as a result of the liquidation, winding-up or deregistration of that liquidating company when deter-
mining its taxable income, assessed loss or aggregate capital gain or capital loss (s 47(5)(a)). It
must similarly disregard any return of capital by way of a distribution of cash or an asset in specie
by the liquidating company in anticipation of or in the course of its liquidation, winding-up or
deregistration (s 47(5)(b)).
Example 20.26. Liquidation distribution – relief

Ship Ltd owns all the shares of Sail Ltd. The layered group structure has become redundant. The
group wishes to liquidate Sail Ltd and transfer its business to Ship Ltd. Ship Ltd will continue to
operate the business in the same manner in which it was operated by Sail Ltd. This transaction
meets the definition of a liquidation distribution in s 47 (Scenario A in Example 20.25. explains
the application of this definition to the transaction).
Ship Ltd incurred expenditure of R40 million to acquire the shares in Sail Ltd during 2014.
Discuss the effect of the roll-over relief in terms of s 47 for Ship Ltd and Sail Ltd.
818
SOLUTION
Sail Ltd
The roll-over relief mechanism described in 20.4.4 applies. This means that Sail Ltd is deemed to
have disposed of the business assets at their tax costs. No allowances will be recouped by
Sail Ltd when it distributes the assets to Ship Ltd (s 47(2) and 47(3)).
Ship Ltd
The roll-over relief mechanism described in 20.4.4 applies. Ship Ltd is deemed to acquire the
business assets at the same base cost that Sail Ltd is deemed to have disposed of it. Ship Ltd is
only entitled to deduct allowances in respect of the assets on the remaining tax costs. If Ship Ltd
were to dispose of the assets, the recoupment includes the allowances deducted by Ship Ltd
itself as well as the allowances deducted by Sail Ltd (s 47(2) and 47(3)).
Ship Ltd must disregard the disposal of its shares in Sail Ltd and the effect of any distribution of
the assets from Sail Ltd (s 47(5)). The base cost of R40 million is lost during this process.
20.10.3 Anti-avoidance rules (s 47(4))

The relief in respect of liquidation distributions is subject to a ring-fencing provision that applies if
gains and losses in respect of the assets are subsequently realised in the hands of the holding
company within 18 months of the liquidation distribution (s 47(4)). This ring-fencing rule employs the
mechanism described in 20.4.5.
819
21 Cross-border transactions
Pieter van der Zwan

l identify the factors to consider to determine the tax implications of a cross-border
transaction
l determine whether or not income is received or accrues from a South African
source
l apply the provisions of a tax treaty that South Africa entered into to a cross-border
transaction
l calculate the South African tax liabilities, including withholding taxes, of a person
who is not a resident of South Africa for tax purposes
l calculate the normal tax consequences of cross-border transactions for South
African tax residents, including to identify specific exemptions, rebates or deduc-
tions for foreign taxes that are available
l apply the controlled foreign company rules to an interest that a resident holds in a
foreign company
l identify whether a transaction is subject to the transfer pricing rules and make the
necessary adjustments
l determine whether a taxpayer qualifies for the benefits of a special cross-border
tax regime and explain the benefits available to it.
Contents
Page
21.1 Overview ......................................................................................................................... 823
21.2 Principles of South African taxation of cross-border transactions ................................. 824
21.3 Source (s 9) .................................................................................................................... 826
21.3.1 Source of dividend income (s 9(2)(a)) ............................................................ 827
21.3.2 Source of interest income (s 9(2)(b)) .............................................................. 827
21.3.3 Source of royalty income and know-how payments (s 9(2)(c), 9(2)(d),
9(2)(e) and 9(2)(f)) .......................................................................................... 828
21.3.4 Source of rental income .................................................................................. 829
21.3.5 Source of amounts derived from the disposal of assets and exchange
differences (s 9(2)(j), 9(2)(k) and 9(2)(l); s 9J) ............................................... 829
21.3.6 Source of income from services rendered ..................................................... 830
21.3.7 Source of employment income (s 9(2)(g) and 9(2)(h)) ................................... 830
21.3.8 Source of amounts received from a retirement fund (s 9(2)(i)) ...................... 831
21.4 Tax treaties ..................................................................................................................... 831
21.4.1 Integration with domestic law (s 108) ............................................................. 832
21.4.2 Application and scope .................................................................................... 833
21.4.3 Allocation of taxing rights and elimination of double taxation ........................ 835
21.4.3.1 Income from immovable property ................................................. 835
21.4.3.2 Dividends ...................................................................................... 836
21.4.3.3 Interest .......................................................................................... 838
21.4.3.4 Royalties ........................................................................................ 838
21.4.3.5 Employment-related income ......................................................... 840
21.4.3.6 Students ........................................................................................ 842
21.4.3.7 Artists and sportsmen ................................................................... 842
21.4.3.8 International traffic ........................................................................ 842
21.4.3.9 Business profits ............................................................................. 842
21.4.3.10 Capital gains ................................................................................. 845
821
Page
21.4.3.11 Other income................................................................................. 846
21.4.3.12 Capital ........................................................................................... 846
21.4.4 Special provisions ........................................................................................... 846
21.5 South African taxation of income of non-residents ........................................................ 847
21.5.1 Overview of tax liability and obligations.......................................................... 847
21.5.2 Withholding taxes ............................................................................................ 848
21.5.2.1 Common features of withholding taxes imposed in respect of
payments to non-residents ........................................................... 848
21.5.2.2 Withholding tax from amounts paid to non-resident sellers of
immovable property (s 35A) ......................................................... 854
21.5.2.3 Tax on foreign entertainers and sportspersons (ss 47A to 47K) .... 855
21.5.2.4 Withholding tax on royalties (ss 49A to 49H) ................................ 857
21.5.2.5 Withholding tax on interest (ss 50A to 50H) ................................. 857
21.5.3 Comprehensive example: Taxation of cross-border transactions by non-
residents .......................................................................................................... 859
21.6 South African taxation of income of residents ................................................................ 860
21.6.1 Normal tax liability ........................................................................................... 860
21.6.2 Specific exemptions available to residents in respect of foreign sourced
amounts ........................................................................................................... 861
21.6.2.1 Exemption of certain foreign dividends and capital gains
(s 10B and par 64B of the Eighth Schedule) ................................ 861
21.6.2.2 Exemption for foreign employment income (s 10(1)(o)) ............... 861
21.6.2.3 Exemption for foreign pensions and welfare payments
(s 10(1)(gC)).................................................................................. 862
21.6.2.4 Exemption for international shipping activities by domestically
flagged ships (s 12Q) ................................................................... 862
21.6.3 Rebates and deductions for foreign tax (s 6quat) .......................................... 862
21.6.3.1 Rebate for foreign tax ................................................................... 862
21.6.3.2 Deduction for foreign tax .............................................................. 867
21.6.4 Comprehensive example: Taxation of cross-border transactions by
residents .......................................................................................................... 869
21.7 Controlled foreign companies (CFCs)............................................................................ 871
21.7.1 Overview of the effect of the CFC regime ....................................................... 872
21.7.2 Application of CFC rules (s 9D definitions and s 9D(2))................................. 874
21.7.2.1 Definition of a CFC and related concepts .................................... 874
21.7.2.2 Inclusion of amount in resident’s taxable income (s 9D(2)) ......... 877
21.7.2.3 Net income of a CFC (s 9D(2A) and 9D(6)) .................................. 879
21.7.3 Income not subject to CFC rules (s 9D(9) and 9D(9A)) ................................. 883
21.7.3.1 Foreign business establishment exclusion (s 9D(9)(b),
9D(9)(fB) and 9D(9A)) ................................................................... 883
21.7.3.2 Amounts that have already been subject to tax in South Africa
(s 9D(9)(d) and 9D(9)(e)) .............................................................. 889
21.7.3.3 Amounts that have already been subject to the CFC rules
(s 9D(9)(f)) ..................................................................................... 889
21.7.3.4 Intra-group passive income (s 9D(9)(fA)) ..................................... 889
21.7.3.5 Amounts attributable to certain policyholders (s 9D(9)(c)) .......... 890
21.7.4 Practical approach to applying CFC rules ..................................................... 890
21.8 Transfer pricing (s 31) .................................................................................................... 891
21.8.1 Basic principles............................................................................................... 891
21.8.1.1 Transactions that are subject to transfer pricing in South Africa .... 891
21.8.1.2 Transfer pricing adjustments (s 31(2) and 31(3)) ......................... 892
21.8.2 Thin capitalisation ........................................................................................... 893
21.8.3 Exceptions where transfer pricing rules do not apply .................................... 894
21.8.3.1 High-taxed CFC exemption (s 31(6)) ............................................ 894
21.8.3.2 Equity loan exemption (s 31(7)) .................................................... 895
21.8.4 Compliance and reporting requirements ........................................................ 895
21.9 Special cross-border tax regimes in South Africa ......................................................... 896
21.9.1 Headquarter company regime (s 9I) .............................................................. 896
21.9.2 Domestic treasure management companies (ss 1, 24l and 25D) .................. 897
822
21.1 Chapter 21: Cross-border transactions
21.1 Overview
Global trade has increased exponentially over the past few decades as technology and access to
global markets improved. This results in economic activities where parties who are situated in
different jurisdictions transact with each other. Examples of such transactions include foreign persons
setting up business operations in South Africa or rendering services to South Africans (inbound trans-
actions). Conversely, South African businesses may carry on trade in other parts of the world (out-
bound transactions). These transactions are broadly referred to as cross-border transactions in this
chapter. Cross-border transactions are not limited to business transactions; it may also extend to
investment transactions.
Countries generally encourage cross-border trade as this has a positive impact on their economies.
Cross-border transactions pose a challenge from an income tax perspective as they may attract tax
in more than one jurisdiction. The respective tax authorities must acknowledge the tax effects of
transactions in the other jurisdiction to prevent multiple layers of tax, which is an obstacle to cross-
border trade.
The interaction of tax laws of various jurisdictions, however, also present opportunities to structure
transactions to avoid or reduce taxes paid in a legal manner by using differences that exist between
the tax legislation in different countries. This behaviour resulted in the introduction of many anti-avoid-
ance rules aimed at closing loopholes that exist in a cross-border context. The Organisation for
Economic Co-operation and Development (OECD) and the G20 attempted to address this problem
from a global perspective. This project culminated in the publication of a number of action plans with
measures to counter base erosion and profit shifting (BEPS). The OECD/G20 Inclusive Framework on
Base Erosion and Profit Shifting recently agreed to a two-pillar approach aimed at reaching a multi-
lateral, consensus-based solution to address tax challenges that arise from the digitalisation of the
economy. This includes measures like a ‘global minimum tax’, which may introduce a minimum
effective tax rate of 15% calculated based on a specific rule set.
The moral acceptability of structures that avoid or reduce tax using legal means has also become a
factor in this equation. This is evident from, for example, investigations by the United Kingdom
government into the tax affairs of large technology companies. These concerns are largely premised
on the fact that the taxes avoided through complex international structures deprive the governments
of the affected country of funds that would be used to provide basic services to ordinary citizens.
These debates raise difficult questions to businesses around the nature of the planning and
structuring that they may be willing to undertake in a cross-border context.
This chapter explains the South African tax rules applicable to cross-border transactions. The
structure of the chapter is:
Principles of taxation of cross-border transactions (21.2)
Principles applicable to transactions by residents and non-residents:

Source concept (21.3) Application of tax treaties (21.4)
Application to transactions by non-residents (21.5) Application to transactions by residents (21.6)
Anti-avoidance applicable to residents:

Controlled foreign company structures (21.7)
Anti-avoidance: Transfer pricing rules (21.8)
823
Remember
Cross-border transactions are also subject to the exchange control requirements in South Africa.
The Exchange Control Regulations, as promulgated in terms of the Currency and Exchanges
Act, and Orders and Rules issued by the Minister of Finance under the Exchange Control
Regulations, contain these requirements. Even though these requirements do not necessarily
relate to the taxation of cross-border transactions, they must be taken into account when
entering into such a transaction.
21.2 Principles of South African taxation of cross-border transactions

South Africa introduced a residence-based system of tax in 2001. This means that persons who are
residents of South Africa for tax purposes are subject to income tax in South Africa on their worldwide
income (par (i) of the definition of ‘gross income’ in s 1). Persons who are not residents of South
Africa for tax purposes (referred to as non-residents in this book) are only subject to income tax in
South Africa on amounts derived from a source in South Africa (par (ii) of the definition of ‘gross
income’ in s 1 and paragraph 2 of the Eighth Schedule). The tax in respect of amounts paid to non-
residents is often levied in the form of a withholding tax for ease of collection.
The starting point to determine the South African tax implications of a cross-border transaction is to
establish whether or not the person who derives income from it is a resident of South Africa for tax
purposes. Chapter 3 deals with tax residence in detail.
A cross-border transaction may be subject to tax in:
l The jurisdiction where the income is sourced (the source country). This tax is imposed on the
basis that the income was derived in this country, using its resources, irrespective of the
residence of the recipient.
l The jurisdiction where the recipient of the income is a resident (the country of residence). This tax
arises if the jurisdiction where the recipient is a tax resident follows a residence-based tax system
(like the one in South Africa).
If the same amount is taxed in the hands of the same person by more than one country, the trans-
action may no longer be economically feasible. Various measures exist to prevent double taxation
from obstructing cross-border trade. These include:
l Countries that follow a residence-based tax system generally provide relief to its residents for
certain foreign taxes incurred in respect of cross-border transactions. South Africa provides this
relief to residents in terms of s 6quat.
l Certain cross-border transactions are exempt from tax. This may be an exemption afforded by
the source country or the country of residence.
l Governments enter into agreements to avoid double tax imposed on the residents of a country
when they transact with or in the other country. These agreements are referred to as tax treaties
or double tax agreements (DTAs). A tax treaty generally limits the taxing right of one of the
countries involved (source country or country of residence).
The following approach may be a useful guideline to determine the South African tax implications of a
cross-border transaction:
824
Determine the residence of the person that derives income from a

cross-border transaction (chapter 3)
For transactions by
If the person is a resident: residents or If the person is a non-resident:
non-residents:
Include amount in gross

Include amount in gross
income or proceeds for capital Determine the income or taxable capital
gains tax purposes source of the gains if derived from a South
income (21.3) African source
Consider if this income is

exempt (for example, the
exemption for foreign
dividends) Consider whether Consider whether the
a tax treaty has amount is subject to a
been concluded withholding tax
between South
Africa and the
If the income is not exempt, other country and
consider whether South Africa if it has, determine
may tax this type of income in effect on the Consider if this income is
terms of the relevant tax treaty specific type of exempt (Amounts that are
income (21.4) subject to withholding taxes
are generally exempt from
normal tax)
If South Africa may tax income

in terms of the treaty,
determine whether relief is
available for foreign tax If the income is not exempt,
imposed on the transaction in consider whether South Africa
terms of s 6quat (rebate or may tax this type of income in
deduction) terms of the relevant tax treaty
and whether the amount of tax
is limited
The comprehensive examples at the end of 21.5 and 21.6 illustrate how to apply this approach to
both residents and non-residents.
It is evident that the source of income is central to the taxation of both residents and non-residents.
Tax treaties also affect the tax implications for transactions undertaken by both residents and non-
residents. The discussion below considers these two aspects first. An explanation of the tax rules that
apply to transactions by non-residents and residents follows in 21.5. and 21.6.
Remember
Cross-border transactions are often denominated in foreign currency. These transactions can
give rise to exchange items when amounts owing between the parties are denominated in
foreign currencies. Chapter 15 discusses the conversion of these foreign currencies to rand and
the tax implications of exchange items resulting from these transactions in detail.
825
21.3 Source (s 9)
Prior to 2001 South Africa had a source-based tax system. At the time the concept of source played
an important role to determine the income tax liability of both residents and non-residents.
Under the current residence-based tax system, the source of income is relevant for non-residents to
determine whether an amount will be subject to tax in South Africa. A resident is subject to income
tax in South Africa, irrespective whether the amount was derived from a South African source or not.
The concept of source remains important when determining the tax liability of residents. For example,
if a resident derives income from a source outside of South Africa, a rebate may be available to the
resident in respect of foreign tax suffered on that income (see 21.6.3).
The source of income can be determined in terms of statutory source rules, tax treaties or common
law established by judicial decisions.
Statutory source rules

The Act defines the source of a number of income streams (mostly in s 9). These statutory source
rules deal mostly with passive income, for example interest and royalties, and mirror the source
principles applied in tax treaties to a large extent, although there are some exceptions.
Remember
Some of the statutory source rules refer to the presence of a permanent establishment in South
Africa or abroad. The concept of permanent establishment is discussed in more detail in
21.4.3.9.
Common law source principles

If the source of a specific type of income is not specified in the legislation or tax treaty, it must be
determined with reference to case law. In light of the fact that South Africa previously applied a
source-based tax system, a large body of case law exists on this subject. The authority in South
Africa for the determination of the source of an amount is CIR v Lever Brothers & Unilever Ltd (1946
AD) where Watermeyer CJ said (at 8):
The word ‘source’ has several possible meanings. In this section it is used figuratively, and when so used in
relation to the receipt of money one possible meaning is the originating cause of the receipt of the money,
another possible meaning is the quarter from which it is received. A series of decisions of this Court and of
the Judicial Committee of the Privy Council upon our Income Tax Acts and upon similar Acts elsewhere
have dealt with the meaning of the word ’source‘ and the inference, which, I think, should be drawn from
those decisions is that the source of receipts, received as income, is not the quarter whence they come, but
the originating cause of their being received as income and that this originating cause is the work which the
taxpayer does to earn them, the quid pro quo which he gives in return for which he receives them. The work
which he does may be a business which he carries on, or an enterprise which he undertakes, or an activity
in which he engages and it may take the form of personal exertion, mental or physical, or it may take the
form of employment of capital either by using it to earn income or by letting its use to someone else. Often
the work is some combination of these.
If the source of income must be determined with reference to case law (as opposed in terms of the
statutory source rules), the inquiry involves two questions:
l What is the originating cause of the income?
l Where is the originating cause located?
In many instances it is not difficult to determine and locate the originating cause of income. If an
amount has more than one originating cause, the source of the income is based on the dominant
cause (CIR v Black (1957 AD)). Where an amount has more than one dominant cause, it may be
appropriate to apportion its source (CIR v Nell (1961 AD)). Although the case law provides guidance
that is useful to determine the source of income, it is almost impossible to extract general principles
from these cases. The courts frequently warn that it is dangerous to generalise with regard to source.
Each case must be decided on its own facts.
826
The overall approach to determine source can be gleaned from the following passage from
Liquidator, Rhodesian Metals Ltd v COT (1938 AD) (at 379):
Source means not a legal concept but something which the practical man would regard as a real source of
income. The ascertaining of the actual source is a practical hard matter of fact.
Remember
Some tax treaties that South Africa entered into contain rules that determine where income is
deemed to arise. A deemed source rule in a tax treaty overrides the application of the statutory
or common law source rules as the treaty provisions become part of the Act (see 21.4).
We discuss the source rules and guidance in relation to common income streams next.
21.3.1 Source of dividend income (s 9(2)(a))

The source of dividend income depends on the residence status of the company that pays the
dividend. If the dividend is paid by a South African resident company, the source of the dividend is in
South Africa (s 9(2)(a)). If the dividend is paid by a company that is a non-resident (i.e. a foreign
dividend), the source of the dividend is outside South Africa (s 9(4)(a)).
21.3.2 Source of interest income (s 9(2)(b))

Interest, as defined in s 24J (see chapter 16), can be from a South African source on either of the
following bases:
l the residence of the person paying the interest, or
l the place where the funds or credit obtained is being used or applied.
Interest incurred by a person who is a South African resident is from a South African source
(s 9(2)(b)(i)). If that South African resident, however, incurs interest that is attributable to its
permanent establishment outside South Africa, the residence of the payer does not cause the source
of the interest to be South Africa.
Alternatively, interest received by or accrued to a person is from a South African source if the funds
or credit are used or applied in South Africa (s 9(2)(b)(ii)). If the funds or credit are used in South
Africa, the payer’s residence is not relevant.
Any interest that does not meet one of the criteria to be from a South African source is derived from a
source outside South Africa (s 9(4)(b)).
Remember
Since the source of interest income had been legislated in 2011, it is not necessary to consider
case law, for example the Lever Brothers & Unilever Ltd case, to establish the source of interest.
This does not mean that the case law relating to the source of interest is redundant. The principle
of ‘originating cause’, which stems from the judgment in the Lever Brothers case, is relevant to
determine the source of any income that is not prescribed in the Act.
Example 21.1. Source of interest income

Investisseur Ltd, a Mauritian tax resident, advanced a loan of R10 million to Shishini (Pty) Ltd, a
South African tax resident. The loan bears interest at a fixed rate of 11% per annum. Shishini
(Pty) Ltd used the funds to start its business in South Africa.
What is the source of the interest received by Investisseur Ltd?
827
SOLUTION
As the source rules for interest are legislated, it is not necessary to consult case law to determine
the source of the interest that accrues to the respective persons.
The interest that accrues to Investisseur Ltd is from a South African source since it is incurred by
a South African tax resident, Shishini (Pty) Ltd. The funds are used in its South African oper-
ations. The interest is not attributable to any permanent establishment of Shishini (Pty) Ltd
outside South Africa (s 9(2)(b)(i)).
Note
Even if Shishini (Pty) Ltd was not a South African tax resident, the interest would still have been
from a South African source based on the fact that the funds were used in South Africa
(s 9(2)(b)(ii)).
21.3.3 Source of royalty income and know-how payments (s 9(2)(c), 9(2)(d), 9(2)(e) and
9(2)(f))
A royalty is any amount that is received or accrues for the use, right of use or permission to use intel-
lectual property as listed in s 23I. This definition of intellectual property includes patents, designs,
trademarks and copyrights as defined in the relevant South African legislation as well as similar
foreign legislation. Intellectual property extends to any property or right of a similar nature and
knowledge connected to the use of these items (definition of ‘intellectual property’ in s 23I(1)).
Similar to interest income, royalty income may be from a South African source based on
l the residence of the person paying the royalty, or
l the place where the intellectual property is used or may be used.
Royalties are from a South African source if they are incurred by a person who is a South African
resident (s 9(3)(c)). If the South African resident, however, incurs royalties that are attributable to its
permanent establishment outside South Africa, the residence of the payer does not cause the source
of the royalties to be from South Africa.
Alternatively, royalties received by or that accrue to a person in respect of the use or right to use
intellectual property in South Africa are from a South African source, irrespective of the residence of
the payer (s 9(2)(d)).
If the royalty does not meet one of the criteria to be from a South African source, it is derived from a
source outside South Africa (s 9(4)(c)).
The source of income derived from
l imparting of, or undertaking to impart, any scientific, technical, industrial or commercial know-
ledge or information, or
l rendering of, or undertaking to render, any assistance or service in connection with the applica-
tion or use of such knowledge or information
is based on the similar principles as royalties. These payments are commonly referred to as know-
how payments.
Know-how payments incurred by a person who is a South African resident are from a South African
source, unless the amount is attributable to a permanent establishment outside South Africa
(s 9(2)(e)). Alternatively, know-how payments received by or that accrue to a person in respect of the
imparting of such knowledge or information, and assistance or services relating to such information,
for use in South Africa are from a South African source (s 9(2)(f)).
Remember
The same withholding tax applies to royalties and know-how payments (see 21.5.2.4 for a
detailed discussion of the withholding tax).
Example 21.2. Source of royalty income

Inventeur Ltd, a Mauritian tax resident company, developed intellectual property and registered a
patent in Mauritius. It makes its intellectual property available to Production (Pty) Ltd, a South
African company. Production (Pty) Ltd uses the patented technology in its manufacturing busi-
ness in South Africa and pays Inventeur Ltd a usage-based royalty.
Discuss the source of the royalty income received by Inventeur Ltd from Production (Pty) Ltd.
828
SOLUTION
The patent registered in Mauritius is intellectual property as it is a patent defined in the Mauritian
equivalent of the South Africa Patents Act (par (e) of the definition of ‘intellectual property’ in
s 23I(1)). The amounts payable by Production (Pty) Ltd are for the use of this intellectual property
and therefore royalties (s 9(1)). As the source rules for royalties have been legislated, it is not
necessary to consult case law to determine the source of the royalties that accrue to Inventeur
Ltd.
The royalties that accrue to Inventeur Ltd are from a South African source as they are incurred by
a South African tax resident, Production (Pty) Ltd. As the intellectual property is used in
Production (Pty) Ltd’s South African manufacturing operations, the royalties are not attributable to
any permanent establishment of Production (Pty) Ltd outside South Africa (s 9(2)(c)). The fact
that the patent is not registered in South Africa does not affect the source of the income.
Note
Even if Production (Pty) Ltd was not a South African tax resident, the royalties would still have
been from a South African source based on the fact that the intellectual property was used in
South African-based manufacturing operations (s 9(2)(d)).
21.3.4 Source of rental income

The statutory source rules do not deal with rental income. The originating cause of rental income is
usually the asset used to earn rental income. In COT v British United Shoe Machinery (SA) (Pty) Ltd
(1964 FC) the asset concerned was machinery and the leases were so long in duration that the court
held that the emphasis was on the property let and not on the business of the lessor. The source of
the rent derived from the use of the property was located where it was used, that was, in Rhodesia. It
follows from this decision that it is too wide a proposition to state that the source of rent is always the
asset and that the place where the asset is used by the lessee necessarily determines the source of
the rent. Regard must be had to the nature of the property let, the nature of the lessor’s business and
the duration of the lease. When the emphasis is on the property let and not on the business of the
lessor, the source is located where the property is used. However, where the emphasis is on the
business and not the asset (for example with car rentals), it is not necessarily important where the
asset is used. The source of the rental will then be where the business is situated.
21.3.5 Source of amounts derived from the disposal of assets and exchange differences
(s 9(2)(j), 9(2)(k) and 9(2)(l); s 9J)
Amounts derived from the disposal of assets may be subject to tax in South Africa as income (includ-
ing recoupments) or capital gains. The source of these amounts depends on the nature of the asset
disposed of.
If the asset that is disposed of is immovable property, the source of the amount is in South Africa if
the immovable property is situated in South Africa. The source of amounts derived from the disposal
of any interest in or right to immovable property (for example, certain shares that derive 80% or more
of their market value from immovable property in South Africa) is also in South Africa if the property is
located in South Africa (s 9(2)(j)). Rights to and interests in immovable property in this context have
the same meaning as discussed in chapter 17. The same principle applies where immovable
property, or an interest or right therein, is disposed of as trading stock (s 9J).
If the asset disposed of is movable property, including trading stock, the source of the amounts
derived from the disposal of such asset by a resident is in South Africa if (s 9(2)(k)(i))
l the asset is not effectively connected to a permanent establishment outside South Africa, and
l the proceeds from the disposal of that asset are not subject to tax on income in any foreign
country.
If a non-resident disposes movable property, the source of the amounts derived from the disposal is
in South Africa only if the asset is effectively connected with a permanent establishment of that non-
resident in South Africa (s 9(2)(k)(ii)).
Remember
The term ‘permanent establishment’ is defined in s 1 with reference to the definition in Art 5 of the
OECD Model Tax Convention. This definition is discussed in 21.4.3.9. below.
Amounts derived from the disposal of immovable or movable assets are from a source outside South
Africa if the source does not meet the above requirements (s 9(4)(d)).
829
The rules to determine the source of exchange differences on exchange items mirror the source rules
that apply to amounts derived from the disposal of movable property (ss 9(2)(l) and 9(4)(e)).
21.3.6 Source of income from services rendered

The statutory source rules do not deal with the source of income earned from rendering services. The
originating cause of the income is the services rendered. In COT v Shein (1958 (FC)) the taxpayer
undertook to manage a store in the Bechuanaland Protectorate (now Botswana). Over time the
taxpayer employed a full-time storekeeper to manage the store while the taxpayer himself resided in
Bulawayo in Southern Rhodesia (now Zimbabwe). The tax authorities in Southern Rhodesia attempted
to include a portion of the management fee in his income from a source in that country on the basis
that the taxpayer spent a portion of the time that he performed the work there. The taxpayer appealed
this decision on the basis that the work was done in the store in Bechuanaland and any functions
performed from Southern Rhodesia were trivial and incidental to the work done in Bechuanaland.
Tredgold CJ held the view that (at 15):
It may be accepted that, prima facie, the test of the source of a payment for services rendered is the place
where those services are rendered.
This judgment left the door open for the source of income to be apportioned. It was, however, held
that in this particular case, the activities undertaken in Southern Rhodesia were casual and incidental
in nature. Apportionment was not appropriate in the circumstances. The judgment in CIR v Nell (1961
AD) offers similar support for possible apportionment of the source of income from services
rendered, but also highlighted that the dominating cause of the income must be distinguished from
ancillary or subsidiary activities. The dominant cause of the income determines its source. If the
source of income is apportioned, SARS indicates in Interpretation Note No. 18 that the appropriate
apportionment basis will depend on the facts and circumstances of the case.
21.3.7 Source of employment income (s 9(2)(g) and 9(2)(h))

The statutory source rules only deal with remuneration earned by certain civil and public servants.
Income received by or that accrues to a taxpayer for the holding of a public office, to which the per-
son has been appointed in terms of an Act of Parliament, is from a South African source (s 9(2)(g)).
Amounts received by or that accrued to any person who rendered services to any employer in the
various tiers of the South African government are from a South African source (s 9(2)(h)).
Remuneration paid by the South African government therefore remains within the South African tax
net irrespective of where the services are rendered.
The courts have consistently determined that the originating cause of income from employment and
other services rendered is the provision of the service itself, irrespective of the place where the
contract is made or the remuneration is paid. The source of the remuneration is therefore located at
the place where the services are physically rendered. It was confirmed in SIR v Kirsch (1978 T) that
the same principle applies in respect of shares allotted to a taxpayer for services rendered. An
apportionment of the gain in respect of equity instruments awarded to a taxpayer by virtue of
employment may be required if the employment was exercised in South Africa and abroad while the
award was earned.
Example 21.3. Source of employment income
Mr Gomez, a Brazilian tax resident, is a permanent employee of Grande Ltda, a large listed Bra-
zilian company. He has a permanent office at Grande Ltda’s head office in Brazil. Mr Gomez is
seconded to South Africa for four months for a consulting project undertaken in South Africa by
Grande Ltda. The consulting project is a two-year project undertaken at the premises of the client
in South Africa. You may assume that this project results in a permanent establishment, as
contemplated in Article 5 of the tax treaty between South Africa and Brazil, for Grande Ltda in
South Africa.
Grande Ltda has given Mr Gomez the choice as to where he would like his salary to be paid to
during the time that he spends in South Africa. He provided Grande Ltda with the banking details
of a Cyprian bank account. Grande Ltda deposits the funds from Brazil into this account at the
end of each month while Mr Gomez is in South Africa. Mr Gomez is able to withdraw the funds
that he needs from the account at South African ATMs, while keeping the rest of the funds in
Cyprus.
What is the source of Mr Gomez’s remuneration?
830
21.3–21.4 Chapter 21: Cross-border transactions
SOLUTION
There is no legislated source rule for employment exercised in the private sector. Case law
should therefore be consulted to determine the source of Mr Gomez’s remuneration.
It was held in CIR v Lever Brothers & Unilever Ltd that the source of income is not the place
where the amount comes from (Brazil in this case). It is submitted that the source of the income is
similarly not determined by the place where the money is received or kept (Cyprus in this case).
Instead the originating cause and the work that the taxpayer does to earn the income. In the
context of employment, the source of the income is where the services were performed to earn
the remuneration.
The source of the remuneration earned by Mr Gomez while working in South Africa is located in
South Africa.
The courts have held that a director’s services in his capacity as director must be regarded as being
rendered at the head office of the company where the board of directors ordinarily carries on its
business. Consequently, if the head office is in South Africa, the fees are derived from a South
African source, irrespective of the place where the director resides and performs the services (ITC 77
(1927)). A director who is a non-resident would therefore be liable for South African normal tax on his
fees if the board of directors meets in South Africa.
21.3.8 Source of amounts received from a retirement fund (s 9(2)(i))

The source of lump sum payments, pensions or annuities received from pension funds, pension
preservation funds, provident funds or provident preservation funds depend on where the services, in
respect of which the amounts are received, were rendered. These amounts are from a South African
source if the services were rendered in South Africa (s 9(2)(i)). If the services were rendered partly in
South Africa and partly abroad, the source must be apportioned based on the period that services
were rendered in South Africa to determine the South African sourced amount (proviso to s 9(2)(i)).
Remember
Lump sum payments, pensions or annuities received by or that accrued to a resident from a
source outside South Africa may be exempt. This exemption only applies if the amount is not
received from a pension fund, pension preservation fund, provident fund, provident preservation
fund or retirement annuity fund as defined in s 1 of the Act (s 10(1)(gC)(ii)). These definitions of
retirement funds refer to South African funds approved by SARS. This implies that foreign
sourced amounts from retirement funds are only exempt in the hands of resident recipients if the
fund is not a South African retirement fund.
21.4 Tax treaties

Countries enter into tax treaties to avoid juridical double taxation, which arises when they impose tax
on the same taxpayer in respect of the same amount. Countries also contract with each other to
agree to exchange information and assist each other in the collection of taxes.
Remember
Tax treaties normally refer to the countries that are parties to the treaty as the Contracting States.
Countries use model conventions to negotiate and draft treaties that they enter into. These include
the OECD Model Tax Convention on Income and on Capital and the United Nations Model Double
Taxation Convention between Developed and Developing Countries. The model tax conventions have
detailed commentary to illustrate and explain the interpretation of its provisions. Each treaty
concluded is a negotiated agreement between the countries involved. It may contain specific infor-
mation that the model tax convention does not have (for example date of entry into force) and may
have provisions that differ from those of the model tax conventions.
831
This chapter uses the OECD Model Tax Convention on Income and on Capital to
explain concepts found in many of the tax treaties concluded by South Africa.
The provisions of the relevant treaty itself, rather than those of a model tax
convention, must, however, be considered to determine the tax implications of a
transaction.
Please note!
Not all the tax treaties that South Africa is party to were negotiated under the
current versions of the model tax conventions. The provisions of some of the older
treaties, for example the treaties with Germany and Zambia, are very different
from the ones described in this section. In addition, some of the South African tax
treaties contain articles found in the United Nations Model Tax Convention.
A tax treaty is generally concluded between two countries. In a South African context, s 108(1) makes
provision for the National Executive to enter into an agreement with the government of another
country with the view to prevent, mitigate or discontinue the levying of tax under the laws of the
countries on the same income, profits or gains. It also allows for South Africa to render reciprocal
assistance in the administration and collection of taxes under the laws of South Africa and the other
country. South Africa has entered into tax treaties with a number of countries on this basis.
Remember
All the tax treaties concluded by the South African Government are available on the SARS web-
site on the Legal Counsel page under the heading International Treaties & Agreements.
Some tax treaties are negotiated and agreed to between more than two countries, for example the
Nordic Multilateral Tax Treaty that applies to Denmark, the Faroe Islands, Finland, Iceland, Norway
and Sweden.
A number of countries are signatories to a multilateral instrument that implements measures recom-
mended in the BEPS project to reduce opportunities for tax avoidance using treaty provisions. South
Africa signed the multilateral instrument during June 2017 and will take the necessary steps to ratify
this instrument in terms of the domestic laws. This instrument will have a significant effect on existing
treaties, as its provisions will be incorporated into the existing treaties to close gaps identified as part
of the BEPS project. This instrument will be incorporated in this publication once it takes effect in
South Africa.
21.4.1 Integration with domestic law (s 108)

A tax treaty must be read with the domestic tax law of a country when it becomes effective. A country
imposes tax on a transaction in terms of its domestic tax laws only. A tax treaty cannot impose a tax
liability on a taxpayer that such taxpayer would not otherwise be liable for under the domestic tax
laws of a country. The tax treaty allocates rights to the contracting states to impose taxes in terms of
their respective domestic laws.
Remember
In practice, the starting point to determine the tax implications of a transaction is to consider
whether the transaction will be subject to tax in terms of the domestic tax laws of a country. If a
transaction is not subject to tax in South Africa in terms of the Income Tax Act, there is no need
to consider the provisions of a tax treaty from a South African tax perspective. If, on the other
hand, the transaction is subject to tax in South Africa, the provisions of the relevant tax treaty (if
any) should be considered to determine whether South Africa may impose the tax in terms of the
Income Tax Act.
Diagram 21.2. as well as the examples in this chapter illustrate this approach.
A tax treaty has the effect as if it has been enacted in the Income Tax Act once it has been published
in the Government Gazette following its approval by Parliament (s 108(2)). This means that where any
provision of the Act, as discussed in the rest of this book, is applied to a transaction to which a treaty
also applies, the treaty provisions must be considered as if they form part of that provision. The
provision of the Act must be read in conjunction with the relevant treaty provision(s), irrespective of
whether the provisions make explicit reference to a treaty or not.
832
As an example, the New convention between the Government of the Republic of South Africa and the
Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains
was signed by the representatives of both countries on 4 July 2002. It was published in Government
Gazette No. 24335 on 31 January 2003. From a South African tax perspective, Article 27 determines
that the provisions of the treaty enter into force for amounts withheld at the source on or after
1 January 2003 or in respect of taxable years beginning on or after 1 January 2003 for other taxes.
The domestic tax laws of South Africa must be read with this treaty when applied to a transaction
entered into by a resident of either of the states. If, as an example, a South African company pays
interest to a resident of the United Kingdom, the South African tax implications of the interest must be
determined in terms of
l the relevant provisions of the Act (i.e., exemption of interest in the hands of non-residents
(s 10(1)(h)) and the requirements relating to the withholding tax on interest (ss 50A to 50H))
l read with Article 11 of the tax treaty between South Africa and the United Kingdom.
The tax treaty provisions enjoy preference over the domestic tax laws. All the examples in the remain-
der of this chapter illustrate the integration of the tax treaties into domestic law.
21.4.2 Application and scope

The first step to determine whether the provisions of a particular tax treaty apply to a transaction is to
establish whether the treaty has come into force. Most treaties contain a provision towards the end of
the agreement that specifies how and when the treaty will enter into force (Art 30 of the OECD Model
Tax Convention). This process involves notification by each country to the other when the processes
to bring the treaty into force have been completed. Once it has been determined that the treaty is in
fact in force, it is also necessary to make sure that the parties have not terminated it (Art 31 of the
OECD Model Tax Convention).
Tax treaties only apply in respect of taxes covered by the treaty and for the benefit of persons
covered by the treaty.
Persons covered
A tax treaty applies to persons who are residents of one or both of the contracting states that entered
into the agreement. This means that a person is only entitled to the benefits of the treaty if that person
is a resident of one of the countries that concluded the treaty. Article 1 of the OECD Model Tax Con-
vention, which deals with persons covered, states:
This Convention shall apply to persons who are residents of one or both of the Contracting States.
The term ‘resident’ in the context of the treaty refers to a resident as defined in the treaty itself. If the
tax treaty is in line with the OECD Model Tax Convention, a resident is a person who is liable to tax in
one of the contracting states by reason of domicile, residence, place of effective management or any
other similar criterion (Art 4(1) of the OECD Model Tax Convention). Treaties normally include rules,
commonly referred to as tie-breaker rules, that are used to determine the residence of a person if that
person is resident in both of the contracting states from their domestic tax perspectives (Art 4(2) and
4(3) of the OECD Model Tax Convention).
Remember
The definition of resident in the Act specifically excludes a person who is deemed to be exclu-
sively a resident of another country for purposes of the application of any tax treaty entered into
between South Africa and the other country. For example, if a natural person is resident in the
Netherlands by reason of the fact that he ordinarily resides there but is also deemed to be a
resident in South Africa based on the physical presence test (see chapter 3), the tie-breaker
rules in Article 4(2) of the tax treaty between South Africa and the Netherlands will apply. If the
person only has a permanent home available to him in the Netherlands and stays at a guest
house when in South Africa, that person will be deemed to be a resident of the Netherlands in
terms of Article 4(2)(a) of the treaty. This person is then excluded from being a resident of South
Africa, despite the fact that he meets the physical presence test.
Taxes covered
A treaty applies to the taxes specified. Treaties negotiated on the basis of the OECD Model Tax
Convention specify that they apply to taxes on income and on capital imposed on behalf of a
Contracting State or its political subdivisions or local authorities, irrespective of the manner in which
they are levied (Art 2(1) of the OECD Model Tax Convention). Most treaties list the specific taxes that
833
are taxes on income and on capital in each of the contracting states (Art 2(2) and 2(3) of the OECD
Model Tax Convention).
Since treaties are not updated or amended every year for changes in the domestic tax legislation of
the two countries, the listing of taxes covered often become outdated. Treaties generally make provi-
sion to also apply to any identical or substantially similar taxes imposed by a country after the date of
signature of the treaty (Art 2(4) of the OECD Model Tax Convention). As an example, many of the
South African treaties do not explicitly state that they apply to the withholding tax on interest, which
only came into effect on 1 March 2015 (see 21.5.2.5). This tax would, however, be a tax on income
and substantially similar to the taxes listed in the ‘Taxes covered’ provision of those treaties.
SARS issued Binding General Ruling No. 9 (BGR9) to indicate which taxes in South
Please note! Africa are considered to be taxes on income or taxes substantially similar to those
listed for purposes of South Africa’s tax treaties. If in doubt, this ruling is a useful
resource.
Example 21.4. Entitlement to treaty benefits

Investeerder BV subscribed for all the equity shares of Danger (Pty) Ltd, a South African start-up
business, during 2022. Investeerder BV is a resident of the Netherlands in terms of Dutch tax
laws on the basis that the company was incorporated in and is managed from the Netherlands.
The dividends that Investeerder BV expect to receive in future from this investment are from a
South African source and will be subject to the dividends tax in South Africa at a rate of 20%.
Discuss whether Investeerder BV would be entitled to the relief afforded in respect of dividend
income in terms of the tax treaty (and subsequent protocol) concluded between South Africa and
the Netherlands.
SOLUTION
The Convention between the Republic of South Africa and the Kingdom of the Netherlands for
the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on
income and capital (treaty) came into force on 28 December 2008 and has effect for taxable
years beginning on or after 1 January 2009. Neither of the states has given notice of termination.
As a result, the treaty is in force.
Article 1 of the treaty states that: ‘This Convention shall apply to persons who are residents of
one or both of the Contracting States.’ The term ‘resident’ is defined in Article 4(1)(a) of the treaty
as: ‘any person who, under the laws of that State, is liable to tax therein by reason of that per-
son’s domicile, residence, place of management or any other criterion of a similar nature, and
also includes that State and any political subdivision or local authority thereof. This term,
however, does not include any person who is liable to tax in that State in respect only of income
from sources in that State or capital situated therein.’ As Investeerder BV is a resident of the
Netherlands in terms of the Dutch tax laws based on its place of management, it is a resident of
the Netherlands as defined in Article 4(1)(a) of the treaty. The treaty therefore applies to Inves-
teerder BV.
Article 2(1) of the treaty states that it applies as follows: ‘This Convention shall apply to taxes on
income and on capital imposed on behalf of a Contracting State or of its political subdivisions or
local authorities, irrespective of the manner in which they are levied.’ Article 2(3)(b)(ii) lists
secondary tax on companies as one of the existing taxes to which the treaty applies in South
Africa. Article 2(4) of the treaty, following amendment by the protocol, however, determines that:
‘The Convention shall apply also to any identical or substantially similar taxes, including taxes on
dividends, that are imposed by either Contracting State after the date of signature of the Con-
vention in addition to, or in place of, the existing taxes. The competent authorities of the Contract-
ing States shall notify each other of any significant changes that have been made in their re-
spective taxation laws.’ Even though dividends tax is not listed in Article 2(3) of the treaty, SARS
states in BGR9 that dividends tax is a tax on income that qualifies for treaty relief. As a result of
Article 2(4) of the treaty, the treaty applies in respect of the dividends tax imposed in South Africa
on the dividends received by Investeerder BV.
Investeerder BV should consider the provisions of Article 10 of the treaty, as amended by the
protocol, to determine whether, and to what extent, South Africa may impose dividends tax in
respect of the dividends it receives from Danger (Pty) Ltd.
Note
Article 10(10) of the treaty (as amended by the protocol) contains a relatively scarce type of
provision, namely a most favoured nation clause. The application of this clause has recently
been the subject of disputes considered by the courts in South Africa and the Netherlands.
These disputes were all decided in favour of the taxpayer.
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21.4.3 Allocation of taxing rights and elimination of double taxation

A tax treaty allocates the right to tax amounts between the country of residence of the taxpayer and
the country of source where the income arises. It specifies the taxing rights for various categories of
income. The category of income is normally defined in the definitions article of the treaty or in the
relevant article that deals with the type of income.
Treaties generally allocate one of the following taxing rights to the country where the source of the
income or capital is situated:
l the country of source may not tax the income or capital at all
l the country of source may tax the income or capital subject to a limit, or
l the country of source may tax the income or capital without any limitation.
In the last two scenarios, the same income or capital can still be subject to tax in the recipient’s
country of residence and the source country. The tax treaty does not eliminate the juridical double
taxation. In such cases, the OECD Model Tax Convention makes provision for the country of
residence to provide relief where the country of source of the income has imposed tax on the amount.
It requires that the country of residence of the recipient allow a credit for the tax suffered in the
country of source (Art 23B of the OECD Model Tax Convention) or exempt income that has been
subject to tax in the country of source (Art 23A of the OECD Model Tax Convention). The South
African tax treaties normally require that South Africa provide a credit for the foreign taxes suffered by
its residents. Many of these treaty provisions require that the credit must be allowed in terms of the
South African domestic law (i.e. s 6quat – see 21.6.3).
If a treaty allocates an exclusive taxing right to a particular state, the provision uses
wording that clearly precludes one of the countries from taxing the income. An
example of an exclusive taxing right is Art 11(1) of the treaty between South Africa
and the United Kingdom (UK), which states:
Interest arising in a Contracting State and paid to a resident of the other Con-
tracting State shall be taxable only in that other State, if such resident is the bene-
ficial owner of the interest (own emphasis)
As a rule, the OECD Model Tax Convention confers exclusive tax rights to the state
of residence.
If, on the other hand, the treaty allows a state to tax income, but this taxing right is
not exclusive, it normally determines that the income may be taxed in or is taxable
in a particular state. This does not preclude the other country from also taxing this
income. An example of wording that achieves this allocation of taxing rights is
found in Art 6(1) of the treaty between South Africa and the UK:
Please note!
Income derived by a resident of a Contracting State from immovable property
(including income from agriculture or forestry) situated in the other Contracting
State may be taxed in that other State. (own emphasis)
Article 6(1) of the treaty between South Africa and Mauritius similarly does not
prevent the country of residence from taxing income from immovable property,
although the wording differs slightly from that of the treaty between South Africa
and the UK:
Income derived by a resident of a Contracting State from immovable property,
including income from agriculture or forestry, is taxable in the Contracting State in
which such property is situated. (own emphasis)
If both the state of source and the state of residence have taxing rights, the state of
residence must allow relief from double tax (under Art 23A or 23B in the context of
the OECD Model Tax Convention).
The taxing rights generally allocated to categories of income or capital gains are briefly discussed
next. The allocation below is based on the OECD Model Tax Convention. Unless specifically indi-
cated, the allocation of taxing rights according to the UN Model Double Taxation Convention mirrors
the OECD model.
21.4.3.1 Income from immovable property

Income derived by a resident of one of the contracting states from immovable property situated in the
other contracting state (for example, rental income earned from a property situated in the other
country) may generally be taxed in the country where the immovable property is situated (source
country) (Art 6 of OECD Model Tax Convention). This is not an exclusive taxing right. The definition of
835
immovable property refers to the meaning of this term in the domestic law of the contracting states.
The meaning of the term for treaty purposes is wide and includes property accessory to the immov-
able property (for example livestock).
Example 21.5. Allocating of taxing rights in respect of income from immovable property
Propco Plc, a tax resident of the United Kingdom (UK), owns a commercial building in Cape
Town (South Africa). It leases the building to tenants who operate restaurants from the premises.
Discuss whether the treaty between South Africa and the UK allows South Africa to tax the rental
income earned by Propco Plc.
SOLUTION
Propco Plc is a resident of the UK. It is a covered person for purposes of the tax treaty con-
cluded between South Africa and the UK (Art 1 of the treaty). The rental income is derived from
a South African source (see 21.3.4.). This rental income will therefore be subject to normal tax in
South Africa. The treaty states that it applies in respect of normal tax in South Africa
(Art 2(3)(a)(i) of the treaty).
Article 6(1) of the treaty allocates the following taxing right in respect of income derived from
immovable property:
Income derived by a resident of a Contracting State from immovable property (including
income from agriculture or forestry) situated in the other Contracting State may be taxed in
that other State.
Art 6(2) determines that the term ‘immovable property’ shall have the meaning which it has
under the law of the Contracting State in which the property in question is situated.
Art 6(3) states that the above provision applies to income derived from direct use, letting or use
in any other form of immovable property.
As the immovable property that is leased out by Propco Plc is situated in South Africa, South
Africa may tax the income derived from it (Art 6(1) of the treaty).
21.4.3.2 Dividends
Dividends paid by a company that is a resident of one of the contracting states (source country) to a
resident of the other contracting state (country of residence) may normally be taxed in both countries
(Art 10 of OECD Model Tax Convention). If the recipient of the dividends is the beneficial owner of the
dividends, the rate at which the source country may tax the dividends is often limited. The rate limita-
tions vary depending on the nature of the beneficial owner of the dividend and the size of the interest
that the person holds in the company. In many instances the relevant treaty would reduce the South
African dividends tax rate of 20% to a lower rate, for example, 5% in terms of the treaty concluded
between South Africa and the United Kingdom if the requirements for such relief are met.
The OECD Model Tax Convention defines the term ‘dividend’ to include income from shares as well
as income from other corporate rights, which is subject to the same taxation treatment as income
from shares by the laws of the State of which the company making the distribution is a resident. The
National Treasury took the policy position that deemed dividends that arise from transfer pricing
adjustments (see 21.8.1.1.) should not qualify for treaty relief. In order to ensure that such deemed
dividends are not dividends in terms of the South African domestic law and therefore do not qualify
for treaty relief on this basis, they are specifically excluded from the definition of a dividend in s 1(1).
These dividends are, however, specifically included in the definition of dividend for purposes of
dividends tax (definition of dividend in s 64D(1)) to ensure that they attract dividends tax.
Most treaties do not prescribe the mechanism that a country should use to apply the treaty relief. In
the case of dividends, the treaty relief will only apply in South Africa if the requirements to apply a
reduced rate, as discussed in chapter 19, are met.
836
Example 21.6. Allocation of taxing rights in respect of dividend income

Bheka Ltd is a South African resident company with a February financial year-end. The company
is a wholesaler of locally produced vegetables.
A number of companies, including three foreign companies, hold the ordinary shares issued by
Bheka Ltd. The foreign shareholders are Wales Ltd (which holds 15% of the issued ordinary
shares) and Eng Ltd (which holds 7% of the issued ordinary shares). Both entities are residents
of the United Kingdom (UK) for tax purposes. Neither of these entities have a permanent estab-
lishment in South Africa.
On 25 February 2022, Bheka Ltd declared and paid out a cash dividend of R1 000 000 in total to
its shareholders.
Discuss whether the treaty between South Africa and the UK allows South Africa to tax the divi-
dends paid by Bheka Ltd to each of the above foreign shareholders. (You may assume that
Bheka Ltd is not a property investment company.)
SOLUTION
As residents of the UK, the recipients of the dividends may qualify for relief in terms of the double
tax agreement (DTA) between South Africa and the UK (Art 1 of the DTA). As dividends tax is a
tax on income, the treaty relief applies to it (Art 2(1) of the DTA and BGR 9). Article 10(2) of the
DTA (amended by the Protocol) allocates the following taxing rights to South Africa, as the
contracting state in which the company paying the dividends is a resident, in respect of the
dividends:
However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident and according to the laws of that State, but if the beneficial
owner of the dividends is a resident of the other Contracting State, the tax so charged shall not
exceed:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which
holds at least 10 per cent of the capital of the company paying the dividends; or
(b) 15 per cent of the gross amount of the dividends in the case of qualifying dividends paid
by a property investment company which is a resident of a Contracting State; or
(c) 10 per cent of the gross amount of the dividends in all other cases.
Wales Ltd
Wales Ltd, as the beneficial owner of the dividends, holds at least 10% of the capital of
Bheka Ltd. It qualifies for a reduced rate of 5% of the gross amount of the dividends (Art 10(2)(a)
of the DTA).
Eng Ltd
Eng Ltd, as the beneficial owner of the dividends, does not hold at least 10% of the capital of
Bheka Ltd. It qualifies for a reduced rate of 10% of the gross amount of the dividends
(Art 10(2)(c) of the DTA).
Note
The treaty does not specify how the reduced rate should be administered. Dividends tax can
only be withheld at a reduced rate in South Africa if the recipient has provided the payer with a
written declaration stating that it qualifies for a reduced withholding rate and an undertaking to
inform the payor if its status changes (see chapter 16 for a more detailed discussion of these
requirements).
These provisions do not affect the right of the country of source to tax the profits from which the divi-
dend distributions are made.
Treaties use the concept of beneficial ownership to ensure that persons who
receive income as a conduit or agent on behalf of another person, who may not
necessarily qualify for the benefit, do not enjoy treaty benefits.
The commentary to the OECD Model Tax Convention does not define when a
person would be the beneficial owner of income. It indicates that the term should
Please note! not be interpreted in a narrow technical manner. The commentary suggests that if
the recipient’s right to use and enjoy income is constrained by a contractual or
legal obligation to pass the amount on to another person, the recipient will not be
the beneficial owner of the income.
In practice, an accepted view on the meaning of beneficial ownership is that the
beneficial owner of income is the person whose ownership attributes outweigh
that of any other person.
Du Toit Beneficial Ownership of Royalties in Bilateral Tax Treaties 1999 20
837
If the shareholding in respect of which the dividends are received is effectively connected to a per-
manent establishment situated in the country of source, the business profit provisions take prefer-
ence over the dividend provision (Art 10(4) of OECD Model Tax Convention).
21.4.3.3 Interest
Interest that arises in a contracting state (source country) and that is paid to a resident of the other
contracting state (country of residence) may generally be taxed in both countries (Art 11 of OECD
Model Tax Convention). If the recipient of the interest is the beneficial owner of the amount, the right
of the source country may be limited. If the debt in respect of which the interest is received is
effectively connected to a permanent establishment situated in the country of source, the business
profit provisions take preference (Art 11(4) of OECD Model Tax Convention).
It is important to note that in the context of interest paid between related persons, the relief only
applies to the extent that the interest amount does not exceed interest that would have been agreed
to between persons without any special relationship (Art 11(6) of OECD Model Tax Convention).
Example 21.7. Allocation of taxing rights in respect of interest

South African tax resident. The loan bears interest at a fixed rate of 11% per annum. Shishini
(Pty) Ltd used the funds to start its business in South Africa.
Investisseur Ltd’s operations are all based in Mauritius.
Discuss whether the treaty between South Africa and Mauritius allows South Africa to tax the
interest paid to Investisseur Ltd by Shishini (Pty) Ltd.
SOLUTION
The treaty applies to Investisseur Ltd as a resident of Mauritius (Art 1 of the treaty). The with-
holding tax on interest is a tax on income, which is covered by Art 2 of the treaty (BGR9).
Investisseur Ltd therefore qualifies for treaty relief on the interest.
The interest arises from a debt claim that Investisseur Ltd has against Shishini (Pty) Ltd. It is
interest as defined in Art 11(5) of the treaty. The interest is deemed to arise in South Africa where
the payer (Shishini (Pty) Ltd) is a resident (Art 11(7) of the treaty).
Article 11(2) of the treaty allocates the following taxing rights to the state in which the interest
arises:
However, such interest may also be taxed in the Contracting State in which it arises and
according to the laws of that State, but if the beneficial owner of the interest is a resident of the
other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount
of the interest.
The competent authorities of the Contracting States shall by mutual agreement settle the
mode of application of this limitation.
The information available does not suggest that Investisseur Ltd is not the beneficial owner of the
interest. It must, however, be considered whether it can use and enjoy the income without any
constraints to pass it on to another person. In the absence of such a constraint or restriction,
Investisseur Ltd should qualify for the relief in terms of Article 11(2) of the treaty.
The interest does not qualify for any exemption in the state in which it arises in terms of Art 11(3)
of the treaty. South Africa’s taxing right is not affected by Art 11(6) of the treaty because
Investisseur Ltd does not have a permanent establishment in South Africa to which the debt
claim is connected. There is no indication that any special relationship exists between
Investisseur Ltd and Shishini (Pty) Ltd. The extent of the relief will not be limited in terms of
Art 11(8) of the treaty.
Note
The treaty does not specify how the reduced rate should be administered. The reduced rate of
tax can only be applied in South Africa if the recipient of the interest has provided the payer with
a written declaration stating that it qualifies for a reduced withholding rate and an undertaking to
inform the payer if its status changes (see 21.5.2.1. for a more detailed discussion of these
requirements).
21.4.3.4 Royalties
Royalties that arise in a contracting state (source country) and are paid to a resident of the other con-
tracting state (country of residence) are exclusively taxable in the country of residence if the OECD
Model Tax Convention is followed (Art 12(1) of OECD Model Tax Convention). An exception exists if
the royalties are effectively connected to a permanent establishment situated in the source country, in
which case the business profits provisions apply (Art 12(3) of OECD Model Tax Convention).
838
Under the UN Model Double Taxation Convention, these royalties may be taxed in both countries
(Art 12 of the UN Model Double Taxation Convention). This is an example where the UN model
affords greater taxing right to the source country, which may often be a developing country. The right
of the source country will generally be limited if the royalties accrue to a beneficial owner that is a
resident of the other country. Again, an exception would be where the royalties are effectively con-
nected to a permanent establishment situated in the source country, in which case the business
profits provisions apply (Art 12(4) of the UN Model Double Taxation Convention).
Both model tax conventions determine that where a special relationship exists between the payer and
the recipient of the royalties, the relief only applies to the extent of the amount of royalties that would
have been agreed to in the absence of this relationship.
Example 21.8. Allocation of taxing rights in respect of royalties

patent in Mauritius. Inventeur Ltd makes its intellectual property available to Production (Pty) Ltd,
a South African company. Production (Pty) Ltd uses the patented technology in its manufacturing
business in South Africa and pays Inventeur Ltd a usage-based royalty. Inventeur Ltd does not
have any operations or presence in South Africa other than this arrangement.
Discuss whether the treaty between South Africa and Mauritius allows South Africa to tax the
royalties paid to Inventeur Ltd by Production (Pty) Ltd.
SOLUTION
The treaty applies to Inventeur Ltd, as a resident of Mauritius (Art 1 of the treaty). The withholding
tax on royalties is specifically listed as a tax covered by the treaty (Art 2(3)(b)(iii) of the treaty).
Inventeur Ltd therefore qualifies for treaty relief on the royalties.
The payment for the use of a patent is a royalty for treaty purposes (Art 12(3) of the treaty). The
royalties are deemed to arise in South Africa where the payer (Production (Pty) Ltd) is a resident
(Art 12(5) of the treaty).
Article 12(2) of the treaty allocates the following taxing rights to the state in which the royalties
arise:
However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the laws of that State, but if the beneficial owner of the royalties is a resident of
the other Contracting State, the tax so charged shall not exceed 5 per cent of the gross
amount of the royalties.
The competent authorities of the Contracting States shall by mutual agreement settle the mode
of application of this limitation. (see note 2 below)
As owner of the patent, Inventeur Ltd should be the beneficial owner of the royalties. If this is the
case, the royalties qualify for the relief in terms of Art 12(2) of the treaty.
South Africa’s taxing right is not affected by Art 12(4) of the treaty because Inventeur Ltd does
not have a permanent establishment in South Africa to which the patent in respect of which the
royalties are paid is connected. In addition, there is no indication that any special relationship
exists between Inventeur Ltd and Production (Pty) Ltd. The extent of the relief will not be limited
in terms of Article 12(6) of the treaty.
South Africa may impose the withholding tax on royalties on this amount, but only at a reduced
rate of 5%.
Note 1
The taxing rights allocated in respect of royalties in terms of the treaty reflect a typical allocation
of taxing rights where a developing country is involved and the UN Model Double Taxation Con-
vention was used as a basis to negotiate the treaty. This can be compared to Art 12 of the treaty
between South Africa and the Netherlands, which only allows the country of residence to tax its
residents on the royalties earned. If Inventeur Ltd was a Dutch tax resident, South Africa would
not have been allowed to impose a withholding tax on the royalties paid to it.
Note 2
The treaty does not specify how the reduced rate should be administered. The reduced rate of
tax can only be applied in South Africa if the recipient of the royalties has provided the payer
with a written declaration stating that it qualifies for a reduced withholding rate and an under-
taking to inform the payer if its status changes (see 21.5.2.1 for a more detailed discussion of
these requirements).
839
The meaning of ‘royalty’, for treaty purposes, may be different from the definition
Please note! in South African tax law (s 49A). For example, in terms of international precedent
a royalty refers to the exploitation of intellectual property and not merely having
access to it. The definitions of royalty also differ between treaties.
21.4.3.5 Employment-related income

Salaries, wages and other similar remuneration derived by a resident of a contracting state from exer-
cising employment in the other contracting state (source country) may be taxed in both countries
(Art 15 of OECD Model Tax Convention). In circumstances where the payment of this remuneration is
not paid or borne by a taxable person in the source country and the person’s presence in the source
country does not exceed a specified number of days during a 12-month period (for example 183
days), the source country may, however, not tax this income.
Article 19 of OECD Model Tax Convention determines that salaries, wages and similar remuneration
paid by one of the governments to an individual for services rendered to that government are only
taxable in the country whose government pays the amounts. Such payments are, however, only
taxable in the other country if the individual renders the services in the other country and is a resident
and national of that country. This exception applies to remuneration earned by personnel of foreign
diplomatic missions and consular posts.
Example 21.9. Allocation of taxing rights in respect of employment income
Mr Gomez, a Brazilian tax resident, is seconded to South Africa for four months for a consulting
project undertaken in South Africa by his employer, Grande Ltda. The income earned during this
period is derived from a South African source by Mr Gomez (Example 21.3. illustrates how the
source of employment income is determined).
The consulting project gives rise to a permanent establishment, as contemplated in Article 5 of
the tax treaty between South Africa and Brazil, for Grande Ltda in South Africa.
Discuss whether South Africa may tax the remuneration earned by Mr Gomez while working in
South Africa.
SOLUTION
As the remuneration earned by Mr Gomez, a non-resident, is from a South African source, it will
be included in his gross income and be subject to normal tax in South Africa. The representative
employer of Grande Ltda will be required to withhold and pay employees’ tax in South Africa on
this remuneration.
It should be considered whether South Africa may tax the amounts paid to Mr Gomez in terms of
the tax treaty concluded between South Africa and Brazil. As Mr Gomez is a Brazilian tax
resident, he is a covered person for purposes of the treaty (Art 1 of the treaty). South African
normal tax is covered by the treaty (Art 2(3)(b)(i)).
Article 15(1) of the treaty states that:
Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuner-
ation derived by a resident of a Contracting State in respect of an employment shall be
taxable only in that State unless the employment is exercised in the other Contracting State. If
the employment is so exercised, such remuneration as is derived therefrom may be taxed in
that other State.
The remuneration earned by Mr Gomez was not earned as a director, as pension or in respect of
government service. Article 15(1) therefore applies to it. As the employment was exercised by
Mr Gomez in South Africa, South Africa may impose tax in respect of remuneration derived from
the period during which he worked in South Africa.
The taxing right of the source country may, however, be limited by Article 15(2), which reads:
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Con-
tracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days in any twelve-month period commencing or ending in the fiscal year
concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State, and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the
employer has in the other State.
continued
840
Mr Gomez will spend less than 183 days in South Africa, as contemplated in par (a). In addition,
the remuneration is paid to Mr Gomez by Grande Ltda, a non-resident employer, as contem-
plated in par (b). Grande Ltda has a permanent establishment in South Africa and the remu-
neration paid to Mr Gomez relates to the activities carried on through this permanent estab-
lishment. It should be established whether the remuneration paid to Mr Gomez is borne by this
permanent establishment. In relation to the phrase ‘borne by a permanent establishment’ the
OECD, in par 7 of its commentary to Article 15, indicates that this requirement must be read in
light of its purpose. The requirements in paras (b) and (c) are contained in treaties to ensure that
the country of source is not required to give up its taxing right to the remuneration, while having
to allow a deduction for the remuneration against its tax base in the hands of the payer (in this
case, Grande Ltda). As the cost of employment of Mr Gomez would have to be taken into
account to determine the profits attributable to the permanent establishment, the permanent
establishment bears this cost. As a result, the remuneration earned by Mr Gomez while working
in South Africa does not qualify for the exemption in Article 15(2) of the treaty and may be taxed
in South Africa.
The OECD Model Tax Convention allocates the exclusive taxing right to pensions and similar remu-
neration paid to a resident of a contracting state to the country of residence (Art 18 of OECD Model
Tax Convention). The UN Model Double Taxation Convention has two alternatives that countries can
follow. The first mirrors the OECD approach, while the other allows the other country (source country)
to also tax such amounts if paid by a taxable person in that country (Art 18 of the UN Model Double
Taxation Convention). The taxing rights in respect of pensions paid by governments of either of the
contracting states follow similar principles as those in relation to government remuneration (Art 19(2)
of OECD Model Tax Convention).
Example 21.10. Allocating taxing rights in respect of pensions
Mr John Smith, a tax resident of the United Kingdom (UK), worked in South Africa for six years
during his working career. During this period, his employer (not the South African government)
made contributions to a South African pension fund. The contributions to this fund were only
made for the period that Mr Smith worked in South Africa.
Mr Smith retired and now earns pension of R20 000 per month from this fund.
Discuss whether South Africa will impose tax on the pension earned by Mr Smith.
SOLUTION
The first step to determine whether the pension earned by Mr Smith would be subject to normal
tax in South Africa is to establish the source of the pension. A statutory source rule applies to
pensions received from pension funds (s 9(2)(i)). In this context, a pension fund refers to a
pension fund as defined in s 1 (i.e. a South African pension fund). As Mr Smith rendered the
services that the pension relates to in South Africa, the pension will be from a South African
source (see 21.3.8) and be subject to normal tax in South Africa.
It should be considered whether South Africa may tax the amounts paid to Mr Smith in terms of
the tax treaty concluded between South Africa and the United Kingdom. As Mr Smith is a tax
resident of the United Kingdom, he is a covered person for purposes of the treaty (Art 1 of the
treaty). South African normal tax is covered by the treaty (Art 2(3)(a)(i)).
Article 17(1)(a) of the treaty states that:
Subject to the provisions of paragraph 2 of Article 18 of this Convention:
(a) pensions and other similar remuneration paid in consideration of past employment, and
(b) any annuity paid,
to an individual who is a resident of a Contracting State shall be taxable only in that State.
The provisions of Article 18(2) are not applicable as Mr Smith was not employed by the South
African government. South Africa may therefore not tax the pensions earned by Mr Smith for
services rendered in South Africa. A non-resident whose pension may not be taxed should apply
for a directive for relief of the withholding of employees’ tax in respect of the pension (RST01
application form).
Directors’ fees and similar payments received by a resident of one of the contracting states (country
of residence) in the capacity as member of the board of directors of a company that is resident in the
other contracting state (source country), may be taxed in both countries (Art 16 of OECD Model Tax
Convention). The UN Model Double Taxation Convention extends this treatment to salaries, wages
and other similar remuneration earned by a person in the capacity as top-level managerial position of
a company in the source country (Art 16(2) of the UN Model Double Taxation Convention).
841
21.4.3.6 Students
Students, business trainees or apprentices who are, or were, residents of a contracting state (country
of residence) may be present in the other state (source country) for purposes of education or training.
Payments received for purposes of the maintenance, education or training of these persons may not
be taxed in the source country if such payments arise from sources outside the source country
(Art 20 of OECD Model Tax Convention). This treatment does not extend to remuneration paid to the
person for services rendered. This is covered by the employment-related provisions discussed
above.
21.4.3.7 Artists and sportsmen

Income earned by a resident of a contracting state (country of residence) from exercising his or her
personal activities as an entertainer or sportsman in the other contracting state (country of source),
may be taxed in that state (Art 17(1) of OECD Model Tax Convention). This is not an exclusive taxing
right. This provision applies where the person earns the income in the form of remuneration from
employment or as profits from business activities. This means that the provisions of Art 17 generally
override those of Art 7 (business profits), Art 14 (independent personal services) and Art 15
(dependent personal services).
If this income accrues to a person other than the entertainer or sportsperson who exercises his or her
personal activities, it may still be taxed in the contracting state where such activities were exercised
(Art 17(2) of OECD Model Tax Convention). Where an entertainer or sportsperson’s income is diverted
to legal entities, for example a management company or star company, the country of source retains its
right to tax the income.
21.4.3.8 International traffic

International traffic refers to any transport by means of a ship or aircraft operated by a business that
has its place of effective management in one of the contracting states. It excludes cases where that
ship or aircraft is operated only between places in the other contracting state. Income derived from
international traffic may only be taxed in the country where the business that operates this traffic has
its place of effective management (Art 8 of OECD Model Tax Convention). The UN Model Double
Taxation Convention proposes two alternatives. The first mirrors the OECD approach. The second
allows the other contracting state (source country) to tax profits from international shipping activities if
the operations in that country are more than casual (Art 8 of the UN Model Double Taxation Conven-
tion).
21.4.3.9 Business profits

The profits of a business carried on by a resident of a contracting state are only taxable in the country
of residence, unless that business is carried out by the person in another contracting state through a
permanent establishment therein. Put differently, both model tax conventions determine that the
source country may only tax the business profits of a resident of another country if that resident
carries on business through a permanent establishment situated in the source country. If it carries on
business through a permanent establishment in the source country, the source country may only tax
profits attributable to that permanent establishment (Art 7 of OECD Model Tax Convention). The
taxing right allocated to the source country is not an exclusive taxing right. The country of residence
of the person carrying on the business in this manner may still tax the profits but would be required to
provide relief for the tax suffered in respect of the permanent establishment in the source country.
Various business activities carried on in another country can give rise to a per-
manent establishment. The detailed circumstances under which these activities
will give rise to the existence of a permanent establishment are discussed in more
detail below. In broad terms, the main forms of permanent establishments found
in practice are
Please note! l a physical permanent establishment
l a services permanent establishment, and
l a dependent agent permanent establishment.
Article 5 of both model tax conventions contains detailed definitions of the term
‘permanent establishment’.
continued
842
A permanent establishment is defined as a fixed place of business through which

the business of an enterprise is wholly or partly carried on (Art 5(1)). Specific
examples that may be a permanent establishment, if all the criteria in the defin-
ition are met, include a place of management, branch, office, factory and work-
shop. In a mining context, this includes a mine, oil or gas well, quarry or other
place of extraction of natural resources (Art 5(2)) (a physical permanent estab-
lishment).
In order to eliminate uncertainty regarding the duration of projects required to be
a permanent establishment, a deeming rule exists in relation to building sites and
construction or installation projects. The OECD model tax convention proposes a
Please note! 12-month threshold, while the UN Model Double Taxation Convention suggests a
6-month threshold (Art 5(3) of the respective model conventions). In addition, the
UN model proposes a similar deeming rule for activities that involve the furnishing
of services (service permanent establishment).
Certain ancillary or incidental activities, to which it would be difficult to attribute
any profits, do not result in a permanent establishment (Art 5(4)).
The presence of a dependent agent in the other contracting state may give rise to
a permanent establishment (Art 5(5) and 5(6)). The mere fact that a parent or
subsidiary company relationship exists does not in itself give rise to the existence
of a permanent establishment in the other contracting state (Art 5(7)) (a depend-
ent agent permanent establishment).
The OECD Model Tax Convention requires that profits should be attributed to the permanent estab-
lishment on the basis of the profits that it might be expected to make if it were a separate and
independent enterprise. In particular, this applies to the permanent establishment’s dealings with the
rest of the enterprise (Art 7(2) of OECD Model Tax Convention). The OECD suggests that the same
principles that used to determine the arm’s length pricing for purposes of transfer pricing should be
applied to attribute profits to a permanent establishment.
The UN Model Double Taxation Convention starts off with a similar approach. It, however, disallows
the deduction of certain expenses that may pose a risk to the tax base of the source country (for
example head office management service charges, royalties or interest) (Art 7(2) to (4) of the UN
Model Double Taxation Convention).
The UN Model Double Taxation Convention contains a specific provision that deals with independent
personal services. This is aimed at professional services. This provision allows the country where the
services are rendered (source country) to tax the income derived from such services if the person
has a fixed base regularly available to him in that country to perform the services, or has spent a
specified period of time in the country for these purposes (Art 14 of the UN Model Double Taxation
Convention). The OECD eliminated its equivalent of this provision as it overlapped with the business
profits provision. It considered the independent services provision to be redundant.
Example 21.11. Allocation of taxing rights in respect of business profits

Scenario A
Tyres Plc, a company that is a tax resident of the United Kingdom (UK), manufactures truck tyres
at its plant in Portsmouth in the UK. It has recently set up a distribution business in South Africa.
Tyres Plc imports the tyres into South Africa, stores them at a warehouse close to the harbour
port and sells them on a wholesale basis from this distribution point.
Discuss whether the business profits of Tyres Plc will be subject to normal tax in South Africa.
Scenario B
Top Advice (Pty) Ltd is a South African tax resident that carries on an engineering consulting
business. It consults with customers in various countries and provides them with designs for
infrastructure that they intend to construct. The staff involved in each project would initially visit
the client at its premises in the country to discuss their needs. The design work is done from Top
Advice (Pty) Ltd’s offices in Johannesburg and a report is emailed to the client at the completion
of the work. Top Advice has recently completed two projects on this basis, each with a three-
month duration, for clients in Botswana and Mozambique respectively.
Discuss whether Botswana and Mozambique may tax the respective business profits of Top
Advice (Pty) Ltd, if you assume that their domestic tax laws allow them to impose a 20% with-
holding tax on any service fees paid to foreign persons.
843
SOLUTION
Scenario A
As a non-resident, Tyres Plc will be subject to normal tax in South Africa in respect of income
earned from a South African source. The source of income from the sale of movable goods by
Tyres Plc, a non-resident, will be in South Africa if the tyres are attributable to a permanent estab-
lishment in South Africa.
Tyres Plc is a resident of the UK and therefore a covered person for purposes of the treaty
(Art 1). South African normal tax is covered by the treaty (Art 2(1)(a)(i)). Article 7(1) requires that
it should be considered whether a permanent establishment exists in South Africa to determine if
South Africa may tax this income:
The profits of an enterprise of a Contracting State shall be taxable only in that State unless the
enterprise carries on business in the other Contracting State through a permanent establish-
ment situated therein. If the enterprise carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as is attributable to that
permanent establishment.
Article 5(1) of the treaty defines a permanent establishment as ‘a fixed place of business through
which the business of an enterprise is wholly or partly carried on’. The warehouse premises from
which Tyres Plc carries on its wholesale distribution business is likely to be a permanent
establishment as defined, unless the activities conducted from it are preparatory or auxiliary in
nature as contemplated in Art 5(4). If the tyres are attributable to a permanent establishment in
South Africa, the source of the income will be in South Africa. South Africa may tax so much of
the profits of Tyres Plc as is attributable to the business carried on through this permanent estab-
lishment. Articles 7(2) to 7(5) describe how this profit attribution should be done.
Scenario B
The fact pattern states that the domestic laws of the respective countries allow them to impose a
withholding tax on service fees paid to foreign persons.
The question that remains to be answered is whether each of the countries is allowed to impose
this tax in terms of the tax treaties that they have concluded with South Africa. This is discussed
below for each country. In each case, Top Advice (Pty) Ltd, as a South African tax resident, will
be a covered person for purposes of the relevant treaty. For purposes of this example, it can be
assumed that the taxes imposed by each of the countries will be taxes on income to which the
treaty applies.
Mozambique client
The treaty concluded between South Africa and Mozambique does not contain a specific
provision that deals with service income. The business income provision therefore applies.
Article 7(1) of this treaty states that:
enterprise carries on business in the other Contracting State through a permanent estab-
lishment situated therein. If the enterprise carries on business as aforesaid, the profits of the
A permanent establishment is defined in Article 5(1) of the treaty as ‘a fixed place of business
through which the business of an enterprise is wholly or partly carried on’. The definition specif-
ically includes, in Article 5(3)(b):
the furnishing of services, including consultancy services, by an enterprise through employees
or other personnel engaged by an enterprise for such purpose, but only where activities of that
nature continue (for the same or a connected project) within the Contracting State for a period
or periods exceeding in the aggregate 180 days in any twelve-month period commencing or
ending in the fiscal year concerned.
The presence of Top Advice staff in Mozambique for the initial meeting does not give rise to it
conducting business through a place in that country with any degree of permanency. With the
exception of the initial meeting, no activities are carried on by Top Advice in Mozambique. As a
result, Top Advice does not carry on business through a permanent establishment in Mozam-
bique. In these circumstances, Article 7(1) of the treaty prohibits Mozambique from taxing the
income that Top Advice derives from the Mozambican client.
Botswana client
Article 20 of the treaty concluded between South Africa and Botswana specifically deals with
technical fees. Technical fees are defined in Article 20(3) to include payments in consideration
for any services of a technical or consultancy nature. Article 20(5) deems these fees to arise in
the country where the payer is a resident (in this case, Botswana), unless the fees are effectively
connected to a permanent establishment in the other country. For reasons similar to those in the
Mozambican client’s case, Top Advice (Pty) Ltd does not carry on business through a permanent
establishment in Botswana. Article 20(4) is therefore not applicable.
continued
844
Article 20(2) of the treaty allows the following taxing rights to the country of source where the fees
arise:
However, such technical fees may also be taxed in the Contracting State in which they arise,
and according to the laws of that State, but where such technical fees are derived by a
resident of the other Contracting State who is subject to tax in that State in respect thereof, the
tax charged in the Contracting State in which the technical fees arise shall not exceed 10 per
cent of the gross amount of such fees.
It follows from Article 20(2) that Botswana would be allowed to tax the fees, but only at a max-
imum rate of 10%.
21.4.3.10 Capital gains

The OECD Model Tax Convention determines that capital gains realised by a resident of a contract-
ing state (country of residence) may be taxed in the other country (source country) if that gain arises
from
l the alienation of immovable property situated in the source country or shares that derive more
than 50% of their value from immovable property situated in the source country (Art 13(1) and
13(4) of OECD Model Tax Convention), or
l the alienation of movable property that forms part of the business property of a permanent estab-
lishment situated in the source country (Art 13(2) of OECD Model Tax Convention).
Any other capital gains are taxable only in the country of residence (Art 13(5) of OECD Model Tax
Convention). This provision is often particularly relevant in the context of a disposal of shares which is
only taxable in the country of residence. This applies irrespective of whether the country of residence
imposes capital gains tax or not.
Example 21.12. Allocation of taxing rights in respect of capital gains
The following assets are disposed of by persons who are tax residents of the United Kingdom
(UK):
Scenario A
Propco UK Plc owns a commercial building in Cape Town (South Africa). It disposes of the build-
ing to SA Property (Pty) Ltd, a South African resident company.
Scenario B
Shareco UK Plc holds all the shares of ABC (Pty) Ltd, a South African registered company.
Approximately 55% of the value of the ABC (Pty) Ltd shares is derived from its office buildings,
while the remaining 45% of the value is derived from its operating assets and profit prospects.
Shareco UK Plc has no presence or operations in South Africa.
Discuss whether the respective sellers will be subject to tax in South Africa if they were to dis-
pose of the assets described above.
SOLUTION
As both sellers are residents of the UK, they are covered persons for purposes of the tax treaty
concluded between South Africa and the UK (Art 1 of the treaty). Capital gains tax forms part of
normal tax (included in taxable income and subject to normal tax in terms of s 26A. The treaty
states that it applies in respect of normal tax in South Africa (Art 2(3)(a)(i) of the treaty).
Article 13(1) of the treaty allocates the following taxing right in respect of capital gains arising on
the disposal of immovable property:
Gains derived by a resident of a Contracting State from the alienation of immovable property
referred to in Article 6 of this Convention and situated in the other Contracting State may be
taxed in that other State.
In relation to shares, Article 13(2) determines:
Gains derived by a resident of a Contracting State from the alienation of:
(a) shares, other than shares quoted on an approved Stock Exchange, deriving their value or
the greater part of their value directly or indirectly from immovable property situated in the
other Contracting State, … may be taxed in that other State.
Lastly, in respect of movable property (which includes shares), Article 13(3) states:
Gains from the alienation of movable property forming part of the business property of a per-
manent establishment which an enterprise of a Contracting State has in the other Contracting
State, including such gains from the alienation of such a permanent establishment (alone or
with the whole enterprise), may be taxed in that other State.
continued
845
Any other gains on the disposal of assets are only taxable in the country of residence of the
alienator of the assets (Art 13(5)).
Scenario A
A non-resident, in this case Propco UK Plc, is subject to capital gains tax in respect of the
disposal of immovable property situated in South Africa (par 2(1)(b)(i) of the Eighth Schedule).
As the immovable property being disposed of is situated in South Africa, South Africa may tax
the capital gains arising on the disposal of the property (Art 13(1) of the treaty).
This tax is administered through amounts withheld by the purchaser from payments made to the
seller (Propco UK Plc) for the property. This withholding obligation is illustrated in Example 21.13.
Scenario B
A non-resident is only subject to capital gains tax in South Africa in respect of the following
shares:
l shares that represent an interest in immovable property (paras 2(1)(b)(i) and 2(2) of the
Eighth Schedule), or
l shares that are effectively connected to a permanent establishment of the non-resident in
South Africa (par 2(1)(b)(ii) of the Eighth Schedule).
As the immovable property situated in South Africa only contributes 55%, as opposed to 80%, to
the value of the ABC (Pty) Ltd shares, these shares do not represent an interest in immovable
property (par 2(2)(a) of the Eighth Schedule). As Shareco UK Plc does not have any presence or
operations in South Africa, the shares are not connected to any permanent establishment in
South Africa. Shareco UK Plc, as a non-resident, will therefore not be subject to capital gains tax
in terms of the Eighth Schedule when it disposes of the shares.
The fact that Article 13(2) of the treaty allows South Africa to tax these gains does not impact on
the tax implications arising in the hands of Shareco UK Plc. A treaty does not impose additional
taxes to those imposed in terms of the domestic tax laws (in this case, the Eighth Schedule).
21.4.3.11 Other income

Income that does not fall within any of the above-mentioned categories is only taxable in the country
where the recipient is resident. An exception exists if this income is effectively connected to a per-
manent establishment carried on in the other country, in which case the business profits provisions
apply (Art 21 of OECD Model Tax Convention).
21.4.3.12 Capital
Tax treaties also deal with taxes on capital. These taxes exclude taxes on estates and inheritances (in
the South African context, estate duty) or taxes on gifts (in the South African context, donations).
South Africa does not currently impose a tax on capital, but in recent years there have been some
proposals for wealth taxes to be introduced.
The taxing rights to capital mirror those that apply to capital gains (Art 22 of OECD Model Tax Con-
vention).
21.4.4 Special provisions

In addition to dealing with the allocation of taxing rights, tax treaties also contain special provisions
that govern certain aspects of the relationship between the contracting states (Chapter VI of the
OECD Model Tax Convention). These special provisions deal with
l the elimination of tax discrimination in certain circumstances, where differentiation between tax-
payers cannot legitimately be justified (Art 24 of OECD Model Tax Convention)
l the institution of a mutual agreement procedure for resolving difficulties arising from the applica-
tion of the treaty (Art 25 of OECD Model Tax Convention)
l the exchange of information and co-operation between the tax administrations of the contracting
states (Art 26 of OECD Model Tax Convention)
l rendering assistance to each other in the collection of taxes (Art 27 of OECD Model Tax Convention)
l specific matters relating to the treatment of members of diplomatic missions and consular posts
to ensure that they receive no less favourable treatment than that to which they are entitled to
under international law or special international agreements (Art 28 of OECD Model Tax Conven-
tion)
l the extension of the territories to which the tax treaty applies and procedures to do this (Art 29 of
OECD Model Tax Convention).
846
21.5 South African taxation of income of non-residents
21.5.1 Overview of tax liability and obligations

Persons who are not residents of South Africa for tax purposes are only subject to tax in South Africa
on amounts received by or accrued to them from a source in South Africa (par (ii) of the definition of
‘gross income’ in s 1). The rules to establish whether amounts are from a South African source were
discussed in detail in 21.3.
Remember
A non-resident who enters into an inbound transaction into South Africa may be subject to tax in
its country of residence. From the perspective of the country of residence, this transaction will be
an outbound transaction in terms of which the resident earns foreign sourced income. The
country of residence will generally provide some form of relief (for example an exemption or
rebate) for the taxes suffered in the foreign country (in this instance, the South African taxes).
This South African tax can be in the form of normal tax or as a withholding tax. If the income is sub-
ject to a withholding tax, a corresponding exemption from normal tax usually exists to prevent the
amount from being taxed in South Africa more than once. The withholding taxes, and related exemp-
tions from normal tax that apply to amounts received by non-residents, are discussed in more detail
in 21.5.2. below.
Non-residents are only liable to tax on capital gains that arise from the disposal of (par 2(1)(b) of the
Eighth Schedule):
l immovable property situated in South Africa
l an interest or right to or in immovable property situated in South Africa (refer to chapter 17), or
l an asset that is effectively connected with a permanent establishment in South Africa.
Remember
All the above taxes are imposed on persons who are not residents in terms of the Income Tax
Act, South Africa’s domestic tax legislation. If there is a tax treaty between South Africa and the
country where this person is a resident, the provisions of the tax treaty must be considered to
determine whether South Africa may tax the income as required by the Act. Refer to 21.4 for a
detailed discussion of the interpretation of tax treaties.
A non-resident must register as a taxpayer for income tax purposes in South Africa if it becomes
liable for normal tax or is liable to submit an income return in South Africa (s 67(1)). In terms of the
most recent notice issued by SARS to notify persons who should submit returns for normal tax, the
following non-residents are required to submit income tax returns (Notice 419 issued on 14 May
2021):
l every non-resident that is a company, trust or other juristic person which
– carried on a trade through a permanent establishment in South Africa
– derived income from a source in South Africa (see 21.3)
– derived any capital gain or capital loss from the disposal of assets to which the Eighth Sched-
ule applies
l every company incorporated, established or formed in South Africa, which is not a resident as a
result of the application of a tax treaty
l every natural person who is not a resident and who carried on a trade, other than solely as an
employee, in South Africa
l every natural person, including non-residents, whose gross income exceeded the tax threshold
l every natural person who is not a resident and who derived any capital gain or capital loss from
the disposal of assets to which the Eighth Schedule applies, as indicated above
l every non-resident whose gross income included interest from a South African source that was
not exempt in terms of s 10(1)(h).
Natural persons who were non-residents throughout the year of assessment and whose gross income
consisted solely of dividends do not have to submit returns.
847
Non-residents may also be parties to reportable arrangements (see chapter 32). This includes
specific reportable transactions that involve foreign trusts, foreign insurers and foreign service
providers.
21.5.2 Withholding taxes

Withholding taxes are used to ensure that tax collection in circumstances where it may otherwise be
difficult to collect it. It commonly applies to amounts received by or that accrue to a person who does
not have a sufficient presence in the source country to be certain of efficient collection of the tax.
Withholding taxes are therefore generally imposed on passive income that does not require the
presence of the person in a country, for example interest or royalties that are earned from making
funds or intellectual property available for use in a country. Some countries, however, also impose
withholding tax on more active types of income, for example service fees. These withholding taxes
can significantly affect the profitability of transactions undertaken, as they do not take account of
profit margins of the transaction but are only based on the gross amount received by the taxpayer.
South Africa imposes withholding taxes on the following South African source income of a non-
resident:
l proceeds paid to non-resident sellers in respect of immovable property disposed of (s 35A)
l fees earned as entertainers and sportspersons (Part IIIA of Chapter II of the Act: ss 47A to 49K)
l royalties (Part IVA of Chapter II of the Act: ss 49A to 49H)
l interest (Part IVB of Chapter II of the Act: ss 50A to 50H).
These withholding taxes share a number of common features that are discussed in 21.5.2.1. This is
followed by a discussion of the unique features of each of the withholding taxes (in 21.5.2.2 to
21.5.2.5).
Remember
A withholding tax on some service fees paid to non-residents was proposed in South Africa but
never came into effect. Instead, certain arrangements that involve the rendering of consultancy,
construction, engineering, installation, logistical, managerial, supervisory, technical or training
services to a resident or a non-resident’s permanent establishment in South Africa should be
reported to SARS. Service arrangements must be reported if
l a non-resident (or any employee, agent or representative of a non-resident) is or was, or is
anticipated to be, physically present in South Africa to render the service, and
l the expenditure incurred or to be incurred in respect of the services under the arrangement
exceeds or is anticipated to exceed R10 million in total.
The reporting obligation does not exist for expenditure that is remuneration, which should in prin-
ciple be subject to employees’ tax.
Dividends paid by South African resident companies are subject to dividends tax. This is also a with-
holding tax when dividends are paid in cash. This withholding tax, however, applies to dividends
paid to both residents and non-residents. Chapter 19 deals with dividends tax.
Remuneration paid to any employee, whether a resident or non-resident, may be subject to
employees’ tax. Employees’ tax is another form of withholding tax that serves as an advance payment
of the employee’s normal tax liability. Chapter 10 explains employees’ tax.
21.5.2.1 Common features of withholding taxes imposed in respect of payments to
non-residents
The withholding tax applies to South African sourced amounts
The scope of each of the withholding taxes is limited to South African-sourced amounts. The table
below indicates how each of the taxes applies to amounts derived by non-residents from a source in
South Africa.
848
Withholding tax regime Application

Immovable property Amounts paid to a non-resident in respect of the disposal of immovable property in
South Africa (s 35A(1)). Immovable property in this context includes interests or
rights to or in immovable property (see chapter 17) (definition of ‘immovable prop-
erty’ in s 35A(15)).
Foreign entertainers Amounts received by or accrued to a non-resident for a personal activity exercised
and sportspersons in South Africa by the person as an entertainer or a sportsperson (s 47B(1) and
definition of ‘specified activity’ in s 47A(b)). An entertainer or sportsperson is a
person who, for reward, exercises any of the following activities (definition in
s 47A(a)):
l performs as a theatre, motion picture, radio or television artiste or musician,
l takes part in any sport, or
l takes part in any other activity usually regarded as of an entertainment character.
Royalties Royalties paid to or for the benefit of a non-resident from a source in South Africa
(see 21.3.3) (s 49B(1)). Royalties in this context refer to amounts received by or
accrued for the use or right of use of intellectual property and know-how payments
(definition of ‘royalty’ in s 49A(1)).
Interest Interest paid to or for the benefit of a non-resident from a source in South Africa
(see 21.3.2) (s 50B(1)). Interest in this context refers to interest, other than interest
arising on certain sale and leaseback transactions, as defined in s 24J (see
16.2.1.2). Interest that is deemed to be a dividend in specie in terms of ss 8F or
8FA is not considered to be interest for purposes of this tax and therefore not
subject to the withholding tax (definition of ‘interest’ in s 50A(1)).
The withholding tax regime applies to payments made to non-residents who have a limited presence
in South Africa
With the exception of the obligation to withhold amounts from payments made to non-resident sellers
of immovable property, the withholding taxes only apply to payments made to non-residents who
have a limited presence in South Africa. When a non-resident has a stronger presence in South
Africa, there is a reduced risk of collection of taxes due by this person. These non-residents are sub-
ject to normal tax, as opposed to the withholding tax, on the amounts that they receive.
The table below shows the inter-relationship between the withholding tax and normal tax with regard
to amounts received by the non-resident:
Subject to withholding tax Subject to normal tax
Withholding tax regime
(exempt from normal tax) (exempt from the withholding tax)
Foreign entertainers Any amount received by or Amounts received by or accrued to a person
and sportspersons accrued to the person who is who is
subject to the withholding tax is l an employee of an employer who is a resi-
exempt from normal tax dent, and
(s 10(1)(lA)) l is physically present in South Africa for
more than 183 days during any 12-month
period beginning or ending during the year
of assessment in which the specified activity
is exercised.
continued
849

Royalties Royalties that are received by Royalties that are received by or accrue to a
or accrue to a non-resident non-resident
(s 10(1)(l)) l who is a natural person who was physically
l who is a natural person who present in South Africa for more than 183
was not physically present days in the 12-month period before the
in South Africa for more than accrual or receipt of the royalties (s 49D(a))
183 days in the 12-month l where the intellectual property or know-
period before the accrual or ledge or information from which the royalty
receipt of the royalties is paid is effectively connected to a per-
l where the intellectual prop- manent establishment of the non-resident in
erty or knowledge or infor- South Africa provided that the non-resident
mation from which the royal- is registered as a taxpayer in South Africa
ty is paid is not effectively (s 49D(b)).
connected to a permanent The person to whom the royalties are paid must
establishment of the non- submit a declaration (WTRD) to the person
resident in South Africa. making the payment that states that it is
This exemption must be indi- exempt from the withholding tax (either in terms
cated on the non-resident’s of an exemption or a double tax agreement),
income tax return (if the person together with a written undertaking to inform the
is required to submit an income payer if this is no longer the case (s 49E(2)(b)).
tax return). This should be submitted to the payer before
the royalty is paid. With effect from 1 July 2020,
such a declaration and undertaking are only
valid for a period of five years from the date of
the declaration (s 49E(4)).
Interest Interest that is received by or Interest that is received by or accrues to a non-

accrues to a non-resident resident
(s 10(1)(h)) l who is natural person who was physically
l who is natural person who present in South Africa for more than 183
was not physically present days in the 12-month period before the
in South Africa for more than accrual or receipt of the interest
183 days in the 12-month (s 50D(3)(a))
period before the accrual or l where the debt from which the interest
receipt of the interest arises is effectively connected to a per-
l where the debt from which manent establishment of the non-resident in
the interest arises is not South Africa provided that the non-resident
effectively connected to a is registered as a taxpayer in South Africa
permanent establishment of (s 50D(3)(b)).
the non-resident in South The person to whom the interest is paid must
Africa. submit a declaration (WTID) to the person
This exemption must be indi- making the payment, stating that it is exempt
cated on the non-resident’s from the withholding tax, together with a written
income tax return (if the person undertaking to inform the payer if this is no
is required to submit an income longer the case (s 50E(2)(b)). This should be
tax return). submitted to the payer before the interest is
paid.
With effect from 1 July 2020, such a declaration
and undertaking will only be valid for a period
of five years from the date of the declaration
(s 50E(4)), unless the payer monitors its validity
while performing its obligations in relation to the
person to whom the payment is made in terms
of
l the Financial Intelligence Centre Act, 38 of
2001
l the Agreement Between the Government of
the Republic of South Africa and the
Government of the United States of America
to improve International Tax Compliance
and to Implement the US Foreign Account
Tax Compliance Act, or
l the OECD Standard for Automatic Ex-
change of Financial Account Information in
Tax Matters (s 50E(4)).
continued
850

Note
Certain interest that accrues to or is received by non-residents is not subject to
normal tax (qualifies for the exemption in s 10(1)(h) as above) or the withholding
tax. There are specific exemptions to exclude this interest from the withholding tax
regime (see 21.5.2.5).
The withholding taxes, other than those that apply to payments made to non-resident sellers of
immovable property, are final taxes (ss 47B(2), 49B(3) and 50B(3)). The non-resident recipient is not
subject to any further tax in South Africa in respect of the amount.
Amounts withheld on payments to non-resident sellers of immovable property are advance payments
of the seller’s normal tax liability on the gains realised from the disposal of the property (s 35A(3)(a)).
This means that, similarly to provisional tax payments made by a taxpayer in relation to its normal tax
liability, these amounts must be deducted to determine the normal tax still payable by the non-
resident when it is assessed for normal tax.
Basic calculation of amount to be withheld

The amount of withholding tax is calculated by applying a rate to the gross amount of the transaction.
No deductions are allowed from this amount. This tax is imposed on income (or in the case of
immovable property, proceeds), as opposed to the profit or gain realised on the transaction.
The table below summarises the rates and amounts to which the rate should be applied:
Withholding tax regime Rate Amount to which
the rate is applied
Immovable property Depends on the nature of the non-resident seller of the Amount payable in
immovable property (s 35A(1)): respect of the dis-
l 7,5%, if natural person posal of immovable
l 10%, if company property in South
Africa (s 35A(1)).
l 15%, if trust
Note
As this is not a final tax, but rather an advance payment of normal tax, certain
exceptions to the above calculation exist in order to align the advance payment
with the normal tax in respect of the disposal (see 21.5.2.2 below).
Foreign entertainers 15% (s 47B(2)) Amount received
and sportspersons by or accrued in
respect of any spe-
cified activity exer-
cised in South
Africa (s 47B(1)).
Royalties 15% (s 49B(1)) Royalties paid from
The rate may be reduced if the foreign person to whom, or a South African
for whose benefit, the royalties are paid has submitted a source.
declaration (WTRD) to the person making the payment
stating that a reduced rate should be applied as a result of
the application of a tax treaty, together with a written
undertaking to inform the payer if this is no longer the case
(s 49E(3)). This should be submitted to the payer before the
royalty is paid. With effect from 1 July 2020, such a declara-
tion and undertaking will only be valid for a period of five
years from the date of the declaration (s 49(4)).
continued
851
Withholding tax regime Rate Amount to which

the rate is applied
Interest 15% (s 50B(1)) Interest paid from a
The rate may be reduced if the foreign person to whom, or South African
for whose benefit, the interest is paid has submitted a de- source.
claration (WTID) to the person making the payment stating
that a reduced rate should be applied as a result of the
application of a tax treaty, together with a written under-
taking to inform the payer if this is no longer the case
(s 50E(3)). This should be submitted to the payer before the
interest is paid.
With effect from 1 July 2020, such a declaration and under-
taking will only be valid for a period of five years from the
date of the declaration (s 50E(4)), unless the payer monitors
its validity while performing its obligations in relation to the
person to whom the payment is made in terms of:
l the Financial Intelligence Centre Act, No. 38 of 2001,
l the Agreement Between the Government of the Repub-
lic of South Africa and the Government of the United
States of America to improve International Tax Compli-
ance and to Implement the US Foreign Account Tax
Compliance Act, or
l the OECD Standard for Automatic Exchange of Finan-
cial Account Information in Tax Matters (s 50E(4))
All these rates may be changed by announcement by the Minister of Finance in the national annual
budget. Any changes take effect from a date mentioned in that announcement and applies for a
period of 12 months from the announcement. The change in the rate is subject to Parliament passing
legislation within 12 months from the announcement to give effect to the announcement (ss 35A(1)(d),
35A(1A), 47B(2)(a)(ii), 47B(2)(b), 49B(1)(a)(ii), 49B(1)(b), 50B(1)(a)(ii) and 50B(1)(b)).
A declaration of the beneficial owner’s tax status (applicable to dividends tax as

well as interest and royalty withholding taxes) and a written undertaking to inform
the payer of changes in this tax status (applicable to dividends tax and interest
withholding tax) should only be submitted once every five years to the payer for
the treaty relief to apply. When the circumstances of the beneficial owner of the
Please note! income or the payer change in a manner that affects the treaty relief, a revised
declaration and undertaking should be submitted.
The declaration and undertaking are generally submitted by the beneficial owner
to the payer for record keeping. These documents are only provided to SARS on
request or when seeking a refund from SARS for withholding tax incorrectly
withheld and paid.
In all instances other than amounts withheld when a non-resident disposes of immovable property in
South Africa, where the amount withheld is denominated in a foreign currency, it must be converted
to rand at the spot rate on the date on which the amount was deducted or withheld (ss 47J, 49H and
50H). In the case of an amount withheld from the payments made to a non-resident on the disposal of
immovable property in South Africa, the amount to be paid to SARS must be converted to rand at the
spot rate on the date that the amount is paid to SARS (s 35A(5)).
Person responsible to withhold and pay the tax to SARS

The obligation to withhold the tax rests on the person who pays, or is liable to pay, the amount to the
non-resident. This person is a withholding agent, as contemplated in s 156 of the Tax Administration
Act. The withholding agent is personally liable for any amounts of tax withheld and not paid to SARS
or amounts that should have been withheld that were not withheld (s 157(1) of the Tax Administration
Act – see chapter 33).
852
The table below summarises who these persons liable to withhold the tax are:
Withholding tax regime Person responsible to withhold or pay tax to SARS
Immovable property Any person who pays an amount to a non-resident that disposes of immovable
property in South Africa, or who pays such amount to any other person for or on
behalf of this non-resident seller, is liable to withhold the tax and pay it to SARS
(s 35A(1)). This will generally be the purchaser of the immovable property. Both
resident and non-resident purchasers have to withhold tax and pay the amounts to
SARS. The purchaser is personally liable for the tax if it knew, or should reasonably
have known, that the seller is a non-resident (s 35A(7)).
An estate agent or conveyancer, who assists with and is remunerated for services
relating to the disposal of the property, is required to inform the purchaser in writing
of the fact that the seller is not a resident and that an amount should be withheld
(s 35A(11)). An estate agent or conveyancer who knew, or should reasonably be
expected to have known, that the seller is a non-resident, and failed to notify the
purchaser, is jointly and severally liable for the tax. Their liability is limited to the
remuneration that they earned from the services in respect of the transaction
(s 35A(12)). If an estate agent or conveyancer assisted with the transaction and
failed to notify the purchaser of the fact that the seller is not a resident, the
purchaser is not personally liable for the tax (s 35A(8)).
Foreign entertainers Any resident who is liable to pay amounts subject to this withholding tax must
and sportspersons withhold the tax from the payment it makes to the person (s 47D(1)). This resident is
personally liable for the payment of the tax if it fails to withhold the tax, unless the
taxpayer to whom the amount accrued to or was received by has already paid the
tax, as indicated below (s 47G). Non-resident payers are not required to withhold
this tax.
If the tax was not withheld by the person making the payment (for example, paid by
a non-resident) and was not recovered by SARS from the person who should have
withheld it, the taxpayer who received the amount must pay the tax, as a final tax,
to SARS (s 47C).
Royalties The person who pays the royalties must withhold the tax from the payment of the
royalties (s 49E(1)). If the tax was not withheld by this person, the person to whom
the royalties were paid is liable for the withholding tax (s 49C).
Interest The person who pays the interest subject to the withholding tax must withhold the
tax from the payment of the interest (s 50E(1)). This person can be a resident or, in
certain instances, a non-resident (see 21.5.2.5 for the circumstances when a non-
resident would be required to withhold the tax). If the tax was not withheld by this
person, the person to whom the interest was paid is liable for the withholding tax
(s 50C).
Timing of the payment and return to SARS

The tax payable to SARS must be withheld from a payment made to the recipient. The withholding tax
regimes therefore generally require that the tax must only be paid to SARS when an amount is paid,
as opposed to when it accrues, to the counterparty from which this tax can be withheld. The return in
respect of the tax must accompany the payment.
In the context of the withholding tax on royalties and interest, an amount is

deemed to be paid at the earlier of the date when it is actually paid or when it
Please note! becomes due and payable (ss 49B(2) and 50B(2)). It may therefore happen that
the withholding tax is payable to SARS even though the actual payment of the
royalty or interest has not been made.
If the purchaser is a resident, the withholding tax on the disposal of immovable property in South
Africa by non-residents must be paid to SARS within 14 days from the date when the amount was
withheld. If the purchaser is not a resident, the amount must be paid to SARS within 28 days from the
date that it is withheld (s 35A(4)). The purchaser must submit a return (NR02 return) at the time of the
payment to SARS (s 35A(6)). Failure to pay the tax to SARS on time attracts a 10% penalty
(s 35A(9)(b)). Interest accrues at the prescribed rate on the outstanding amount from the day
following the date when payment had to be made until the date when the tax is paid to SARS
(s 35A(9)(a)).
853
The purchaser of immovable property is not required to withhold an amount when

it has only paid a deposit to the seller to secure the disposal. The withholding
Please note! obligation only arises when the agreement for the disposal becomes uncon-
ditional. Once this happens, the amount to be withheld from the deposit should
be withheld from the first following payments made to the seller (s 35A(14)(b)).
The tax withheld from amounts paid to non-resident entertainers and sportspersons must be paid to
SARS before the end of the month following the month during which the amount was withheld (s 47E).
If the person who received the amount has to pay the tax to SARS (as opposed to a withholding
agent), that person must pay the tax to SARS within 30 days after an amount subject to the tax has
accrued to or been received by that person (s 47C(1)). These payments, whether made by the
resident withholding agent or the taxpayer itself, must be accompanied by a return (NR01) (s 47F).
The withholding tax on royalties must be paid to SARS by the person who pays the royalties to the
foreign person, or by the foreign person, by the last day of the month following the month during
which the royalty is paid (s 49F). The payment must be accompanied by a return (WTR01) (s 49F(2)).
The person who makes the payment must submit the return. If the withholding tax on royalties is
withheld and paid to SARS in respect of royalties due to the fact that the recipient did not submit a
declaration confirming its entitlement to an exemption or reduced rate to the withholding agent, this
tax can be refunded if the declaration is obtained within three years after the royalties have been paid
(s 49G(1)). The withholding tax is also refundable if it was paid in respect of an amount of royalties
that subsequently became irrecoverable (s 49G(2)).
The withholding tax on interest must be paid to SARS by the person who pays the interest to the
foreign person, or by the foreign person, by the last day of the month following the month during
which the interest is paid or becomes due and payable (s 50F). The payment must be accompanied
by a return (WT002) (s 50F(2)). The person who makes the payment must submit the return. If the
withholding tax on interest is withheld and paid to SARS due to the fact that the recipient did not
submit a declaration confirming its entitlement to an exemption or reduced rate to the withholding
agent, this tax can be refunded if the declaration and/or written undertaking is obtained within three
years after the interest has been paid (s 50G(1)). A refund is also available for withholding tax on
interest due and payable, which subsequently becomes irrecoverable (s 50G(2)).
A person who must withhold tax from interest paid to a non-resident is required to
submit a third-party return in terms of s 26 of the Tax Administration Act. This
Please note! return is in the form of an IT3(b) return. It must indicate the amount of interest paid
or that becomes due and payable as well as the tax withheld in respect of it
(Notice 241 of 2018).
21.5.2.2 Withholding tax from amounts paid to non-resident sellers of immovable property
(s 35A)
This tax differs from the other withholding taxes in the sense that this is not a final tax. A number of
exceptions exist to align the withholding tax with the actual tax payable in respect of the disposal
because this tax is an advance payment in respect of the normal tax that arises on the disposal of the
property.
The seller may apply to SARS for a directive that the purchaser withhold a reduced amount or no
amount (s 35A(2)). This request must be based solely on the following factors that take into account
the actual tax liability that arise from the disposal and the risk of collection:
l security that the seller can furnish for the payment of any taxes due on the disposal of the
property
l the extent to which the seller has other assets in South Africa
l whether the seller will be subject to tax on the disposal of the immovable property
l whether the actual tax liability of the seller regarding the disposal is less than the amount to be
withheld.
This directive can be requested on a NR03 application form.
The purchaser is not required to withhold tax if the amounts payable to the seller to acquire the
property do not exceed R2 million (s 35A(14)(a)). No directive is required in these circumstances.
Since the tax withheld is not a final tax, SARS may owe the non-resident an amount if the amount
withheld exceeds the actual tax. In the past, some non-residents did not submit their income tax
returns in South Africa on a timely basis. Where a non-resident does not submit a return for the year
of assessment in which the disposal took place within 12 months after the end of that year,
854
the payment is deemed to be a sufficient basis for SARS to issue an estimated assessment (s 95 of
the Tax Administration Act). If the taxpayer does not request SARS to issue a reduced assessment by
submitting a complete and correct return, the estimated assessment becomes final (s 100 of the Tax
Administration Act).
Example 21.13. Tax withheld from amounts paid to a non-resident for immovable property
in South Africa
Propco UK Plc, a resident of the United Kingdom (UK) for tax purposes, owns a commercial
building in Cape Town (South Africa). Propco UK Plc acquired the property in 2005 for an
amount of R3 500 000.
It disposes of the building to SA Property (Pty) Ltd, a South African resident company.
On 1 February 2022 SA Property (Pty) Ltd agreed to buy the commercial property in Cape Town
from Propco UK Plc for R5 000 000. The purchase price is payable as follows in terms of the
contract:
l on 1 February 2022, a deposit of R1 million to secure the transaction until financing is
arranged for the remaining portion of the purchase price
l on 30 April 2022, the date of transfer of the property to SA Property (Pty) Ltd, the remaining
R4 million.
Propco UK Plc has a June financial year-end.
Discuss the responsibilities of SA Property (Pty) Ltd in respect of the purchase of the immovable
property. Discuss the South African tax implications of the disposal of the property for Propco
UK Plc, if you assume that the tax treaty between South Africa and the UK allows South Africa to
tax capital gains (Scenario A in Example 21.12. illustrates the application of the treaty provision
to this transaction).
SOLUTION
SA Property (Pty) Ltd obligations
SA Property (Pty) Ltd will pay amounts to Propco UK Plc, a non-resident, for the disposal of
immovable property in South Africa. SA Property (Pty) Ltd, as the purchaser of the property, must
withhold 10% of the amounts paid to Propco UK Plc. This amounts to R500 000 (R5 million ×
10%) (s 35A(1)). Propco UK Plc can apply for a directive to reduce this amount (as discussed
below). SA Property (Pty) Ltd must pay the amounts withheld over to the SARS within 14 days
after payment was made and the tax was withheld (s 35A(4)). The payment of this tax must be
accompanied by a NR02 return (s 35A(6)).
SA Property (Pty) Ltd will not be required to withhold any tax from the deposit paid to secure the
transaction (s 35A(14)(b)). It will, however, be required to withhold the tax on the full purchase
price of R5 million from the payment of R4 million that it makes on 30 April 2022.
Propco UK Plc
PropCo UK Plc is subject to capital gains tax in respect of the disposal of immovable property
situated in South Africa (par 2(1)(b)(i) of the Eighth Schedule). In this case, Propco UK Plc’s
actual capital gain on the disposal will be R1 500 000 (R5 million – R3,5 million). None of the
exclusions in the Eighth Schedule apply to this disposal. South Africa may impose this tax in
terms of the treaty between South Africa and the UK. The capital gain will be included in its
taxable income at a rate of 80%. This amount will be subject to tax at 28%. The total normal tax in
respect of the transaction will be R336 000 (R1 200 000 × 28%).
The amount withheld by SA Property (Pty) Ltd and paid to SARS, as discussed above, is not a
final tax but rather advance payments towards Propco UK Plc’s normal tax liability arising from
the disposal of the commercial property in South Africa. Propco UK Plc will be able to apply the
tax withheld against its normal tax liability for the 2022 year of assessment.
In light of the fact that the actual tax is less than the amount to be withheld by SA Property
(Pty) Ltd, Propco UK Plc could consider to apply for a directive for a reduced withholding
obligation on SA Property (Pty) Ltd (s 35A(2)).
If Propco UK Plc fails to submit the return for its 2022 year of assessment by 30 June 2023, the
tax withheld and paid over to SARS by SA Property (Pty) Ltd may become a final tax based on an
estimated assessment (ss 95 and 100 of the Tax Administration Act).
21.5.2.3 Tax on foreign entertainers and sportspersons (ss 47A to 47K)

The scope of the tax on foreign entertainers and sportspersons is wider than just amounts that accrue
directly to or are received directly by the entertainer or sportsperson who exercises the specified
activity in South Africa. It extends to payments made to any other person who is not a resident, for
example a management company or a team that the person is involved with (s 47B(1)).
The short period for which many sportspersons or entertainers are present in South Africa makes this
tax difficult to administer. SARS must be notified of the presence of such a person. Any resident who
855
is primarily responsible for founding, organising or facilitating an event by a sportsperson or enter-

tainer in South Africa and who will be rewarded for this function, must notify SARS of the event within
14 days of the conclusion of the agreement relating to its function (s 47K). This notification should be
done on the NR01 form.
Example 21.14. Tax on foreign entertainers and sportspersons

Jan Lied, a famous Dutch singer, will visit South Africa for a once-off performance. The event
organisers will pay a performance fee to Jan’s management company, Lied Beheer BV. Jan Lied
is a resident of the Netherlands for tax purposes.
The South African organisers of the event are required to pay Jan’s management company, Lied
Beheer BV, a performance fee of $500 000 on 1 June 2022 in order to secure his performance.
Lied Beheer BV is a company incorporated and tax resident in the Netherlands. Jan Lied will
arrive in South Africa on 14 June 2022 and perform on 15 June 2022. Following this, he will
spend two weeks in the Kruger National Park, after which he will continue his world tour. This is
his first and only visit to South Africa.
Discuss whether the performance fee will be subject to tax in South Africa and calculate the tax
(if any). Discuss the obligations of the South African organisers for this tax.
SOLUTION
The performance fee is paid to Lied Beheer BV, a non-resident, in respect of the activity of Jan
Lied to perform as a musician in South Africa for reward. The source of this income is in South
Africa where he renders the performance. The fees must be included in Lied Beheer BV’s gross
income. It is necessary to consider whether the fees are subject to the withholding tax on foreign
entertainers and sportsperson. If it is, the fees will be exempt from normal tax.
Jan Lied is a foreign entertainer (definition of ‘entertainer or sportsperson’ in s 47A). The personal
activity of performing in South Africa is a specified activity (definition of ‘specified activity’ in
s 47A) in respect of which the tax on foreign entertainers and sportspersons should be imposed
(s 47B(1)).
Jan Lied is not employed by a resident and will only be in South Africa for approximately two
weeks. He does not qualify for the exemptions from the tax on foreign entertainers or sports-
persons in s 47B(3).
The tax is calculated at 15% on the amount received for Jan Lied’s performance in South Africa.
For these purposes, the amount must be converted to rand at the spot rate on 1 June 2022,
when the payment is made and the tax is withheld. South Africa may only impose this tax if
allowed to do so by the relevant treaty.
Jan Lied is a Dutch tax resident and is therefore a person covered by the treaty concluded
between South Africa and the Netherlands (Art 1 of the treaty). The tax on foreign entertainers
and sportspersons imposed in South Africa is a tax on income, which falls within the scope of the
treaty (Art 2(4) of the treaty and BGR9).
Income earned by entertainers and sportspersons is covered in Art 16 of the treaty between
South Africa and the Netherlands. Article 16(1) of the treaty allocates the taxing rights as follows:
Notwithstanding the provisions of Articles 7 and 14, income derived by a resident of a Con-
tracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or
a musician, or as a sportsperson, from that person’s personal activities as such exercised in
the other Contracting State, may be taxed in that other State.
Article 16(2) states that where the income in respect of the personal activities exercised by an
entertainer in that person’s capacity as such accrues to a person other than the entertainer, the
income may still be taxed in the country in which the activities were exercised.
As Jan Lied will perform, and therefore exercise the personal activities as entertainer in South
Africa, South Africa may impose tax on the income derived from those activities. This is the case
whether the fee accrues to Jan Lied or to another person, in this case, Lied Beheer BV.
There is no indication that Jan Lied’s performance will be funded with public funds from the
Netherlands. The provisions of Art 16(3) of the treaty will accordingly not be applicable.
The organisers of the event, who are liable to pay the performance fee to Lied Beheer BV, must
withhold the tax (s 47D(1)). This tax must be paid over to SARS before the end of July 2021. The
event organisers should submit the NR01 notification to SARS 14 days after the agreement with
Lied Beheer BV was concluded. The tax withheld and paid over to SARS must correspond with
the amounts indicated on the NR01 (s 47F).
The tax withheld by the event organisers is a final tax (s 47B(2)). As indicated in Example 21.7,
this tax may be imposed by South Africa in terms of the allocation of taxing rights in the treaty
between South Africa and the Netherlands.
The performance fees are exempt from normal tax as the fees have been subject to the with-
holding tax (s 10(1)(lA)).
856
21.5.2.4 Withholding tax on royalties (ss 49A to 49H)

All the requirements that apply to the withholding tax on royalties were discussed in 21.5.2.1.
Example 21.15. Withholding tax on royalties

patent in Mauritius. Inventeur Ltd makes its intellectual property available to Production (Pty) Ltd,
a South African company. Production (Pty) Ltd uses the patented technology in its manufacturing
business in South Africa and pays Inventeur Ltd a usage-based royalty. Inventeur Ltd does not
have any operations or presence in South Africa other than this arrangement.
The royalties are payable by Production (Pty) Ltd to Inventeur Ltd at the end of each quarter,
based on the preliminary sales for the quarter. The royalties for the first quarter of 2022 amounted
to R3 million and became payable to Inventeur Ltd on 30 April 2022.
Discuss whether the royalties paid to Inventeur Ltd by Production (Pty) Ltd will be subject to tax
in South Africa and calculate the amount of the tax (if any). Discuss the obligations of Production
(Pty) Ltd with regard to the tax. You may assume that the royalty income is derived from a South
African source (Example 21.2. illustrates how the source of royalty income is determined). You
may further assume that the treaty between South Africa and Mauritius allows South Africa to tax
the royalties at a rate of 5% (Example 21.8. illustrates the application of the treaty provision to this
transaction).
SOLUTION
The royalties are paid to Inventeur Ltd by a resident and therefore accrue from a South African
source (s 9(2)(c)). It is included in Inventeur Ltd’s gross income. It is necessary to establish
whether the royalties are subject to the withholding tax on royalties, in which case it would
generally be exempt from normal tax.
The royalties are subject to the withholding tax on royalties in terms of s 49B for the following
reasons:
l The patent registered in Mauritius is intellectual property as it is a patent defined in the
Mauritian equivalent of the South African Patents Act (par (e) of the definition of ‘intellectual
property’ in s 23I(1)). The amounts payable by Production (Pty) Ltd are royalties as they are
paid in respect of the use of this intellectual property (definition of ‘royalty’ in s 49A(1)).
l The royalties accrue to Inventeur Ltd from a South African source (see above)
l The royalties are paid to Inventeur Ltd, a person who is not a resident.
As Inventeur Ltd does not have a presence in South Africa, the exemptions from the withholding
tax on royalties in s 49D do not apply.
The withholding tax will be R450 000 (15% × R3 million) unless the rate is reduced in terms of the
tax treaty concluded between South Africa and Mauritius.
The treaty between South Africa and Mauritius allows South Africa to tax the royalty at a rate of
5%. The amount of the withholding tax will be R150 000 (5% × R3 million). Inventeur Ltd has to
submit a WTRD declaration to Production (Pty) Ltd in order for Production (Pty) Ltd to withhold
tax at the reduced rate (s 49E(3)).
Production (Pty) Ltd is responsible to withhold this tax from the payment of the royalties to Inven-
teur Ltd (s 49E(1)). Production (Pty) Ltd must submit a WTR01 return and pay the tax to SARS by
31 May 2022.
The royalties are exempt from normal tax in terms of s 10(1)(l). It accrues to a non-resident and
the intellectual property in respect of which the royalties accrue is not connected to a permanent
establishment in South Africa.
21.5.2.5 Withholding tax on interest (ss 50A to 50H)

Certain interest paid to foreign persons are exempt from both withholding tax and normal tax. These
exemptions depend on the nature of the lender, the borrower or the specific type of interest. The
amounts that are exempt from the withholding tax on interest on this basis are
l interest paid to a foreign person by (s 50D(1)(a)(i))
– the South African government in the national, provincial and local sphere
– any bank, the South African Reserve Bank, the Development Bank of Southern Africa (DBSA)
or the Industrial Development Corporation
The exemption of interest paid by a bank does not apply where the bank on-lent
the amount that the foreign person advanced to another person (s 50D(2)). Local
Please note!
banks can therefore not be used as intermediaries for foreign funding to avoid the
withholding tax on interest.
857
l interest paid to the following foreign persons (s 50D(1)(d)):

– the African Development Bank
– the World Bank
– the International Monetary Fund (IMF)
– the African Import and Export Bank
– the European Investment Bank
– the New Development Bank
l interest paid to a foreign person in respect of listed debt instruments (s 50D(1)(a)(ii))
l interest paid to a foreign person in respect of funds in a trust account in terms of s 21(6) of the
Financial Markets Act (s 50D(1)(b))
l interest paid to a foreign person by another foreign person, unless
– the payer is a natural person who has been present in South Africa for more than 183 days in
the 12-month period before the interest was paid, or
– the interest arises from a debt claim that is effectively connected to the foreign person’s per-
manent establishment in South Africa if that person is registered as a taxpayer in South Africa
(s 50D(1)(c)).
South African sourced interest paid to a foreign person may be included in the income of a resident
on the basis that it is attributable to a donation, settlement or other disposition by that resident
(see s 7(8)). This interest is not subject to the withholding tax on interest (s 50D(1)(e)).
Example 21.16. Withholding tax on interest

South African tax resident. The loan bears interest at a fixed rate of 11% per annum. Shishini (Pty)
Ltd used the funds to start its business in South Africa.
Investisseur Ltd’s operations are all based in Mauritius.
The loan agreement between Shishini (Pty) Ltd and Investisseur Ltd states that interest for the
year becomes payable at the end of every calendar year. Shishini (Pty) Ltd paid the interest for
the 2022 calendar year to Investisseur Ltd on 31 December 2022.
Discuss whether the interest paid to Investisseur Ltd by Shishini (Pty) Ltd will be subject to tax in
South Africa and calculate the amount of the tax (if any). Discuss the obligations of Shishini (Pty)
Ltd for the tax. You may assume that the interest income is derived from a South African source
(Example 21.1. illustrates how the source of interest income is determined). You may further
assume that the treaty between South Africa and Mauritius allows South Africa to tax the interest
at a rate of 10% (Example 21.7. illustrates the application of the treaty provision to this trans-
action).
SOLUTION
The interest is paid to Investisseur Ltd by a resident and therefore accrues from a South African
source (s 9(2)(b)(i)). It is included in Investisseur Ltd’s gross income. It is necessary to determine
whether the interest is subject to the withholding tax on interest, in which case it would generally
be exempt from normal tax.
The interest is subject to the withholding tax on interest in terms of s 50B as:
l The interest paid by Shishini (Pty) Ltd to Investisseur Ltd represents interest in respect of an
interest-bearing arrangement between the parties. This is interest as defined in s 24J (see
16.1.2) and is therefore interest to which the withholding tax applies.
l The interest accrues to Investisseur Ltd from a South African source.
l The interest is paid to Investisseur Ltd, a person who is not a resident.
None of the exemptions from the withholding tax on interest in s 50D apply in this case.
The withholding tax will be R165 000 (15% × (R10 million × 11% per annum)) unless the rate is
reduced in terms of the tax treaty concluded between South Africa and Mauritius.
The treaty between South Africa and Mauritius allows South Africa to impose tax on this income
at a rate of 10%. The amount of the withholding tax will be R110 000 (10% × (R10 million × 11%
per annum)). Investisseur Ltd has to submit a WTID declaration and a written undertaking to
Shishini (Pty) Ltd in order for Shishini (Pty) Ltd to withhold tax at the reduced rate (s 50E(3)).
Shishini (Pty) Ltd is responsible to withhold this tax from the payment of the interest to Investis-
seur Ltd (s 50E(1)). Shishini (Pty) Ltd must submit a WT002 return and pay the tax to SARS by
31 January 2023.
As Investisseur Ltd, a non-resident, does not have a permanent establishment in South Africa,
the interest is not effectively connected to such a permanent establishment. The interest is
exempt from normal tax in South Africa in terms of s 10(1)(h).
858
21.5.3 Comprehensive example: Taxation of cross-border transactions by non-residents

The next example demonstrates how to determine the South African tax implications of cross-border
transactions of a non-resident, taking into account the principles explained in 21.5.1 and 21.5.2. and
applying the approach suggested in 21.2.
Example 21.17. South African income tax implications of inbound cross-border
transactions by a non-resident
Mr Klaus Friedrich, a 45-year-old natural person who is a German tax resident, received and incur-
red the following amounts relating to activities in South Africa during the 2022 year of assessment:
Rental income from house in Cape Town .................................................................... R300 000
Levies, repairs and maintenance with regard to the house ......................................... (R25 000)
Dividend income from shares in South African companies ......................................... R500 000
Interest earned in respect of bonds listed on the JSE that were issued by South
African companies ....................................................................................................... R150 000
You may assume that Mr Friedrich has not been in South Africa at any stage during the year and
does not have a permanent establishment in the country. Mr Friedrich is taxable on his worldwide
income in Germany as tax resident in that country.
Determine Mr Friedrich’s tax liabilities in South Africa for the 2022 year of assessment.
SOLUTION
Each of the transactions entered into by Mr Friedrich should be analysed in terms of the
provisions of the Act to determine his tax liabilities in South Africa. South Africa entered into a tax
treaty with Germany in 1973. As Mr Friedrich is a German tax resident, he is a covered person for
purposes of this treaty (Art 1). The effect of this treaty on South Africa’s right to impose the
respective taxes in terms of the Act should also be considered.
Transaction 1: Rental income from house in Cape Town
Step 1: The rental derived from the property situated in South Africa is derived from a South
African source. The rental income of R300 000 is included in his gross income (par (ii) of the
definition of ‘gross income’ in s 1). He is entitled to deduct the expenditure incurred in respect of
levies, repairs and maintenance from this (s 11(a)).
Step 2: No withholding tax applies to rental income from a South African source.
Step 3: No exemption applies to South African sourced rental income that accrues to a non-
resident. The rental income (less related expenditure) remains included in Mr Friedrich’s taxable
income.
Step 4: Because the income is subject to tax in South Africa, it must be established whether
South Africa may impose this tax in terms of the treaty. Normal tax is covered by the treaty
(Art 2(3)(a)). Article 10(1) of the treaty states that
Income from immovable property may be taxed in the Contracting State in which such
property is situated.
South Africa, as the country where the property is situated, may therefore impose the normal tax
as indicated in Steps 1–3.
Transaction 2: Dividend income from shares in South African companies
Step 1: The dividends are derived from a South African source as the companies that paid the
dividends are South African companies (s 9(2)(a)). The amount of R500 000 is included in his
gross income (par (k) of the definition of ‘gross income’ in s 1).
Step 2: The dividends are subject to dividends tax at a rate of 20% (s 64E(1)).
Step 3: The dividends are exempt from normal tax (s 10(1)(k)).
Step 4: As the dividend income is subject to tax in terms of the Act (dividends tax), it must be
established whether South Africa may impose this tax in terms of the treaty. Dividends tax is a tax
on income, which is covered by the treaty (Art 2(2) and BGR009). Article 7(1) of the treaty states
that
Dividends paid by a company which is a resident of a Contracting State, to a resident of the
other Contracting State, may be taxed in that other State.
South Africa may therefore impose tax on the dividends earned by Mr Friedrich from South
African companies. Article 7(2) of the treaty, however, limits the right to impose this tax:
However, such dividends may be taxed in the Contracting State of which the company paying
the dividends is a resident, and according to the law of that State, but the tax so charged
shall not exceed:
(a) 7,5 per cent of the gross amount of the dividends if the recipient is a company
(excluding partnerships) which owns directly at least 25 per cent of the voting shares of
the company paying the dividends;
(b) 15 per cent of the gross amount of the dividends in cases not dealt with in sub-
paragraph (a) if such dividends are subject to tax in the other Contracting State.
continued
859
As Mr Friedrich is not a company, par (a) does not apply. South Africa may therefore only levy
dividends tax at a rate of 15% (par (b)). Before the dividend is paid, Mr Friedrich has to submit a
declaration and undertaking to the companies to notify them that he qualifies for a reduced rate
with reference to the treaty as well as an undertaking to inform them if this tax status changes
(s 4G(3)).
Transaction 3: Interest earned in respect of bonds listed on the JSE that were issued by South
African companies
Step 1: The interest incurred by South African resident companies is from a South African source
(s 9(2)(b)). There is no indication that the interest relates to debt used in a permanent estab-
lishment outside South Africa. The interest income of R150 000 is included in his gross income
(par (ii) of the definition of ‘gross income’ in s 1).
Step 2: The withholding tax on interest applies to the interest paid to Mr Friedrich (s 50B(1)). The
interest is, however, exempt from the withholding tax on interest as it is paid in respect of listed
debt (s 50D(1)(a)(ii)). The South African companies paying this interest are not required to with-
hold any tax from these amounts (s 50E(2)(a)).
Step 3: The interest received from a South African source by Mr Friedrich (non-resident) is
exempt from normal tax as he has not been present in South Africa at any time during the year
and does not have a permanent establishment in South Africa to which the interest is connected
(s 10(1)(h)).
Step 4: As the interest is not subject to tax in South Africa, it is not necessary to consider the
provisions of the treaty.
Mr Friedrich’s tax liabilities in South Africa can be summarised as follows:
Normal tax
Gross income ............................................................................................................ R950 000
Rental income from a South African source (transaction 1) ...................................... R300 000
Dividends from a South African source (transaction 2) ............................................ R500 000
Interest from a South African source (transaction 3) ................................................. R150 000
Less: Exempt income................................................................................................ (R650 000)
Dividends received from a South African company (transaction 2).......................... (R500 000)
Interest received by a non-resident from a South African source (transaction 3) ..... (R150 000)
Less: Deductions allowed in terms of s 11(a) ........................................................... (R25 000)
Taxable income ......................................................................................................... R275 000
Normal tax on this (after taking into account primary rebate) .................................... R38 490
Withholding tax on interest (transaction 3) ................................................................ –
Dividends tax (transaction 2) (R500 000 × 15%) ...................................................... R75 000
21.6 South African taxation of income of residents
21.6.1 Normal tax liability

South African residents are subject to income tax on all amounts that accrue to or are received by
them, irrespective of the source of the amount (par (i) of the definition of ‘gross income’ in s 1). They
are therefore taxable on their worldwide income and aggregate capital gains.
Two specific exceptions apply to foreign sourced taxable income of residents:
l A resident will generally be subject to income tax on amounts at the earlier of accrual or receipt of
the amount (see chapter 3). It may not be possible to remit amounts that were received or
accrued outside South Africa to South Africa due to currency or other restrictions or limitations
imposed by the laws of that country (blocked foreign funds). The resident can defer the inclusion
of such amounts in its taxable income until the funds may be remitted to South Africa (ss 9A(1)
and (2)). The resident must deduct this amount from income in the year in which the blocked
foreign funds may not be remitted and include it in income in the subsequent year. This deferral
is permitted until the funds may be remitted.
l Taxpayers can normally set off an assessed loss arising from a trade against taxable income from
other trades that they carry on (see chapter 12). Assessed losses, or balances of assessed
losses, from trades carried on outside South Africa can, however, not be set off against any
amounts derived from a source within South Africa (proviso (b) to s 20(1)). These foreign sourced
assessed losses are ring-fenced and may only be set off against other foreign sourced amounts.
860
Amounts derived from sources outside South Africa may also be subject to tax in another country
(source country). This double taxation is addressed or eliminated in a number of ways, including:
l Specific unilateral relief in South Africa, which generally involves that the amount will not be
taxed, or only be partially taxed, in South Africa. The exemptions available to residents in respect
of foreign sourced income are discussed briefly in 21.6.2.
l A rebate or deduction for the foreign taxes paid when determining the South African normal tax
liability. This is discussed in 21.6.3 below.
l Tax treaties, as discussed in 21.4, may reduce the double taxation. Tax treaties generally limit the
right of the source country, rather than the country of residence, to tax the income. Exceptions
exist for government remuneration and pensions (see 21.4.3.5). Some of South Africa’s older
treaties, for example, the Zambian treaty, limit the right of the country of residence of the recipient
to tax certain amounts.
21.6.2 Specific exemptions available to residents in respect of foreign sourced amounts

South Africa exempts certain amounts earned abroad. Each of these exemptions is discussed in
detail in another chapter, but is briefly described below.
21.6.2.1 Exemption of certain foreign dividends and capital gains (s 10B and par 64B of the
Eighth Schedule)
The tax implications should not discourage South African investors from remitting foreign dividend
income back to South Africa in instances where they have sufficient influence in the affairs of the
foreign company to do so. Dividends derived from a substantial shareholding in a foreign company
qualify for the participation exemption (s 10B(2)(a) – see chapter 5). Over the years, the threshold for
this exemption has decreased from a 25% interest to the current requirement of 10% equity share-
holding and voting rights in the foreign company. There is a capital gains tax exemption for certain
disposals of shares in foreign companies that mirrors this exemption to some extent (par 64B of the
Eighth Schedule – see chapter 17).
Remember
The participation exemption presented taxpayers with structuring opportunities to avoid certain
tax charges that they may otherwise have been subject to. A number of anti-avoidance rules
have been introduced to counter these opportunities:
l If a person ceases to be a resident, the person is deemed to dispose of its assets at their
market value on the day before ceasing to be a resident. Some taxpayers avoided this tax
charge on shares in foreign companies by extracting the value of the shares or disposing of
it before ceasing to be resident, while benefitting from the participation exemptions. An anti-
avoidance rule exists to claw back the participation exemptions enjoyed within a period of
three years before a company ceases to be a resident (s 9H(3)(e) and (f)).
l When a company ceases to be a resident, this opens the opportunity for its shareholders to
benefit from the participation exemptions in future. With effect from 1 January 2021, any
person who holds at least 10% of the equity shares and voting rights in a company that
ceases to be a resident is deemed to have disposed of those shares at their market value
on the day before the company ceases to be a resident and reacquired the shares on the
day that the company ceases to be a resident (s 9H(3A)). This deemed disposal prevents
the shareholder from enjoying the participation exemption in respect of value that
accumulated while the company was a resident.
Chapter 3 deals more comprehensively with changes in residence and related matters.
Foreign dividends that have already been subject to tax in South Africa, whether through the control-
led foreign company rules (see 21.7) or dividends tax (see chapter 19), are also exempt.
All other foreign dividends are subject to income tax in South Africa at a reduced rate. This rate
aligns the tax implications of these foreign dividends with domestic dividends that are subject to
dividends tax (s 10B(3) – see chapter 5).
21.6.2.2 Exemption for foreign employment income (s 10(1)(o))

Remuneration earned by officers and crew members on board ships engaged in international
transport of passengers or goods for reward or in certain maritime mining activities is exempt from
income tax if the person was outside South Africa for more than 183 days during the year of assess-
ment (s 10(1)(o)(i)). A similar exemption is available for remuneration earned by a person as an
officer or crew member of a ship that is registered as a South African ship engaged in international
shipping of passengers or goods (see s 12Q – see chapter 5) or fishing outside South Africa. If the
861
person is employed on a domestically flagged ship, the remuneration earned is exempt irrespective
of the number of days spent outside South Africa (s 10(1)(o)(iA)).
Persons who earn foreign sourced employment income, other than as officers or crew members
aboard ships, may also enjoy an exemption depending on the period spent outside South Africa to
render the service (s 10(1)(o)(ii)). For years of assessment commencing on or after 1 March 2020,
this exemption only applies to the first R1,25 million of income earned from services rendered outside
South Africa. The exemption does not apply to persons working abroad while deriving income from
the South African government. Chapter 5 discusses this exemption in more detail.
21.6.2.3 Exemption for foreign pensions and welfare payments (s 10(1)(gC))
Any amount that is received by or that accrues to a resident under the social security system of
another country is exempt from income tax in South Africa (s 10(1)(gC)(i)). Lump sums, pensions and
annuities from sources outside South Africa as consideration for services rendered outside South
Africa are exempt (s 10(1)(gC)(ii)). This exemption does not apply to amounts received from a
pension fund, pension preservation fund, provident fund, provident preservation fund or retirement
annuity fund as defined in s 1. These definitions refer to domestic retirement funds. An exception
exists for amounts transferred to these domestic retirement funds from a source outside South Africa.
This ensures that persons who transfer their retirement funds to a South African retirement fund when
they retire in South Africa are not taxed on these amounts.
21.6.2.4 Exemption for international shipping activities by domestically flagged ships (s 12Q)
International shipping income derived by a South African ship from the conveyancing of passengers
or goods is exempt from income tax (s 12Q(2)(a)). Capital gains or capital losses of international
shipping companies on South African ships engaged in international shipping are also exempt
(s 12Q(2)(b)). Resident companies that operate one or more South African ships, which are used for
international shipping, are not required to pay dividends tax on dividends derived from the inter-
national shipping income (s 12Q(3)). Interest paid on debts used to fund the acquisition, construction
or improvement of a South African ship used for international shipping is exempt from the withholding
tax on interest (see 21.5.2.5) (s 12Q(4)). These exemptions were introduced in 2013 to ensure that
tax is not a hindrance for South Africa to attract ships to its flag.
21.6.3 Rebates and deductions for foreign tax (s 6quat)

South African tax residents who suffer foreign taxes on their income are entitled to some form of relief
for those taxes. The relief is provided as:
l A rebate (also referred to as a credit) for the foreign taxes on the income. This rebate is deducted
from the normal tax otherwise payable by the resident. This means the normal tax is reduced by
the full amount of the foreign tax rebate (which may be less than the foreign tax suffered). The
rebate for foreign tax is discussed in 21.6.3.1 below.
l A deduction for the foreign taxes on the income. Unlike the rebate, the deduction for foreign taxes
is allowed as a deduction in the calculation of the resident’s taxable income. The foreign tax is
treated similarly to any other deductible expenditure. The deduction for foreign taxes is
discussed in 21.6.3.2 below.
Remember
A rebate or deduction for foreign tax is only available to residents. If a non-resident is taxed in
South Africa, this tax is imposed on the basis that the source of the income is in South Africa. As
the source country, South Africa may tax the income (if allowed to do so in terms of the relevant
tax treaty) without having to acknowledge the fact that the non-resident may also suffer tax in its
own country of residence. A non-resident may be entitled to relief in respect of the South African
tax in its own country of residence.
Interpretation Note No. 18 deals extensively with the rebate and deduction for foreign taxes. It is a
useful resource to consult together with the discussion below.
21.6.3.1 Rebate for foreign tax
Amounts that qualify for the rebate
A resident whose taxable income for the year of assessment includes certain foreign sourced
amounts that are taxed in South Africa must deduct a rebate when determining its normal tax payable
(s 6quat (1)). These foreign sourced amounts, which could potentially also have been subject to
foreign tax, are
l income received by or accrued to the resident from a source outside South Africa (see 21.3)
862
l taxable capital gains from the disposal of an asset with its source outside South Africa (see
21.3.5)
l any of the following amounts that are deemed to have accrued to or been received by the
resident:
– a foreign sourced amount attributed to the resident as a result of a donation, settlement or
other disposition by the resident (s 7 – see chapter 24)
– a foreign sourced capital gain attributed to the resident as a result of a donation, settlement or
other disposition by the resident or from a distribution by a trust (paras 68 to 72 and 80 of the
Eighth Schedule – see chapter 24)
– a distribution of foreign sourced income or capital gain by a non-resident trust to the resident in
any year following the year during which the amount accrued to the foreign trust (s 25BA and
par 80(3) of the Eighth Schedule – see chapter 24)
l a proportional amount of the net income of a controlled foreign company in relation to the resident
(see 21.7).
Remember
The source of income, as explained in 21.3, is important from the perspective of a resident. This
determines whether the resident is entitled to a rebate in respect of foreign taxes. The rebate is
only available for amounts or gains that are not from a South African source.
Calculation of the rebate

The rebate is equal to the sum of all taxes on income proved to be payable to any sphere of a foreign
government (foreign taxes) on the above amounts included in the resident’s taxable income. To
qualify for the rebate, this tax should have been paid by the following person (s 6quat (1A))
l in the case of foreign sourced income or capital gains, the resident
If the resident is a partner in a partnership or beneficiary of a trust, where the

partnership or trust is taxed as a separate entity in another country, the propor-
Please note! tionate amount of the tax payable by the partnership or trust (as a separate tax-
payer) is deemed to have been payable by the resident for purposes of
determining the foreign tax that qualifies for a rebate.
l relation to amounts deemed to have accrued to the resident, the person who actually received
the amount attributed or vested in the resident, or
l in the case of proportional amounts of net income, the controlled foreign company.
Tax is payable to a foreign government if it is levied in terms of the domestic laws of that country and
the tax treaty between that country and South Africa allows the foreign government to impose the tax.
If a foreign government imposes tax contrary to a tax treaty, this tax is not payable and is not eligible
for a rebate. The mere fact that a person paid tax is therefore not sufficient to conclude that this tax
was payable.
The rebate is not available where the person has a right to recover foreign taxes (for example, a right
to claim a refund of the tax paid or withheld). Taxes that can be recovered because the foreign tax
legislation allows losses to be carried back to a previous year of assessment are, however, eligible
for a rebate.
The rebate is determined in respect of the aggregate of all foreign taxes that meet the above require-
ments. For these purposes, the foreign tax is converted to rand by applying the average exchange
rate for the year of assessment (s 6quat (4)).
The total rebate amount is subject to a number of limitations (s 6quat (1B)). All foreign taxes are
aggregated for purposes of the rebate, as opposed to being tested for the limitation on a country-by-
country or income-by-income basis. The limitations, in the sequence that it has to be determined and
applied, are:
l The foreign tax payable by a controlled foreign company in relation to a proportional amount of
net income included in the resident’s taxable income as a result of the application of the diver-
sionary rules (see 21.7.3.1) must be limited to the normal tax attributable to those proportional
amounts (proviso (iA) of s 6quat (1B)(a)). Any excess foreign tax cannot be carried forward.
l Capital gains are only partially subject to tax in South Africa because of the inclusion rate that
applies to it (see chapter 17). The gain may be subject to tax to a greater extent in the other
country (for example 100% of the gain could be taxable). If the foreign country imposes foreign
863
tax at a greater percentage of the capital gain than the inclusion rate in South Africa, only the
foreign tax on the portion of the capital gain actually included in the resident’s taxable income
(i.e. the inclusion rate) qualifies for a rebate. SARS refers to this step as the comparative capital
gains tax inclusion limitation in Interpretation Note No. 18.
After having performed the comparative capital gains tax inclusion limitation, a further capital
gains tax limitation applies. The foreign tax payable (after application of the above limit) in
respect of foreign sourced capital gains must in aggregate be limited to the total normal tax
attributable to the taxable capital gains (proviso (i B) of s 6quat (1B)(a)). This limitation does not
apply to gains on assets attributable to any permanent establishment of the resident outside
South Africa.
Any excess foreign tax in terms of either of the capital gains tax limitations cannot be carried
forward.
l After the above two limitations have been applied, an overall limitation must be applied. The total
rebate to be tested against the overall limit is equal to the total of
– the foreign tax on capital gains, after application of the above limitation
– the foreign tax in respect of proportional amounts of net income included in the resident’s
taxable income, after application of the above limitation, and
– all other qualifying foreign taxes.
This total rebate is limited to the South African normal tax payable in respect of the amounts that
qualify for a rebate that were included in the resident’s taxable income (see s 6quat (1) above).
This limitation is calculated as:
X = A × (B/C)
Where:
X = Limitation of the rebate
A = Normal tax payable by the resident, before rebates are taken into account
B = Amounts included in the resident’s taxable income that qualified for a foreign tax rebate
(s 6quat (1))
C = Resident’s total taxable income
Example 21.18. Rebate for foreign taxes on income and basic application of the overall
limitation
Six Ltd received the following amounts during the 2022 year of assessment:
Gross foreign royalties (foreign tax of R1 000 paid) .................................................... R10 000
Foreign interest (foreign tax of R5 600 paid) ............................................................... R14 000
Other foreign income (foreign tax of R12 000 paid)..................................................... R30 000
South African receipts .................................................................................................. R114 000
All foreign taxes paid are not recoverable.
Calculate the foreign tax credit in terms of s 6quat and the normal tax payable of Six Ltd for its
year of assessment ended 28 February 2022.
SOLUTION
Foreign royalties............................................................................................................ R10 000
Foreign interest ............................................................................................................. R14 000
Other foreign income .................................................................................................... R30 000
South African receipts ................................................................................................... R114 000
Taxable income............................................................................................................. R168 000
Tax payable
Normal tax before rebates (28% of R168 000).............................................................. R47 040
Less: Section 6quat rebate (see calculation below)..................................................... (R15 120)
Normal tax payable ....................................................................................................... R31 920
Calculation of the s 6quat rebate
Foreign taxable income (B)
× Normal tax payable before rebates (A)
Taxable income (C)
R54 000 (note 1)
= × R47 040
R168 000
= R15 120
continued
864
Since the actual foreign tax of R18 600 (R1 000 + R5 600 + R12 000) exceeds the calculated
R15 120, the s 6quat rebate is limited to R15 120 in terms of s 6quat (1B)(a).
The excess of the foreign tax which was not allowed as s 6quat rebate, i.e. R3 480 (R18 600 less
R15 120), may be carried forward for a maximum period of seven years to be set off against
normal tax (proviso (iii) to s 6quat (1B)(a)).
Note 1
The R54 000 is calculated as (R10 000 + R14 000 + R30 000)
Deductible contributions to retirement funds (s 11F) or donations (s 18A) are determined with ref-
erence to a taxpayer’s overall taxable income, irrespective of the source thereof. When determining B
in the above formula, these amounts must be deemed to be incurred proportionately between
amounts sourced in South Africa and amounts from sources outside South Africa. This apportionment
is based on the relative taxable income derived from each (proviso (i)(aa) to s 6quat (1B)). The
deduction of contributions to retirement funds (s 11F) must be apportioned first, without taking into
account the deduction for donations (s 18A) or the deduction for foreign taxes (see below).
Thereafter, the deduction for donations must be apportioned on the basis of taxable income from
sources within and outside South Africa, again without taking into account the deduction for foreign
taxes (see below).
Example 21.19. Limitation of rebate and the apportionment of certain allowable deductions
Mr Rebate is a South African resident under the age of 65 years. During the current year of
assessment, he had taxable income of R100 000 from South African sources before taking into
account the following information:
l Mr Rebate contributed R30 000 to a retirement annuity fund. You may assume that the full
amount qualifies as deduction under s 11F.
l He also donated R15 000 to an approved PBO and received a s 18A receipt.
Mr Rebate also received R160 000 income from India on which he paid foreign taxes amounting
to R30 000.
Calculate the foreign tax rebate in terms of s 6quat and the normal tax liability of Mr Rebate for
his year of assessment ended 28 February 2022.
SOLUTION
South African taxable income ....................................................................................... R100 000
Income from India ......................................................................................................... R160 000
Taxable income before taking into account the contribution to the retirement
annuity fund and donation (A)....................................................................................... R260 000
Less: Section 11F deduction for contributions to retirement annuity fund .................... (R30 000)
Taxable income before taking into account the donation (B) ....................................... R230 000
Less: Section 18A deduction (not exceeding 10% of R230 000) ................................. (R15 000)
Taxable income............................................................................................................. R215 000
In calculating the s 6quat rebate, proviso (i) to s 6quat (1B)(a) determines that the
deduction for the contribution to the retirement annuity fund must first be appor-
tioned on the basis of taxable income from sources within and outside South Africa
before this deduction or the deduction for donations has been taken into account
(A). This deduction allowed under s 11F is apportioned as follows:
South African-sourced taxable income (R100 000/R260 000 × R30 000) .................... R11 538
Indian-soured taxable income (R160 000/R260 000 × R30 000) .................................. R18 462
Following this, the total taxable income of R230 000 before the deduction for dona-
tions is taken into account (B) consists of:
Taxable income from sources within South Africa (R100 000 – 11 538) ...................... R88 462
Taxable income from sources outside South Africa (R160 000 – 18 462) .................... R141 538
The deduction for donations under s 18A must then be apportioned to sources
within and outside South Africa on the basis of this taxable income:
South African-sourced taxable income (R88 462/R230 000 × R15 000) ...................... R5 769
Indian-sourced taxable income (R141 538/R230 000 × R15 000) ................................ R9 231
continued
865
This means that, of the total taxable income of R215 000, R82 693 (R100 000 less
R11 538 less R5 769) is attributable to income from South Africa and R132 307
(R160 000 less R18 462 less R9 231) is attributable to the income from India.
Normal tax
Normal tax payable on R215 000 before rebates ......................................................... R38 700
Less: Section 6quat rebate (see calculation below) ..................................................... (R24 263)
Less: Primary rebate ..................................................................................................... (R14 958)
Normal tax payable ....................................................................................................... R207
Calculation of the s 6quat rebate
Taxable foreign income

× Normal tax before rebates
Taxable income
R132 307
= × R38 700
R215 000
= R23 815
Because the actual foreign tax amount (R30 000) exceeds the calculated foreign tax rebate limit,
the rebate is limited to the calculated limit of R23 815.
Where the amount of foreign taxes exceed the limitation amount, the excess can be carried forward
to the next year of assessment (s 6quat (1B)(a)(ii)(aa)). This excess is deemed to be a foreign tax on
income in the next year of assessment. It can be set off against the normal tax payable by the
resident in respect of amounts that qualify for the rebate in that year of assessment, after all foreign
tax relating to amounts in the resident’s taxable income that qualify for a rebate have been taken into
account (s 6quat (1B)(a)(ii)(bb)). In other words, the current year’s qualifying foreign taxes must be
claimed as a rebate first. Any excess amounts carried forward can then be claimed as a rebate if the
limitations allow this. The excess can be carried forward for seven years from the year of assessment
that it was carried forward for the first time (s 6quat (1B)(a)(iii)).
Example 21.20. Rebate for foreign taxes on income: Carry-forward of excess foreign tax
Rough Ltd is a South African resident. During the year of assessment ended 28 February 2021,
the company received foreign income to the equivalent of R200 000 on which foreign tax of
R80 000 was paid. The company’s South African taxable income amounted to R1 100 000. For
the 2022 year of assessment the company received R1 600 000 from South African sources as
well as foreign income of R800 000 on which R160 000 worth of foreign tax was paid.
Calculate the foreign tax credit in terms of s 6quat and the normal tax liability of Rough Ltd for the
2021 and 2022 years of assessment respectively. You may assume that the tax legislation for the
2021 and 2022 years of assessment is the same.
SOLUTION
South African income ................................................................................................ R1 100 000
Foreign income ......................................................................................................... R 200 000
Taxable income......................................................................................................... R1 300 000
Normal tax before rebates (28% of R1 300 000)....................................................... R364 000
Less: Section 6quat rebate of R80 000 limited to
(R200 000 (B) /R1 300 000 (C) × R364 000 (A)) i.e. R56 000 (X) ................... (R56 000)
Normal tax payable ................................................................................................... R308 000
Since the actual foreign tax of R80 000 exceeds the calculated limit of R56 000, the s 6quat
rebate is limited to the R56 000.
The excess amount of the foreign tax that did not qualify as a s 6quat rebate (the excess amount)
i.e. R24 000 (R80 000 less R56 000), may be carried forward for a maximum period of seven
years to set off as a rebate against normal tax.
continued
866

South African income ................................................................................................ R1 600 000
Foreign income ......................................................................................................... R 800 000
Taxable income......................................................................................................... R2 400 000
Normal tax before rebates (28% of R2 400 000)....................................................... R672 000
Less: Section 6quat rebate (Actual of R160 000 (2022) limited to
(R800 000/R2 400 000 × R672 000) i.e. R224 000 ......................................... (R160 000)
Less: Section 6quat rebate (R24 000 (carried forward from 2021) limited to
(R800 000/R2 400 000 × R672 000) i.e. R224 000 – R160 000 = R64 000..... (R24 000)
Normal tax payable ................................................................................................... R488 000
The rebate in terms of s 6quat is not available in addition to relief that a resident is
entitled to in terms of a tax treaty (s 6quat (2)). A resident must choose between
the relief in terms of the rebate allowed by s 6quat and the tax treaty relief for
double taxation (see 21.4.3). Many of the tax treaties concluded by South Africa
Please note! require that relief be provided in accordance with the domestic laws, i.e. the
rebate in terms of s 6quat. The differences between the rebate available in
s 6quat and the credit in tax treaties include, amongst others, that tax treaties do
not allow carrying forward of excess foreign taxes and require limitations to be
applied on a country-by-country basis.
Foreign dividends that are partially taxable in South Africa (s 10B(3) – see chapter 5) may result in
the foreign tax rebate not being available in respect of the full amount of foreign tax imposed on
these dividends, but only on the part of the dividend that is included in the recipient’s taxable
income. A resident can therefore find itself in a position where the foreign taxes do not exceed the tax
imposed on the dividends in South Africa, yet it may not be able to claim a rebate for the full amount
of the foreign tax. To prevent this unjust outcome, it is deemed that the full dividend was subject to
tax in South Africa for purposes of determining the foreign tax rebate (proviso (ii) to s 6quat (1A)). The
full foreign tax payable regarding such dividends can be included in the rebate amount to which the
overall limitation is applied despite the fact that the foreign dividend was only partially taxed in South
Africa.
Administrative matters relating to the rebate

The timing of the calculation of the rebate could pose a problem for taxpayers if foreign taxes only
become payable after the year of assessment in which the foreign sourced income is included in the
resident’s taxable income. The rebate is available in the year of assessment in which the foreign
income is included in the resident’s taxable income, rather than in the year in which the foreign tax
becomes payable. If such a timing mismatch arises, an adjustment must be made to the rebate
deducted for the year of assessment in which the foreign sourced income was included in the
resident’s taxable income. To facilitate this adjustment, an additional assessment or reduced assess-
ment may be made within a period of six years from the date of the original assessment to give effect
to the rebate that the resident is entitled to (s 6quat (5)). This rule overrides the provisions of the Tax
Administration Act that impose limitations on the period during which an assessment can be made
and finality of assessments.
21.6.3.2 Deduction for foreign tax

Amounts that qualify for the deduction
A resident may elect to deduct the sum of any taxes on income that was paid, or is proved to be pay-
able to foreign governments, from its income when calculating the taxable income derived from
carrying on any trade (s 6quat (1C)(a)). This deduction is only available in respect of foreign taxes
that were not considered for purposes of the rebate (determined in terms of s 6quat(1A)). SARS holds
the view that the deduction is not available for foreign taxes on foreign sourced income that were
considered for purposes of the rebate, but that did not qualify for the rebate. The deduction therefore
applies in respect of foreign tax imposed on South African sourced income. Foreign tax can be
imposed on South African source income in the following circumstances:
l A conflict exists between the source rules applied in South Africa and the source rules applied in
the other country. As a result, both countries may consider the income to be from a source in that
867
country. In these circumstances, the other country will tax the income as it views it as being from
a source in that country. The resident is not entitled to a rebate for South African tax purposes if
the income is considered to be from a South African source. Source conflicts are often resolved if
a treaty has been entered into between the two countries. It remains a problem where a resident
transacts in a country with which no treaty has been concluded.
l Foreign tax is imposed in another country contrary to the tax treaty entered into between South
Africa and the country. The foreign tax will not be payable, as required for purposes of the rebate.
Unlike the rebate, a deduction is allowed for tax paid despite the fact that it should not have been
imposed by the foreign tax authorities. The latter scenario often arises when tax is withheld at the
time of payment in terms of the domestic tax laws of the country, but this practice is contrary to
the relevant tax treaty.
Remember
Taxes are often withheld in other countries contrary to tax treaties in the context of fees paid for
services rendered from South Africa. Unless the relevant tax treaty contains a deemed source
rule, the source of such services will be South Africa. In the absence of a specific rule dealing
with service fees, these fees will be subject to the business profits provision of a tax treaty. As
indicated in 21.4.3.9, the other country can only tax these profits if they are attributable to a
permanent establishment in that country. Services physically rendered from South Africa are
generally not attributable to a permanent establishment in the other country and may accordingly
not be taxed in that country. Many countries, especially other African countries, withhold tax on
service fees despite not being allowed to do so in terms of the tax treaty.
Like the rebate, the deduction is only available for foreign tax that cannot be recovered. Legislation
that allows losses to be carried back to a previous year of assessment is not considered to be a right
of recovery. A right of recovery in terms of a mutual agreement procedure (MAP), as provided for in a
tax treaty (see 21.4.4), also does not prevent the resident from claiming the deduction (s 6quat (1C)(a)).
A resident may claim the deduction for taxes imposed contrary to a treaty. The MAP must be followed
to recover the tax. If the resident is successful and recovers the tax paid through the MAP, or is dis-
charged of the liability for the tax in a subsequent year of assessment, the amount of the tax refunded
or reduction of the liability must be included in its taxable income (s 6quat (1C)(a)). This inclusion
effectively recoups the deduction previously claimed.
Calculation of the deduction

For purposes of calculating the amount of the deduction, the foreign tax is converted to rand at the
average exchange rate for the year of assessment (s 6quat (4)).
The deduction is also subject to a limitation. The deduction may not exceed the taxable income
attributable to the income that was subject to the foreign tax. Any deduction allowable in terms of
deductible contributions to retirement funds (s 11F) or donations (s 18A) must be apportioned relative
to the attributable and non-attributable taxable income (s 6quat (1D)). Similarly to the apportionment
for purposes of the limitation that applies to the rebate, the deductible contributions to retirement
funds must be apportioned first, followed by the apportionment of deductible donations. The excess
foreign tax that does not qualify for a deduction cannot be carried forward.
Example 21.21. Deduction of foreign taxes on South African source income

Deduct Ltd is a South African resident. The company renders consulting services to a Zambian
customer from South Africa. The government of Zambia deems the services and the resultant
income to be from a Zambian source. They require that the client withhold tax at a rate of 25% on
the income. During the current year of assessment, Deduct Ltd received R800 000 for the
services and had to pay withholding tax of 25% thereon to the government of Zambia. Other
South African income of the company amounted to R1 000 000.
Calculate the foreign tax deduction in terms of s 6quat and the normal tax liability of Deduct Ltd
for its 2022 year of assessment. Assume that SARS views the income to be from a South African
source and that the tax was withheld in Zambia contrary to the treaty with South Africa.
868
SOLUTION
Deduct Ltd carries on a trade in South Africa
Income from consulting services .............................................................................. R800 000
Other South African income ...................................................................................... R1 000 000
R1 800 000
Less: Section 6quat deduction (25% × R800 000) ................................................... (R200 000)
(This amount does not exceed the total taxable income attributable
to the consulting income included in Deduct Ltd’s taxable income.)
Taxable income......................................................................................................... R1 600 000
Normal tax payable (28% of R1 600 000) ................................................................. R448 000
Like the rebate, the deduction is not allowed in addition to tax treaty relief. The
Please note! taxpayer must elect to either use the deduction or the relief in terms of a tax treaty
(s 6quat(2)).
21.6.4 Comprehensive example: Taxation of cross-border transactions by residents

The next example demonstrates how to determine the South African tax implications of cross-border
transactions for residents, taking into account the principles set out in 21.6.1 to 21.6.3 and applying
the approach suggested in 21.2.
Example 21.22. South African income tax implications of outbound cross-border
transactions by a resident
Mr Thabo Gumede, a 60-year-old natural person and South African tax resident, has worked as an
engineer for the past 40 years. His taxable income for the 2022 year of assessment derived from
South African sources, before taking into account any of the items below, is R1 400 000.
He received the following amounts from abroad during the 2022 year of assessment:
Salary from employment in Singapore (note 1) ............................................................ S$100 000
Service fee for project undertaken in the United Kingdom (UK) (note 2) .................... £50 000
Rental income from property in the UK (note 3)........................................................... £28 000
Royalties received from a Zambian company in respect of use of a design
in Zambia (note 4) ........................................................................................................ $10 000
Note 1
Mr Gumede spent 7 months (211 days) of the year of assessment in Singapore. He was
employed by a Singaporean employer for this period. The amounts paid to him were subject to
personal income tax of S$14 000 in Singapore. This tax was withheld when the payments were
made to him.
Note 2
Following his time in Singapore, Mr Gumede was involved as a design engineer for a construc-
tion project in the UK. He was involved in the capacity as an independent contractor. He drew
up designs from his home in Johannesburg and sent these to the client using the postal service.
The client was unsure whether they should withhold tax on the payments made to him or not.
They withheld tax of £10 000 to be safe. Mr Gumede established that he should be able to claim
a refund of this tax upon submitting his tax return in the UK if it should not have been withheld.
Note 3
The rental income was earned from a property that Mr Gumede bought in the UK when he
worked there between 1985 and 1998. The rent will be subject to income tax amounting to
£7 000 in the UK. Mr Gumede will be assessed for this tax when he submits his tax return in the
UK. He has not yet paid the tax.
Note 4
In his younger days, Mr Gumede designed a spring used in water pumps. He makes this design
available to a company in Zambia that manufactures the springs. The client withheld tax
amounting to $2 000, as required by the Zambian tax laws, on the payments made to him.
Mr Gumede, as a natural person, has elected, to use average exchange rates to convert foreign
currency amounts to rand as allowed in terms of s 25D(3). The average exchange rates for the
2022 year of assessment were R18:£1, R14:$1 and R11:S$.
Determine Mr Gumede’s normal tax liability in South Africa for the 2022 year of assessment.
869
SOLUTION
The amounts earned from abroad are all included in Mr Gumede’s gross income, irrespective of
the source, as he is a resident (par (i) of the definition of ‘gross income’ in s 1) (step 1).
Transaction 1: Remuneration from Singapore
Step 2: As this remuneration was derived by Mr Gumede for services rendered outside South
Africa to an employer for a period of more than 183 days during a 12-month period (211 days),
including a continuous 60-day period (full 211 days continuous), an amount of R1,25 million of
this income is exempt from tax in South Africa (s 10(1)(o)(ii)). The remuneration translated at the
average exchange rate for the year amounts to R1,1 million. The full amount therefore qualifies
for the exemption.
Step 3: It is not necessary to consider whether a treaty applies in respect of the income from a
South African tax perspective as the income is not subject to tax in South Africa.
Mr Gumede may still want to consider the treaty to establish whether Singapore was allowed to
impose the tax of S$14 000 on this income. As explained in the next point, this is however of no
relevance to his South African tax calculations.
Step 4: As no amount is included in Mr Gumede’s taxable income for this income, he is not
entitled to a rebate or deduction in South Africa for the foreign tax of S$14 000 paid in Singapore.
Transaction 2: UK project fee
Step 2: Mr Gumede did not earn this fee for services rendered to an employer (he acted as an
independent contractor) or while working abroad (he worked from his home in Johannesburg).
The income does not qualify for any exemption in South Africa.
Step 3: As a South African tax resident, Mr Gumede is a covered person for purposes of the tax
treaty between South Africa and the UK (Art 1). South African normal tax is covered by the treaty
(Art 2(3)(a)(i)). Article 7(1) of the treaty states the following in relation to business profits:
enterprise carries on business in the other Contracting State through a permanent estab-
lishment situated therein. If the enterprise carries on business as aforesaid, the profits of the
As expected, the treaty does not limit South Africa’s right to tax the business profits derived from
the UK. It is questionable whether Mr Gumede even carried on business in the UK, as contem-
plated in Article 7(1).
Step 4: Once it has been established that the amount is taxable in South Africa, it should be
considered whether Mr Gumede is entitled to any relief in South Africa for the £10 000 tax paid in
the UK.
The source of the business income earned by Mr Gumede is where he exercised the activities
that gave rise to the income (CIR v Epstein). In this case, the activities consisted of the personal
exertion to perform the work and draw up the designs, which was done in South Africa. The
source of the fees is in South Africa.
As indicated above, Article 7(1) of the treaty only allows the UK to impose tax on the business
profits of a South African resident (Mr Gumede) if he carried on business in the UK through a
permanent establishment situated there. Because he performed the work from his home in
Johannesburg, he did not derive the income from a permanent establishment in the UK. Even
though the tax was collected (i.e. paid by Mr Gumede), he has a right to claim a refund of this tax
when he submits his tax return in the UK.
In light of the fact that the income is not foreign sourced, Mr Gumede is not entitled to a rebate in
respect of the foreign tax (s 6quat (1)). As Mr Gumede is entitled to a refund of the tax when
submitting his tax return, he has a right of recovery, other than through a mutual agreement
procedure in terms of the tax treaty, available to him. He is therefore also not entitled to a deduc-
tion in respect of the foreign tax paid in the UK (s 6quat (1C)). Mr Gumede will not enjoy any relief
in South Africa for the refundable UK tax withheld on the payments.
Transaction 3: UK rental income
Step 2: No exemption exists in South Africa for foreign rental income earned by residents.
Step 3: As a South African tax resident, Mr Gumede is a covered person for purposes of the tax
treaty between South Africa and the UK (Art 1). South African normal tax is covered by the treaty
(Art 2(3)(a)(i)). Article 6(1) of the treaty states the following regarding income derived from
immovable property, including letting thereof (Art 6(3)):
Income derived by a resident of a Contracting State from immovable property (including
income from agriculture or forestry) situated in the other Contracting State may be taxed in
that other State.
As expected, the treaty does not limit South Africa’s right to tax the rental income derived from
the UK.
Step 4: Once it has been established that the income is taxable in South Africa, it should be con-
sidered whether Mr Gumede is entitled to any relief in South Africa for the £7 000 tax payable in
the UK.
continued
870
21.6–21.7 Chapter 21: Cross-border transactions
The source of the business income earned by Mr Gumede is where the originating cause of the
income is located (CIR v Lever Brothers & Unilever Ltd). The originating cause of the income is
the property, which is situated in the UK (COT v British United Shoe Machinery (SA) (Pty) Ltd).
The amount of £28 000 derived from rental income is therefore foreign sourced income included
in Mr Gumede’s taxable income.
As indicated above, Article 6(1) of the treaty allows the UK to tax income derived by a South
African resident from immovable property situated in the UK. If required by the UK domestic
laws, the treaty allows this tax to be imposed. The tax of £7 000 can therefore be proved to be
payable, even if it has not yet been paid.
Mr Gumede qualifies for a rebate for the foreign tax proved to be payable to the UK (£7 000) in
respect of the foreign sourced income (£28 000).
Transaction 4: Zambian royalties
Step 2: No exemption exists in South Africa for foreign royalties received by residents.
Step 3: South African normal tax is covered by the treaty (Art I). Article VI of the treaty states the
following in relation to royalties:
Any royalty, rent (including rent or royalties of cinematograph films) or other consideration
received by or accrued to a resident of one of the territories by virtue of the use in the other
territory of, or the grant of permission to use in that other territory any patent, design, trade
mark, copyright, secret process, formula or other property of a similar nature shall be exempt
from tax in that first-mentioned territory if such royalty, rent or other consideration is subject to
tax in the other territory.
The royalties that accrue to Mr Gumede, a resident of South Africa, for the use of his design in
Zambia, are exempt from tax in South Africa as the royalties were subject to tax in Zambia (tax of
$2 000 imposed in Zambia).
Step 4: Mr Gumede’s taxable income does not include any amount in respect of the royalties as
a result of the treaty exemption. He would therefore not qualify for any relief in South Africa for the
foreign tax paid on the royalties.
Mr Gumede’s normal tax liability in South Africa is calculated as follows:
Taxable income before transactions 1 to 4 (given) ................................................ R1 400 000
Gross income from transactions 1 to 4 .................................................................. R2 644 000
Remuneration from Singapore (transaction 1) (S$100 000 × 11) .......................... R1 100 000
UK project fee (transaction 2) (£50 000 × 18) ....................................................... R900 000
UK rental from property (transaction 3) (£28 000 × 18) ......................................... R504 000
Zambian royalties (transaction 4) ($10 000 × 14) .................................................. R140 000
Less: Exempt income ............................................................................................. (R1 240 000)
Singaporean remuneration (transaction 1) (s 10(1)(o)(ii)) ...................................... (R1 100 000)
Zambian royalties (transaction 4) (exempt in terms of Art VI of the treaty) ............ (R140 000)
Taxable income ...................................................................................................... R 2 804 000
Normal tax (before taking into account primary rebate) ......................................... R 1 103 923
Rebate for foreign tax (transaction 3) (s 6quat (1))
(lesser of foreign tax or limit, as calculated below) ................................................ (R126 000)
Foreign tax that qualifies for the rebate (£7 000 × 18) ........................................... R126 000
Foreign source taxable income (only transaction 3, all other foreign sourced
income was exempt and transaction 2 did not give rise to foreign sourced
income) .................................................................................................................. R504 000
Limitation of foreign tax rebate: R1 103 923 × (R504 000/R2 804 000) ................. R198 422
Normal tax payable after foreign tax rebate .......................................................... R977 923
Primary rebate........................................................................................................ (R15 714)
Normal tax payable by Mr Gumede ....................................................................... R962 209
21.7 Controlled foreign companies (CFCs)

Residents who are subject to tax in South Africa on all amounts that they receive or that accrue to
them may attempt to avoid, or at least defer, this tax by setting up offshore structures in which
income can accrue. The controlled foreign company regime is an anti-avoidance mechanism that tar-
gets income diverted into offshore structures to ensure that it does not escape tax in the hands of
residents who have an interest in that structure. Currently, the controlled foreign company (hereafter
CFC) regime only applies to foreign companies. The National Treasury has, however, hinted on a
number of occasions that structures involving foreign trusts may be included in this regime at some
point.
871
21.7.1 Overview of the effect of the CFC regime

This section of the discussion provides a broad overview of the effect of the CFC rules. Given the
technical and complex nature of the rules, it is useful to understand the aim and working of the
system before considering the detailed provisions.
If residents control a foreign company (non-resident company), they may have the ability to divert
income that would otherwise have accrued directly to them to this company. To ensure that this
income does not escape the South African tax net, a resident must include its proportional share of
the profits of the CFC in its taxable income (this amount is referred to as the proportional amount)
(s 9D(2)). This leaves the resident taxpayer in the same position that it would have been had this
profit accrued directly to it. The CFC rules affect the resident shareholders of the foreign company,
rather than to impose additional South African tax on the foreign company itself. The foreign company
remains taxable in South Africa only on its South African sourced income, as any other non-resident
company would be.
The CFC regime is aimed at avoidance structures. The net income that is to be included into the
taxable income of a resident excludes amounts that do not pose an avoidance threat. The CFC rules
should not obstruct valid commercial structures. If they do, this places South African-owned busi-
nesses in an uncompetitive position in the global market. It is a fine balancing act to ensure that the
scope of the CFC rules is sufficient to counter avoidance schemes but does not affect legitimate
cross-border activity.
The CFC rules mainly target mobile income that accrues to a foreign company passively or without
much tangible offshore business activities. It also targets schemes that involve income being diverted
abroad by South African residents. As a result of various exclusions (ss 9D(2A) and 9D(9)), the CFC
rules do not apply to, amongst others, the following income which does not pose much of an avoid-
ance threat:
l amounts that are subject to levels of tax that are comparable to those that it would have been
subject to had it accrued to the resident, as there is little tax at stake for South Africa and it is
likely that the structure is not motivated by tax benefits
l amounts that have already been subject to tax in South Africa
l amounts attributable to bona fide business activities with evidence of substance outside South
Africa.
A resident that included a proportional amount in its taxable income in terms of the CFC rules (s 9D)
can deduct a rebate for the foreign taxes payable by the foreign company in respect of those profits
(see 21.6.3.1) (s 6quat (1)(b)). The application of these anti-avoidance rules should, in principle, not
result in double taxation.
Example 21.23. Basic principles of CFC rules

Clever Ltd is a South African resident company. It incorporated a company, Sand LLC, in Dubai.
Clever Ltd subscribed for all the shares of Sand LLC for an amount of R10 000. Sand LLC is not a
South African tax resident. Sand LLC is a CFC in relation to Clever Ltd.
Clever Ltd structured its affairs in such a manner that some of its offshore income accrues to
Sand LLC, which is not subject to any corporate income tax in Dubai.
The net profits of Sand LLC consist of the following amounts:
Year 1
Profits of a passive/mobile nature before tax ............................................................... R7 000 000
Withholding taxes suffered in respect of above income in foreign countries .............. (R500 000)
Rental income from building in South Africa ................................................................ R400 000
Year 2
Profits of a passive/mobile nature before tax ............................................................... R8 000 000
Withholding taxes suffered in respect of above income in foreign countries .............. (R800 000)
Rental income from building in South Africa ................................................................ R450 000
Calculate the impact of the investment in Sand LLC on Clever Ltd’s normal tax liability.
872
SOLUTION
For purposes of simplicity it is assumed that the profits of Sand LLC will represent its taxable
income determined in accordance with the Act. The CFC rules target passive or mobile income
that a resident could have shifted to a foreign company. The CFC rules would require that the
resident’s interest in these amounts that accrued to the CFC to be included in the resident’s
taxable income.
Year 1:
Total profits (before tax) ............................................................................................ R7 400 000
Less: Amounts that do not pose a risk to the South African tax base
(rental from South African property already taxed in South Africa) ................ (R400 000)
Taxable income that accumulated in the CFC that may have been shifted
from the South African tax base (net income of the CFC) ......................................... R7 000 000
Proportional amount included in resident (Clever Ltd) taxable income
(100 % × R7 000 000) (s 9D(2)) ................................................................................ R7 000 000
Normal tax liability of Clever Ltd on the above (R7 000 000 × 28%) ........................ R1 960 000
Rebate for foreign tax payable by the CFC in respect of net income
(s 6quat (1)(b)) .......................................................................................................... (R500 000)
Impact on normal tax liability of Clever Ltd................................................................ R1 460 000
Year 2:
Total profits (before tax) ............................................................................................ R8 450 000
Less: Amounts that do not pose a risk to the South African tax base (rental from
South African property already taxed in South Africa) .................................... (R450 000)
Taxable income that accumulated in the CFC that may have been shifted
from the South African tax base (net income of the CFC) ......................................... R8 000 000
Proportional amount included in resident (Clever Ltd) taxable income
(100% × R8 000 000) (s 9D(2)) ................................................................................. R8 000 000
Normal tax liability of Clever Ltd in respect of the above (R8 000 000 × 28%)......... R2 240 000
Rebate for foreign tax payable by the CFC in respect of net income
(s 6quat (1)(b)) .......................................................................................................... (R800 000)
Impact on normal tax liability of Clever Ltd................................................................ R1 440 000
Note
This calculation shows that the CFC rules include all the profits, with the exception of certain
amounts that do not pose a risk to the South African tax base, that would have been taxable had
it accrued directly to the resident into the resident’s taxable income. This places the resident,
Clever Ltd, back in the position as if these amounts accrued to it.
The participation exemption generally ensures that the distribution of profits that have been subject to
the CFC rules does not attract tax when distributed to the resident (s 10B(2)(a) – see chapter 5). In
exceptional circumstances, the CFC rules require imputation of profits into the hands of a resident
while the participation exemption did not apply. In these circumstances, the foreign dividends
received by the resident are exempt to the extent that the profits have already been taxed in South
Africa under the CFC rules (s 10B(2)(c) – see chapter 5).
When profit accrues to a company (including a foreign company, such as a CFC) and is not distrib-
uted, this accumulation increases the value of the shares of that company. The shareholder may
realise this value by disposing of the shares, rather than receiving distributions from the company.
This disposal will be subject to capital gains tax (see chapter 17). In the context of CFCs, these
capital gains are likely to arise in the hands of the resident who holds the participation rights and may
therefore already have been taxed on the profits of the company (in terms of the CFC rules) that
reflect in the proceeds from the disposal of the shares. Depending on the detail of the disposal trans-
action, the full capital gain may be exempt under the participation exemption (par 64B of the Eighth
Schedule – see chapter 17). If the participation exemption does not apply, the base cost of the
shares of the CFC in the hands of the resident must be increased by the undistributed profits taxed in
terms of the CFC rules (par 20(1)(h)(iii) of the Eighth Schedule – see chapter 17).
873
Example 21.24. Basic principles of CFC rules – distribution of profits to South Africa or
realisation of value accumulated offshore
This example is based on the same facts as Example 21.23.
Discuss what the South African tax implications would be in either of the following cases:
l Sand LLC distributes R14 million of the profits that it accumulated over the past two years to
Clever Ltd at the end of Year 2, or
l Clever Ltd sells the shares in Sand LLC to another South African resident taxpayer for an
amount of R20 million at the end of Year 2.
SOLUTION
The value accumulated in Sand LLC can be realised by Clever Ltd through a distribution of the
profits to it or by disposing of the shares and, in this manner, receiving the accumulated value in
cash.
If Sand LLC distributed a dividend of R14 million to Clever Ltd
Amount included in gross income (par (k) of the definition of ‘gross income’) ..... R14 000 000
Less: Foreign dividend exempt in terms the participation exemption
(s 10B(2)(a)) .......................................................................................................... (R14 000 000)
Impact on taxable income .................................................................................... –
If Clever Ltd were to dispose of the Sand LLC shares to another resident
The disposal of the shares will be subject to capital gains tax in the hands of
Clever Ltd. The participation exemption from capital gains tax does not apply
if the shares of a foreign company are disposed of to another resident
(par 64B(1)(b) of the Eighth Schedule). The capital gain on the transaction
must be calculated as follows:
Proceeds on the disposal of the Sand LLC shares ............................................. R20 000 000
Base cost of the shares ........................................................................................ (R15 010 000)
Cost to acquire the shares ................................................................................... (R10 000)
Amounts included in the taxable income of Clever Ltd in terms of CFC rules
(par 20(1)(h)(iii) of the Eighth Schedule (R7 000 000 (Year 1) + R8 000 000
(Year 2)) (note) ...................................................................................................... (R15 000 000)
Capital gain on the disposal ................................................................................ R4 990 000
Taxable capital gain included in Clever Ltd taxable income
(R4 990 000 × 80%) .............................................................................................. R3 992 000
Impact on normal tax liability of Clever Ltd (R3 992 000 × 28%) .......................... R1 117 760
Note
The adjustment to the base cost ensures that the amount that has already been subjected to the
CFC rules is not taxed as a capital gain again when the taxpayer realises this amount. The
normal tax payable in respect of the disposal is only imposed on the portion of the value of the
shares that has not yet been taxed in South Africa.
21.7.2 Application of CFC rules (s 9D definitions and s 9D(2))

The CFC rules require that a resident includes its share of the net income of the CFC into its taxable
income (s 9D(2)). To apply this requirement, the interest that the resident holds in a company that is a
CFC must firstly be determined.
21.7.2.1 Definition of a CFC and related concepts

A CFC is a foreign company where
l more than 50% of the total participation rights in that company are directly or indirectly held by
residents (one or more residents),
l more than 50% of the total voting rights in that company are directly or indirectly exercisable by
residents (one or more residents) (definition of ‘controlled foreign company’ in s 9D(1)), or
l the financial results of that foreign company are reflected in the consolidated financial statements
(prepared in terms of IFRS 10) of a resident company.
874
A foreign company is a company that is not a resident. For purposes of the CFC
rules, a ring-fenced cell in a protected cell company, as well as the residual
Please note! portion of a protected cell company that is not ring-fenced or allocated to specific
cells, are treated as foreign companies (definition of ‘foreign company’ in
s 9D(1)). These cells are commonly used in the insurance industry.
A person holds participation rights in a foreign company to the extent that the person has the right to
participate in all or part of the benefits of the rights, excluding voting rights, that attach to a share in a
company (par (a) of the definition of ‘participation rights’ in s 9D(1)). These rights generally consist of
the right to participate in distributions (dividends or capital) made by the company. The rights may
attach to ordinary shares, but also other shares, for example preference shares. In the absence of
any such rights attached to shares or where no such rights can be determined for any person, the
right to exercise voting rights represents the participation rights in the company (par (b) of the
definition of ‘participation rights’ in s 9D(1)).
Example 21.25. Classification of a company as a CFC
Discuss whether each of the following foreign companies will be a CFC:

1. Rooibos (Pty) Ltd, a South African resident, holds all the issued shares of Sand LLC, a
company incorporated and effectively managed in Dubai.
2. Rooibos (Pty) Ltd, a South African resident, holds all the issued shares of Sand LLC, a com-
pany incorporated and effectively managed in Dubai. Sand LLC in turn holds all the issued
shares of Clover Ltd, an Irish company.
3. Rooibos (Pty) Ltd, a South African resident, entered into a joint venture with Clover Ltd, an
Irish company. Sand LLC was incorporated in Dubai to house the operations of the joint
venture. Sand LLC will be effectively managed from Dubai. Rooibos (Pty) Ltd and Clover Ltd
will each hold 50% of the issued shares and voting rights of Sand LLC.
4. Rooibos (Pty) Ltd, a South African resident, holds 30% of the shares of Sand LLC, a company
incorporated and effectively managed in Dubai. Springbok Ltd, another South African resi-
dent, holds 25% of the shares of Sand LLC. The remaining 45% shareholding in LLC is held
by a wealthy and influential individual who is resident in Dubai.
5. The Paradise Trust, a trust formed and managed by trustees in the Bahamas, holds all the
issued shares of Sand LLC, a company incorporated and effectively managed in Dubai. The
Paradise Trust is a discretionary trust. Some of its beneficiaries are natural persons who are
South African residents.
6. Island Ltd is a company that is effectively managed and controlled in Singapore. Rooi-
bos (Pty) Ltd, a South African resident, holds 45% of its issued shares, but concluded that it
has the power to direct the relevant activities of Island Ltd based on the size of its voting
rights and dispersion of other voting rights between a number of small shareholders, as con-
templated in IFRS 10.B42(a). Rooibos (Pty) Ltd therefore consolidates the financial results of
Island Ltd into its consolidated financial statements.
SOLUTION
1. A resident (Rooibos (Pty) Ltd) holds all the shares, and therefore directly holds all the
participation rights and voting rights in Sand LLC, a foreign company. Sand LLC is a CFC
in relation to Rooibos (Pty) Ltd.
2. Similarly to 1 above, Sand LLC will be a CFC. A resident (Rooibos (Pty) Ltd) indirectly,
through its shareholding in Sand LLC, holds all the participation rights and voting rights in
Clover Ltd, a foreign company. As a result, Clover Ltd is also a CFC in relation to Rooibos
(Pty) Ltd (see note 1).
3. Rooibos (Pty) Ltd, a resident, only holds 50% of the participation rights and voting rights of
Sand LLC. A resident(s) is required to hold more than 50% of the participation rights or
voting rights of a foreign company in order for that company to be a CFC. Sand LLC is not
a CFC.
4. As South African residents (Rooibos (Pty) Ltd and Springbok Ltd) hold more than 50% of
the participation rights and voting rights of Sand LLC, a foreign company, Sand LLC will be
a CFC in relation to these two residents (see note 2).
5. The voting rights and participation rights of Sand LLC are held directly by the Paradise
Trust, a non-resident entity. This will not result in Sand LLC being classified as a CFC. The
trust deed and rights of the beneficiaries to the Paradise Trust must, however, be con-
sidered to determine whether residents indirectly hold more than 50% of the participation
rights or voting rights of Sand LLC.
continued
875
6. Despite the fact that Rooibos (Pty) Ltd does not hold 50% of the participation rights or
voting rights of Island Ltd, Island Ltd will be a CFC because its financial results are consoli-
dated into the consolidated financial statements of Rooibos (Pty) Ltd.
Note 1
Rooibos (Pty) Ltd is required to include its proportional amount of the net income of Sand LLC in
its taxable income. In addition, Rooibos (Pty) Ltd is also required to include its proportional
amount of the net income of Clover Ltd in its taxable income. The results of Clover Ltd are not
incorporated into Rooibos (Pty) Ltd’s taxable income via the proportional amount of Sand LLC.
Note 2
There is no requirement that the residents who hold participation rights in a CFC must be related
or aware of each other in any manner. The mere fact that a foreign person holds a greater
interest than any specific South African resident and possibly controls the foreign company on a
de facto basis does not preclude a foreign company from being a CFC.
Remember
The CFC rules do not apply to foreign companies where the participation rights or voting rights
are held by discretionary foreign trusts merely because that trust has some South African resi-
dent beneficiaries or founders, as illustrated in Scenario 5 in Example 21.25 above. If the profits
of these companies are distributed to the foreign trust (as shareholder of the foreign company),
the resulting dividends could, in principle, be excluded from the attribution rules or be exempt
when distributed by the trust in terms of the participation exemption (see chapter 5 and 21.6.2.1).
This would allow resident beneficiaries to participate in the profits of foreign companies without
being taxed on these profits in South Africa. This outcome is in contrast to the policy intent of the
CFC rules.
A number of anti-avoidance rules aim to ensure that such dividends are taxed in South Africa by
disregarding the participation exemption in certain circumstances (see chapters 17 and 24).
The indirect voting or participation rights of a person are normally calculated as the effective partici-
pation rights or voting rights that the person holds or can exercise in a company. For example, if a
resident holds 80% of the ordinary shares of a foreign company, which in turn holds 80% of the
ordinary shares of another foreign company, the resident will hold 64% (80% × 80%) of the partici-
pation rights of the second foreign company. To prevent a situation where a resident effectively
controls a foreign company but has an effective participation of less than 50% in this company, a
specific rule applies to indirect voting rights. If any voting rights in a foreign company can be exer-
cised directly by any other CFC in which the resident (and its connected persons) can, directly or
indirectly, exercise more than 50% of its voting rights, the voting rights held by that CFC are deemed
to be directly exercisable by the resident. If, for example, a resident holds 60% of the ordinary shares
of a foreign company, which in turn holds 60% of the ordinary shares of another foreign company, the
resident will hold 36% (60% × 60%) of the participation rights and voting rights of the second foreign
company in the absence of the deemed voting rights rule. In these circumstances the second
company will not be a CFC. The effect of the deemed voting right rule is that the resident is deemed
to be able to directly exercise the 60% voting rights held in the second foreign company by the first
one. As the resident is now deemed to be able to exercise 60% of the voting rights of the second
foreign company, this company is classified as a CFC. The resident still only effectively holds 36% of
the participation rights in this company. The proportional amount for inclusion in the taxable income
of the resident is based on this percentage.
A number of further exceptions apply in respect of foreign companies that are widely held.
Where the foreign company is a listed company, voting rights in this company must be disregarded
when determining whether it is a CFC (proviso (i)(aa) to par (a) of the definition of ‘controlled foreign
company’ in s 9D(1)). Similarly, voting rights held by residents indirectly via listed foreign entities
should be disregarded (proviso (i )(bb) to par (a) of the definition of ‘controlled foreign company’ in
s 9D(1)).
A resident that holds less than 5% of the participation rights in a listed foreign company is deemed
not to be a resident for purposes of applying the definition of CFC. This exemption also applies to
voting rights or participation rights in a foreign company, where a resident holds these rights
indirectly through a listed foreign company (proviso (ii ) to par (a) the definition of ‘controlled foreign
876
company’ in s 9D(1)). This exception extends to residents that hold less than 5% of the participation
rights in foreign portfolios of collective investment schemes and to participation rights or voting rights
in foreign companies indirectly held through these small interests in the schemes (proviso (iii ) to par
(a) of the definition of ‘controlled foreign company’ in s 9D(1)). These exceptions aimed to exclude de
minimis shareholdings in listed foreign companies that could make it difficult to track ownership
through various layers of widely held entities. The exceptions should assist smaller shareholders who
may not be able to access the information necessary to trace effective ownership of these
companies. The exceptions do not apply if persons who are connected in relation to each other hold
more than 50% of the voting rights or participation rights of that foreign company. This would create
opportunities for artificial structuring to misuse the de minimis exception.
21.7.2.2 Inclusion of amount in resident’s taxable income (s 9D(2))

Once it has been established that a foreign company is a CFC, residents who directly or indirectly
hold participation rights in this company must include a portion of the CFC’s net income in their
taxable income.
The portion of the net income that a resident should include is based on the percentage of the
participation rights in the CFC held by the resident. This portion of the net income is referred to as the
proportional amount that a resident includes in its taxable income in respect of a CFC.
A foreign company may in some cases only be a CFC due to the fact that it is treated as a subsidiary
of a resident company (holding company) in terms of IFRS 10, rather than on the basis of voting or
participation rights. In these cases, the percentage of the participation rights, for purposes of deter-
mining the proportional amount, is equal to the net percentage of the financial results of the foreign
company that is included in the consolidated financial statements of the holding company.
Where a resident holds participation rights in a CFC indirectly through share-

holding in a resident company, this resident is not required to include a portion of
the net income of the CFC in its taxable income (proviso (B) of s 9D(2)). The resi-
dent company through which the participation rights are held is already required
Please note! to apply the CFC rules and would therefore have included the same portion of the
net income in its taxable income. If the resident was required to also include a
portion of this net income, the same net income of the CFC would have been
subject to the CFC rules twice (or more, depending in the group structure that the
resident company that holds the direct interest forms part of).
The resident is required to include a portion of the net income of the CFC for the foreign tax year that
ends during the resident’s year of assessment. The foreign tax year refers to the year or period that
the foreign company (CFC) has to report for foreign income tax purposes or any annual period if the
company is not subject to foreign income tax.
The application of this requirement is depicted as follows:
1 March Year 1 28 February Year 2
Resident year
of assessment:
1 January Year 1 31 December Year 1
CFC foreign tax year: Resident’s portion of CFC net income
877
The participation ratio and net income amount that must be used to determine the proportional
amount depend on whether the CFC was a CFC for the full foreign tax year or not. The following per-
mutations may exist:
Scenario:
Participation ratio used for
CFC status during the Net income
inclusion in resident’s taxable income
foreign tax year
CFC for full foreign tax Resident’s participation rights relative to Net income for the full foreign tax year
year (s 9D(2)(a)(i)) total participation rights on the last day
of the foreign tax year
Became a CFC during Resident’s participation rights relative to At the option of the resident:
the foreign tax year total participation rights on the last day l net income for the full foreign tax
(s 9D(2)(a)(ii)) of the foreign tax year year × (number of days that the
company was a CFC/total number
of days in the foreign tax year), or
l net income for the period from the
date that the company commenced
being a CFC until the end of the
foreign tax year
Ceased to be a CFC Resident’s participation rights relative to At the option of the resident:
during the foreign tax total participation rights on the last day l net income for the full foreign tax
year (s 9D(2)(b)) that the foreign company was a CFC year × (number of days that the
company was a CFC/total number
of days in the foreign tax year), or
l net income for the period from the
first day of the foreign tax year until
the day before that the foreign com-
pany ceased to be a CFC
When a company ceases to be a CFC (other than by becoming a resident)

l its foreign tax year must be deemed to have ended on the day prior to it
ceasing to be a CFC (s 9H(3)(d)), and
l an exit charge is triggered in respect of its assets (s 9H(3)(b)).
The exit charge arises from the fact that the CFC is deemed to have disposed its
assets at their market value to a person that is a resident on the day before it
ceased to be a CFC (s 9H(3)(b)(i)). It is deemed to have reacquired the assets for
the same amount on the day that it ceases to be a CFC (s 9H(3)(b)(ii)). The
calculation of the exit charge is similar to that when a company ceases to be a
Please note! resident, as discussed and illustrated in Chapter 3.
A CFC will not be deemed to have disposed of certain assets that remain within the
South African tax net after it ceased to be CFC. These assets are immovable
property situated in South Africa and assets attributable to a permanent establish-
ment in South Africa (s 9H(4)).
In addition, a deemed disposal does not arise if a foreign company ceases to be a
CFC as a direct or indirect result of a disposal of an equity share in a foreign com-
pany by a person and that disposal qualified for the participation exemption from
capital gains tax (see 21.6.2.1) (s 9H(5)). The exit charge will also not arise where a
company ceases to be a CFC as a result of an amalgamation transaction (as
defined in s 44) or liquidation distribution (as defined in s 47) (s 9H(6)).
A de minimis exemption is available for residents that hold less than 10% of the participation rights of
the CFC and cannot exercise more than 10% of the voting rights in the CFC (proviso (A) to s 9D(2)).
The voting and participation rights of the resident together with its connected persons must be
considered for purposes of this exemption. This test is applied on the last day of the foreign tax year,
or the last day that the foreign company was a CFC if it ceased to be a CFC during the year.
878
Every resident who, together with its connected persons, holds at least 10% of
the participation rights of a CFC on the last day of the foreign tax year or imme-
Please note!
diately before a foreign company ceased to be a CFC during the year must
submit a CFC return to SARS (IT10B) (s 72A(1)).
There are further exemptions from imputation for interests in CFCs held collectively by entities for the
benefit of other persons who are likely to qualify for the de minimis exemption in their own capacities
(provisos (C) and (D) to s 9D(2)).
21.7.2.3 Net income of a CFC (s 9D(2A) and 9D(6))

If a resident must impute an amount in its taxable income, the next step is to determine the net
income of the CFC. This net income is deemed to be nil, and residents that hold participation rights in
a CFC are not required to include any proportional amount, if either of the following exemptions
applies:
l the high-tax exemption, or
l the simplified foreign business establishment (FBE) exemption.
If both exemptions apply, the resident can determine which one to use. The simplified FBE exemption
is likely to be less time consuming and less onerous to apply than the high-tax exemption, which
requires a detailed calculation of net income every year.
High-tax exemption (par (aa) of proviso (i) of s 9D(2A)
This exemption removes the burden of having to apply the CFC rules in cases where there is little
South African tax at stake. The high-tax exemption is premised on the fact that the rebate for the
foreign tax paid by the CFC (see s 6quat (1)(b)) could result in very little, if any, tax ultimately being
payable in South Africa on a CFC’s net income. The high-tax exemption applies if the total tax
payable by the CFC to foreign governments is equal to 67,5% or more of the normal tax that would
have been payable by the CFC, had it been a South African tax resident for that foreign tax year. If
the high-tax exemption applies, the net income of the CFC is deemed to be nil, which results in no
inclusion in the taxable income of the resident.
Remember
The high-tax exemption threshold changed to 67,5% for years of assessment that end on or after
1 January 2020. For years of assessment that ended before this date, the threshold was 75%.
When determining the aggregate foreign taxes payable by the CFC any relief avail-
able in terms of tax treaties, credits, rebates or other rights to recover the taxes
from a foreign government must be taken into account (par (aa) of proviso (ii) to
s 9D(2A)). This means that the foreign tax liabilities considered must be the actual
and final tax liabilities of the CFC.
Losses that arose in foreign tax years, after the foreign company became a CFC,
must be disregarded (par (bb) of proviso (ii) to s 9D(2A)). The foreign tax payable
by the CFC must therefore be a notional tax calculated on its taxable profits,
before reducing this tax amount with prior year tax losses carried forward. If such
tax losses had to be taken into account, the foreign tax actually paid would be
lower and could result in the 67,5% threshold not being met. The effect of group
Please note! losses (i.e. losses of other group entities) must, however, be taken into account in
calculating the foreign tax liability. If a CFC does not pay foreign tax as a result of
losses of other entities in a group (where group taxation applies), the fact that the
CFC did not actually pay foreign tax should be reflected in the 67.5% test.
For purposes of applying the 67,5% test to a CFC’s taxable income, any amounts
that the CFC, as resident, would have had to include in respect of participation
rights that it holds in other CFCs must not be taken into account in determining
the normal tax that would have been payable by it (proviso (iii) to s 9D(2A)). This
implies that the taxable income calculated for this purpose must not include the
effects of s 9D. If the 67,5% threshold was applied to a group of CFCs, the
average rate may exceed 67,5% while the group could include certain low-taxed
CFCs, that should be subject to the CFC rules.
879
Example 21.26. High-tax exemption
Rooibos Ltd (a South African resident) holds all the participation rights in Clover Ltd, an Irish
company and CFC in relation to Rooibos Ltd.
Clover Ltd had a net income before tax to the equivalent of R100 million. The corporate tax rate
in Ireland is 12,5%. Corporate tax amounting to the equivalent of R10 million is payable in Ireland
in respect of this income. This corporate tax liability reflects the effect of deductions for the
acquisition of intellectual property that qualifies for tax incentives in Ireland by Clover Ltd. In
addition to the Irish corporate tax, Clover suffered non-refundable withholding taxes of R5 million
on payments made to it from other jurisdictions than Ireland.
If Clover Ltd had been a South African resident, it would have paid normal tax of R28 million on
its net income, before the deduction of any rebates for foreign taxes.
Determine whether Clover Ltd can be regarded as a high-taxed CFC.
SOLUTION
Clover Ltd’s total tax payable to foreign governments amounts to R15 million (R10 million +
R5 million). This tax liability, expressed as a percentage of its South African normal tax liability if
it were a resident, is 53,57% (R15 million/R28 million). Clover Ltd is therefore not a high-taxed
CFC as contemplated in par (aa) of proviso (i) to s 9D(2A).
It is important to note that the high-tax exemption requires the actual tax liabilities of the CFC to
be established and compared to the South African normal tax. It is not sufficient to compare the
corporate tax rate of the jurisdiction where the CFC is a resident (in this case, Ireland’s 12,5%
corporate tax rate) to the South African company tax rate of 28%. This example illustrates that
there are other factors, such as incentives and foreign taxes, payable other than those payable
to the jurisdiction of residence that may affect the ratio.
Simplified foreign business establishment exemption (par (bb) of proviso (i) of s 9D(2A))
This exemption is closely linked to the fact that the CFC rules do not target income from business
activities with substance carried on outside South Africa. If all receipts and accruals of the CFC are
attributable to a foreign business establishment (see 21.7.3.1 below) and none of the diversionary
rules (also see 21.7.3.1) apply, the net income of the CFC is deemed to be nil (par (bb) of proviso (i)
of s 9D(2A)). This exemption is commonly referred to as the simplified FBE exemption. It was inserted
into the legislation to remove the burden on residents, who hold participation rights in foreign
companies with foreign business establishments, of having to prepare the calculations necessary to
apply the high-tax exemption in order to be excluded from the CFC regime.
Calculation of net income in the absence of the two exemptions

If neither of the above exemptions apply, the net income of the CFC must be determined. This
amount is the basis for the proportional amount to be included by residents in their taxable income.
The net income of a CFC is a hypothetical amount that is based on the taxable income of the CFC,
calculated as if the CFC was a taxpayer and resident for the following purposes (s 9D(2A)):
l The determination of its gross income. This means that all receipts and accruals not of a capital
nature must be taken into account, irrespective of the source (definition of ‘gross income’ in s 1 –
see chapter 3). The hypothetical taxable income of the CFC must also include capital gains or
losses on the disposal of any asset, irrespective of its source (par 2(1)(a) of the Eighth Schedule).
In determining the base cost of such assets, the CFC must be treated as having commenced to
be a resident when it became a CFC (par 24 of the Eighth Schedule – see chapter 17).
l Any South African sourced interest received by the CFC is not treated as exempt on the grounds
that the CFC is a non-resident (s 10(1)(h) – see chapter 5).
l The CFC is treated as a resident for purposes of any distributions by trusts (s 25B and par 80 of
the Eighth Schedule – see chapters 17 and 24).
l The attribution rules applicable to income and capital gains that accrue to non-residents as result
of a donation, settlement or other disposition by a resident (s 7(8) and par 72 of the Eighth
Schedule) or conditional or revocable vesting of capital gains as result of a donation, settlement
or other disposition (paras 70 and 71 of the Eighth Schedule) apply as if the CFC is a resident.
880
Remember
In practice it is often challenging to calculate what the CFC’s taxable income would have been
had it been a resident, due to a lack of available information. It could either be that the person
does not have access to the detailed information or that the specific information required to
determine taxable income in terms of the Act is not prepared by foreign accounting systems.
The financial statements of the foreign company are often used as a basis for calculating this
hypothetical taxable income.
A resident must have a copy of the financial statements of a CFC available in case SARS
requests this (s 72A(2)). If this is not available, without reasonable grounds that this failure was
beyond its control or it believed it was not subject to the requirement to obtain the financial
statements, this has adverse implications for the resident. The resident will be required to
include a proportional amount of the CFC’s receipts and accruals, as opposed to its net income,
in its taxable income (s 72A(3)(b)(i)). It is also not entitled to a rebate in respect of the taxes paid
by the CFC on these amounts (s 72A(3)(b)(ii)).
The following prescriptions must be applied when calculating the net income of a CFC:
l The net income of the CFC must be calculated in its functional currency (s 9D(6)). The functional
currency of a CFC is the currency of the primary economic environment in which its business
operations are conducted (definition of ‘functional currency’ in s 1). Once the total taxable income
has been determined in the functional currency, taking into account all the prescriptions below,
this amount is converted to rand at the average exchange rate for the foreign tax year.
l When calculating the hypothetical taxable income of the CFC, any deductions or allowances from
the income must be limited to the income of the foreign company (s 9D(2A)(a)). This means that
residents cannot impute a loss suffered by a CFC into its taxable income. If the deductions or
allowances exceed the income of the CFC, the excess deductions or allowances can be carried
forward to the succeeding foreign tax year. This excess is deemed to be a balance of an
assessed loss in terms of s 20 when the taxable income of the CFC is determined in the next year
of assessment (s 9D(2A)(b)).
l No deductions are allowed for certain passive transactions between CFCs that form part of the
same group of companies (group CFC) (s 9D(2A)(c)). This corresponds with the exclusion from
the net income of the recipient CFC (s 9D(9)(fA) – see 21.7.3.4). These rules ensure that com-
panies that performed centralised functions can be used in an offshore structure without being
disadvantaged by the CFC rules. The intra-group rules apply to
– interest, royalties, rental, insurance premiums or income of a similar nature (including transfer
pricing adjustments) paid or payable by the foreign company to a group CFC
– exchange differences arising on exchange items to which the foreign company and a group
CFC are parties to and forward exchange contracts or foreign currency option contracts
entered into to hedge these items
– any reduction or discharge of a debt owed to the foreign company by a group CFC for less
consideration than the face value of the debt.
The deduction is, however, available if the corresponding amount must be taken into account by
the group CFC that receives it.
l If a CFC holds shares in another company, it could derive dividends that should be taken into
account in determining the net income:
– Foreign dividends that accrue to a CFC from a foreign company may be exempt in terms of the
participation exemption (s 10B(2)(a) – see chapter 5). If this is not the case, the exemptions
that apply to foreign dividends distributed from profits that have already been subject to the
CFC rules (s 10B(2)(c) – see chapter 5) or the exemption of foreign dividends received by a
foreign company (CFC) from another foreign company that is resident in the same country
(s 10B(2)(b) – see chapter 5) may be particularly relevant in the context of determining the net
income of a CFC.
– Dividends received from resident companies must not be treated as fully exempt (in terms of
s 10(1)(k)(i)) where such dividends are received by or accrue to the CFC on or after 1 January
2021 (s 9D(2A)(d)). The portion of the dividends that do not qualify for the exemption must be
calculated using the following formula:
A = B × (C – D)
881
‘A’ represents the portion of the dividends to which the exemption (s 10(1)(k)(i)) must not be
applied. ‘B’ is the ratio 20 divided by 28. ‘C’ represents the amount of dividends received by or
accrued to the CFC during the foreign tax year. ‘D’ represents an adjustment to reflect the
effect of any taxes already paid by the CFC as dividends tax deducted in respect of the
dividend. This adjustment aims to ensure that the dividend is ultimately subject to tax at a rate
of approximately 20% if the aggregate of the inclusion in net income and dividends tax with-
held are considered. ‘D’ must be determined by applying the following percentages to the
amount of dividends, depending on the rate at which dividends tax was paid:
Dividends tax rate Percentage to determine ‘D’

20% 100%
15% 75%
10% 50%
8% 40%
7,5% 37,5%
5% 25%
l A number of further prescriptions apply to determine capital gains or losses of the CFC on the
disposal of assets:
– For purposes of determining the base cost of the assets disposed of by the CFC, the valuation
date is deemed to be the date before the CFC commenced being a CFC (s 9D(2A)(e)). As a
result, the capital gains or losses reflected in the net income of the CFC are only those that
represent the gains or losses that arose since the date when the foreign company became a
CFC, rather than the absolute gain or loss in respect of the asset since the foreign company
actually acquired it.
– The functional currency of a CFC is deemed to be its local currency for purposes of deter-
mining any exchange gains or losses or capital gains or losses on assets acquired or disposed
of in foreign currencies (see s 24I and par 43 of the Eighth Schedule) (s 9D(2A)(k)). Specific
provisions apply to determine the base cost of assets when a hyperinflationary currency of a
CFC has been abandoned (s 9D(2A)(l)).
– The inclusion rate for purposes of capital gains tax depends on the nature of the resident that
holds the participation rights in the CFC and who has to include its proportional amount of the
CFC’s net income in its taxable income. If this resident is an insurer in respect of its individual
policyholder fund, the inclusion rate is 40% (s 9D(2A)(f)). In all other cases, an inclusion rate of
80% applies.
l Exchange items denominated in a hyperinflationary currency, which is not the functional currency
of the CFC, must be deemed not to be attributable to any permanent establishment of the CFC
(proviso to s 9D(6)). This is the equivalent from a CFC perspective of the provisions of s 25D(2A)
that would apply in the hands of a resident with a permanent establishment outside South Africa.
Example 21.27. Calculation of net income of a CFC

Rooibos Ltd, a South African resident company, holds 80% of the equity share capital of Clover
Ltd, an Irish tax resident company.
Rooibos Ltd’s year of assessment ends on 31 December 2022. Clover Ltd has a 30 June
financial year-end.
Clover Ltd’s operations are all conducted in Euro (̀as its primary currency.
Clover Ltd’s income statement for the year ended 30 June 2022 is as follows:
Net profit before tax (excluding research and development and investment
income) generated from activities in Ireland and the United Kingdom.................. ̀20 000 000
Research and development expenditure in developing a patent in Ireland .......... (̀3 000 000)
Dividend that accrued to Clover on 30 April 2022 from Protea (Pty) Ltd, a resident
company in which Clover holds a minority interest. After taking into account the
relevant treaty relief, Protea (Pty) Ltd withheld dividends tax at a rate of 5% in
South Africa in respect of this dividend ................................................................. ̀100 000
Net profit before tax ............................................................................................... ̀17 100 000
continued
882
The net profit before tax, with the exception of the research and development cost and dividend
income from Protea (Pty) Ltd, reflects the same amount that would have been taken into account
in the calculation of Clover Ltd’s taxable income had it been a resident of South Africa for tax
purposes.
The average exchange rate for the year ended 31 December 2022 is €1 = R17. The average
exchange rate for the foreign tax year ended 30 June 2022 is €1 = R14.
Assuming that no further amounts can be excluded from the net income of Clover Ltd, determine
the net income of Clover Ltd that must be used to determine the proportional amount to be
included in the taxable income of Rooibos Ltd for the 2022 year of assessment.
SOLUTION
The starting point for the calculation of the net income of Clover Ltd to be included in the taxable
income of Rooibos Ltd is to determine what Clover Ltd’s taxable income would have been had it
been a South African resident. This net income will be determined in Clover Ltd’s functional
currency, which is the euro, that it uses in its primary operations.
Rooibos Ltd must include its proportional amount of the net income, for Clover Ltd’s foreign tax
year that ends during Rooibos Ltd’s 2022 year, in its taxable income for the 2022 year of
assessment. Clover Ltd’s taxable income for its foreign tax year that ends on 30 June 2022, if it
were a resident, would have been:
Taxable income includes amounts irrespective of source (Clover Ltd deemed
to be a resident for purposes of the definition of ‘gross income’ in s 1) ............. €20 000 000
No adjustment made for expenditure to develop capital asset (patent) as
s 11D allowances are only available in respect of research and development
in South Africa that is approved by the Department of Science and Tech-
nology ................................................................................................................. –
Dividend from Protea (Pty) Ltd (par (k) of the definition of ‘gross income’ in s 1) .. €100 000
Dividend from Protea (Pty) Ltd that qualifies for exemption (s 10(1)(k)(i) ........... (€46 429)
Amount of the dividend ....................................................................................... €100 000
Portion of the dividend that does not qualify for exemption: (s 9D(2A)(d))
20/28 (‘B’) × (€100 000 (‘C’) – (25% × €100 000) (‘D’))....................... (€53 571)
Net income determined as if Clover Ltd was a resident ...................................... €20 053 571
Net income converted to rand at the average exchange rate for Clover Ltd’s
foreign tax year (€20 053 571 × 14) .................................................................. R280 749 994
Inclusion in Rooibos Ltd’s taxable income (R280 749 994 × 80%)..................... R224 599 995
21.7.3 Income not subject to CFC rules (s 9D(9) and 9D(9A))

The net income of a CFC, as calculated up to this point, includes all its profits. This consists of profits
that should be within the scope of the anti-avoidance rules but also profits not targeted by these
rules. The last step in the process to determine the net income that must be used for purposes of
calculating the proportional amount is to exclude amounts that are not within the scope of the anti-
avoidance rules from the net income (s 9D(9)).
21.7.3.1 Foreign business establishment exclusion (s 9D(9)(b), 9D(9)(f B) and 9D(9A))
The net income of a CFC must exclude profits generated by offshore business activities that pose no
real threat to the South African tax base. If such profits were subject to the CFC rules, it would cause
South African-based groups to be in an uncompetitive position globally. The net income attributable
to an FBE of the CFC is therefore excluded from the amount used to determine the proportional
amount included in the taxable income of a resident (s 9D(9)(b)). This exclusion applies to both the
operating profits realised by this FBE as well as the amounts derived from the disposal of its assets.
The above exclusion for capital gains or losses applies to the capital gains or
losses arising on the disposal of assets owned by the CFC and used in its own
Please note! FBE. The exclusion extends to the disposal of assets owned by a CFC that were
attributable to the FBE of another CFC that forms part of the same group of
companies as the CFC that owns the asset (s 9D(9)(fB)).
Definition of foreign business establishment

The first step to apply this exclusion is to establish whether a CFC carries on business through an
FBE. The definition of an FBE has a broad provision (par (a) of the definition of ‘foreign business
establishment’ in s 9D(1)) and followed by a list of specific circumstances that also give rise to an
FBE (paras (b) to (g) of the definition of ‘foreign business establishment’ in s 9D(1)).
883
In a broad sense, a CFC will have an FBE if it carries on business through a fixed place of business
located outside South Africa. The requirement for a fixed place of business implies that the business
activities must be carried on with a degree of permanency from a specific location. The business
must have been, or should continue to be, carried on at this place for a period of at least one year.
This place of business must meet all the following operational criteria, which aim to establish whether
the business in question has sufficient substance to qualify for the exclusion: (subpar (i) to (iv) of
par (a) of the definition of ‘foreign business establishment’ in s 9D(1)):
l The business must be conducted through a physical structure in the form of offices, shops,
factories, warehouses or other structures. There is no requirement that the CFC must own the
structure. The requirement that the business has to be conducted through the structure implies
that the mere availability of a structure is not sufficient to meet this requirement.
l The fixed place of business must be suitably staffed with on-site managerial and operational
employees of the CFC that conduct the primary activities of the business.
l The fixed place of business must be suitably equipped to conduct the primary activities of the
business.
l The fixed place of business must have suitable facilities to conduct the primary activities of the
business.
The last three criteria require a thorough understanding of the primary activities of the business. The
assessment as to whether these criteria are met depends on the fact and circumstances of each
business. This includes an understanding of the core business model to determine what constitutes
the primary activities of the business.
The last requirement that must be met for an FBE to exist relates to the business purpose. In order to
be an FBE, the fixed place of business must be located outside South Africa solely or mainly for a
business purpose, rather than to postpone or reduce any tax imposed in South Africa (subpar (v) of
par (a) of the definition of ‘foreign business establishment’ in s 9D(1)). This requires a similar type of
assessment of the reason for carrying on the business outside South Africa, in the context of any tax
benefit that it may derive, as the assessment when considering the general anti-avoidance rules (see
chapter 32).
Multinational groups often set up business structures in a manner to avoid dupli-

cation of functions. For purposes of considering whether a CFC carries on busi-
ness through an FBE, the use of structures, employees, equipment and facilities
of other CFCs that form part of the same group of companies as the CFC can be
taken into account. The other group CFC must, however, be subject to tax in the
Please note! country by reason of residence, place of effective management or similar criteria
where the fixed place of business is located. In addition, this concession only
applies to the extent that the structures, employees, equipment and facilities are
located in the country where the fixed place exists from which the CFC carries on
its business (proviso to par (a) of the definition of ‘foreign business establish-
ment’).
The following specific business activities carried on outside South Africa also give rise to the exist-
ence of an FBE (paras (b) to (g) of the definition of ‘foreign business establishment’ in s 9D(1)):
l any place outside South Africa where the CFC carries on operations for prospecting or explora-
tion for natural resources or mining or production operations of natural resources
l a site outside South Africa where the CFC carries on activities for the construction or installation
of buildings, bridges, roads, pipelines, heavy machinery or other projects of a comparable mag-
nitude, which lasts for a period of not less than six months
l agricultural land in a foreign country used by the CFC to carry on bona fide farming activities
l a vessel, vehicle, rolling stock or aircraft used solely outside South Africa by the CFC, or by a
group CFC that has its place of effective management in the same country as the CFC, for pur-
poses of transportation, fishing, prospecting or exploration for natural resources or mining or pro-
duction of natural resources.
884
Example 21.28. Determining whether the operations of a CFC qualify as a foreign

business establishment
Rooibos Ltd, a South African tax resident, is the parent company of a South African-based multi-
national group of companies involved in the pharmaceutical industry. Rooibos Ltd holds all the
shares in Clover Ltd, an Irish tax resident company. Clover Ltd is a CFC in relation to Rooi-
bos Ltd.
Rooibos Ltd is a distributor of medicine to various hospitals all over the world. Clover Ltd was
incorporated five years ago to serve as a procurement hub. It is located outside Dublin, close to
a number of pharmaceutical companies that develop and produce new medicine. Clover Ltd
buys medicine from Irish suppliers as well as other foreign pharmaceutical companies. Clover
Ltd owns an office building and storage warehouse. The warehouse is equipped to comply with
international standards for storage of medicine. All medicine that is ordered is shipped to the
warehouse, where it is packaged into Rooibos-group branded packaging. From here, the
medicine is sold to the group’s distribution subsidiaries in the countries where the group
operates, including a subsidiary in South Africa. This subsidiary is Six Roses (Pty) Ltd, a South
African resident company. It is wholly-owned by Rooibos Ltd. The distribution subsidiaries then
on-sell the products to the customers (hospitals) in each country.
Clover Ltd employs administrative staff as well as managerial and operational staff who carry out
the storage and distribution activities.
Discuss if Clover Ltd’s distribution activities outside Dublin will qualify as an FBE.
SOLUTION
The activities carried on by Clover Ltd do not fall into any of the specific items that will be an FBE,
as listed in paras (b) to (g) of the definition of ‘foreign business establishment’ in s 9D(1). It
should therefore be considered whether the activities fall within par (a) of this definition.
The activities may meet the requirements to be an FBE as
l The activities are carried on at a fixed place consisting of an office and warehouse outside
Dublin.
l The activities have been carried on from this location for five years (therefore more than one
year).
l It depends on the detailed procurement and distribution business model followed by
Clover Ltd, but on face value it appears as if the place of business may be suitably equipped
and has the necessary facilities to operate a procurement and distribution business. It
employs managerial and operational staff to carry out its activities at the premises.
l From the facts provided, a reason for the choice of location is its close proximity to suppliers.
This reason for establishing the procurement hub in Ireland must, however, be weighed up
against the tax benefits available in Ireland to establish whether the sole, or at least main,
reason for establishing the distribution hub in Ireland was a business reason, rather than a
tax reason. This is a factual question which requires more information than the information
provided to be considered.
Attribution of profits to the FBE

For purposes of determining the amount of net income to be attributed to the FBE, the FBE must be
viewed as a distinct and separate enterprise that deals wholly independently from the rest of the CFC
(s 9D(9)(b)(i)). The attribution of profits to the FBE must be done as if the amounts arose in transac-
tions entered into on terms and conditions that would have existed between persons dealing at arm’s
length (s 9D(9)(b)(ii)). Similar principles as those applicable to the attribution of profits to permanent
establishments (see 21.4.3.9), and therefore by implication transfer pricing principles (as discussed
in 21.8), apply.
Anti-diversionary rules
If a CFC carries on business through an FBE, the net income derived through this FBE is excluded
from the CFC rules. This FBE, however, creates a ‘tax-free pocket’ into which amounts can be divert-
ed from South Africa, and therefore presents a potential avoidance opportunity. In principle, this
misuse of the FBE should be prevented by transfer pricing rules (see 21.8), which counter profit
shifting through artificial pricing of transactions. The transfer pricing rules are applied on a case-by-
case basis on the facts and circumstances of each transaction and often makes it difficult to enforce.
As a second measure to protect the fiscus against transactions that artificially divert profits from
South Africa into an FBE of a CFC, the CFC rules contain a number of anti-diversionary rules.
The anti-diversionary rules identify, and apply to, types of transaction or activities that could poten-
tially pose a risk of abuse of the FBE exemption. The net income attributable to such transactions or
activities would then remain included in the net income of the CFC, unless it meets prescribed
885
criteria. These criteria reflect instances in which the risk of abuse is unlikely to exist or is reduced.
Each of the anti-diversionary rules start by describing transactions or activities from which the net
income cannot be excluded from the net income of a CFC merely on the basis that it is attributable to
an FBE. This is then followed by a number of circumstances, often very narrowly defined, where it is
appropriate to exclude the amounts from the net income of the CFC.
These rules target two categories of FBE activities:
l firstly, transactions entered into between connected resident taxpayers and the FBE, as a tax-free
pocket from a South African tax net perspective
l secondly, activities of FBEs that may represent activities aimed at earning passive income,
despite the fact that it is earned within a business structure that meets the definition of an FBE.
The following anti-diversionary rules aim to prevent the diversion of amounts from connected persons
who are South African residents to FBEs of CFCs:
Net income from the following
transactions must be taken into
account by the resident under the
CFC rules despite being Amounts that may properly be excluded from the CFC rules, despite
attributable to FBE due to the risk being a risk transaction (Acceptable transactions)
of amounts artificially diverted from
connected South African tax
residents (Risk transactions)
Amounts derived by the CFC from Amounts derived in the following circumstances (paras (aa) to (dd) of
the sale of goods, directly or s 9D(9A)(a)(i)):
indirectly, to a South African resi- l the CFC purchased the goods for delivery in the country where the
dent that is a connected person in CFC has its place of effective management from a person, or
relation to the CFC (s 9D(9A)(a)(i)) l the CFC has undertaken activities that entail the creation, extraction,
production, assembly, repair or improvement of these goods. These
activities must comprise more than minor assembly or adjustment,
packaging and labelling activities, or
l the CFC sells a significant quantity of goods of the same or similar
nature to unconnected persons at comparable prices. The compar-
ability assessment should take into account market levels, volume
discounts and delivery costs, or
l the CFC purchases the same or similar goods mainly for delivery in
the country where the CFC has its place of effective management
from unconnected persons.
Amounts derived by the CFC from Amounts derived in the following circumstances (paras (aa) to (dd) of
the sale of goods, directly or s 9D(9A)(a)(iA)):
indirectly, to any person, where l the goods or tangible inputs purchased from the residents who are
the CFC purchased the goods or connected persons amount to an insignificant portion of the total
tangible inputs, directly or goods or intermediary inputs into the goods, or
indirectly, from a South African l the CFC has undertaken activities that entail the creation, extraction,
resident(s) that is a connected production, assembly, repair or improvement of these goods. These
person in relation to the CFC activities must comprise more than minor assembly or adjustment,
(s 9D(9A)(a)(iA)) packaging and labelling activities, or
l the CFC sells the products to unconnected persons for physical
delivery at the customer’s premises in the country where the CFC
has its place of effective management, or
l the CFC sells products of the same or similar goods mainly to
unconnected persons for physical delivery to the customer’s
premises within the country where the CFC has its place of effective
management.
continued
886

CFC rules despite being Amounts that may properly be excluded from the CFC rules, despite
attributable to FBE due to the risk being a risk transaction (Acceptable transactions)
of amounts artificially diverted from
connected South African tax
residents (Risk transactions)
Amounts derived by the CFC from Amounts derived from performing the service outside South Africa in
any service performed, directly or the following circumstances (paras (aa) to (dd) of s 9D(9A)(a)(ii)):
indirectly, for the benefit of a l the service related directly to the creation, extraction, production,
South African resident that is a assembly, repair or improvement of goods used outside South Africa,
connected person in relation to or
the CFC (s 9D(9A)(a)(ii)) l the service relates directly to the sale or marketing of goods of a
South African resident that is connected to the CFC, where those
goods are sold to unconnected persons for physical delivery to the
customer’s premises within the country where the CFC has its place
of effective management, or
l the service is rendered mainly in the country where the CFC has its
place of effective management for the benefit or customers that
have premises in that country, or
l to the extent that no deduction is allowed for any amount paid by
the connected person for the service.
Example 21.29. Application of the diversionary rules to FBE income

This example is based on the same facts as Example 21.28. Assuming that the activities of
Clover Ltd at the office and warehouse outside Dublin is an FBE, discuss the impact of the diver-
sionary rules to the FBE exclusion.
SOLUTION
Six Roses (Pty) Ltd, a resident company, is a connected person in relation to Clover Ltd as it
forms part of the same group of companies. Income derived by the FBE from selling goods to Six
Roses (Pty) Ltd pose a risk of profits being diverted to Clover Ltd’s FBE from Six Roses (Pty) Ltd
(s 9D(9A)(a)(i)). As a result, this income will have to be included in Clover Ltd’s net income that is
included in Rooibos Ltd’s taxable income.
The following exceptions may result in these amounts being excluded from this net income:
l Clover Ltd (CFC) purchases some, but not all, of the goods sold to Six Roses (Pty) Ltd, within
Ireland from unconnected persons. As it also purchases some goods from outside Ireland,
the exception in s 9D(9A)(a)(i)(aa) will therefore not apply.
l The only activity that takes place at the premises outside Dublin is packaging of the products.
The exception in s 9D(9A)(a)(i)(bb) will therefore not apply.
l From the information provided, it appears as if Clover Ltd only sells the products to connected
persons (group subsidiaries that distribute the product in their respective countries). The
exception in s 9D(9A)(a)(i)(cc) will therefore not apply.
l Clover Ltd (CFC) purchases the same or similar goods (except for the packaging) to those
sold to Six Roses (Pty) Ltd from unconnected suppliers in Ireland. If it can be demonstrated
that it mainly purchases (presumably more than 50% of its purchases) these goods within
Ireland, it may qualify for the exception in s 9D(9A)(a)(i)(dd).
If Clover Ltd complies with the requirement in s 9D(9A)(a)(i)(dd), the effect will be that the net
income used to determine Rooibos Ltd’s proportional amount to be included in its taxable income
in South Africa will not include the net income from sales of products to Six Roses (Pty) Ltd.
If, however, Clover Ltd does not comply with the requirements of that provision, the net income
from sales of products to Six Roses (Pty) Ltd must be included in the net income used as a basis
for Rooibos Ltd’s proportional amount included in its taxable income. This will effectively neu-
tralise any deduction that Six Roses (Pty) Ltd would have been able to make in respect of the
purchase of these products from Clover Ltd.
887
The anti-diversionary rules aimed at passive income being generated through a business structure
that meets the definition of an FBE are:

Amounts that may properly be excluded from the CFC rules, despite
CFC rules despite being
being a risk transaction (Acceptable transactions)
attributable to FBE due to the risk
of being passive income generated
within an FBE (risk transactions)
Amounts arising in respect of Amounts derived from financial instruments in the following circum-
financial instruments stances (paras (aa) to (cc) of s 9D(9A)(a)(iii)):
(s 9D(9A)(a)(iii)) l The financial instrument is attributable to the principal trading
activities of a bank, financial service provider or insurer carried on
by the FBE. This exception does not apply if the principal trading
activities are those of a treasury operation or captive insurer, as
described in ss 9D(9A)(b)(iii) and (iv), as these may be disguised
as banking, financial services or insurance businesses.
l Amounts that are attributable to exchange differences in respect of
financial instruments arising in the ordinary course of the principal
trading activities of a bank, financial service provider or insurer
carried on by the FBE. This exception does not apply if the principal
trading activities are those of a treasury operation or captive
insurer, as described in ss 9D(9A)(b)(iii) and (iv).
l To the extent that the amounts or exchange gains arise in respect of
financial instruments that are attributable to the activities of the FBE
(as opposed to being unrelated instruments conveniently housed in
the FBE) exceed 5% of the total receipts or accruals of the FBE.
Any amounts that qualify for other exclusions from net income, as
discussed in 21.7.3.2 to 21.7.3.5, and amounts derived from
treasury operations or captive insurers, must be excluded for pur-
poses of this calculation.
Note: Amounts that may be excluded from the net income of a CFC
solely as a result of any of the above items, must be taken into account
in the net income of the CFC to the extent that it is attributable to
deductible amounts incurred by residents who are connected persons
in relation to the CFC.
Amounts derived from the rental of Amounts derived from the rental of movable property in the form of an
movable property (s 9D(9A)(a)(iv)) operating lease or financial instrument (i.e. finance lease) (paras (aa)
and (bb) of s 9D(9A)(a)(iv)). In the case of a lease in the form of a
financial instrument, the diversionary rules that apply to amounts
arising from financial instruments will govern whether the amount is
included in net income or not.
In this context of this item an operating lease refers to a lease of
movable property concluded by a lessor in the ordinary course of a
letting business, where (s 9D(9A)(b)(v))
l this property can be hired by members of the general public for a
period of no longer than five years, and
l the lessor bears the cost or performs the activities to maintain and
repair the asset in consequence of normal wear and tear, and
l the lessor bears the risk of loss or destruction of the asset, except
when it has a claim against the lessee for failure to take proper care
of the asset.
Amounts derived from the use, Amounts derived from the use of intellectual property, which is not
right of use or permission to use tainted intellectual property (see chapter 13), where the CFC directly
intellectual property, as described and regularly creates, develops or substantially upgrades the intellec-
in 21.3.3 (s 9D(9A)(a)(v)). This tual property that gave rise to the amount (paras (aa) and (bb) of
also extends to capital gain in s 9D(9A)(a)(v)). Capital gains on the disposal of intellectual property
respect of the disposal of such may similarly be excluded from net income if the capital gain arose
intellectual property from the disposal of intellectual property that the CFC directly and
(s 9D(9A)(a)(vi)). regularly creates, develops or substantially upgrades (s 9D(9A)(a)(vi)).
continued
888

Amounts that may properly be excluded from the CFC rules, despite
CFC rules despite being
being a risk transaction (Acceptable transactions)
attributable to FBE due to the risk
of being passive income generated
within an FBE (risk transactions)
Amounts derived in the form of Amounts derived from insurance premiums that are attributable to the
insurance premiums principal trading activities of an insurer carried on by the FBE (par (aa)
(s 9D(9A)(a)(vii)) of s 9D(9A)(a)(vii)). This does not apply to an insurer whose principal
trading activities are the activities of a captive insurer, as defined in
s 9D(9A)(b)(iv), which may be disguised as an insurance business.
21.7.3.2 Amounts that have already been subject to tax in South Africa (s 9D(9)(d)
and 9D(9)(e))
If an amount received by or accrued to a CFC has already been subject to tax in South Africa in the
hands of the CFC (as a taxpayer itself), there is no need for the CFC rules to apply to it. In fact, if the
CFC regime applied to these amounts, this would result in double taxation. The net income of a CFC
therefore excludes
l interest received by the CFC that is subject to the withholding tax on interest (see 21.5.2.5), after
taking into account any treaty relief available (s 9D(9)(d)(i))
l royalties received by the CFC that are subject to the withholding tax on royalties (see 21.5.2.4),
after taking into account any treaty relief available (s 9D(9)(d)(ii))
l amounts that have been included in the taxable income of the CFC, on the basis that the amounts
were received by or accrued to the CFC, as a non-resident taxpayer, from a South African source
(see 21.5) (s 9D(9)(e)).
Example 21.30. Exclusion for amounts already taxed in South Africa
A resident holds all the shares of a foreign company. The foreign company is a CFC in relation to
the resident. The foreign company owns fixed property in South Africa. The fixed property gener-
ates rental income that accrues to the foreign company.
The rental income of the foreign company will already be subject to tax in South Africa. This is
because the foreign company is a non-resident that is taxed in South Africa on a source basis.
The rental income is from a South African source. The rental income would have been included
in the CFC’s taxable income as a taxpayer in South Africa.
As this amount has already been subject to tax in South Africa and would therefore not pose a
risk to the South African tax base, it will be excluded from the net income of the CFC (s 9D(9)(e)).
21.7.3.3 Amounts that have already been subject to the CFC rules (s 9D(9)(f))
If participation rights in a CFC (CFC2) are held indirectly through another CFC (CFC1) by a resident,
each of the CFCs will be a CFC in relation to that resident. The resident is required to include its
proportional amount of the net income of each CFC (based on its participation rights in that CFC) in
its taxable income. As a result, the profits of CFC2 may be subject to tax in the hands of the resident
as and when these profits accrue in CFC2. At some point, CFC2 may distribute the profits and CFC1
will receive this as foreign dividends. If these profits were to be included in the net income of CFC1,
of which a portion has to be included in the taxable income of the same resident that already had an
inclusion of CFC2’s net income, this will result in double taxation. To prevent this, the net income of
CFC1 must exclude the foreign dividends received from CFC2 to the extent that those dividends
have been declared from profits that have already been subject to tax in the hands of the resident
(s 9D(9)(f)).
21.7.3.4 Intra-group passive income (s 9D(9)(fA))
South African-based groups should be able to structure their offshore affairs in a manner that cen-
tralises financing, licensing and leasing functions for offshore activities without being penalised by
the CFC rules. The income that accrues to the offshore group entity where these functions are
centralised from other CFCs should be considered from the perspective of the group entity where it
arises, rather than the entity that performs this centralised group function. The net income of a CFC
excludes certain amounts that accrue from other CFCs that form part of the same group of com-
panies (group CFC) from the net income of the recipient. These payments cannot be deducted when
determining the net income of the group CFC that makes the payment (see discussion of intra-group
rules in 21.7.2.3). On this basis, the net income of a CFC must exclude
889
l interest, royalties, rental, insurance premiums or income of a similar nature (including transfer
pricing adjustments) paid or payable to the foreign company by a group CFC
l exchange differences arising on exchange items to which the foreign company and a group CFC
are parties to and forward exchange contracts or foreign currency option contracts entered into
to hedge these items
l any reduction or discharge of a debt owed by the foreign company to a group CFC for less
consideration than the face value of the debt.
21.7.3.5 Amounts attributable to certain policyholders (s 9D(9)(c))

The net income attributable to any foreign person or CFC in relation to a resident from policies issued
by a company licensed to issue long-term policies in its own country of residence, must be excluded
from the net income of that CFC. Amounts that accrue to CFCs of South African insurance
companies, which will ultimately be paid to policyholders who are not subject to tax in South Africa,
are not subject to tax in South Africa in terms of the CFC rules.
21.7.4 Practical approach to applying CFC rules

The CFC rules, as explained in 21.7.1 to 21.7.3, are complex and taxpayers often find it difficult to
apply. The following diagram suggests a stepped approach to apply these rules:
No
Step 1: Is or was the foreign company a CFC during the foreign tax year that
ends during the resident’s year of assessment? (21.7.2.1)
Yes
No
Step 2: Does the resident in question directly or indirectly hold participation
rights in this CFC at the end of the tax year that ends in the resident’s
year of assessment? (21.7.2.2)
Yes
Does one of the exemptions from having to include any amount in Yes
Step 3:
taxable income apply to this resident? (21.7.2.2)
Yes
Step 4: Does the high-tax exemption apply to the CFC? (21.7.2.3) or Yes to either
Does the CFC derive all its receipts and accruals from a FBE without any
of the diversionary rules applying? (21.7.2.3 and 21.7.3.1)
Neither
Step 5a: Calculate net income for inclusion in accordance with guidelines in 21.7.2.3.
Step 5b: Exclude amounts attributable to FBE, after adjusting for diversionary rules (21.7.3.1).
Exclude amounts already taxed in South Africa (21.7.3.2) or already subject to CFC
Step 5c:
rules (21.7.3.3).
Step 5d: Exclude passive income derived from group CFCs (21.7.3.4).
= Net income of the CFC to be used for inclusion in resident’s taxable income
Step 5e: Multiply: Resident’s participation rights at the relevant date (21.7.2.3).
Amount to be included in the hands of resident No inclusion in the hands of resident that
that holds participation rights in a CFC holds participation rights in a CFC
890
21.8 Transfer pricing (s 31)

Taxpayers may attempt to use artificial pricing of transactions between related persons to achieve a
favourable tax outcome. These arrangements would normally entail that taxable profits are shifted
from high tax jurisdictions to low tax jurisdictions by pricing transactions differently to how they would
have been priced between independent persons. Transfer pricing rules require that the tax implica-
tions of international transactions must be based on arm’s length principles of the arrangements to
counter such profit shifting.
Example 21.31. Basic principles of transfer pricing
SACo Ltd is a South African tax resident and is subject to normal tax in South Africa at 28%.
Sand LLC is a company incorporated and effectively managed in Dubai. SACo Ltd’s parent
company owns all the shares of Sand LLC. Sand LLC is not subject to corporate tax in Dubai.
The concept of transfer pricing can be illustrated by the following simple transactions between
SACo Ltd and Sand LLC:
l The parent company owns the shares of SACo Ltd and Sand LLC. It may be indifferent in
which entity the group’s profits ultimately accumulate. It will be beneficial from a tax per-
spective if profits accumulate in Sand LLC, where it will not be subject to corporate tax,
rather than in SACo Ltd, where it will be subject to normal tax at 28%. To achieve this, the
following transactions can be entered into between SACo Ltd and Sand LLC.
l Depending on the market and nature of SACo Ltd’s business activities, SACo Ltd could
supply its products to Sand LLC at a lower price than it would be able to sell the products to
independent customers. This results in a lower taxable income in SACo Ltd’s hands. The
profits on the sale of the products will now realise in the hands of Sand LLC, as it purchased
the goods at an artificially low price and is able to sell it at the normal market price to cus-
tomers.
l Alternatively, Sand LLC could charge SACo Ltd excessive fees, for example management
fees. These fees would be deductible and thereby reduce SACo Ltd’s taxable income, which
will ultimately be taxed at 28%. The fees are included in the income of Sand LLC where it will
not be subject to corporate tax. A similar outcome can be achieved if SACo Ltd were to pay
Sand LLC excessive interest, royalties or prices for goods purchased from Sand LLC.
Transfer pricing rules prevent taxpayers from determining their taxable income based on the
transactions, such as the ones above, that are artificially priced in an attempt to move profits
between related persons.
The South African transfer pricing provisions are contained in s 31. This provision was overhauled in
2012. The previous version of South Africa’s transfer pricing rules focused only on pricing of
transactions as opposed to the overall economic substance and commercial objectives of an
arrangement. Section 31 was replaced to modernise the South African transfer pricing rules to be in
line with those of the OECD. The wording of the current transfer pricing rules is more closely aligned
with the wording of Article 9 of the OECD and United Nations model tax conventions.
21.8.1 Basic principles
21.8.1.1 Transactions that are subject to transfer pricing in South Africa

The transfer pricing rules apply to any transaction, operation, scheme, agreement or understanding
(collectively referred to as transactions in the remainder of this discussion) that is an affected trans-
action.
A transaction will be an affected transaction if it has, directly or indirectly, been entered into between,
or for the benefit of, either or both of the persons involved in any of the following sets of persons
(definition of ‘affected transaction’ in s 31(1)):
l a resident and a non-resident
l a non-resident and another non-resident’s permanent establishment in South Africa to which the
transaction relates
l a resident and another resident’s permanent establishment outside South Africa to which the
transaction relates
l a non-resident and any CFC in relation to any resident
who are connected persons or, for years of assessment commencing on or after 1 January 2023,
associated enterprises (see chapter 13) in relation to each other.
These permutations all involve a person who is not subject to tax in South Africa to the same extent
as the other, and to whom taxpayers could potentially move profits that would otherwise be taxed in
891
South Africa. The connected person requirement reflects the fact that it is unlikely that persons, who
are not related parties, would be willing to enter into transactions at artificial terms or conditions to
obtain a tax benefit. It is clear from these requirements that both transactions by residents and
certain non-residents may be affected transactions and therefore be subject to the transfer pricing
provisions.
When determining whether two persons are connected in relation to each other
for purposes of applying the transfer pricing provisions to transactions involving
the granting of financial assistance or intellectual property, a lower threshold must
Please note! be used. A company will be treated as a connected person in relation to another
company in which it holds at least 20% of the equity shares and voting rights,
irrespective of whether any other person holds the majority of the voting rights in
the company or not (s 31(4)).
The term associated enterprise is defined as an associated enterprise as contemplated in Art 9 of the
OECD Model Tax Convention (definition of ‘associated enterprise’ in s 31(1)). Article 9 broadly
describes circumstances where it is appropriate to apply transfer pricing rules to commercial and
financial relations between enterprises where one enterprise participates in the management, control
or capital of the other or where the same persons participate in the management, control or capital of
both enterprises. An enterprise is defined broadly in Art 3 of the OECD Model Tax Convention as the
carrying on of a business. The term ‘associated enterprise’ is, however, not an explicitly defined term
in Art 3 or Art 9. It is unclear at this stage how taxpayers should interpret the term ‘associated
enterprise’ in the context that it is used in s 31 once the expansion of the scope of s 31 to such enter-
prises becomes effective.
A transaction between these persons is an affected transaction if any term or condition of that trans-
action is different from any term or condition that would have existed had those persons been inde-
pendent persons dealing at arm’s length. The Act does not prescribe the methodology that should be
used to assess whether the terms or conditions of a transaction reflect those that would have been
agreed to between persons dealing at arm’s length. SARS and the National Treasury have indicated
that the OECD guidelines should be followed to make this determination.
The OECD published comprehensive transfer pricing guidelines. According to

these guidelines, there are five methods which taxpayers can use to determine an
arm’s length price. These methods are:
l the comparable uncontrolled price method (CUP method)
l the resale price method
Please note! l the cost plus method
l the transactional net margin method (TNM method), or
l the transactional profit split method.
For further information on these methods, please consult the OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations, which
can be found on the OECD’s website.
The transfer pricing provisions only apply to an affected transaction, if the term or condition that is not
at arm’s length and that caused the transaction to be an affected transaction, results in a tax benefit
for a party to the transaction, or for a resident who includes a proportional amount in its taxable
income for a CFC that is a party to an affected transaction (s 31(2)(b)(ii)). A tax benefit exists where
any liability for tax imposed in terms of the Act (normal tax or withholding taxes referred to in 21.5.2)
has been avoided, postponed or reduced. The determination as to whether a person obtained a tax
benefit is limited to an assessment from a South African tax perspective, rather than from the
perspective of a taxpayer’s global tax liabilities. A tax benefit will normally arise as a result of non-
arm’s length terms or conditions, if
l these terms and conditions enabled a taxpayer to deduct a greater amount from its taxable
income than it would have been able to do had the transaction taken place at arm’s length terms
and conditions, or
l these terms and conditions resulted in a lesser amount accruing to or being received by the
taxpayer than would have been the case had the transaction taken place at arm’s length terms
and conditions.
21.8.1.2 Transfer pricing adjustments (s 31(2) and 31(3))

A taxpayer who entered into an affected transaction and derived a tax benefit must make
adjustments when determining its tax liabilities.
892
Primary transfer pricing adjustment (s 31(2))

The first adjustment that a taxpayer must make is to its taxable income or the tax payable. The
taxable income or tax payable should be calculated as if that transaction had been entered into on
the terms and conditions that would have existed between independent person’s dealing at arm’s
length.
Secondary transfer pricing adjustment (s 31(3))

In addition to the direct tax effect addressed by the primary adjustment, a transaction that does not
take place at arm’s length also results in value being moved between the persons involved. If this
value was moved in a more conventional manner, it would have been subject to tax. These tax con-
sequences will not necessarily arise if the movement of value is disguised in the form of an artificially
priced transaction. The secondary transfer pricing adjustments ensure that this movement of value
using affected transactions is subject to these tax consequences.
The amount of the secondary adjustment is equal to the primary adjustment made for a transaction
between a resident, who derives a tax benefit, and any other person, who is either not a resident or
another resident’s permanent establishment outside South Africa. This amount is deemed to be
l a dividend in the form of a distribution of an asset in specie declared and paid by the resident, if
the resident is a company, or
l a donation for purposes of donations tax, if the resident is not a company.
Example 21.32. Transfer pricing and adjustments
Transfer Ltd, a South African resident, sells goods to its French subsidiary for R200 000 on
15 January 2022. The cost of the goods for the South African company was R150 000. The
goods had a market value of R400 000 (considered to be an arm’s length price) at the time of the
sale. Transfer Ltd’s taxable income before taking the above transaction into account was
R1 500 000. Transfer Ltd’s year of assessment ends on 31 March 2022. Ignore the provisions of
any double tax agreement.
Calculate the tax implications of this transaction for Transfer Ltd.
SOLUTION
Taxable income – given ............................................................................................ R1 500 000
Proceeds from sale ................................................................................................... R200 000
Section 31(2) adjustment (R400 000 – R200 000) .................................................... R200 000
R1 900 000
Less: Cost of goods (s 11(a)).................................................................................... (R150 000)
R1 750 000
The transaction is between Transfer Ltd (a resident) and its French subsidiary (a
non-resident). In terms of s 31(3), the primary adjustment of R200 000 in terms of
s 31(2) is deemed to be a dividend in specie declared and paid by Transfer Ltd.
Transfer Ltd will have to account for dividends tax on the deemed dividend in
specie.
Dividends tax on deemed dividend in specie of R200 000 at 20%. ......................... R40 000
The dividend in specie is deemed to have been paid and declared at the end of
six months after the year of assessment in respect of which the adjustment was
made. As the adjustment was made for the year of assessment ended
31 March 2022, the dividend in specie will be deemed to have been paid on
30 September 2022. In terms of the dividends tax provisions, Transfer Ltd will
have to pay the amount of R40 000 over to SARS by 31 October 2022. As this is
a deemed dividend in specie, the liability for the dividends tax is that of
Transfer Ltd. SARS states in the Comprehensive Guide to Dividends Tax that this
deemed dividend in specie does not qualify for treaty relief.
21.8.2 Thin capitalisation

Thin capitalisation arises when businesses are funded with a disproportionate amount of debt in
relation to equity. The foreign investor (financier) receives interest income, which may be exempt
from tax (s 10(1)(h)), while the company deducts the interest incurred in respect of that debt (instead
of paying non-deductible dividends in respect of equity capital). Thin capitalisation provisions limit
the deductibility of interest on the excessive debt funds, thereby protecting the South African tax
base against the distortions that result from excessively geared investments. The thin capitalisation
rules were merged into the transfer pricing rules in 2012. The amount of debt obtained by a South
893
African resident from a foreign lender that is a connected person in relation to the resident is viewed
as one of the terms or conditions of the transaction when assessing whether the loan is an affected
transaction.
Previously, a safe harbour rule of a 3:1 debt to equity ratio applied to determine the allowable capital
loan amount and interest deduction on inbound loans for thin capitalisation purposes. This practice is
no longer acceptable. SARS issued a Draft Interpretation Note during 2013 where it suggested that
inbound financial assistance must be assessed in terms of a proper transfer pricing analysis. The
draft interpretation note proposed that inbound loans should be arm's length, from the perspective of
both the amount of the loan amount and the interest incurred by the borrower, in order to be accept-
able for South African income tax purposes. It further suggested that the old safe harbour rules
could, at best, be used as a risk identification indicator. Unfortunately, SARS has not yet provided
further detailed guidance following this Interpretation Note to date (at the time that this publication
was printed).
Due to the fact that National Treasury regarded the provisions that limit excessive interest deductions
as incomplete (including s 31), s 23M, which provides a formula that limits the amount of interest that
can be deducted in certain circumstances, was introduced. That provision, however, not only applies
to transactions between residents and non-residents. Chapter 16 considers s 23M in detail.
Example 21.33. Thin capitalisation and adjustments
Thin Ltd, a South African resident, borrowed R1 500 000 from Foreign Plc (its foreign parent
company) on 1 March 2022. Interest is payable at 6% per year and Thin Ltd has a 31 December
year-end. You can assume that the interest complies with the requirements of s 24J and will be
deductible, where applicable.
Thin Ltd has determined that an arm’s length amount of debt is R1 000 000 and an arm’s length
rate of interest is 6% per year.
Determine the income tax implications of this transaction for Thin Ltd for its year of assessment
ended 31 December 2022.
SOLUTION
Interest paid by Thin Ltd (R1 500 000 × 6% × 306/365)............................................ R75 452
Interest that should have been paid (R1 000 000 × 6% × 306/365) (note 1) ............ (R50 301)
Primary adjustment in terms of s 31(2) (note 2) ........................................................ R25 151
Secondary adjustment (note 3) ................................................................................. R5 030
Notes
(1) An arm’s length amount of debt is R1 000 000 and not R1 500 000.
(2) Thin Ltd must make a primary adjustment by not claiming a tax deduction for the interest of
R25 151 on the ‘disallowed’ portion of the debt (R500 000 × 6% × 306/365). This will
increase the company’s taxable income.
(3) Thin Ltd is a resident company that has made an adjustment of R25 151 to its taxable
income in terms of s 31(2). The R25 151 will be a deemed dividend in specie and Thin Ltd
will be liable for dividends tax of R5 030 thereon (R25 151 × 20%). This dividend in specie
will be deemed to have been declared and paid on 30 June 2023.
(4) The provisions of s 23M relating to the limitation of interest deductions in respect of debts
owed to persons not subject to tax (see chapter 23) should also be considered in these
circumstances.
21.8.3 Exceptions where transfer pricing rules do not apply
21.8.3.1 High-taxed CFC exemption (s 31(6))

An affected transaction between a South African resident and a CFC in which that South African
resident has an interest is subject to the transfer pricing provisions.
South African-based multinationals often provide assistance to offshore operations, especially during
the start-up phase of these operations. This assistance is in the form of soft-loans, which function as
capital, or sharing of knowledge and intellectual property without compensation. This assistance is
not driven by tax considerations. An exemption from the transfer pricing provisions facilitates this
assistance without the hindrance of transfer pricing adjustments for the South African company. This
exemption applies where a resident grants the right to use intellectual property or financial assistance
to CFCs if all the following requirements are met (s 31(6)):
l The CFC must be a CFC in relation to the South African resident or a company that forms part of
the same group of companies as the resident.
894
l The CFC must have a foreign business establishment (as defined for CFC purposes) (see
21.7.3.1).
l The CFC must be high-taxed in a broadly similar manner as contemplated in the CFC exemption
for high-taxed entities, with the main difference relating to the disregarding of certain losses in
calculating the foreign tax payable. (see 21.7.2.3).
This is not a complete exemption from transfer pricing for all transactions between the resident and
the high-taxed CFC. It only exempts interest and royalties that the resident charged (or should have
charged) to the high-taxed CFC from the transfer pricing provisions. Financial assistance also
includes the provision of security or guarantees (see definition of ‘financial assistance’ in s 31(1)).
Guarantee fees and similar charges should also qualify for the exemption. Other services and trans-
actions involving goods between the South African company and its CFC are still subject to the
transfer pricing provisions.
21.8.3.2 Equity loan exemption (s 31(7))

South African companies may fund foreign subsidiaries, other than high-taxed CFCs, without
charging interest. A company will provide this funding in the form of an equity loan (also known as
quasi equity). This type of loan is generally more similar to equity than debt in the sense that it may
be deeply subordinated, have flexible repayment terms (if any) or will often be unsecured. The
reasons for advancing this choice of funding are normally not tax related. In the absence of a specific
concession, the transfer pricing provisions will apply to this financial arrangement between a South
African resident and a foreign connected person of the resident. The South African resident would be
required to include the interest income that it would have charged had these funds been advanced to
an independent person, which is unlikely to have happened in the first place, in its taxable income.
To prevent transfer pricing considerations from obstructing South African residents to advance this
form of capital, an exemption from the transfer pricing provisions exist. This exemption applies if all
the following requirements are met (s 31(7)):
l a transaction has been entered into between
– a resident company or any company that forms part of the same group of companies as that
resident company, and
– a foreign company in which the resident company (alone or together with any company that
forms part of the same group of companies) directly or indirectly holds at least 10% of the
equity shares and voting rights
l the transaction represents a debt owed by that foreign company to the resident company (or any
company that forms part of the same group of companies as that resident company)
l the foreign company is not obligated to redeem that debt in full within 30 years from the date on
which the debt was incurred
l the redemption of the debt in full is conditional upon the market value of the assets of the foreign
company not being less than its liabilities, and
l no interest accrued in respect of the debt during the year of assessment.
21.8.4 Compliance and reporting requirements

Taxpayers who enter into affected transactions should make the adjustments referred to in 21.8.1.2
without any intervention by SARS. The Tax Administration Act places the burden on a taxpayer to
prove that an amount is deductible or that a valuation is correct (ss 102(1)(b) and (e) of the Tax
Administration Act). This is of particular importance in the context of transfer pricing where the
taxpayer should be able to demonstrate that no adjustment was required or that the adjustment that it
made was correct.
Until 2016 South Africa did not have prescribed transfer pricing documentation requirements. The
requirement to keep transfer pricing documentation was only governed by the general requirements
of the Tax Administration Act (s 29(1) of the Tax Administration Act). Towards the end of 2016, SARS
issued a public notice (Public Notice No. 1334 in Government Gazette 40375) that applies to tax-
payers who enter into transactions that may potentially be affected transactions. To determine
whether transactions are potentially affected transactions, the taxpayer must disregard the require-
ment relating to the arm’s length terms and conditions of the transaction in the definition of affected
transaction (see 21.8.1.1). A potentially affected transaction is therefore one entered into between
two persons listed in the definition of ‘affected transaction’ who are connected persons in relation to
each other. The notice prescribes specific documentation that these persons whose aggregate of
potentially affected transactions for a year of assessment exceeds, or is reasonably expected to
895
exceed, R100 million, should keep. This includes specified information about their group structures
and business operations. They should further keep prescribed documentation detailing the terms and
conditions of potentially affected transactions that exceed or can reasonably be expected to exceed
R5 million in value. Persons who are not within the scope of these requirements must keep records,
books of account or documents to enable it to ensure and satisfy SARS that its potentially affected
transactions are conducted at arm’s length.
One of the OECD/G20 BEPS Project proposals relates to requirements for multinational taxpayers to
report certain information on a country-by-country basis to tax authorities. This is commonly referred
to as country-by-country reporting (CBC reporting). This information enhances transparency and
enable tax authorities to assess transfer pricing and other BEPS risks at a high level. SARS published
a public notice (Public Notice No. 1117 in GG 41186) that requires the submission of country-by-
country information, master files and local files for financial years commencing on or after 1 March
2016.
21.9 Special cross-border tax regimes in South Africa

Countries implement tax concessions or incentives to attract investment to their shores. Some of the
measures used include tax holidays in certain industries or for new investors (for example, not
imposing tax on farming operations in which foreign investors have invested funds for a specified
number of years), lower tax rates or accelerated tax allowances (for example, patent box regimes
aimed at attracting research and development activities). This section of the chapter considers the
special cross-border tax regimes available in South Africa to attract foreign investment.
21.9.1 Headquarter company regime (s 9I)

During 2010 the South African government identified the fact that South Africa may be a natural
holding company gateway for investment into Africa due to its location, sizable economy, political
stability at the time and overall strength in financial services as well as its extensive treaty network. It
introduced the headquarter company tax incentive to ensure that the tax system did not act as a
barrier to the country’s attractiveness as a regional headquarter location.
Remember
Interpretation Note No. 87 deals extensively with the headquarter company regime. This is a use-
ful resource to consult for any persons interested in using the concession or who are otherwise
affected by it.
The headquarter company regime is an elective regime that relaxes the requirements of the tax laws
for certain South African companies that are used by foreign investors as investment vehicles into
other countries (ss 9I(1) and 9I(3)). In addition to the tax concession, foreign exchange control
regulations may also be relaxed for headquarter companies (qualifying as such for exchange control
purposes).
Remember
The requirements for a company to be considered a headquarter company for exchange control
purposes are different from those in the definition of a headquarter company for tax purposes.
In brief terms, a headquarter company is one that meets all the following requirements:
l The company must be a tax resident in South Africa (see chapter 3) (s 9I(1)(a)).
l For the duration of a year of assessment, each shareholder in the company (alone or with com-
panies that form part of the same group of companies) held at least 10% of the equity shares and
voting rights in that company (s 9I(2)(a)).
l At the end of a year of assessment and all previous years of assessment, at least 80% of the cost
of the total assets of the company was attributable to equity shares in, debts owed by or
intellectual property licensed to any foreign company in which that company held at least 10% of
the equity shares and voting rights (s 9I(2)(b)).
l If the gross income of the company for the year of assessment exceeded R5 million, at least 50%
of that gross income consisted of
– rental, dividend, interest, royalty or service fees paid or payable by a foreign company in which
that company held at least 10% of the equity shares and voting rights
896
– proceeds from the disposal of any interest in the equity shares of the foreign company in which
it held at least 10% of the equity shares and voting rights or intellectual property licensed to
this company.
The following tax concessions have been made for headquarter companies:
l As discussed in 21.7, a foreign company is not classified as a CFC based on voting or participa-
tion rights held by headquarter companies or because its results are included in the consolidated
financial statements of a headquarter company (definition of ‘controlled foreign company’ in s 1).
Furthermore, a headquarter company is not required to impute any amount if it holds participation
rights in CFCs (s 9D(2)).
l Certain concessions exist for interest and royalties in respect of financial assistance and licensing
of intellectual property to the headquarter company, if it applies the financial assistance or grants
the right of use to foreign companies in which it held at least 10% of the equity shares and voting
rights (back-to-back transactions). No withholding taxes, as contemplated in 21.5.2.4 or 21.5.2.5,
apply to the royalties or interest paid to a foreign person by a headquarter company (ss 49D(c)
and 50D(1)(a)(i)(cc)). These back-to-back transactions are also not subject to transfer pricing in
South Africa (s 31(5)). The deduction of interest and royalties incurred by the headquarter
company towards foreign shareholders is, however, limited to the amounts that the headquarter
company receives in terms of the pass-through transactions (s 20C).
l Dividends paid by headquarter companies are not subject to dividends tax (s 64E(1)). These divi-
dends are taxed in the same way as foreign dividends in the hands of a resident who received it
(s 10B(1)).
l The requirements for the participation exemption are relaxed in respect of capital gains tax on the
disposal of the shares of foreign companies in which a headquarter company held at least 10%
of the equity shares and voting rights (par 64B(2) of the Eighth Schedule). Returns of capital
received from these companies must similarly be disregarded for purposes of capital gains tax
(par 64B(4) of the Eighth Schedule).
l The headquarter company is afforded some flexibility when it comes to the translation of foreign
currency amounts to rand (ss 24I(3), 25D(4) and 25D(7) as well as par 43(7) of the Eighth Sched-
ule).
A headquarter company is subject to normal tax in South Africa on any taxable income that it may
have left after the above concessions have been applied. The taxation of headquarter companies is
similar to any other resident company, as discussed in 21.6. A number of anti-avoidance rules specif-
ically apply in respect of headquarter companies. These include specific provisions that govern the
tax consequences when a company becomes a headquarter company (s 9H(3)). In addition, it is
excluded from the corporate rules, as discussed in chapter 20.
It appears as if the regime has failed to get much uptake to date.
21.9.2 Domestic treasury management companies (ss 1, 24I and 25D)

Some companies may establish one subsidiary to manage the group treasury functions free from
exchange control. The financial surveillance department of the SARB governs this concession.
A domestic treasury management company is a company that is either
l incorporated in South Africa and not subject to exchange control restrictions by virtue of being
registered with the financial surveillance department of the SARB, or
l incorporated by or under a foreign country’s laws and not subject to exchange control restrictions
by virtue of being registered with the financial surveillance department of the SARB before 1 Jan-
uary 2019.
The company must have its place of effective management in South Africa (definition of a domestic
treasury management company in s 1).
A domestic treasury management company may use a currency other than the rand as its base
currency for income tax purposes if that currency is its functional currency. A company’s functional
currency is the currency of the primary economic environment in which it conducts its business oper-
ations (definition of functional currency in s 1). A domestic treasury management company that uses
a functional currency other than rand must translate any amounts that accrue to or are received by
such a domestic treasury management company or that it incurs in its functional currency to rand at
the average rate for the year of assessment (s 25D(7)). It must also translate any amounts received or
accrued or expenditure incurred in a currency other than its functional currency to that functional
currency and then translate this amount to rand at the average exchange rate for the year of assess-
ment (s 25D(5)). Such a company’s functional currency is considered to be its local currency to
determine exchange gains or losses in terms of s 24I (par (e) of the definition of local currency in
s 24I(1)).
897
22 Farming operations
Alta Koekemoer and Marese Lombard

l identify when a person is farming and what constitutes farming income
l calculate the taxable income of a farmer in accordance with s 26 of the Income Tax
Act and the provisions of the First Schedule
l apply the special provisions of the First Schedule relating to livestock of a farmer
l apply the special provisions of the First Schedule and the Income Tax Act relating
to the capital expenditure of a farmer
l calculate the taxable income of a farmer using the special drought provisions avail-
able in par 13 of the First Schedule
l calculate the tax payable by a plantation farmer using par 15 of the First Schedule
l calculate the tax payable by a sugar cane farmer using par 17 of the First Schedule
l calculate the tax payable by a farmer using average rating formula of par 19 of the
First Schedule
l calculate the taxable income of a farmer in the event of his death or his other
cessation of farming activities.
Contents
Page
22.1 Overview ......................................................................................................................... 900
22.2 Framework for the calculation of taxable income of a farmer ........................................ 900
22.3 Meaning of ‘farming operations’ (s 26 and par 12) ........................................................ 902
22.4 Subsidies (par 12(1) and s 1 and 17A(1))...................................................................... 903
22.5 Livestock and produce (paras 2 to 11) .......................................................................... 903
22.5.1 Valuation of livestock and produce (paras 4, 5, 6 and 9)................................ 904
22.5.2 Livestock ring-fencing provision (par 8) .......................................................... 906
22.5.3 Recoupment (par 11) ....................................................................................... 907
22.6 Farming expenditure and allowances (s 11, 17A and 23, and paras 12 and 15) ......... 908
22.7 Development expenditure (par 12 of the First Schedule and par 20 of the Eighth
Schedule) ....................................................................................................................... 909
22.7.1 Recoupment of development expenditure (par 12) ........................................ 911
22.7.2 Purchase and sale of a farm (par 12) .............................................................. 912
22.8 Section 12B: ‘50/30/20’ allowance ................................................................................. 912
22.9 Average rating formula (par 19) ..................................................................................... 914
22.9.1 Who may make the election? (par 19) ............................................................. 915
22.10 Cessation of farming (s 26) ............................................................................................ 916
22.11 Commencement or recommencement of farming (par 4(1)(b)) .................................... 918
22.12 Death of a farmer (par 3 and ss 9HA and 9HB) ............................................................. 918
22.13 Partnerships .................................................................................................................... 919
22.14 Cessation of farming on sale of land to the state (par 20) ............................................. 919
22.15 Drought, stock disease, damage to grazing by fire or plague, and
livestock-reduction schemes (paras 13 and 13A) ......................................................... 921
22.16 Plantation farmers (paras 14 to 16, 20) .......................................................................... 921
22.16.1 Plantation farmers: Rating formula (par 15) ..................................................... 923
899
Page
22.17 Sugar cane farmers: Disposal of sugar cane damaged by fire (par 17) ....................... 925
22.18 Game farmers ................................................................................................................. 925
22.19 Capital gains tax (Eighth Schedule) ............................................................................... 926
22.20 Diesel rebate for farming operations (s 75 and Schedule 6 to the Customs and
Excise Act 9 of 1964)...................................................................................................... 927
22.21 Detailed examples calculating taxation payable by farmers ......................................... 927
22.1 Overview
A person carrying on pastoral, agricultural or other farming operations is regarded as carrying on ‘farm-
ing operations’ for tax purposes. Persons carrying on farming operations are taxed in accordance with
the ordinary provisions of the Act, but the calculation will be subject to the First Schedule (s 26(1)). The
First Schedule contains some provisions that are specifically aimed at persons carrying on farming
operations. The First Schedule is applicable even when a taxpayer discontinues farming operations
(s 26(2)).
Apart from these special provisions, farmers are subject to tax in the same way as other taxpayers.
Their taxable income from the carrying on of farming operations is included with their income from
other sources to determine their taxable income for the year of assessment.
A loss arising from the operation of pastoral, agricultural or other farming operations may be taken
into account in the calculation of an assessed loss (s 20). All natural persons carrying on farming
operations are provisional taxpayers.
The interaction between s 26 of the Act and the First Schedule is illustrated in Figure 22.1.
Person deriving income from ‘farming operations’
Taxable income from ‘farming operations’ is calculated

in the same manner any other person’s taxable income
(in terms of the Income Tax Act) but it is subject to the
provisions of the First Schedule.
Income and expenditure not relating to ‘farming

operations’ are recorded in the same return, but have to
be shown separately.
Figure 22.1: The interaction between the main Act and the First Schedule
Except where otherwise stated, references to paragraphs in this chapter are references to paragraphs
of the First Schedule.
22.2 Framework for the calculation of the taxable income of a farmer

Income
Sales: Produce (see 22.5) ............................................................................................... Rxxx
Livestock (see 22.5) .............................................................................................. xxx
Forced sales: Drought (see 22.15)
l Tax in year of sale – par 13
l Tax in Year 6 or on withdrawal – par 13A
Private consumption at cost (if not available, then market value) (see 22.5.3) ................................... xxx
Donations at market value (see 22.5.3) ............................................................................................... xxx
Employees’ rations at market value (see 22.5.3) ................................................................................. xxx
Subsidies (see 22.4) ............................................................................................................................ xxx
Recoupments: Sections 8(4) and par 12(1B) recoupments (see 22.8)
Claimed under ss 11(e), 12B and par 12 (50/30/20) (see 22.8) ........................... xxx
Total farming income for par 8 purposes ............................................................................................. Rxxx
Closing stock: Produce at market value (excluding standing crops and wool on sheep)
(see 22.5.1) ........................................................................................................... xxx
Livestock at standard values (see 22.5.1) ............................................................ xxx
Note: No consumables and spares!
continued
900
22.2 Chapter 22: Farming operations
Total farming income after closing stock ............................................................................................. Rxxx

Less: Total farming expenses .............................................................................................................. (xxx)
Expenses
Opening stock: Produce at market value (excluding standing crops and wool on sheep)
(see 22.5.1) .......................................................................................................... (xxx)
Livestock at standard values (see 22.5.1) ............................................................ (xxx)
Inheritance/Donation at market value (see 22.5.3) ............................................... (xxx)
Purchases: Livestock (par 8): Tests 1 and 2 (see 22.5.2)........................................................ (xxx)
l Test 1: Total farming income – see 22.5.1 ........................................ Rxxx
Plus: Closing stock at standard value .................................. xxx
Less: Opening stock at value per par 4 ............................... (xx)
Deduction limited to .............................................................. Rxxx
Carry excess over to Test 2
l Test 2: Excess after Test 1 ............................................................... Rxxx
Plus: Opening stock at value per par 4 ................................ xx
Less: Closing stock at market value ..................................... (xx)
Additional deduction ............................................................. Rxxx
Carry excess over to next year
(Purchases: Drought (Forced sale) – Include at par 8 test above) (see 22.15)
Year of sale
Choice:
Year of purchases
(see 22.15 for the detail of the above choice)
General farming expenses (see 22.6) ................................................................................................. (Rxxx)
l Feed purchased
l Seeds and fertiliser
l Veterinary expenses
l Wages
l Employer’s contributions to retirement funds and medical funds
l Salaries
l Employees’ rations at market value
Capital allowances (see 22.8):
Section 11(e): Wear-and-tear allowance ...................................................................................... (xxx)
Binding ruling 7: Rates
Vehicles used to transport people
Office equipment
Section 12B: 50/30/20 capital allowance ................................................................................... (xxx)
Machinery, implements, articles used by the farmer in the carrying
on of farming operations
Net farming income ............................................................................................................................. xxx
Plus: Capital gain on farming assets (see 22.19, note 1) .................................................................... xxx
Less: Capital development expenses (see 22.7)
Par 12(1)(a) and (b): Soil erosion ................................................................................................ (xx)
Noxious .............................................................................................. Rxx (xx)
Net farming income after soil erosion and noxious plants (can create a loss) ............................ xxx
Par 12(1)(c) to (i): Development expenditure:
Balance forward (previous year disallowed) ..................................... xx
Less: Par 12
– Recoupments in current year ........................................................... (xx)
Deduct: net balance carried forward/ add net recoupment ............. (xx)
Less: Current year expenditure
Fences ................................................................................... xx
Irrigation scheme................................................................... xx
Roads .................................................................................... xx
Dipping tanks ........................................................................ xx
Trees ..................................................................................... xx
Electric power........................................................................ xx
xx
Limited to net farming income before this deduction .................................................................. (xx) (xx)
Taxable farming income ......................................................................................................................... Rxxx
continued
901
Tax calculation
Taxable farming income ......................................................................................................................... Rxx
Other income: Salary ....................................................................................................................... xx
Pension .................................................................................................................... xx
Lump sums .............................................................................................................. xx
Interest ..................................................................................................................... xx
Rent .......................................................................................................................... xx
Rxx
Exemptions: Interest (s 10(1)(i)(xv) – natural persons) (see chapter 8) ....................................... (xx)
Rxx
Deductions: Pension, Provident & Retirement annuity funds contributions (see chapter 7) ........ (xx)
Plus: Capital gain on non-farming assets (see 22.19) ............................................................................ xxx
Deductions: Donations to Public Benefit Organisations (see chapter 7) .................................... (xx)
Total taxable income .............................................................................................................................. Rxxx
Note 1
Paragraph 12(3) is not clear whether any taxable capital gain from the disposal of farming assets
should be included in ‘net farming income’ for the purpose of the par 12 limitation.
22.3 Meaning of ‘farming operations’ (s 26 and par 12)

The special provisions of the First Schedule only apply when the taxpayer is carrying on farming
operations (s 26(1)). There is no definition of the expression ‘farming operations’ in the Act. The
question whether a person is carrying on farming operations is one of fact.
In ITC 1319, Smalberger J stated (at 264):
It seems . . . that before a person can be said to carry on farming operations there must be a genuine inten-
tion to farm, coupled with a reasonable prospect that an ultimate profit will be derived . . .
There must be a direct connection between the farming operations and the income under considera-
tion. If a farmer invests surplus funds, even funds derived from farming operations, the interest re-
ceived on the investment would not usually be regarded as income derived from farming operations.
If the interest received forms part of a purchase price (for example interest levied on the late payment
for the purchase of livestock), it will constitute farming income.
In ITC 586, a taxpayer acquired cattle and grazed them on a farm for periods varying between six
weeks and six months before selling them. The Special Court drew a distinction between this type of
farming operation and the business of a speculator in livestock. The taxpayer was carrying on farm-
ing operations and the taxpayer was not merely speculating with livestock.
In practice, grazing fees are regarded as having been derived from farming operations.
The letting of a farm for a cash rental is not the carrying on of a farming operation, because the rental
a lessor receives is not derived from farming operations but from the ownership of the land. If, how-
ever, the income derived from the rental is a percentage of farming income, this income would consti-
tute farming income for the lessor. A farmer engaged in the breeding of thoroughbred horses is
considered to be carrying on farming operations but the business of horse-racing is not a farming
operation.
The wording ‘farming operations’ includes only activities connected with what
a farmer derives from his land. He need not be the owner of the land, but he
Please note! must enjoy a right to it and its yield. Only then is he a farmer for the purposes
of the First Schedule.
Taxable income derived from ‘farming operations’

The phrase ‘taxable income derived from farming operations’ requires that the taxable income refer-
red to must arise or accrue directly from farming operations (s 26(1)). There must be a direct connec-
tion between the income and the farming operations.
Taxable income derived from farming operations include:
l Livestock and produce taken into account in the determination of taxable income.
902
22.3–22.5 Chapter 22: Farming operations
l Deemed recoupments included in a farmer’s income in terms of paras 12(1B) and 12(1C).
l The amount of any excess development expenditure that is added back to farming income under
par 12(3).
l The income of a farmer who carries on a manufacturing process and uses mainly his own farming
produce as the raw materials in the manufacturing process.
l The value of livestock or produce that the farmer lets in terms of a sheep lease or similar agree-
ment. This will also include proceeds derived from the outright disposal by the farmer of livestock
or produce subject to such an agreement.
l A farmer who has discontinued farming operations but retained possession of livestock or pro-
duce and let it in return for a cash rental or under a sheep lease (s 26(2) and par 3(2), (3)). (The
livestock or produce must continue to be taken into account in terms of the First Schedule. The
rentals received would not form part of taxable income derived from farming operations.)
Items not included in taxable income derived from farming operations are:
l Rentals received from the letting of farming assets, because it is not received due to any farming
operation carried on but by virtue of the farmer’s ownership of the land or the farming assets.
l Rentals received from the letting of livestock, since the letting of animals is not ordinarily a farm-
ing operation.
l The manufacturing income of a farmer who is carrying on two distinct trades, namely farming and
manufacturing. Separate statements of comprehensive income for his farming operations and his
manufacturing business must be compiled. The farming product is to be charged to the manufac-
turing department at a current market price as if the two trades were conducted by two separate
taxpayers. In this way, the farmer may return a taxable income derived from farming operations and
may therefore claim the allowances for expenditure on development and improvements.
22.4 Subsidies (par 12(1) and ss 1 and 17A(1))

An amount received by or accrued to a farmer by way of a grant or subsidy in respect of
l soil-erosion works referred to in s 17A(1), or
l expenditure on farming development and improvements referred to in par 12(1)(a) to (i)
will be included in the farmer’s gross income by virtue of par (l ) of the definition of ‘gross income’ in
s 1. For example, a subsidy received by a farmer on the cost of the construction of a dam would be
included in his gross income.
If a subsidy in respect of interest is received by or accrued to a farmer, it will form part of the gross
income of the farmer.
Subsidies received for farming products produced or exported constitute taxable income derived
from farming operations. In practice, the SARS regards subsidies received for the construction of
capital works as constituting taxable income derived from farming operations. The subsidy is taxed in
the year of its receipt or accrual even though the capital expenditure to which it relates has not yet
been deducted.
22.5 Livestock and produce (paras 2 to 11)

The value of all opening stock (livestock and produce) held and not disposed of at the beginning and
end of each year of assessment must be included in a farmer’s tax return (par 2).
The value of closing stock (livestock or produce) at the end of the year of assessment must be in-
cluded in income for that year of assessment. This amount is deemed to be the value of his opening
stock for the following year (par 4(1)(a)(i)). The value of opening stock (livestock and produce) at the
beginning of the year of assessment will be allowed as a deduction from income in that year
(par 3(1)).
All livestock and produce used by a farmer in his farming operations are regarded as non-capital in
nature, irrespective of the purpose for which they may have been acquired. All livestock acquired by
a farmer are therefore regarded as non-capital in nature and will be included in opening and closing
stock. This will be the case even though livestock is acquired as a capital asset (such as cows for a
dairy farmer) that is not held for resale. The purchase of the livestock would therefore be deductible
in terms of s 11(a), subject, however, to the ‘livestock ring-fencing provisions’ (par 8, see 22.5.2). Any
proceeds on a subsequent disposal, even if realised on the abandonment of farming operations,
would be taxable.
903
Livestock that is held by the farmer purely for private or domestic purposes, which does not form part
of his farming operations, will not be included in opening and closing stock.
Consumable stores on hand at the end of the year of assessment are not required to be included in
taxable income. Stocks of fuel, spare parts for equipment and machinery, spraying materials, fertil-
izers, packing materials and other stores that cannot be regarded as produce are not included in
closing stock.
The word ‘produce’ is not defined in the Act. Crops that have not reached the stage of being con-
verted into produce having a saleable or marketable value (growing crops) cannot be regarded as
‘produce held’. Only produce that has been harvested and is marketable needs to be included in the
return. Growing crops and wool on the sheep’s back need not be included in the value of closing
stock.
Both a farmer’s own produce and produce acquired from others for farming purposes are included in
‘produce’. In practice, a farmer is required to bring into account all produce on hand at the end of the
year of assessment. This can include produce grown or produced by him or acquired from other
farmers for the purpose of feeding his livestock or supplementing his own stocks of produce avail-
able for sale.
The lessor of a sheep lease or similar agreement must treat the livestock or produce as his own stock
for as long as the agreement continues to be in force. This will be the case even though ownership is
effectively transferred to the lessee (par 3(3)).
Natural increases in livestock during a year of assessment are automatically brought into account,
since the proceeds are included in income if sold during the year of assessment. Or, if they are not
sold, their value is included in the closing stock on hand at the end of the year.
Livestock losses due to the death or theft of animals during a year of assessment are excluded from
closing stock and therefore excluded from the income of a farmer.
Section 22 (see chapter 14) applies to the trading stock of ordinary traders, but
Please note! does not apply to farmers. Farmers have only two types of stock: ‘livestock’ and
‘produce’.
22.5.1 Valuation of livestock and produce (paras 4, 5, 6 and 9)

Closing stock of livestock will be valued at standard values applicable to that livestock (par 5(1)).
Legislation requires the valuation to be included at standard values even though they are substantial-
ly lower than the market values of livestock. If no standard value is provided for a specific specie, it is
deemed that the closing value of the livestock is nil.
The standard value of any class of livestock of a farmer is either
l the standard value fixed for that class of livestock by regulation under the Act, or
l any other standard value adopted by the farmer when including a particular class of livestock in
his income for the first time (par 6(1)(b), (c) and (d)).
The standard value adopted by a farmer that is not fixed by regulation may not be more than 20%
higher or lower than the standard value fixed by regulation for livestock of the relevant class.
Once a farmer adopts a value for a particular class of livestock, he is prohibited from altering that
value at a later date.
The value to be placed upon closing stock of produce included in any return is a fair and reasonable
value of the produce (par 9). In practice, SARS requires that produce be valued at the lower of its
average cost of production or market value. The average cost of production is based on the farmer’s
actual costs, excluding the cost of purchases of livestock and expenditure on development and
improvements. This basis would also apply to produce purchased from outside sources.
When a farmer acquires livestock or produce during a year of assessment by way of donation or
inheritance, it will have the following effect on opening stock:
l The market value of that livestock or produce is added to his opening stock. This rule applies
whether the farmer carried on farming in the previous year of assessment or commenced or rec-
ommenced farming operations during the current year (par 4(1)(a) and (b)). In practice, SARS
applies this provision only when the livestock or produce received by way of donation or inher-
itance is used or held for the purpose of farming.
904
l The proceeds of the disposal of such livestock or produce will be of a capital nature if it is imme-
diately disposed of and not used for the purpose of farming. There would then also be no open-
ing stock (there may be a CGT implication).
l Should a farmer merge the livestock or produce so acquired into his general farming activities,
the proceeds arising on the sale of that livestock or produce will be included in his income. If it is
unsold at the end of the year, its standard value will be included in his closing stock.
The standard values fixed by regulation are as follows:
Standard
Classification Values
R
Cattle –
Bulls ................................................................................................................................................... 50
Oxen .................................................................................................................................................. 40
Cows .................................................................................................................................................. 40
Tollies and heifers –
Two to three years .............................................................................................................................. 30
One to two years ................................................................................................................................ 14
Calves ................................................................................................................................................ 4
Sheep –
Wethers .............................................................................................................................................. 6
Rams .................................................................................................................................................. 6
Ewes .................................................................................................................................................. 6
Weaned lambs ................................................................................................................................... 2
Goats –
Fully grown ......................................................................................................................................... 4
Weaned kids ...................................................................................................................................... 2
Horses –
Stallions, over four years .................................................................................................................... 40
Mares, over four years ....................................................................................................................... 30
Geldings, over three years ................................................................................................................. 30
Colts and fillies, three years ............................................................................................................... 10
Colts and fillies, two years.................................................................................................................. 8
Colts and fillies, one year ................................................................................................................... 6
Foals, under one year ........................................................................................................................ 2
Donkeys –
Jacks, over three years ...................................................................................................................... 4
Jacks, under three years ................................................................................................................... 2
Jennies, over three years ................................................................................................................... 4
Jennies, under three years................................................................................................................. 2
Mules –
Four years and over ........................................................................................................................... 30
Three years ........................................................................................................................................ 20
Two years ........................................................................................................................................... 14
One year ............................................................................................................................................ 6
Ostriches, fully grown ............................................................................................................................ 6
Pigs –
Over six months ................................................................................................................................. 12
Under six months (weaned) ............................................................................................................... 6
Poultry, over nine months ...................................................................................................................... 1
Chinchillas, all ages .............................................................................................................................. 1
Example 22.1. Livestock and produce

A cattle farmer has adopted the following standard values for the various classes of cattle on his
farm:
Bulls ........................................................................................................................ R60 each
Oxen ....................................................................................................................... R35 each
Cows ....................................................................................................................... R35 each
Tollies and heifers (over one year and under two years) ........................................ R12 each
Calves (under one year) ......................................................................................... R4 each
The number of livestock on hand on the last day of February Year 1 was as follows:
Year 1
Bulls ................................................................................... 7
Oxen .................................................................................. 8
Cows .................................................................................. 350
Tollies and heifers .............................................................. 380
Calves ................................................................................ 180
Calculate the value of livestock on hand at the end of Year 1.
905
SOLUTION
The value of livestock on hand at the end of Year 1 is calculated as:
7 bulls at standard value R60 .......................................................................................... R420
8 oxen at standard value R35 .......................................................................................... 280
350 cows at standard value R35 ..................................................................................... 12 250
380 tollies and heifers at standard value R12 .................................................................. 4 560
180 calves at standard value R4 ..................................................................................... 720
Value of livestock on hand at the end of Year 1............................................................... R18 230
This value must be included in income at the end of Year 1 and is deemed to be the value of
opening stock in Year 2.
22.5.2 Livestock ring-fencing provision (par 8)

A farmer’s cost of his purchases of livestock is deductible for tax purposes but the deduction might
be limited (s 11(a) and par 8). This prevents farmers from creating a large farming loss with the
purchase of livestock. This is due to the fact that closing stock is included at standard values at year-
end while the deduction allowed for the purchase is at acquisition cost, which is generally much
higher (s 11(a)). The value of the closing stock included in taxable income is therefore substantially
lower than the deduction of the purchase costs (market values) and can potentially create a large
farming loss.
The limit contained in par 8 consists of two parts and can be illustrated as follows:
Part 1: Limits the amount that is allowed as a deduction, to (par 8(1)):
Farming income for the year ................................................................................................... Rxxx
Add: Closing stock @ standard values ................................................................................... xxx
Less: Opening stock @ value per par 4 .................................................................................. (xxx)
Expenditure deductible – s 11(a) ............................................................................................ Rxxx
Part 2: Allows a further deduction (par 8(3)) if the market value of the closing stock ex-
ceeds the sum of the disallowed portion (of part 1) and the opening stock at standard
value.
Expenditure disallowed (purchase cost less part 1 limit) – s 11(a)......................................... Rxxx
Add: Opening stock @ value per par 4 ................................................................................... xxx
Less: Closing stock @ market value........................................................................................ (xxx)
Additional expenditure allowed............................................................................................... Rxxx
A further deduction in terms of part 2 is available only when there was a reduction in the market
value of closing stock.
Opening stock of livestock is defined in par 4 and will therefore also include the market value of
livestock inherited or donated as well as the market value of livestock on hand when a farmer com-
mences with farming operations. See 22.5.1.
An amount that is disallowed under this provision is carried forward and deemed to be expenditure
incurred by the farmer on the acquisition of livestock during the next year of assessment (par 8(2)).
The limitation will not apply to the cost of livestock that is no longer held and not disposed of by him at
the end of the year of assessment (s 8(3)(a)). A farmer who disposed or lost his entire herd will therefore
be unaffected by the limitation.
This limitation on the deduction of the cost of livestock purchases is based upon a farmer’s income
derived from farming. The term ‘income’ represents
l the farmer’s gross income from all farming activities (which would exclude receipts and accruals
of a capital nature or from a foreign source)
l less any exempt income associated with farming, and
l before any expenses, whether allowable or not.
906
Example 22.2. Livestock and produce: Ring-fencing provision

A farmer had the following livestock on hand at the beginning of the year of assessment.
10 bulls at standard value R50 each ...................................................................... R500
25 oxen at standard value R40 each ...................................................................... 1 000
1 200 cows at standard value R40 each ..................................................................... 48 000
600 tollies and heifers at standard value R30 each ................................................. 18 000
140 calves at standard value R4 each ..................................................................... 560
R68 060
He bought a further 300 cows during the year at a cost of R220 000. He derived an income from
farming operations (before the deduction of any expenditure) of R55 000 during the year. He had
the following livestock on hand at the end of the year of assessment:
9 bulls at standard value R50 each ............................................................................... R450
23 oxen at standard value R40 each ............................................................................. 920
1 400 cows at standard value R40 each........................................................................ 56 000
500 tollies and heifers at standard value R30 each ....................................................... 15 000
220 calves at standard value R4 each........................................................................... 880
R73 250
All the livestock bought during the year was still on hand at the end of the year. The market value
of the livestock on hand at the end of the year of assessment was R1 million.
Calculate the deduction that will be allowed under s 11(a) for the cows bought during the year of
assessment.
SOLUTION
The deduction for cows bought is limited to an amount determined as follows in terms of par 8:
Farming income + standard value of closing stock of livestock – standard value of opening stock
of livestock
= R55 000 + R73 250 – R68 060
= R60 190
Consequently, the excess of R159 810 (R220 000 – R60 190) may not be deducted in the current
year. However, the ring-fencing provision does not apply to so much of the amount of R159 810
as, together with the standard value of livestock on hand at the beginning of the year of assess-
ment (R68 060), exceeds the market value of all the livestock on hand at the end of the year of
assessment (R1 million). Since there is no such excess, the limitation on the deduction applies,
and the amount of R159 810 must be carried forward and deemed to be expenditure incurred in
the next year of assessment.
22.5.3 Recoupment (par 11)

A recoupment arises if during a particular year of assessment livestock or produce has been
l applied by the farmer for his private or domestic use or consumption
l removed by the farmer from South Africa for purposes other than producing income from sources
within South Africa
l donated
l disposed of, other than in the ordinary course of his farming operations, for a consideration less
than market value
l distributed as a dividend in specie to a holder of a share in such a company, or
l applied for a purpose other than disposal in the ordinary course of his farming operations and
under circumstances other than those referred to above.
The cost price of livestock or produce applied for the farmer’s private or domestic use or consump-
tion must be included in his income for that year of assessment. If the cost price cannot be readily
determined, the market value of the livestock or produce must be included in his income (paras 11(a)
and (A)).
In the other abovementioned scenarios, the market value of livestock or produce must be included in
the farmer’s income for that year of assessment (paras 11(b), (c) and (B)). If livestock or produce is
disposed of for a consideration less than its market value, the market value less the consideration
received must be included in income (proviso (b) to par 11).
907
The value of livestock and produce used by the farmer as rations for his farm employees is effectively
not taxable. The market value of this livestock or produce must be included in income (par 11(c)(iv)),
as well as in deductible expenditure (proviso (a) to par 11). Since both transactions have exactly the
same value, the net effect is neutral.
The market value of livestock or produce donated by the farmer will also be subject to donations tax,
unless the donation is exempt (see chapter 26). Property disposed of for a consideration that is not
an adequate consideration will be deemed to have been disposed of as a donation for the purposes
of donations tax.
The recoupment can be illustrated as follows:

Livestock or produce applied for private or domestic use ............. Recoupment at cost
Livestock or produce applied as donation ..................................... Recoupment at market value
Livestock and produce given as rations to farm employees .......... Recoupment at market value
22.6 Farming expenditure and allowances (ss 11, 17A, and 23 and paras 12
and 15)
While the First Schedule makes certain deductions available exclusively to farmers, the allowable ex-
penditure of a farmer is otherwise subject to the same rules that apply to all other taxpayers.
Examples of deductible farming expenditure in terms of s 11(a) are the
l purchase of livestock (whether acquired for resale or use in farming as permanent assets, for
example animals acquired for breeding)
l hire of farming land
l animal feed, fertilisers and manure
l wages of farm employees (wages paid to employees employed in the construction of the capital
works set out in par 12 cannot be claimed as revenue expenses but must be regarded as part of
the cost of the capital works and are deductible to the extent set out in terms of par 12)
l rations bought for employees (this includes the market value of livestock given to employees as
rations)
l seeds, plants and trees. In practice, the cost of seeds and plants is allowed as a deduction even
when annual cropping does not involve the destruction of the plant. The cost of plantations and
their establishment is deductible (par 15). Expenditure incurred on the planting of trees, shrubs or
recurrent plants is deductible (par 12(1)(g))
l expenses for clearing land, provided that income is derived from farming in the year in which the
expenditure is incurred. The cost of the eradication of noxious plants is deductible in terms of
par 12(1)(a)
l veterinary surgeon’s fees for services rendered to animals and medicine for animals
l rates and taxes
l packing materials (for example grain-bags, wool-packs, and binding wire)
l medical services for employees
l interest on loans or bank overdrafts used for farming purposes, and
l travelling and entertainment expenses in terms of s 11(a).
A farmer is entitled to claim the special deductions granted to all other taxpayers, such as the deduc-
tions for repairs (s 11(d)) and lease premiums (s 11(f)). The wear-and-tear (s 11(e)) and s 11(o) allow-
ances are available only on items excluded from the deduction for development expenditure but
used by the farmer for the purposes of his trade. If the farmer is also involved in manufacturing, all
the appropriate allowances for those activities are available to him in the same way as to any other
taxpayer (s 12C).
A farmer, like any other taxpayer, is prohibited from claiming a deduction for his personal or domestic
expenditure (s 23(a) and (b)), such as the cost of repairs to his private homestead or the wages and
rations of his domestic servants.
Lessors of land let for farming purposes are entitled to a deduction of expenditure incurred on ‘soil
erosion works’ in terms of s 17A, subject to the following conditions:
l Pastoral, agricultural or other farming operations must take place on the land during the year of
assessment by the lessee.
l Expenditure must be incurred by the lessor in the construction of soil erosion works, which must
be certified by an officer designated under the Conservation of Agricultural Resources Act.
908
l The deduction is limited to the taxable income derived from letting this type of land during the
year of assessment and any excess is carried forward to the following year of assessment.
The rental included in taxable income will not be farming income because it is not linked to the les-
sor’s farming activities.
22.7 Development expenditure (par 12 of the First Schedule and par 20

of the Eighth Schedule)
The following development expenditure can be deducted in the determination of the taxable income
of a farmer in the year that the development expenditure was incurred (100% deduction subject to
limitation explained below):
(a) The eradication of noxious plants and alien invasive vegetation. Can create a loss
(b) The prevention of soil erosion. (always deductible)
(c) Dipping tanks.

(d) Dams, irrigation schemes, boreholes and pumping-plants. (‘Irrigation
schemes’ includes expenditure on water furrows and pipelines.)
(e) Fences.
(f) The erection of or extensions, additions or improvements (other than
repairs) to buildings used in connection with farming operations, but oth-
er than those used for domestic purposes.
(g) The planting of trees, shrubs or recurrent plants and the establishment Cannot create a loss
of any area used for the planting of such trees, shrubs or plants. The (limited to taxable
purchase of a farm, with existing trees or shrubs on it, would not qualify farming income
for a par 12(g) deduction. See 22.16 for detail on plantation farmers. available)
(h) The building of roads and bridges used in connection with farming oper-
ations.
(i) The carrying of electric power from the main transmission lines to the
farm apparatus or under an agreement concluded with Eskom. The
farmer must agree to bear a portion of the cost incurred by Eskom in
connection with the supply of electric power consumed by the farmer
wholly or mainly for farming purposes.
The deductible development expenditure as set out in par 12 must be incurred

l by the farmer personally, and
l in connection with his own farming operations.
The farmer need not be the owner of the farming property in order for him to be entitled to the deduc-
tion in respect of the development expenditure. No deduction is allowed on expenditure incurred on
buildings used for domestic purposes (par 12(f)).
There must be a direct relationship between the development expenditure and the capital works
listed in par 12(1). The expenditure will include the cost of labour and materials, but the cost of
machinery or other assets used to carry out the work would not qualify for deduction under par 12(1).
These assets may qualify for deduction under ss 12B or 11(e).
The total amount to be allowed as a deduction in any year of assessment under par 12(1)(c) to (i) is
limited to taxable income derived from farming operations after taking into account par 12(1)(a) and
12(1)(b) (par 12(3)). The amount of the development expenditure exceeding the taxable income must
be added back to farming income. The excess will be deemed to be expenditure incurred on
items (c) to (i) in the following year of assessment. Expenditure incurred on items (a) and (b) is not
limited and will always be fully deductible.
The amount carried forward must first be reduced in the following year by recoupments on movable
assets arising in that year. Any balance will be taken into account as expenditure in the following year
(see 22.7.1) (par 12(3B)). The amount carried forward must be reduced by the amount of any expen-
diture in respect of which the taxpayer has made an election in terms of par 20A of the Eighth
Schedule (par 12(3C)).
When a farmer ceases farming operations and owns property on which development expenditure
was carried out, he will be allowed to add any undeducted amount of development expenditure to
the property’s base cost. This increase in the base cost of the asset is subject to certain limitations
(par 20A of the Eighth Schedule).
909
The deductions allowed in terms of par 12(1)(c) to (i) are limited to the taxable
income from farming operations. According to the CGT guide (par 23.4.6) that
was issued by SARS, the taxable income from farming operations will not include
Please note! capital gains realised on assets not forming part of the farming operations. This
implies that capital gains made on the disposal of farming assets will be included
in the taxable income from farming. However, the IT12 return does not currently
make provision for this scenario. It is likely that the farmer will have to raise an
objection once the assessment is issued. Most likely, a manual intervention from
SARS will be required to correct the assessment.
When a farmer ceases farming operations in any year of assessment, he is no longer entitled to carry
forward any excess development expenditure. If farming recommences in a subsequent year, it is
submitted that the carrying forward of the development expenditure to that year will not be allowed. If
the farmer continues to carry on farming operations on another farm, he is entitled to carry forward
any excess development expenditure. A full year of assessment during which the farmer does not
carry on farming operations must pass before the farmer will lose the right to carry the expenditure
forward.
Non-farm trade expenditure on land conservation and maintenance that falls within the par 12(1)(a),
(b), (d) or (e) development expenditure categories, could also qualify for a deduction if (par 12(1A))
l incurred in terms of a management agreement that will last for a minimum of five years
l in terms of the s 44 of the National Environmental Management: Biodiversity Act 10 of 2004, and
l the taxpayer will use the land or other land in the immediate proximity (for example adjacent,
across the road) for the carrying on of farming operations.
The deductions in terms of par 12(1A) will also be limited to income derived by the taxpayer from farm-
ing operations. A breach of the biodiversity management agreement by the taxpayer will result in a
recoupment of all par 12(1A) deductions within the last five years before the breach (par 12(1D).
Example 22.3. Development expenditure

The following information illustrates the treatment of surplus development expenditure:
Current farming income before any development expenditure ...................................... R40 000
Less: Current expenditure on items (a) and (b) ............................................................ (9 000)
Preliminary farming taxable income ........................................................................... R31 000
Less: Balance of expenditure on items (c) to (i) not deducted in the
past .................................................................................................. (R33 000)
Plus: Recoupment on movable assets (par 12(3B)) ........................ 5 000
Less: Current expenditure on items (c) to (i) ................................... (11 000)
(39 000)
Excess ........................................................................................................................ (R8 000)
Excess added back to farming income (note 1) ............................................................. 8 000
Final farming income....................................................................................................... Rnil
Non-farming income ....................................................................................................... 5 000
Taxable income .......................................................................................................... R5 000
Note
(1) The excess added back to farming income of R8 000 will be deemed to be development
expenditure incurred on items (c) to (i) in the following year of assessment.
(2) If, instead of preliminary farming income, there was a loss of R31 000, all the past and cur-
rent expenditure on items (c) to (i), totalling R39 000, would have been disallowed. The final
farming income would have been a loss of R31 000, and the assessed loss would have
been R26 000 (R31 000 – R5 000). The R39 000 would then have been deemed to be ex-
penditure incurred on items (c) to (i) in the following year of assessment.
When development expenditure is allowable under par 12(1) for any machinery, implements, utensils
or articles or for capital expenditure on scientific research, the farmer may not claim a wear-and-tear
allowance under s 11(e) (or similar provision in a previous Income Tax Act) or an alienation, loss or
destruction allowance under s 11(o) for those items (par 12(2)).
Paragraph 12 expenditure is deducted before taking into account any assessed

Please note! loss (in terms of s 20) brought forward from the previous year of assessment or
from any other trade carried on by the taxpayer (CIR v Zamoyski (1985 C)).
910
Example 22.4. Development expenditure

A farmer has incurred the following expenditure on development and improvements:
Year of assessment
1 2
New dam.................................................................................................... R82 000 –
Dipping tank .............................................................................................. – R5 000
Fences ....................................................................................................... 5 000 2 000
Eradication of noxious plants ..................................................................... 1 000 1 500
Prevention of soil erosion ........................................................................... 15 000 10 000
Electricity lines ........................................................................................... – 6 000
Road construction ...................................................................................... 5 000 30 000
R108 000 R54 500
The taxable income derived from farming operations before the deduction of any of the devel-
opment expenditure specified above was as follows:
Year of assessment 1..................................................................................................... R75 000
Year of assessment 2..................................................................................................... R160 000
Calculate the farmer’s taxable income from farming in each year of assessment.
SOLUTION
Year of assessment 1
Taxable income before development expenditure ......................................................... R75 000
Less: Expenditure falling under par 12(1)(a) and (b)
Eradication of noxious plants .......................................................... R1 000
Prevention of soil erosion................................................................. 15 000
(16 000)
Preliminary farming taxable income ............................................................... R59 000
Less: Expenditure falling under par 12(1)(c) to (i) ..................................................... (92 000)
Excess ......................................................................................................................... (R33 000)
Excess added back to farming income ....................................................................... 33 000
Taxable income from farming ...................................................................................... Rnil
Excess development expenditure to be carried forward to Year 2 ............................. R33 000
Year of assessment 2
Taxable income before development expenditure ...................................................... R160 000
Less: Expenditure falling under par 12(1)(a) and (b)
Eradication of noxious plants .......................................................... R1 500
Prevention of soil erosion................................................................. 10 000
(11 500)
Preliminary farming taxable income............................................................................. R148 500
Less: Expenditure falling under par 12(1)(c) to (i)
Excess development expenditure brought forward from Year 1 ..... R33 000
Current expenditure (54 500 – 11 500)............................................ 43 000
(76 000)
Taxable income from farming ...................................................................................... R72 500
22.7.1 Recoupment of development expenditure (par 12)

The deductions allowed to a farmer under par 12 are not subject to taxation if recovered or recouped.
This is because the recoupment provision contained in s 8(4)(a) does not extend to expenditure
deducted in terms of the First Schedule.
When a farmer disposes of a movable asset for which a capital development expenditure deduction
has been allowed under par 12(1) or par 12(1A), he must include the amount derived in his income.
This recoupment will be limited to the expenditure allowed on the movable asset (par 12(1B)(a)).
When a movable asset is disposed of by the farmer to any other person
l by way of donation, or
l for a consideration that is not an adequate consideration or is not readily capable of valuation,
911
the farmer is deemed to have received a consideration equal to the fair value of the asset, limited to
the cost to him of the asset. The same amount is deemed to have been paid by the person acquiring
the asset from the farmer (par 12(1C)).
If a farmer has a recoupment of development expenditure, the recoupment will first be set off against
any excess development expenditure carried forward from a previous year of assessment (par 12(3B)).
Any excess development expenditure that remains after the set-off of the recoupment must be treat-
ed as development expenditure incurred during the current year (par 12(3)). If the amount recouped
exceeds the excess development expenditure carried forward from a previous year of assessment,
the balance must be recouped in terms of par 12(1B) and added to the farmer’s income.
Example 22.5. Recoupment of development expenditure

A farmer’s current farming income is R36 000 and his current capital expenditure on items (c) to
(i) of par 12 is R7 000. The expenditure brought forward under par 12(3) to the current year of
assessment is R8 000. The recoupment under par 12(1B) is:
(a) R2 000 (in column A), or
(b) R11 000 (in column B).
Calculate the farming income.
SOLUTION
A B
Excess development expenditure brought forward ... (R8 000) (R8 000)
Recoupment referred to in par 12(1B) ....................... 2 000
Deemed expenditure on items (c) to (i) ................. (R6 000)
Recoupment referred to in par 12(1B) ....................... 11 000
Included in income ................................................ R3 000
Taxable income before development expenditure..... R36 000 36 000
R39 000
Current farming income including net recoupment
Less: Deemed expenditure on items (c) to (i) .......... (R6 000)
Current expenditure on items (c) to (i) ............ (7 000) (R7 000)
(13 000) (7 000)
Farming taxable income ........................................ R23 000 R32 000
22.7.2 Purchase and sale of a farm (par 12)

A contract for the purchase and sale of a farm usually assigns separate values to the land, farming
buildings, orchards, vineyards or roads and bridges. No portion of the assigned amounts is deduct-
ible as capital development expenditure by the purchaser in terms of par 12(1)(f), (g) or (h). The
reason for this exclusion is that it is an express requirement of par 12(1) that the taxpayer must have
incurred the expenditure in respect of ‘the erection of buildings’, ‘the planting of trees’ and ‘the build-
ing of roads and bridges’. The seller, not the purchaser, incurred the expenditure (the purchaser
merely purchased the assets). A similar situation arises under par 12(1)(a), (b) and (i).
The requirements of par 12(1)(f), (g) or (h) that buildings be ‘erected’, trees and other items ‘planted’
and roads and bridges ‘built’ by the farmer are not found in par 12(1)(c), (d) or (e). However, in
practice SARS insists that the taxpayer shows that the dam, borehole or fencing was constructed by
him and not by someone else.
22.8 Section 12B: ‘50/30/20’ allowance

The s 12B allowance is currently available for
l machinery, implements, utensils or articles (but not livestock), including improvements to these
machinery, implements, utensils or articles, owned by the taxpayer or acquired by him as pur-
chaser under an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and
brought into use for the first time by him and used by him in the carrying on of his farming oper-
ations, except any motor vehicle whose sole or primary function is the conveyance of persons, a
caravan, an aircraft (other than an aircraft used solely or mainly for the purpose of crop-spraying)
or office furniture or equipment (s 12B(1)(f )), and
912
l machinery, plant, implements, utensils or articles including improvements to these machinery,

implements, utensils or articles, owned by the taxpayer or acquired by him as purchaser under
an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and used in his
trade for the production of bio-fuels, and brought into use for the first time by him (s 12B(1)(g)),
and
l machinery, plant, implements, utensils or articles including improvements to these machinery,
plant, implements utensils or articles owned by the taxpayer or acquired by him as purchaser
under an instalment credit agreement per the definition in par (a) of s 1 of the VAT Act and used
for the first time by him for the purposes of his trade to generate electricity from
– wind power
– from solar energy by way of:
• photovoltaic solar energy of more than 1 megawatt
• photovoltaic solar energy not exceeding 1 megawatt; or
• concentrated solar energy
– hydropower to produce electricity of not more than 30 megawatts, or
– biomass comprising organic waste, landfill gas or plant material.
l any foundation or supporting structure regarded as integrated with the machinery, plant, imple-
ments, utensils or articles including improvements to these machinery, plant, implements, utensils
or articles. The useful life of the foundation or supporting structure is or will be limited to the useful
life of the machinery, plant, implement, utensil, article or improvement mounted thereon or affixed
thereto.
This deduction will be allowed in the year of assessment during which a qualifying asset is brought
into use and in each of the two succeeding years of assessment.
The deduction is calculated on the cost of the asset to the taxpayer, and its rate is fixed as follows:
l in the year of assessment during which the asset is brought into use in the manner required, 50%
of its cost
l in the second year, 30% of its cost
l in the third year, 20% of its cost.
The deduction for a taxpayer who generates electricity for the purposes of his trade from photovoltaic
solar energy not exceeding 1 megawatt, will be 100% of its cost.
The full allowance can be claimed, even if the asset is used for only part of the year of assessment.
The allowance is available only if the asset is brought into use for the first time by the taxpayer. This
requirement does not limit the deduction to new or unused assets, but does prevent a taxpayer from
claiming the allowance for a second time on an asset that was previously brought into use by him.
Cost of asset
The ‘cost’ of the asset for the purposes of s 12B(3) is the lesser of:
l the actual cost to the taxpayer, or
l the cost under a cash transaction concluded at arm’s length on the date on which the transaction
for its acquisition was in fact concluded, plus
l the direct cost of its installation or erection.
The deemed cost therefore excludes finance charges, which are possibly deductible under s 24J.
Acquisition from connected person

No allowance in terms of s 12B will be deductible if (s 12B(4)(c)):
l the asset was previously brought into use by any other company during that year, and
l both companies are managed, controlled or owned by substantially the same persons, and
l a deduction under s 12B or 12E, that was previously granted to that other company.
Recoupment
The taxpayer can elect that the provisions of par 65 or 66 of the Eighth Schedule should apply in
order for s 8(4)(e) to provide the delayed taxation of a recoupment of the allowance (see chapter 13).
913
General
The aggregate of the deductions that may be allowed under s 12B is limited to the deemed cost of
the asset referred to above (sec 12B(5)).
The allowance under s 12B is prohibited on the following assets (s 12B(4)):
l any asset that has been disposed of by the taxpayer during any previous year of assessment, or
l any asset on which a s 12E allowance has been granted, or
l any asset that has been disposed of in terms of an instalment credit agreement where the seller
retains ownership of an asset, or
l in the case of an asset that is let in terms of a lease that is not an operating lease, unless
– the lessee derives income from the carrying on of his trade, and
– the period for which the asset is let under the lease must be at least five years or the asset’s
useful life (if shorter than five years).
Deductions under s 12B are subject to inclusion in income if recovered or recouped (s 8(4)(a)) and
are taken into account in the calculation of any alienation, loss or destruction allowance (s 11(o)).
A farmer who uses machinery or plant in a manufacturing process such as the canning of fruit and
uses mainly his own farming produce will be able to claim a deduction under s 12B. If he acquires
the materials for his manufacturing process mainly from outside sources, however, SARS accepts
that he is carrying on two distinct trades. The machinery used in the canning process will then qualify
for the allowances available to manufacturers (s 12C).
If the capital expenditure of a farmer does not qualify for a deduction under either par 12 of the First
Schedule or s 12B, the capital expenditure may still qualify for a deduction in terms of s 11(e).
Remember
The s 12B allowance
l cannot be claimed on buildings, and
l can be claimed in full, even if the asset was used for only a few days in the production of
income.
22.9 Average rating formula (par 19)

A farmer may elect to be taxed in terms of the average rating formula within three months after the
end of any year of assessment. The average rating formula aims at a reduction in the rate of normal
tax owing to the abnormal accrual of income in the current year. It does not relieve a farmer from tax
on any portion of his taxable income (par 19(4)). The farmer will enjoy a lower effective rate of tax
than other taxpayers in every year that his actual taxable income from farming exceeds his average
taxable income from farming, yet will not suffer a higher effective rate when his actual taxable income
is less than the average.
A farmer (excluding companies and close corporations) may elect to apply the rating formula set out
in s 5(10) if, during the period of assessment:
l he or his spouse has carried on farming operations or derived income from farming operations,
and
l his taxable income derived during that period from farming exceeds his average taxable income
from farming as determined under par 19(2), and
l he has made an election under par 19(5) that is binding upon him for that period (par 19(1)).
The rating formula and detailed provisions of s 5(10) are discussed in chapter 11.
The rating formula is contained in s 5(10):
A
Y = × B
B+D–C
B = Taxable income for the year of assessment
C = Excess of current year of assessment over average (determined in terms of s 19(2))
D = That portion of the farmer’s current retirement annuity fund contributions deductible in terms of s 11F
solely by reason of the inclusion in his taxable income of the irregular income qualifying for the rating
formula (‘C’)
A = Normal tax chargeable (before the deduction of rebates) on ‘B – C’
Y = Normal tax to be determined before rebates are taken into account
914
The amount by which the taxpayer’s actual taxable income from farming exceeds his average taxable
income from farming will be represented by the symbol ‘C’ in the rating formula in s 5(10). The bal-
ance of an assessed loss incurred in a previous year of assessment must not be deducted from the
taxable income derived from farming in the current year.
In a year in which the actual taxable income from farming is equal to or less than the average, the
rating formula will not apply.
The taxpayer’s average taxable income from farming is deemed to be one of the following amounts
(par 19(2)(a)):
l The average of the taxpayer’s aggregate taxable income from farming from the current year of
assessment plus the previous four years of assessment. If the farmer carried on farming oper-
ations for less than four years, the average is calculated by dividing the taxable income from
farming operations by the actual number of years (could be less than five). A part of a year is
considered to be a full year for the purposes of this calculation.
l If the farmer first commenced farming operations during the current year, his average taxable
income from farming is calculated as two-thirds of his taxable income from farming for that period.
If losses have been incurred during any of the relevant years, these must be set off against the tax-
able income from farming in order to arrive at the annual taxable income from farming.
If the determination of the taxpayer’s annual average taxable income from farming is a negative
amount as a result of an excess of losses over profits, the average is taken as being zero.
Any ‘excess farming profits’ derived by the taxpayer in any of the five relevant periods of assessment
must not be taken into account in the determination of his annual average taxable income (first provi-
so to par 19(2)(a)). ‘Excess farming profits’ are profits as determined under par 20(3)(a) on the sale of
his farming undertaking to the state (see 22.14).
When farming operations were carried on by an insolvent person prior to his insolvency, any income
and any deductions will be deemed respectively to be income and deductions of the estate
(par 9(2)(a)). The annual average taxable income derived by the estate will be determined, taking
into account the taxable income derived from farming by the insolvent person prior to his insolvency
(second proviso to par 19(2)(a)).
22.9.1 Who may make the election? (par 19)

Only the following persons may elect to benefit from the provisions of par 19:
l A natural person (or spouse) whose taxable income for any period of assessment consists of or
includes taxable income derived from farming operations carried on by him for his own benefit.
l The executor of a deceased estate or the trustee of the insolvent estate of a natural person who
continued farming operations commenced by that person prior to his death or insolvency
(par 19(5)).
An election made in terms of par 19(5) is binding upon the person or estate and
cannot be revoked. Since the rating formula cannot operate to the disadvantage
Please note! of the farmer, his election can only benefit him (except if any of the provisions of
par 13 (see 22.15), 15(3) or 17 are available to the taxpayer).
The rating formula applies only to individuals (natural persons), executors of deceased estates and
trustees of insolvent estates.
Only a person who carries on farming may make an election under par 19(5), and the rating formula
may apply only to a year of assessment in which the taxpayer carries on farming (par 19(1)).
The rating formula is not available to the taxpayer if he has elected one of the following:
l special provision available in par 13 (par 13A election is, however, allowed), or
l rating formula in par 15(3) available to plantation farmers, or
l special provisions available in terms of par 17 to sugar cane farmers.
See 22.16.1 for the working of par 15(3) and 22.17 for the working of par 17.
915
Example 22.6. Rating formula
A farmer, who is under 65 and entitled to only the primary rebate, commenced farming in tax
Year 1. His results were as follows:
Special
Total Farming Other remuneration
taxable taxable taxable under s 5(9)
income income income (mine workers:
see chapter 12)
Year 1 ................................................... R33 000 R2 000 R31 000 –
Year 2 ................................................... 46 000 4 000 42 000 –
Year 3 ................................................... 46 000 3 000 43 000 –
Year 4 ................................................... 35 000 12 000 33 000 –
Year 5 ................................................... 81 500 17 000 64 500 R350
For Year 5 he made the election in terms of par 19(5).
Calculate the farmer’s normal tax liability for Year 5.
SOLUTION
A
Y = × B
B+D–C
B = Taxable income, that is, R81 500.
R38 000
C = Excess of current (R17 000) over average ( or R7 600) taxable income from
5
farming R9 400, plus special remuneration of R350; that is, R9 750.
D = That portion of the farmer’s current retirement annuity fund contributions deductible
in terms of s 11F solely by reason of the inclusion in his taxable income of the irregular
income qualifying for the rating formula; that is, nil.
A = Normal tax chargeable (before the deduction of rebates) on ‘B – C’ (since D equals nil),
that is on R71 750 (i.e. R81 500 – R9 750) is R12 915.
R12 915
Y = × R81 500
R71 750
= R14 670
Normal tax payable .................................................................................................. R14 670
Less: Primary rebate (R15 714 limited to R14 670) ................................................ (14 670)
Normal tax liability ......................................................................................... Rnil
Note
If the taxpayer commenced farming for the first time during Year 3, his average taxable income
R32 000
from farming for tax Year 5
3 ( )
would have been R10 667, and excess farming taxable
income would have been R6 333 (R17 000 – R10 667).

If he commenced farming for the first time during Year 5, the average would have been two-
thirds of R17 000 = R11 333, and excess farming taxable income would have been R5 667
(R17 000 – R11 333).
If his actual taxable income from farming during Year 5 had not exceeded the average taxable
income, the rating formula in s 5(10) would not have applied.
22.10 Cessation of farming (s 26)

The First Schedule usually applies only when the taxpayer derives a taxable income (or an assessed
loss) from farming operations (s 26(1)). Under certain circumstances, this general rule must be mod-
ified in relation to livestock and produce.
In the year of assessment in which a farmer ceases to carry on farming operations and disposes of all
his livestock or produce, the proceeds will be taxable, regardless of the reason for the disposal. The
proceeds will form part of the farmer’s taxable income derived from farming operations (s 26(1)).
If the farmer ceases farming operations and retains or lets his livestock, he must continue to account
for his livestock or produce in accordance with the First Schedule.
916
When a farmer disposes of his farm as a going concern

l the amount realised by him for standing crops is not taxable as long as no price is specifically
allocated to it
l the full proceeds received for the sale of the farm with the crops growing on it are of a capital
nature and are therefore not gross income. The proceeds will be subject to capital gains tax in
terms of the Eighth Schedule
l the purchaser of the farm is not entitled to claim the proportion of the purchase price that is
attributable to the standing crops as a deduction, and
l the acquisition of the growing crops cannot be separated from the acquisition of the land.
These principles do not apply to the sale or purchase of a farm on which a plantation is growing
(par 14(1)).
When the seller and purchaser agree on a price for the growing crops, the agreed price for the
growing crops is taxable in the hands of the seller and is allowable as a deduction to the purchaser.
A special rule comes into play for CGT purposes when a farmer who discontinues his farming oper-
ations has a balance of undeducted development expenditure (see 22.7).
Example 22.7. Cessation of farming and letting of livestock
Mr A ceased farming on 30 November 2018 and entered into a sheep lease with his son, in terms
of which he let all his livestock for a cash rental of R10 000 a year. The agreement provided that
upon termination of the lease or death of the lessor, the son would return to the lessor or his
executors animals of the same type, quality and quantity specified in the agreement.
Up to 30 November 2018, Mr A earned farming income of R60 000. The value of livestock on hand
at 28 February 2018 was R48 000 (based on elected standard values). The value of livestock on
hand at 28 February 2019 that was the subject of the sheep lease was R58 000 (based on elect-
ed standard values). At 30 November 2018, the market value of the livestock was R90 000. This
was also its market value at 28 February 2019. Allowable farming expenditure for the period
1 March 2018 to 30 November 2018 was R56 000.
The sheep lease continued until 31 August 2021, when Mr A died. He had not carried on farming
operations since his retirement, that is, from 1 December 2018 to 31 August 2021. His son ac-
quired the livestock from the executors at a price of R80 000, the fair market value at the date of
death. Mr A enjoyed no other income apart from the rental of R10 000 a year, which was payable
monthly. Calculate Mr A’s taxable income for the years in question.
SOLUTION
Year of assessment ended 28 February 2019:
Farming income .............................................................................................................. R60 000
Livestock on hand at 28 February 2019 (see par 3(2) and (3))
(at elected values, not market value) .............................................................................. 58 000
R118 000
Less: Farming expenditure ......................................................................... R56 000
Less: Livestock on hand at 28 February 2018 ............................................ 48 000
(104 000)
Taxable income from farming................................................................................... R14 000
Add: Rent from livestock (3/12 × R10 000) ...................................................................... 2 500
Taxable income ........................................................................................................ R16 500
Years of assessment ended 29 February 2020 and 28 February 2021:

Livestock on hand at end of year (s 26(2) read with par 3(2) and (3)) ......................... R58 000
Rent from livestock (full year)........................................................................................ 10 000
R68 000
Less: Livestock on hand at the beginning of year (s 26(2) read with par 3(1)) ............ (58 000)
Taxable income ........................................................................................................ R10 000
Period of assessment ended 31 August 2021:
Deemed accrual on disposal of livestock at 31 August 2021 (at market value
(s 9HA – see 22.12)) ..................................................................................................... R80 000
Rent from livestock (6/12 × R10 000) .............................................................................. 5 000
R85 000
Less: Livestock on hand at beginning of year .............................................................. (58 000)
Taxable income ........................................................................................................ R27 000
continued
917
Note
Since the estate did not conduct farming operations, par 4(1)(b)(ii) (see 22.5.1 and 22.11) would
not apply. In practice, however, SARS would permit a deduction of the market value of the live-
stock, and therefore the estate would derive no taxable income on account of the disposal of the
livestock.
22.11 Commencement or recommencement of farming (par 4(1)(b))

Opening stock of livestock or produce of any person commencing or recommencing farming oper-
ations will be the value thereof on the day immediately preceding the date of commencement
(par 4(1)(b)(i)). The value of any livestock or produce held immediately prior to the date of com-
mencement or recommencement of farming operations will be allowed as a deduction.
SARS allows the fair market value of produce at the date of commencement or recommencement of
farming operations as a deduction, while livestock must be valued at the value SARS would allow.
The provisions of par 4(1)(b)(i) do not apply to the executors of the estate of a deceased person who
commence farming from the date of the farmer’s death. This is because the livestock or produce
would not have been held by them at the end of the day prior to the date of his death. Livestock or
produce acquired otherwise than by purchase or natural increase is deemed to have a value equal to
its market value (par 4(1)(b)(ii)(aa)). This implies that the livestock or produce held by the executors
at the commencement of farming must be valued at its market price on the date of the farmer’s death.
Livestock or produce held by the farmer for non-farming purposes will be valued at market value
in the year of assessment in which the farmer starts to use those assets for farming purposes
(par 4(1)(b)(ii)(bb)).
22.12 Death of a farmer (par 3 and ss 9HA and 9HB)

When a farmer dies during a year of assessment, it is necessary to determine his taxable income
from farming operations for the period from the beginning of the year of assessment to the date of his
death.
The value of livestock or produce held at the beginning of the year of assessment must be allowed as
a deduction from income (par 3 read with par 1). For livestock, the opening stock deduction will be at
standard value and produce will be at the lower of the average cost of production or the market
value. On the date of death, a farmer is deemed to have disposed of his assets to his deceased
estate for proceeds equal to the market value thereof for income tax purposes (s 9HA). The value of
livestock and produce held at the date of death must therefore be included in income at their respec-
tive market values. In turn, the deceased farmer’s estate is deemed to have acquired the assets for a
cost equal to the same market value.
Therefore, the market value of the livestock and the produce (harvested) of a deceased farmer will be
included in the taxable income of a farmer on death. Produce not yet harvested on the deceased
farmer’s date of death will have no value for taxable income purposes and will also have no opening
stock value in the deceased estate. Also, the market value of the capital assets of a farmer, for ex-
ample immovable farming property, will be treated as proceeds for capital gains tax purposes upon
death. If capital allowances were claimed on any of the capital assets, it can result in a possible
recoupment being included in the farmer’s income.
If a farmer bequeaths his produce and livestock held on the date of death to his spouse, it will be
deemed that the amount received in respect of the disposal is equal to the amount that was allowed
as a deduction for the farmer before any taxable capital gains. The spouse acquiring the produce
and livestock will be treated as having acquired the items on the same date and at the same cost as
the deceased farmer. Effectively there will be a zero effect for disposals of produce and livestock
between spouses (s 9HB).
Example 22.8. Death of a farmer (sec 9HA)
Mr Ngobo, a farmer and South African resident, died on 27 November 2021. He was married out
of community of property to Mrs Ngobo. According to his last will and testament, he left all his
assets to the family trust. His assets at the date of his death are as follows:
l Farm (including land and buildings) at market value ........................................... R9 000 000
l Tractors and ploughs at market value.................................................................. R1 000 000
l Farming livestock at market value ........................................................................ R2 000 000
Total assets at market value ........................................................................................ R12 000 000
continued
918
Mr Ngobo’s farm was valued on 1 October 2001 and had a market value of R4 500 000. The mar-
ket value will be used as the farm’s base cost. The tax value of the tractors and ploughs were nil
on the date of death and had originally cost R2 900 000. The standard value of the livestock was
R2 300.
You may assume that Mr Ngobo had no other income during the year of assessment ended
2022.
SOLUTION
Mr Ngobo’s taxable income for the year of assessment ended 2022:
Gross income
Deemed accrual on disposal of livestock ................................................................. R2 000 000
Recoupment of tractors and ploughs (R1 000 000 – R0) .......................................... R1 000 000
Deductions
Opening stock of livestock ........................................................................................ (R2 300)
Taxable capital gain
Farm ((R9 000 000 – R4 500 000) x 40% .................................................................. R1 800 000
Taxable income R4 797 700
Important: Before section 9HA was implemented, there would have been no inclusion in income
for livestock on hand at the date of death or any recoupment in respect of the depreciable assets
(tractors and ploughs).
Notes
(1) The livestock of the estate must be valued at the elected standard values. Produce must be
valued at the lower of its cost of production or market value.
(2) The estate may claim a deduction for capital development expenditure that it has incurred
but may not claim a deduction for the balance of the development expenditure on date of
death of the deceased.
(3) If the livestock and farm are transferred to heirs or legatees, then it will be deemed to be at
the same market value that was the proceeds for capital gains tax purposes in the hands of
the deceased. No capital gain or loss is therefore realised in the deceased estate.
22.13 Partnerships
Each partner’s share of the livestock that is an asset of the partnership must be determined in the
ratio in which the partners share profits or losses, unless the partnership agreement provides to the
contrary. If ownership in the livestock remains vested in one or more of the partners to the exclusion
of the other partners, only those partners who enjoy ownership are required to include details of the
livestock in their annual returns.
For example, one of the partners may bring his livestock into the firm on the clear understanding that
the animals belong to him and not to the firm, except that all progeny accrue for the benefit of the
partnership. The other partners are therefore obliged to bring into the computation of their taxable
incomes only their interest in the progeny on hand at the beginning and end of each year. With re-
gard to partnership assets generally, see chapter 18.
Each partner in a farming partnership must elect his own standard values, which
must be applied to his interest in the number of livestock on hand at the begin-
Please note! ning and end of the year of assessment and used in the partnership business as
well as to any livestock used in his private farming operations.
22.14 Cessation of farming on sale of land to the state (par 20)

A special concession is available to a taxpayer (other than a company) who derives income from
farming operations and whose farming land is acquired by the state, a local authority or a specified
juristic person if
l due to the acquisition of his land the farming undertaking on the land (referred to as ‘the under-
taking’) has been or is being wound up, and
l the taxpayer’s income for the year of assessment during which the land was acquired or the first
or second year of assessment succeeding that year includes any ‘abnormal farming receipts or
accruals’.
919
The normal tax payable (as determined before the deduction of any rebate) on his taxable income for
the relevant year of assessment, will then be determined at an amount equal to the sum of
l the taxpayer’s ‘excess farming profits’ for the year of assessment, multiplied by the lowest rate
according to the tables (currently 18%), and
l the normal tax (before the deduction of any rebate) payable by the taxpayer for the year of assess-
ment on the balance of his taxable income for the year (being his taxable income excluding the
‘excess farming profits’) (par 20(1)).
The concession is available in the year of assessment during which the farmer’s land is acquired and
in the following two years of assessment.
‘Excess farming profits’ are defined as the sum of the following items, and may
not exceed the taxpayer’s taxable income for the relevant year (proviso to
par 20(3)):
l The proceeds on the disposal of livestock in the course of winding-up the
undertaking on the acquired land. The amount is limited to the excess of the
Please note! current year’s gross profit on the disposal of livestock over the average gross
profit from the disposal of livestock in previous years.
l The proceeds realised on the sale of the plantation together with the acquired
land, or from the sale of the plantation in the course of winding-up the under-
taking on the acquired land. The amount is limited to the farmer’s excess tax-
able income from plantation farming as determined under par 15(3) (see
22.16.1) (par 20(3)).
The par 20 relief is available at the option of the taxpayer, who must exercise his option by means of
a written application to the Commissioner (par 20(6)(a)).
Example 22.9. Cessation of farming on sale of land to the state
A livestock farmer aged under 65 sold his land to the state during the year ended 28 February Year 2
and applied to the Commissioner to be subject to tax in accordance with par 20. He has not
elected to be subject to tax under par 19. His average livestock profit for the previous five years
was R8 000. He also earned other taxable income of R35 000 during the current year. The follow-
ing is his farming account for the year.
Livestock on hand: 1 March Livestock sold (of which R60 000
Year 1.......................................... R20 000 was sold in the course of
Livestock acquired during winding-up the undertaking) ........... R73 600
the year ....................................... 10 000 Livestock on hand:
Profit ............................................ 45 600 28 February Year 2 ......................... 2 000
R75 600 R75 600
Calculate his normal tax liability for Year 2.
SOLUTION
Total taxable income for the year (profit of R45 600 plus other taxable income
of R35 000) ..................................................................................................................... R80 600
Livestock profit for the year ............................................................................................ R45 600
Less: Average livestock profits for previous five years ................................................. 8 000
Abnormal livestock profit ............................................................................................ R37 600
Excess livestock profits = livestock sales in the course of winding-up the undertaking
(R60 000), limited to abnormal livestock profit for the year ............................................ R37 600
Balance of taxable income = total taxable income of R80 600 less excess livestock
profits of R37 600............................................................................................................ R43 000
Normal tax payable on balance of taxable income:
Schedule tax on R43 000 (@18%) .................................................................................. R7 740
Normal tax payable on excess livestock profits:
R37 600 × 18% ............................................................................................................... 6 768
Normal tax payable .................................................................................................... R14 508
Less: Primary rebate (R15 714 limited to R14 508) ........................................................ (14 508)
Normal tax liability ...................................................................................................... Rnil
920
22.15 Drought, stock disease, damage to grazing by fire or plague, and

livestock-reduction schemes (paras 13 and 13A)
Paragraph 13 provides relief to farmers who are compelled to dispose of livestock under certain cir-
cumstances.
For paragraph 13 to apply, a farmer must have sold livestock in any year of assessment
(a) on account of drought, stock disease or damage to grazing by fire or plague and has within four
years after the close of that year of assessment purchased livestock to replace the livestock sold,
or
(b) by reason of his participation in a government livestock-reduction scheme and has within nine
years after the close of that year of assessment purchased livestock to replace the livestock sold.
If either (a) or (b) above applies, the farmer has the option to elect, when replacing the livestock sold
in (a) or (b), to deduct the cost of purchasing the replacement livestock from the income
l for the year in which he originally disposed of his livestock, or
l in the year when he replaces the livestock.
If the farmer wishes to deduct the cost in the year of disposal, he must initially notify the Commission-
er and obtain and retain full particulars in regard to the livestock so sold. The farmer must claim the
deduction within
l five years after the close of the year in which he was compelled to dispose of the livestock when
item (a) above applies, or
l within ten years after the close of that year when item (b) applies.
A farmer is entitled to claim the benefit both of par 13 and 19 when he has dis-
posed of livestock owing to drought, disease or damage to grazing by fire or
Please note! plague. He, may not, however, claim the benefit of par 13 when he has disposed
of livestock owing to a government livestock-reduction scheme in a year of as-
sessment in which his normal tax chargeable is determined under par 19
(par 13(1)(a)(i) and (b)(i)). Paragraph 13 applies regardless of the three-year
prescription rule contained in s 99(1) of the Tax Administration Act.
The provisions of par 13 do not apply to the cost of any livestock bought to replace livestock sold if
the proceeds derived from the sale of the livestock have been dealt with under par 13A (par 13(5)).
Paragraph 13A is applicable
l when a farmer has disposed of any livestock on account of drought, and
l the whole or any portion of the proceeds of the disposal has been deposited by him with the
Land and Agricultural Bank of South Africa (the ‘Land Bank’), and
l the proceeds were deposited within three months after its receipt by the farmer.
The amount deposited with the Land Bank will only be deemed to be gross income of the farmer
derived from the disposal of livestock on the following days:
l on the date of the disposal, if it is withdrawn from the account less than six months after the last
day of the year of assessment in which the disposal took place
l on the date of the withdrawal, if it is withdrawn from the account more than six months but less
than six years after the last day of the year of assessment in which the disposal took place
l on the day before his death or insolvency, in the event of either occurring before the expiry of the
period
l on the last day of the six-year period (in other words, six years after the last day of the year of
assessment in which the disposal took place), if it is not withdrawn before the expiry of the period
(par 13A(3)).
22.16 Plantation farmers (paras 14 to 16, 20)

The growing of timber constitutes the carrying on of farming operations. Special provisions affecting
plantation farmers are to be found in paras 14, 15, 16 and 20 of the First Schedule. Apart from these
special provisions, plantation farmers are subject to tax in the same manner as all other farmers.
The term ‘plantation’ means any artificially established tree or any forest of such trees, including any
natural extension of such tree (par 16). It does not include the type of tree described in par 12(1)(g),
namely trees, shrubs or perennial plants planted for the production of grapes, fruit, nuts, tea, coffee,
hops, sugar vegetable oils, or fibres.
921
Pine trees, gum trees and wattle trees clearly fall within the definition, being ‘trees’, but pineapple,
sugar cane and nut trees, for example, are excluded since they fall within par 12(1)(g). ‘Plantation’
usually refers to trees which are grown in order to produce both the trees themselves and the by-
products which can be derived from the trees. This differs from an orchard, where the trees are
grown in order to produce fruit.
‘Forest produce’ means trees (other than those described in par 12(1)(g)) and anything derived from
those trees, including timber, wood, bark, leaves, seed, gum, resin and sap (par 16).
If a farmer disposes of a plantation, it will form part of his gross income (par 14(1)). There has to be a
distinction between the portion relating to the plantation and the portion relating to the land itself. The
portion relating to the plantation will be revenue in nature whilst the portion relating to the land will be
seen as capital in nature (par 14(2)). If no clear distinction is made between the two portions, the
Commissioner will determine the portion relating to the plantation.
It is important to take note of the fact that the First Schedule, including par 14, is only applicable to
taxpayers conducting farming operations. In the court case Kluh Investments (Pty) Ltd v SARS it was
held by the court that the mere ownership of land with a plantation on it, with the obligation to main-
tain the plantation and return it at the end of the arrangement with the same volume of timber on it,
was not sufficient to constitute farming operations.
Paragraph 15(1)(a) permits the deduction of any expenditure incurred by a farmer during a year of
assessment in respect of the establishment and maintenance of plantations, such as
l the actual cost of the trees
l the cost of planting the trees
l all subsequent expenditure incurred in tending, cultivating and maintaining the trees, including
expenditure on thinning and weeding.
This expenditure is deductible even if no income has been derived during that year.
The construction of roads is regarded as expenditure incurred in respect of the establishment of the
plantation, as is expenditure incurred in preparing the land prior to the planting of the trees.
The cost of establishing and maintaining a plantation that is deductible under par 15(1)(a) may be set
off against any other taxable income that the farmer may derive (for example from another business).
The deduction allowed in respect of the cost of acquisition of a plantation purchased by a farmer in
any year of assessment is limited to the gross income derived from that plantation for that year
(par 15(1)(b)(i)). Any excess that cannot be deducted is carried forward to the next year and is allow-
able as a deduction in that year, again limited to the gross income derived in that year from that
plantation.
This is only the case if the farmer acquired the plantation. If a farmer established the plantation him-
self, the deduction allowed will not be limited to the gross income derived from that plantation for that
year (i.e. fully deductible).
Example 22.10. Plantation farmers

Mr X carries on mixed farming. For the current year of assessment, he has earned a taxable in-
come derived from vegetables and fruit of R15 600. He cultivates three plantations on three sep-
arate farms:
Plantation A: (Established during the current year of assessment): Gross income derived from the
disposal of plantation and forest produce: Nil. Expenditure incurred during the cur-
rent year of assessment in respect of the establishment of the plantation: R16 000.
Plantation B: Gross income derived from the disposal of plantation and forest produce: R32 000.
Expenditure incurred during current year of assessment for maintenance: R11 000.
Expenditure incurred in an earlier year when acquiring the plantation with the land
on which it is growing: R80 000, of which R60 000 represents the consideration
payable for the plantation. No portion of this amount has been deducted prior to
the current financial year.
Plantation C: (Disposed of during current year of assessment): Gross income derived from the
disposal of plantation and forest produce: R17 000. Expenditure incurred during
the current year in respect of maintenance: R8 000. Disposed of during the current
year of assessment with the land on which it grows for R210 000. It was agreed
between the parties that R160 000 represented the consideration payable for the
plantation without the land.
Calculate Mr X’s taxable income for the current year of assessment.
922
SOLUTION
Plantation A
Gross income ............................................................................................ Rnil
Less: Expenditure incurred in respect of establishment par 15(1)(a)) .... 16 000
(R16 000)
Plantation B
Gross income ............................................................................................ R32 000
Less: Expenditure incurred in respect of maintenance par 15(1)(a)) ..... (11 000)
R21 000
Less: Cost of acquisition R60 000, limited to gross income
(par 15(1)(b)) ................................................................................. (32 000)
(Note that the balance of the cost of acquisition, R28 000
(R60 000 – R32 000), may be carried forward to the next year.) (11 000)
Plantation C
Gross income (R17 000 + R160 000) ...................................................... R177 000
Less: Expenditure incurred in respect of maintenance (par 5(1)(a)) ..... (8 000)
Taxable income from plantations ............................................................................. 169 000
R142 000
Taxable income from vegetables and fruit.................................................................... 15 600
Taxable income ........................................................................................................ R157 600
22.16.1 Plantation farmers: Rating formula (par 15)

If the taxable income derived by a farmer (other than a company) from the disposal of plantations
and
l forest produce in any year of assessment exceeds the annual average taxable income derived by
him from the plantation over the three immediately preceding years of assessment, then
l the normal tax payable for the year of assessment must be determined in accordance with the
rating formula provisions of s 5(10) (par 15(3)).
‘C’ in the rating formula of s 5(10) is the amount by which the actual taxable income from the planta-
tion in a year of assessment exceeds the annual average taxable income. The annual average tax-
able income is determined over the three immediately preceding years of assessment (referred to as
excess plantation taxable income). If the farmer has been farming for less than three years, the aver-
age is still calculated by dividing the taxpayer’s income from plantation by three (not one or two).
If no taxable income was derived from plantations and forest produce during the three previous years
(i.e. a loss), the current year’s taxable income from this source becomes ‘C’ in the rating formula.
The par 15(3) rating formula cannot be used together with the rating formula of
Please note!
par 19(2) available to all farmers.
If the farmer has capital expenditure to be set off against the plantation income, then the taxable
income to be used in the formula will be taxable income after the capital expenditure has been set
off.
Paragraph 15(3) applies only if the disposal of plantations or forest produce in the current year forms
part of the normal farming operations of the farmer (par 15(3)(i)). In practice, SARS applies the aver-
aging provision under par 15(3) when a farmer sells his farm together with the standing plantation
and then discontinues his farming operations.
If a farmer has derived any ‘excess plantation farming profits’ in the current year or the three previous
years of assessment in terms of par 20(3)
l the excess plantation farming profits derived during the current year must be excluded from the
taxable income derived in that year from the disposal of plantations and forest produce, and
l the excess plantation farming profits derived during the three previous years of assessment must
not be taken into account in the determination of his average taxable income (par 15(3)(ii)).
Paragraph 15(3) cannot be used if par 13, 17 or 19 has been elected by the taxpayer. See 22.9.1.
923
Example 22.11. Plantation farmers: Rating formula
A farmer (who is under 65) derived the following income in the year of assessment ended
28 February 2022:
Taxable income from plantation ...................................................................................... R32 000
Taxable income from interest .......................................................................................... 8 000
Rentals ............................................................................................................................ 35 000
Taxable income .......................................................................................................... 75 000
Taxable income derived from plantation over three previous years:
2021 ............................................ R10 000
2020 ............................................ 25 000
2019 ............................................ 10 000
Calculate his normal tax for the year of assessment ended 28 February 2022 in terms of
par 15(3), assuming that he has not elected to be assessed under par 19.
SOLUTION
Taxable income from plantation ................................................................................... R32 000
(R10 000 + R25 000 + R10 000)
Less: Annual average ....................................... (15 000)
3
Excess...................................................................................................................... R17 000
A
Y = × B
B+D–C
B = Taxable income, that is, R75 000.
C = Excess plantation, that is, R17 000.
D = That portion of the farmer’s current retirement annuity fund contributions deductible in terms
of s 11F solely by reason of the inclusion in his taxable income of the irregular income
qualifying for the rating formula, that is, nil.
A = Tax before rebates on ‘B – C’ (since D equals nil), that is, on R58 000 (R75 000 – R17 000)
= R10 440.
R10 440
Therefore Y = × R75 000
R75 000 – R17 000
Normal tax payable .................................................................................................... R13 500
Less: Primary rebate (R15 714 limited to R13 500) ......................................................... (13 500)
Normal tax liability ...................................................................................................... R0
Example 22.12. Plantation farmers: Rating formula

A farmer (who is under 65) derived the following income in the year of assessment ended
28 February 2022:
Taxable income from plantation ...................................................................................... R84 000
Assessed loss from other farming .................................................................................. (1 500)
Taxable income .......................................................................................................... R82 500
Taxable income derived from plantation over three previous years:
2021 ............................................ R500
2020 ............................................ 1 100
2019 ............................................ 2 000
Calculate his normal tax for the year of assessment ended 28 February 2022 in terms of
par 15(3), assuming that he has not elected to be assessed under par 19.
924
SOLUTION
Taxable income from plantation ..................................................................................... R84 000
(R500 + R1 100 + R2 000)
Less: Annual average ......................................................... (1 200)
3
Excess ....................................................................................................................... R82 800
A
Y = × B
B+D–C
B = Taxable income, that is, R82 500
C = Excess over annual average, that is, R82 800
D = That portion of the farmer’s current retirement annuity fund contributions deductible in
terms of s 11F solely by reason of the inclusion in his taxable income of the irregular
income qualifying for the rating formula, that is, nil.
A = Tax before rebates on ‘B – C’ (since D equals nil), that is, on R82 500 – R82 800, or –R300.
Since B – C = –R300, Y must be determined in terms of the proviso to s 5(10), that is, the tax will
be payable at the rate fixed in terms of s 5(2) for the first rand of taxable income, i.e. 18%. The
tax is therefore 18% of R82 500, or R14 850.
Normal tax liability = R14 850 – R15 714 (primary rebate limited to R14 850)
= R0
22.17 Sugar cane farmers: Disposal of sugar cane damaged by fire (par 17)
When a farmer derives taxable income from the disposal of sugar cane as a result of a fire in his cane
fields the normal tax payable on that taxable income must be determined under s 5(10) (par 17).
‘C’ in the s 5(10) rating formula is the taxable income derived from the disposal of sugar cane as a
result of the fire in his cane fields that would not otherwise have been derived by him in that year.
The par 17 rating formula cannot be used together with the rating formula of
Please note! par 19(2) relating to all farmers. See 22.9.1.
22.18 Game farmers

The same tests used to determine whether a person is carrying on normal farming operations are
applicable to game-farming. For example, the activities of a person who owns land and occasionally
allows hunters to cull the game on the land cannot on their own be accepted as constituting farming
with game. The taxpayer will have to convince the Commissioner that game is purchased, sold, bred
on a regular basis before his activities may be regarded as bona fide farming operations.
Income from the sale of game, game carcasses, skins and the like by a farmer is regarded as income
from farming operations, as is income derived from the granting of hunting rights on the farm. This
includes income derived from the supply of guides and trackers used in a hunting expedition.
Income from the following activities, however, is not regarded as farming income:
l accommodation and catering
l admission charged to persons for spending holidays on the farm, and
l fees paid for game drives (SARS Interpretation Note No. 69)).
Livestock
Because of the practical difficulties encountered in establishing the actual number of game livestock
on hand at any given time, game livestock is in practice valued at Rnil for opening and closing stock.
The limitation imposed by par 8 on the deduction in respect of livestock purchases applies to game
livestock acquired (see 22.5.2).
925
Farming expenditure is expenditure on items such as

l equipment: vehicles, firearms, meat saws and two-way radios, and will be
depreciated in terms of s 12B
l facilities: slaughter rooms, meat rooms, cooling rooms, biltong rooms, skin
Please note! rooms and trophy rooms, and will be deducted in terms of par 12(1)
l services: butchers, trackers, professional hunters
l promotion and advertising: travelling expenditure (overseas), advertising
material, and
l other: ammunition and fuel.
Expenditure incurred by a game-farmer on dams, boreholes, pumping plants and fencing qualifies as
a deduction of capital development expenditure (par 12(1)). Improvements to buildings and the con-
struction of roads and bridges will be allowed as a deduction if these assets are being used in con-
nection with farming operations. Expenditure on facilities that are used to accommodate visitors and
hunters will not qualify for deduction.
22.19 Capital gains tax (Eighth Schedule)

A taxpayer carrying on farming operations is liable to account for capital gains tax on disposal of
assets in terms of the Eighth Schedule to the Income Tax Act. Therefore, the disposal of movable or
immovable farming property could result in a capital gain or loss. If a taxpayer has a primary resi-
dence on his farming property, the gain relating to the primary residence will be limited to two hec-
tares (paras 44 and 49 of the Eighth Schedule).
The portion of the capital gain relating to the land on which the primary residence is situated there-
fore needs to be apportioned. Also, see 22.12 for the proposed capital gains tax consequences of
livestock held upon the death of a farmer.
Paragraph 12(1)(c) to (i) of the First Schedule provides that capital development expenditure may
only be deducted from taxable income derived by a farmer from farming operations. Any portion of
taxable income that is comprised of capital gains that are unconnected to farming operations, will not
be available for set-off against capital development expenditure.
Example 22.13. Disposal of farm with primary residence
Mr X, a South African resident, owns a farm in the Free State that he purchased on 1 October 1991
for R500 000. He has farmed on this farm since that date. In 2021 Mr X decided to retire and dis-
posed of the farm on 1 October 2021 for R10 000 000. No commission was payable on the sales
proceeds. The farm was valued for capital gains tax purposes on 1 October 2001 at R2 000 000
and Mr X has elected this as the 1 October 2001 valuation for purposes of establishing the base
cost of the farm.
The farm is 40 hectares in size and Mr X’s primary residence is situated on the farm. The resi-
dence was erected on 1 October 1992 at a cost of R900 000.
Discuss the income tax consequences (including capital gains tax) on the disposal of the farm,
with supporting calculations.
SOLUTION
From the facts, it is obvious that Mr X acquired the farm with capital intent and farmed there until
the time of disposal. The proceeds from the disposal of the farm therefore appear to be capital
in nature and are to be excluded from gross income. Capital gains tax will thus apply and the
capital gain is calculated as follows:
Proceeds from disposal ........................................................................................... R10 000 000
Less: Base cost – market value 1 October 2001 ..................................................... (2 000 000)
Capital gain.............................................................................................................. R8 000 000
But, 5% of the capital gain is subject to the primary residency exclusion
(2 hectares/ 40 hectares = 5%)
Therefore. Less 5% × R8 000 000 (less than R2m therefore excluded in full) = (400 000)
R7 600 000
Less: Annual exclusion ............................................................................................ (40 000)
R7 560 000
Include 40% in taxable income ............................................................................... R3 024 000
926
22.20 Diesel rebate for farming operations (s 75 and Schedule 6 to the Customs
and Excise Act 9 of 1964)
The diesel rebate is an economic stimulus tool that is available to certain sectors involved in primary
production. The primary production sector includes farming operations and, therefore, most farmers
will be able to claim such a rebate. The government’s objective with the diesel rebate is to assist
farmers by partially exempting them from the fuel levy as well as the Road Accident Fund levy. Re-
funds are governed by the Customs and Excise Act 91 of 1964, but are administered through the
Value Added Tax (VAT) refund system. This implies that a farming operation cannot claim a diesel
rebate if the operation is not registered for VAT. In order to register for the diesel rebate system, a
VAT101D form must be completed and submitted to SARS. Once the VAT vendor has been regis-
tered on the diesel rebate system, the diesel rebate can be claimed on the VAT return on eFiling. The
rebate will then be set off against the VAT liability for the applicable tax period or, in turn, increase
any VAT refund that is due. If the farmer is not yet registered for VAT, the registration for VAT and the
diesel rebate can be done simultaneously by completing and submitting a Registrations, Amend-
ments and Verification form (RAV form) on eFiling. However, the farmer still has to comply with the
requirements for both the VAT and diesel rebate systems’ registrations.
The diesel rebate can only be claimed on ‘eligible litres’ in strict compliance with Part 3 of Sched-
ule 6. The term ‘eligible litres’ refers to fuel purchased by the user and used in primary production
activities. It is therefore implied that the rebate cannot simply be claimed on the purchase of the fuel;
it can only be claimed once it has been used in a primary production activity for own benefit, implying
it cannot be claimed on a contract basis. In a recent court case (Commissioner for the SARS v Lang-
holm Farms (Pty) Ltd 1354/2018 [2019]) more guidance was given as to what constitutes the use of
fuel in primary production activities. From the decision it is clear that only fuel that is delivered and
used on the user’s premises can qualify for a rebate. Therefore, if fuel is used to deliver produce to
the market, it qualifies as an ‘eligible activity’ and a rebate may be claimed on it; however, if the truck
has to refuel on its way to the delivery destination, the fuel used to refuel the truck will not be regard-
ed as eligible for the rebate. This can create practical challenges for farmers and it can certainly not
be what the legislator had intended.
In addition, diesel refund claims must be supported by logbooks that indicate a full audit trail of
diesel fuel for which refunds are claimed, from the purchase to the use thereof. The user must keep
two types of logbooks, namely a diesel storage facility logbook as well as a diesel usage logbook.
The logbooks must be quite extensive in nature and must include detail such as the opening and
closing dates, monthly opening litres of diesel in storage, litres received from storage, type of equip-
ment used, the opening and closing kilometres of equipment using diesel, activities performed using
diesel, including the date, area and the particulars of the operator of the equipment. SARS can also
audit diesel rebates up until five years after the claim was submitted. However, in practice, SARS
limits the rebates and storage of documentation to two years. The audit trail only ends once the diesel
has been used/consumed. This implies that if diesel is drawn from the main tanks into a smaller
mobile tanker, a storage logbook for that tanker must also be kept. If an audit finds any erroneous
data, it can lead to penalties, interest, and the forfeiture of the rebate or suspension from the diesel
rebate system. The current diesel rebate, effective 7 April 2021, amounts to R3,66 per litre of 80% of
eligible litres for on-land diesel usage (this means that a farmer effectively receives a rebate of R2,93
per eligible litre used). The levies change during April of each year and it is crucial that farmers also
keep record of opening and closing diesel stock.
22.21 Detailed examples calculating taxation payable by farmers
Example 22.14. Calculation: Taxable income of a farmer

The following is the statement of comprehensive income of a farmer for the year of assessment ended
28 February 2022:
Statement of comprehensive income
Livestock on hand: Livestock on hand:
1 March 2021 .............................. R11 270 28 February 2022 ........................... R10 810
Administration and general Sales:
expenses (all allowable) ............. 31 340 Bean crop .................................... 15 000
Depreciation of motor car and Livestock ..................................... 78 040
office furniture ............................. 1 250 Maize ........................................... 168 000
Donations .................................... 100 Meat ............................................ 19 755
continued
927

Fertilizer ...................................... 4 850
Foodstuffs for livestock ............... 4 200
Grain bags .................................. 3 000
Maintenance and repairs:
Farm buildings ......................... 6 710
Implements .............................. 650
Lorries and tractor ................... 1 100
Maize and potato seed ............... 11 750
Petrol, oil and grease .................. 1 300
Livestock purchases ................... 48 000
Railage and transport ................. 815
Rations for workers ..................... 2 450
Seed spray.................................. 3 500
Veterinary surgeon’s fees ........... 400
Wages – domestic servants ........ 2 400
Wages – farm labourers .............. 13 500
Net surplus .................................. 143 020
R291 605 R291 605
(a) Details of livestock regulation (standard values elected by the taxpayer)

Opening stock Closing stock
Purchases Sales
(1 March 2021) (28 February 2022)
Bulls 3 @ R50 = R150 1 @ R1 140 = R1 140 2 @ R50 = R100
Cows
(3 years
and over) 140 @ R40 = 5 600 10 @ R1 100 = 11 000 50 @ R1 090 = 54 500 120 @ R40 = 4 800
Oxen 30 @ R40 = 1 200 10 @ R1 050 = 10 500 55 @ R40 = 2 200
Tollies and
heifers
(1–2 years) 100 @ R30 = 3 000 50 @ R530 = 26 500 40 @ R560 = 22 400 90 @ R30 = 2 700
(2–3 years) 80 @ R14 = 1 120 55 @ R14 = 770
Calves
(under 1 year) 50 @ R4 = 200 60 @ R4 = 240
403 R11 270 70 R48 000 91 R78 040 382 R10 810
(b) During the year the farmer and his wife and family consumed produce and livestock to an
estimated cost of R3 600.
(c) The following capital expenditure was incurred during the year:
New implements for farm ........................... R7 100
New tractor for farm ................................... 18 200
New irrigation equipment ........................... 6 000
New borehole ............................................. 3 500
(d) The depreciation shown in the account exceeds the wear-and-tear allowed by the Commis-
sioner by R100.
(e) At 28 February 2022 there was a crop of maize growing on the land. It is estimated that the
expenditure laid out on this crop and claimed in the statement of comprehensive income is
R850.
(f) There was no produce on hand at the beginning or end of the year of assessment.
(g) Expenditure on petrol, oil and grease includes R650 for private motor-car expenses.
Calculate the taxable income of the farmer for the year of assessment ending 28 February 2022.
928
SOLUTION
Net surplus shown in account ...................................................................................... R143 020
Add: Donations ............................................................................................ R100
Private motor-car expenses ................................................................ 650
Produce and livestock privately consumed (cost) (note 1) ................ 3 600
Wages of domestic servants............................................................... 2 400
Depreciation disallowed ..................................................................... 100
6 850
R149 870
Less: s 12B allowance on implements and tractor (50% of R25 300)......................... (12 650)
R137 220
Less: New irrigation equipment ................................................................ R6 000
New borehole.................................................................................. 3 500
(9 500)
Taxable income ....................................................................................................... R127 720
Notes
(1) The estimated cost of the livestock and produce consumed by the farmer and his family is
taxable.
(2) The value of livestock on hand at the end of a year of assessment becomes the opening
stock for the next year. Therefore, R10 810 will be allowed as a deduction for that year.
(3) Growing crops cannot be regarded as produce on hand; therefore the cost of the standing
maize crop is not included in income.
(4) The deduction for purchases of livestock is limited in terms of par 8 to an amount deter-
mined as follows: (farming (gross) income of R280 795 (R15 000 + R78 040 + R168 000 +
R19 755) plus the standard value of the closing stock of livestock of R10 810 less the
standard value of the opening stock of R11 270). This amount is R280 335. The cost of the
livestock, R48 000, is therefore deductible in full in the current year.
Example 22.15. Detail calculation of taxable income of a farmer
The following is the statement of comprehensive income of a farmer who commenced farming on
25 August 2021.
Development expenditure: Dividends received from South
New irrigation equipment .............. R25 000 African companies ........................... R6 000
Dams and boreholes..................... 12 360 Fee for letting of machine ................. 9 600
Establishment of orchards ............ 13 600 Grazing fees ..................................... 21 000
New fencing .................................. 3 420 Interest received .............................. 1 920
Road-making ................................ 15 340 Livestock sales ............................... 831 000
Soil-erosion works ......................... 7 500 Produce sales (wool and fruit)........ 114 220
Fertilizers and manures................. 5 250
Food for livestock .......................... 9 360
General farming expenses (all
allowable) ...................................... 13 960
Interest payable .......................... 6 340
Livestock purchases ................... 34 200
Repair of damaged fencing ........ 3 900
Seeds .......................................... 2 980
Wages and rations ...................... 21 556
Wear-and-tear and s 12B
allowance (all allowable) ............. 14 800
Net profit ..................................... 794 174
R983 740 R983 740
(1) When he commenced farming, the executors of the estate of his late father handed over to
him 1 800 ewes, 200 rams and 400 lambs. The current market value of these animals at the
date of his father’s death was R650 000, and this was the fair market price on
25 August 2021. The standard value of this livestock would have been R12 800.
continued
929
(2) On 26 November 2021 he also received by way of donation from his uncle 600 ewes and
100 rams. At the date of donation, the fair market value of these animals was R200 000. The
standard value would have been R4 200.
(3) He has elected the standard values fixed by regulation.
(4) During the year he, his wife and his family consumed produce at an estimated cost of
R3 500.
(5) 24 ewes and 12 rams were donated to charitable institutions during the year. These animals
were acquired at a cost of R6 700, but at the date of donation their fair market value was
R10 800.
(6) At 28 February 2022 the numbers of livestock on hand were as follows:
Ewes ........................................... 1 500
Rams ........................................... 250
Lambs ......................................... 400
(7) The estimated cost of production of wool and fruit on hand at 28 February 2022 was R9 100.
Calculate the taxable income of the farmer for the year of assessment ended 28 February 2022.
SOLUTION
Grazing fees............................................................................................................... R21 000
Livestock sales........................................................................................................... 831 000
Livestock donated to charity (36 sheep at market price) ........................................... 10 800
Produce privately consumed ..................................................................................... 3 500
Produce sales ............................................................................................................ 114 220
Livestock on hand at 28 February 2022 (at standard values fixed by regulation)
1 500 ewes @ R6 ............................................................................... R9 000
250 rams @ R6 .................................................................................. 1 500
400 lambs @ R2................................................................................. 800
11 300
Produce on hand (at lower of cost or market value) .................................................. 9 100
R1 000 920
Less: Livestock on hand at commencement (25 August 2021)
(1 800 ewes, 200 rams, 400 lambs at current market value) ..... R650 000
Livestock received by donation (26 November 2021)
(current market price) ................................................................ 200 000
Fertilizers and manures ............................................................. 5 250
Food for livestock....................................................................... 9 360
General farming expenses ........................................................ 13 960
Interest payable ......................................................................... 6 340
Livestock purchases .................................................................. 34 200
Repair of damaged fencing ....................................................... 3 900
Seeds ......................................................................................... 2 980
Soil-erosion works ...................................................................... 7 500
Wages and rations ..................................................................... 21 556
Wear-and-tear and s 12B allowance ......................................... 14 800
(969 846)
Taxable income from farming (before deduction of development
expenditure) ................................................................................................ R31 074
Less: Development expenditure falling under par 12(1)(c) to (i):
New irrigation equipment ........................................................... R25 000

Dams and boreholes ................................................................. 12 360
Establishment of orchards ......................................................... 13 600
New fencing ............................................................................... 3 420
Road-making ............................................................................. 15 340
(69 720)
Excess ........................................................................................................ (R38 646)
Excess development expenditure added back to farming income ........................... 38 646
Taxable income from farming..................................................................... Rnil
Excess development expenditure to be carried forward to the following year .......... R38 646
continued
930
Taxable income
Fee for letting of machine .......................................................................................... R9 600
Interest received ........................................................................................................ 1 920
Farming ...................................................................................................................... nil
Dividends received .................................................................................................... 6 000
R17 520
Less: Exempt income
Limited interest exemption (s 10(1)(i)) ............................................................ (1 920)
Dividends (s 10(1)(k)) ..................................................................................... (6 000)
Taxable income .......................................................................................... R9 600
Notes
(1) In terms of the practice of SARS, grazing fees constitute taxable income derived from farm-
ing operations.
(2) The estimated cost of produce privately consumed forms part of taxable income derived
from farming operations.
(3) Livestock or produce donated to charity is included in income at its market value and forms
part of taxable income derived from farming operations.
(4) Livestock on hand at the date of commencement of farming must be valued at its current
market value and is allowed as a deduction.
(5) Livestock received by way of donation must be valued at its current market value and is
allowed as a deduction.
(6) Development expenditure on soil-erosion works is deductible in full.
(7) Fees received for the letting of machinery and interest received do not constitute taxable
income derived from farming operations.
(8) The deduction for livestock is limited in terms of par 8 to an amount determined as follows:
(farming (gross) income of R980 520 (R21 000 + R831 000 + R10 800 + R3 500 +
R114 220) plus the standard value of the closing stock of livestock of R11 300 less the live-
stock held and not disposed of by the farmer at the beginning of the year (as defined in
par 4) of R850 000. This amount is R141 820. The cost of the livestock bought during the
year, i.e. R34 200, is therefore deductible in full in the current year.
931
23 Turnover tax system
Madeleine Stiglingh

After studying this chapter, you should be able to explain
l what the turnover tax regime is
l when and at what rate the turnover tax will be levied
l when a person can register as a micro business
l when a person must or can deregister as a micro business.
Contents
Page
23.1 Overview (s 48 to 48C) ....................................................................................................... 933
23.2 Qualifying turnover (definition of ‘qualifying turnover’ in paras 1, 2 and 13) ..................... 934
23.3 Micro business (par 1 – definition of ‘micro business’ and ‘registered micro business’
– and paras 2, 3 and 4) ...................................................................................................... 934
23.3.1 Persons specifically included as qualifying micro businesses (par 2) .............. 934
23.3.2 Persons specifically excluded as qualifying micro businesses
(paras 3 and 4) ................................................................................................... 934
23.4 Registered micro business (definition of ‘registered micro business’ in paras 1 and 8) ....... 934
23.4.1 Registration ......................................................................................................... 934
23.4.2 Deregistration...................................................................................................... 935
23.5 Taxable turnover (definition of ‘taxable turnover’ in paras 1, 5, 6 and 7) .......................... 935
23.6 Levying of turnover tax (ss 48A and 48B) ........................................................................... 937
23.7 Administration of turnover tax (par 11) ................................................................................ 937
23.8 Record-keeping (par 14) ..................................................................................................... 937
23.9 Interaction of the Sixth Schedule with other taxes (ss 10(1)(zJ), 64F and par 57A of the
Eighth Schedule) ................................................................................................................. 937
23.10 Transitional rules (ss 20 and 48C, par 7 and ss 78A and 18(4) of the VAT Act) ................ 938
23.11 Comprehensive examples ................................................................................................... 938
23.1 Overview (s 48 to 48C)

An elective turnover tax system is available for micro businesses with a turnover of up to R1 million
per annum. Although this turnover tax is incorporated in the Sixth Schedule to the Income Tax Act, it
is a stand-alone tax that is totally separate from the normal tax, donations tax or dividends tax calcu-
lations. The turnover tax applies to years of assessments commencing on or after 1 March 2009.
Part IV of the Act, headed ‘Turnover tax payable by micro businesses’, which consists of s 48 to 48C,
has been included in the Income Tax Act and links the Sixth Schedule with the Income Tax Act. (Any
paragraph reference in this chapter, unless stated otherwise, is a reference to the Sixth Schedule to
the Act.)
Put simply, the turnover tax is a tax calculated on the turnover (total receipts) of a micro business,
and not on its profit or its net income. This method eliminates the need for keeping detailed records
of expenses.
Where the qualifying turnover of a micro business does not exceed the amount of R1 million in a
given year of assessment, the business is able to choose to be taxed in terms of this regime.
The turnover tax effectively replaces the normal tax regime (also including normal tax on capital
gains). Every business should assess its individual situation to determine which tax regime will suit it
best.
933
Micro businesses that choose the turnover tax regime are still required to comply with the payroll
levies, such as PAYE, SDL and UIF contributions, as these are taxes generally borne by employees
and collected by employers (in this case, the registered micro business) on behalf of SARS.
Vendors registered under the VAT system may freely register under the turnover tax system if these
taxpayers believe that it is in their best interest to do so and vice versa.
23.2 Qualifying turnover (definition of ‘qualifying turnover’ in paras 1, 2 and 13)

The qualifying turnover refers to the amount that is used to evaluate whether a person could qualify
as a micro business, whereas the taxable turnover (see 23.5) is the tax base for the micro business
on which the actual amount of turnover tax due is calculated.
Qualifying turnover means the total receipts from carrying on business activities, but excluding any
amounts received of a capital nature (par 1 – definition of ‘qualifying turnover’).
Where the qualifying turnover of a micro business does not exceed the amount of R1 million in any
year of assessment, it is able to elect to be taxed in terms of this regime (par 2(1)).
23.3 Micro business (par 1 – definition of ‘micro business’ and ‘registered micro
business’ – and paras 2, 3 and 4)
The definition of a micro business specifically includes (see 23.3.1) and specifically excludes
(see 23.3.2) certain persons.
23.3.1 Persons specifically included as qualifying micro businesses (par 2)

The following persons with a qualifying turnover that does not exceed R1 million qualify as micro
businesses:
l companies, and
l natural persons (that is, natural persons who trade as sole proprietors or partners in a partner-
ship).
A trust is not included in the definition of a micro business and can therefore not elect to pay turnover
tax.
23.3.2 Persons specifically excluded as qualifying micro businesses (paras 3 and 4)

For the sake of simplicity and delivering on the mandate to assist true micro (start-up) types of busi-
ness, some businesses are specifically excluded from qualifying as a micro business. The following
persons are specifically excluded:
l persons with certain interests in other companies
l persons mainly earning income from investments or professional services
l personal service providers and labour brokers
l persons with excessive capital receipts from disposing business assets (more than R1,5 million
over a period of three years)
l certain company exclusions, for example where a shareholder is not a natural person
l certain partnership exclusions, for example if a partner is not a natural person or if a partner is a
partner in more than one partnership.
23.4 Registered micro business (definition of ‘registered micro business’

in paras 1 and 8)
23.4.1 Registration
A micro business as defined should register with SARS if it elects to apply the turnover tax regime.
Registration is always voluntary and no person is obliged to register, even if the person falls within the
definition of a micro business and the person’s qualifying turnover is below the R1 million threshold.
The registration as a micro business always applies with effect from the beginning of a year of assess-
ment.
934
23.4–23.5 Chapter 23: Turnover tax system
23.4.2 Deregistration
There are two circumstances when a registered micro business can deregister from the turnover tax
regime, namely voluntary deregistration and compulsory deregistration. If a micro business is dereg-
istered from turnover tax, that micro business may never re-enter the turnover tax system.
Voluntary deregistration (par 9)

A micro business could elect to deregister. Voluntary deregistration is always effective from the
beginning of a year of assessment.
Compulsory deregistration (par 10)

Compulsory deregistration occurs where a business no longer qualifies as a micro business in terms
of the provisions of the Sixth Schedule. In the event of a compulsory deregistration of the micro
business, that micro business moves back into the normal tax regime with immediate effect (that is,
from the first day of the month during which the business is deregistered from the turnover tax). It is
therefore assessed for two periods in the year of assessment – one in the turnover tax system and the
other in the normal income tax system.
Remember
The year of assessment of a micro business always runs from 1 March to 28/29 February of the
next year.
23.5 Taxable turnover (definition of ‘taxable turnover’ in paras 1, 5, 6 and 7)

The tax base for the turnover tax is the taxable turnover of a registered micro business. It is on this
taxable turnover that the actual amount of tax due is calculated. The turnover tax regime does not
provide for the deduction of any business-related expenditure. As no deductions or allowances are
provided for, the principles of recoupments are also not relevant to a micro business’s turnover tax.
The following two tables summarise the calculation of taxable turnover for natural persons (first table)
and companies (second table):
935
Taxable turnover – natural person
l Amounts received
General l Not of a capital nature
inclusion
l During that year of assessment
(par 5)
l From carrying on business activities in the Republic
Specific 50% of receipts from the sale of any capital asset used
inclusions mainly for business purposes (other than any financial
(par 6) instrument) (par 6(a)).
Investment income (par 7(a))

Specific
exclusions
(paras 5 Amounts refunded from suppliers (par 7(d))
and 7)
Amounts refunded to customers (par 5)
Taxable turnover – companies
l Amounts received
General
l Not of a capital nature
inclusion
(par 5) l During that year of assessment
l From carrying on business activities in the Republic
50% of receipts from the sale of any capital asset used

Specific mainly for business purposes (other than any financial
inclusions instrument) (par 6(a)).
(par 6)
Investment income (excluding dividends) (par 6(b))
Specific Amounts refunded from suppliers (par 7(d))

exclusions
(paras 5
and 7) Amounts refunded to customers (par 5)
936
23.6–23.9 Chapter 23: Turnover tax system
23.6 Levying of turnover tax (ss 48A and 48B)

Turnover tax is payable by a person that is a registered micro business in respect of its taxable turn-
over during a year of assessment (s 48). The following rates are applicable for the 2022 year of
assessment:
Taxable Turnover Tax Liability
On the first R335 000 0%
R335 001 to R500 000 1% of the amount above R335 000
R500 001 to R750 000 R1 650 + 2% of the amount above R500 000
R750 001 and above R6 650 + 3% of the amount above R750 000
23.7 Administration of turnover tax (par 11)

The Sixth Schedule specifically provides for the rules for interim payments of the turnover tax
(par 11). This is similar to the provisional tax payments for normal tax, but these payments are re-
ferred to as interim payments (probably to distinguish these payments from the provisional tax pay-
ments for normal tax). The interim payments must be accompanied by two different tax returns.
A micro-business also has the option of making all payments for employees’ tax, skills development
levies and unemployment insurance fund contributions biannually.
The Sixth Schedule to the Act does not specifically provide for rules governing the submission of the
tax return for a specific year of assessment. Nor does it prescribe the rules for the payment of the
final tax liability. It is therefore submitted that the normal rules applicable to the submission of tax
returns and the payment of taxes due should be followed (see chapter 33).
23.8 Record-keeping (par 14)

One of the main reasons for introducing the turnover tax is to simplify the administrative burden of a
micro business to ensure that it complies with tax legislation. The record-keeping requirements for a
micro business are reduced. Such businesses only need to keep the following records:
l Records should be kept of the details of all amounts received during a year of assessment
(par 14(a)).
l The micro business should record the dividends declared during a year of assessment
(par 14(b)).
l A list should be kept containing details of
– each asset on hand at the end of the year of assessment with a cost price of more than
R10 000 (par 14(c)), and
– all the individual liabilities of the micro business that exceed R10 000 at the end of the year of
assessment (par 14(d)).
23.9 Interaction of the Sixth Schedule with other taxes (ss 10(1)(zJ), 64F and
par 57A of the Eighth Schedule)
A person is not subject to both normal tax and the turnover tax in respect of the same receipt. All
income received by or accrued to a registered micro business conducting business in the Republic
is specifically exempt from normal tax.
The income of natural persons that are registered micro businesses representing
l investment income, and
l remuneration received from employment
are not exempt and are still subject to normal tax (s 10(1)(zJ)(i) and (ii)).
A natural person that is a registered micro business could thus be liable for tax under two systems
(but should not be liable for tax under both systems on the same receipt).
A shareholder in a registered micro business is only partially exempt from the dividends tax, namely
to the extent that the total dividend paid by the micro business for a specific year of assessment does
not exceed R200 000 (s 64F(h)).
937
The capital gain or loss on the disposal of capital assets used mainly for business purposes by a
registered micro business is disregarded for CGT (par 57A of the Eighth Schedule).
23.10 Transitional rules (ss 20 and 48C, par 7 and ss 78A and 18(4) of the VAT Act)
For a person who was registered for normal tax and who elected to register as a micro business for
the turnover tax regime, transitional rules apply with regard to
l amounts already taxed for normal tax purposes (par 7(c)), and
l a balance of an assessed loss brought forward (s 20).
For a person who was registered as a micro business for the turnover tax regime and who deregis-
ters as such, transitional rules apply with regard to
l amounts received by a micro business (but not accrued to) (s 48C(1))
l amounts accrued to a micro business (but not received by) (s 48C(2))
l the deduction of opening stock (s 48C(3))
l output tax on certain deemed supplies (s 78A(2) of the VAT Act)
l the prohibition of input tax on certain expenses (s 78A(3) of the VAT Act), and
l input VAT adjustments on assets (s 18(4) of the VAT Act).
23.11 Comprehensive examples
Example 23.1. Turnover tax and a natural person
On 1 March 2014 Mohammed Ahmed, who is 25 years old, started a new business (sole proprie-
tor) of producing and selling candles. Mohammed Ahmed was never obliged to register as a VAT
vendor and also did not choose to do so. He qualified as a micro business and registered his
business as a micro business with effect from 1 March 2021, thus from the beginning of the 2022
year of assessment.
The following information is relevant to his 2021 year of assessment:
Doubtful debt allowance deducted in 2021 ......................................................... R7 500
Mohammed Ahmed’s assessed loss for 2021 .................................................... 2 345
The following information is relevant to his 2022 year of assessment:
Cash receipts (note 1) ......................................................................................... 395 000
Outstanding debtor (note 2) ................................................................................ 10 000
Interest received on bank account ...................................................................... 25 000
Dividends received on listed shares.................................................................... 250
Expenses incurred in the conversion of garage (note 3) ..................................... 50 000
Proceeds with the sale of mixer (note 4) .............................................................. 20 000
Expenses incurred with the purchase of new mixer ........................................... 35 000
Normal trading expenses incurred ...................................................................... 105 000
Notes
(1) Included in the cash receipts for 2022 is R20 000 received from outstanding debtors as on
28 February 2021 and amounts refunded from suppliers on damaged goods purchased of
R12 000. On 20 June 2021, R3 000 of the R395 000 received was also refunded to a cus-
tomer who bought candles that did not want to light.
(2) Party Hire (Pty) Ltd still owed him R10 000 for candles delivered by him on 20 Febru-
ary 2022.
(3) On 1 March 2021 he converted his garage into business premises at a cost of R50 000. The
garage made up 20% of the total area of his primary residence. He acquired the primary res-
idence in 2007 for R800 000.
(4) He needed a larger mixer to mix the wax for the candles and purchased a new mixer. He
sold the old mixer and received R20 000. The mixer was wholly used for business purposes.
Calculate Mohammed Ahmed’s turnover tax liability for the 2022 year of assessment.
938
23.11 Chapter 23: Turnover tax system
SOLUTION
Doubtful debt allowance (note 1) ......................................................................... Rnil
Cash receipts (note 2) – (R395 000 – R20 000 – R12 000 – R3 000) ................... 360 000
Outstanding debtor (note 3) ................................................................................ nil
Interest received (note 4) ..................................................................................... nil
Dividends received (note 5) ................................................................................. nil
Expenses incurred (note 6) .................................................................................. nil
Proceeds with the sale of mixer (R20 000 × 50%) ............................................... 10 000
Taxable turnover .................................................................................................. R370 000
Turnover tax liability:
On R335 000 ........................................................................................................ Rnil
On R35 000 (R370 000 – R335 000) (R35 000 × 1%) .......................................... 350
Turnover tax liability for 2022 ............................................................................... R350
Notes
(1) Recoupments, assessed losses and previous allowances are not carried into the turnover tax
system.
(2) The cash receipts from carrying on a business in the Republic are included in taxable turn-
over (general inclusion – par 5). The R20 000 received from the debtors outstanding on
28 February 2021 was already subject to normal tax in 2021 and should therefore not again
be included in taxable turnover (specific exclusion – par 7(c)). The R12 000 refunded from a
supplier is just a refund of an expense and not a cash receipt from carrying on a business.
The intention of the turnover tax is to only tax the micro business on the net cash receipts
and the R3 000 refunded to the customer should therefore also be deducted.
(3) The turnover tax is only calculated on amounts received during a specific year of assess-
ment (general inclusion – par 5). The outstanding debtors do not constitute amounts re-
ceived in 2022 and are therefore excluded.
(4) Investment income for natural persons is specifically excluded from the taxable turnover
(specific exclusion – par 7(a)). The interest will be subject to normal tax and Mohammed can
also utilise the s 10(1)(i) interest exemption against it.
(5) Dividends received also constitute investment income and are excluded. To receive divi-
dends, it would imply shareholding in other companies. It is stated that the dividends were
received on listed shares and shareholdings in listed companies are not prohibited
(par 4(a)). The dividends would be subject to normal tax, but are exempt in terms of
s 10(1)(k).
(6) All the expenses incurred, the converted garage, the purchase of the new mixer as well as the
normal trading expenses are irrelevant for the calculation of the taxable turnover. The turnover
tax system only includes receipts and does not allow for the deduction of any expenses.
Example 23.2. Turnover tax and a company
On 1 March 2014 Mohammed Ahmed, who is 25 years of age, started a new business, Candle
Light (Pty) Ltd, of producing and selling candles. Candle Light (Pty) Ltd was never obliged to
register as a VAT vendor and also did not choose to do so. Candle Light (Pty) Ltd qualified as a
micro business and was registered as a micro business with effect from 1 March 2021.
The following information is relevant to Candle Light (Pty) Ltd’s 2021 year of assessment:
Doubtful debt allowance deducted in 2021 ......................................................... R7 500
Candle Light (Pty) Ltd’s assessed loss for 2021 was .......................................... 2 345
The following information is relevant to Candle Light (Pty) Ltd’s 2022 year of
assessment:
Cash receipts (note 1) ......................................................................................... 395 000
Outstanding debtor (note 2) ................................................................................ 10 000
Interest received on bank account ...................................................................... 25 000
Dividends received on listed shares.................................................................... 250
Rent paid for business premises ........................................................................ 50 000
Proceeds with the sale of mixer (note 3) .............................................................. 20 000
Expenses incurred with the purchase of new mixer ........................................... 35 000
Normal trading expenses incurred ...................................................................... 105 000
continued
939
Notes
(1) Included in the cash receipts for 2022 is R20 000 received from outstanding debtors as on
28 February 2021 and amounts refunded from suppliers on damaged goods purchased of
R12 000. On 20 June 2021, R3 000 of the R395 000 received was also refunded to a cus-
tomer who bought candles that did not want to light.
(2) Party Hire (Pty) Ltd still owed Candle Light (Pty) Ltd R10 000 for candles delivered on
20 February 2022.
(3) Candle Light (Pty) Ltd needed a larger mixer to mix the wax for the candles and purchased a
new mixer. Candle Light (Pty) Ltd sold the old mixer and received R20 000. The mixer was
wholly used for business purposes.
Calculate Candle Light (Pty) Ltd’s turnover tax liability for the 2022 year of assessment.
SOLUTION
Doubtful debt allowance (note 1) ......................................................................... Rnil
Cash receipts (note 2) – (R395 000 – R20 000 – R12 000 – R3 000) ................... 360 000
Outstanding debtor (note 3) ................................................................................ nil
Interest received (note 4) ..................................................................................... 25 000
Dividends received (note 5) ................................................................................. nil
Expenses incurred (note 6) .................................................................................. nil
Proceeds with the sale of mixer (R20 000 × 50%) ............................................... 10 000
Taxable turnover .................................................................................................. R395 000
Turnover tax liability:
On R335 000 ........................................................................................................ Rnil
On R60 000 (R395 000 – R335 000) (R60 000 × 1%) .......................................... 600
Turnover tax liability for 2022: .............................................................................. R600
Notes
(1) Recoupments, assessed losses and previous allowances are not carried into the turnover tax
system.
(2) The cash receipts from carrying on a business in the Republic are included in taxable turn-
over (general inclusion – par 5). The R20 000 received from the debtors outstanding on
28 February 2021 was already subject to normal tax in 2021 and should therefore not again
be included in taxable turnover (specific exclusion – par 7(c)). The R12 000 refunded from a
supplier is just a refund of an expense and not a cash receipt from carrying on a business.
The intention of the turnover tax is to only tax the micro business on the net cash receipts
and the R3 000 refunded to the customer should therefore also be deducted.
(3) The turnover tax is only calculated on amounts received during a specific year of assessment
(general inclusion – par 5). The outstanding debtors do not constitute amounts received in
2022 and are therefore excluded.
(4) Investment income for companies is specifically included in the taxable turnover (specific
inclusion – par 6(b)).
(5) Dividends received also constitute investment income, but investment income (excluding
dividends and foreign dividends) is included in taxable turnover of companies. Dividends
are not included in the taxable turnover. Even though investment income is included in the
taxable turnover of companies, dividends (local and foreign) are not included in the taxable
turnover of a company. To receive dividends, it would imply shareholding in other com-
panies. It is stated that the dividends were received on listed shares and shareholdings in
listed companies are not prohibited (par 4(a)).
(6) All the expenses incurred, the rentals paid, the purchase of the new mixer as well as the
normal trading expenses are irrelevant for the calculation of the taxable turnover. The turn-
over tax system only includes receipts and does allow for the deduction of any expenses.
940
24 Trusts
Karen Stark and Madeleine Stiglingh

l calculate the taxable income of all related parties to a trust in respect of amounts
earned by a trust during a year of assessment
l calculate the taxable capital gain of all related parties to a trust resulting from a
disposal of an asset by a trust
l apply the provisions relating to a non-resident trust when amounts are distributed
during the current year as well as in a subsequent year of assessment.
Contents
Page
24.1 Overview ........................................................................................................................... 941
24.2 Creation of the trust .......................................................................................................... 942
24.3 Different types of trusts .................................................................................................... 942
24.3.1 Ordinary trust (ss 1 and 6) ................................................................................ 943
24.3.2 Special trust (s 1 and par 82 of the Eighth Schedule) ...................................... 943
24.4 The nature of the income received and distributed by trusts (ss 10(1)(i), 10(2)(b)
and 10B) ........................................................................................................................... 944
24.5 Person(s) liable for tax on the income earned by trusts (ss 1, 25B and 7) ..................... 946
24.6 Liability of the donor for tax on income (s 7(2) to 7(8)) .................................................... 947
24.6.1 Donation, settlement or other disposition (s 7(9) and 7(10)) ........................... 948
24.6.2 Deemed inclusion in spouse’s income (s 7(2)) ................................................. 948
24.6.3 Deemed inclusion in parent’s income (s 7(3) and 7(4)) ................................... 948
24.6.4 Retained income not vested due to stipulation or condition (s 7(5)) ................ 948
24.6.5 Amount vested that could have been revoked (s 7(6)) .................................... 950
24.6.6 Donation of the right to income (s 7(7)) ............................................................ 951
24.6.7 Resident benefiting a non-resident (s 7(8)) ...................................................... 951
24.6.8 Recovery of tax (s 91(4) and first proviso to s 90) ............................................ 952
24.6.9 Interest-free and low-interest loans (ss 7, 7C, 7D)............................................ 952
24.6.9.1 Normal tax consequences .................................................................. 953
24.6.9.2 Donations tax consequences .............................................................. 955
24.7 Deductions and allowances (s 25B(3)) ............................................................................ 955
24.8 Limitation of losses (s 25B(1), (4), (5), (6) and 7) ............................................................ 956
24.9 Capital gains tax consequences of trusts (paras 11(1)(d), 13(1) and 38)) ..................... 958
24.9.1 Capital gain in respect of a disposal by a trust (paras 62, 64E, 68, 69, 70,
71, 72, 73, 80(1) and 80(2)) .............................................................................. 959
24.9.2 Capital gain distributions to another trust (par 80(2)) ....................................... 960
24.9.3 Distributions to an exempt entity (paras 38, 62, 80(1) and 80(2)) ................... 961
24.9.4 Treatment of capital losses in respect of a disposal by a trust (s 1 and
par 39) ............................................................................................................... 961
24.9.5 Base cost of a discretionary interest (par 81) .................................................. 961
24.10 Comprehensive example ................................................................................................. 961
24.11 Non-resident trusts (s 25B(2A) and par 80) ..................................................................... 965
24.1 Overview
A trust is defined as the legal relationship created by a person (the founder) who places assets under
the control of another (the trustee) for the benefit of specified persons (beneficiaries) or for a specified
purpose. Even though a trust is regarded as a relationship, it is specifically included in the definition
of a ‘person’ to put it beyond doubt that a trust could be subject to normal tax (s 1). The founder
941
appoints the trustee(s) who acts on behalf of the beneficiaries. It is the trustee’s function to administer
and distribute the income and capital of the trust until termination of the trust. Any distribution to the
beneficiaries of the trust must be made in accordance with the provisions of the trust deed, which is
a document containing all the rules of the trust.
Trusts can be used to provide for dependants in the case of death, to manage financial risk exposure
by protecting assets from creditors or to reduce estate duty on death. In a business context, trusts
are used in Black Economic Empowerment (BEE) deals and share incentive schemes.
The following diagram illustrates the layout of the chapter:
Different types of income

(see 24.4)
Third party
(see 24.9)
Creation of the trust TRUST Disposal of assets

(see 24.2) by the trust to:
Beneficiary
(see 24.9)
Distribution/retention
of income will result
in tax
consequences
of one of three
parties:
Donor Beneficiary Trust

(see 24.6) (see 24.5) (see 24.3 and 24.5)
24.2 Creation of the trust

Depending on how a trust is created, it can be classified as either mortis causa or inter vivos. A
mortis causa trust is created in terms of a person’s will and is also known as a testamentary trust. It is
regularly used to provide for minor children and/or the spouse after a person’s death. The trustees
will manage the assets that were bequeathed to the trust on behalf of the spouse and children to
ensure a steady inflow of cash to provide for their needs and living expenses.
An inter vivos trust is created during the lifetime of the founder and is also known as a living trust. The
founder normally sells or donates assets to the trust.
This classification does not determine the tax consequences of the trust, but merely indicates how it
was created.
24.3 Different types of trusts

For tax purposes, we have two types of trusts, namely an ordinary trust and a special trust. The tax
rate of these trusts differ, but neither of them qualify for the primary, secondary or tertiary rebates
(s 6) or for the limited interest exemption (s 10(1)(i)) since a trust is not a natural person. Even though
a trust is not a natural person, its year of assessment always ends on the last day of February.
The above should not be confused with the discretionary power vested in the Commissioner to grant
permission to a natural person or trust to submit accounts for a period which differs from the year of
assessment when a trade is carried on (s 66(13A). When such permission is granted, the year of
assessment is not altered, but merely the accounting period for the trade profits included in the year
of assessment. For example, a full accounting period from 1 January 2021 until 31 December 2021
could be included in the year of assessment ending on 28 February 2022.
942
24.3 Chapter 24: Trusts
24.3.1 Ordinary trust (ss 1 and 6)

An ‘ordinary trust’ is a trust which is not a ‘special trust’ as defined. The tax rate of an ordinary trust is
fixed at 45%. If the trust has, for example, taxable income of R45 000 the tax liability of the trust will
be R20 250 (45% × R45 000).
24.3.2 Special trust (s 1 and par 82 of the Eighth Schedule)

For normal tax purposes the rate of a special trust is not fixed at 45%, but the sliding scale applicable
to natural persons that varies from 18% to 45% applies to special trusts.
The definition of ‘special trust’ provides for two types (s 1). The first type of special trust is a trust that
is created solely for the benefit of a person with a disability. The second type of special trust is a trust
created in terms of the will of a deceased person solely for the benefit of beneficiaries who are his
relatives.
For the first type of special trust, a trust created solely for the benefit of a person with a disability,
the following requirements should be met to qualify as a ‘special trust’:
l If there is more than one beneficiary, both must be disabled and relatives in relation to each
other.
l The disability must prevent the beneficiaries from earning sufficient income for their maintenance
or from managing their own financial affairs.
When all disabled beneficiaries die, the trust will no longer be deemed to be a special trust for the
purposes of years of assessment ending on or after the date of the last person’s death. For example,
if the only disabled beneficiary of a special trust died during the 2022 year of assessment, then the
trust will be regarded as an ordinary trust (and not a special trust) for the entire 2022 year of assess-
ment and taxed accordingly (namely at the fixed rate of 45%).
The second type of special trust is a trust created in terms of the will of a deceased person solely
for the benefit of beneficiaries who are his relatives. These beneficiaries
l must all be alive or have been conceived (not yet born) on the date of his death; and
l the youngest beneficiary must be under the age of 18 years on the last day of the year of assess-
ment of the trust.
The trust will cease to be a special trust in the year of assessment when the youngest beneficiary
attains the age of 18. For example, if the youngest beneficiary turns 18 on 1 December 2021, then the
trust will be an ordinary trust for the entire 2022 year of assessment and taxed accordingly (namely at
the fixed rate of 45%).
For the calculation of any capital gain or loss, different rules apply. When the beneficiary of a special
trust dies, the trust must continue to be treated as a special trust for the purposes of the tax on cap-
ital gains until the earlier of the following dates:
l the date of disposal of all the assets held by the trust, or
l two years after the date of death of the last beneficiary (par 82).
943
24.4 The nature of the income received and distributed by trusts (ss 10(1)(i),
10(2)(b) and 10B)
The following diagram shows different types of income that a trust (with three beneficiaries) may earn:
Dividends Interest Rental Trade income
Assets in the
Asset sold, bequeathed TRUST
or donated to trust that produces
above income
Trustees may
distribute some or
all of income to
beneficiaries in
terms of trust deed
Beneficiary 1 Beneficiary 2 Beneficiary 3
Before a person can decide who should be subject to tax on any income received by a trust or distri-
buted by a trustee, it is important to determine the nature of the amounts received.
A trust is a mere conduit pipe through which income flows, and the income retains its identity in the
hands of the beneficiaries if it flows through in the year of accrual in the trust. If a trust, for example,
receives dividend income and the trustee distributes some of this income to a beneficiary, the nature
of the income received by the beneficiary will also constitute dividend income. A further result of the
conduit pipe principle is that all distributions by a trust are deemed to consist pro rata of the different
types of income earned by the trust. A trust deed may, however, provide that a certain distribution
must be made from a certain type of income only, or that the decision may be left up to the discretion
of the trustees.
After a person has determined the nature of all amounts received by beneficiaries, it is important to
note that any exemption from tax provided in the Act applying to that type of income will be available
to that beneficiary. The normal rules apply to determine whether an exemption applies or not.
The dividend or interest portion of an annuity that is received by or accrues to any person will not
qualify for the local dividend exemption (s 10(1)(k)) or the exemption for interest available to non-
residents (s 10(1)(h)) since it is prohibited (s 10(2)(b)). The foreign dividend exemption (s 10B) is also
prohibited in respect of any portion of an annuity (s 10B(5)). It is submitted that the local interest
exemption available to natural persons (s 10(1)(i)) may still be used against the relevant portion of an
annuity since it is not specifically prohibited.
944
Example 24.1. Income retains its identity
Samuel is 19 years old and is one of three beneficiaries of a testamentary resident trust. In terms
of the trust deed, Samuel must receive an annuity of R18 000 payable pro rata out of the receipts
and accruals of the trust. The trustees may make any further discretionary distributions to Samuel
and his two brothers, David and Carl, after payment of the annuity. No beneficiary has a vested
right to the retained amounts of the trust.
The following income accrued during the 2022 year of assessment to the trust:
Local dividends ............................................................................................................. R35 000
Foreign dividends (not exempt in terms of s 10B(2)) ..................................................... 30 000
Interest from South African investments (not exempt in terms of s 12T) ........................ 25 000
Interest from sources outside South Africa .................................................................... 10 000
R100 000
Apart from the R18 000 annuity paid to Samuel, the trustees made discretionary distributions of
R2 000 to each of the beneficiaries. Assume that the trust incurred no expenses and Samuel
earns no other income.
The distributions can be summarised as follows:
Local Foreign Local Foreign
Total
dividends dividends interest interest
R100 000 R35 000 R30 000 R25 000 R10 000
100% 35% 30% 25% 10%
35 000 30 000 25 000 10 000
100 000 100 000 100 000 100 000
Annuity: Samuel (note) ............ (18 000) (6 300) (5 400) (4 500) (1 800)
Distribution: Samuel ................ (2 000) (700) (600) (500) (200)
Distribution: David................... (2 000) (700) (600) (500) (200)
Distribution: Carl ..................... (2 000) (700) (600) (500) (200)
R76 000 R26 600 R22 800 R19 000 R7 600
Note
Samuel received R18 000 that consists pro rata of each type of income received by the trust.
R6 300 (35% × R18 000) is the local dividend portion, R5 400 (30% × R18 000) is the taxable
foreign dividend portion, R4 500 (25% × R18 000) is the local interest portion and R1 800 (10% ×
R18 000) is the foreign interest portion. The amounts that relate to the other distributions are
apportioned accordingly.
Calculate the taxable income of Samuel for the 2022 year of assessment.
945
SOLUTION
Taxable income of Samuel
Annuity received consisting of the different types of income as indicated
in the distribution table (‘gross income’ as defined in s 1 par (a)).............. R18 000
Local dividends ..................................................................................... R6 300
Foreign dividends .................................................................................. R5 400
Local interest ......................................................................................... R4 500
Foreign interest ...................................................................................... R1 800
Less: Exemptions (note)............................................................................ (R4 500)
Local interest exemption of R4 500 (less than R23 800) (s 10(1)(i)) ......... (R4 500)
Distribution received consisting of the different types of income
as indicated in the distribution table (‘gross income’ as defined in s 1) .... R2 000
Local dividends .................................................................................... R700
Foreign dividends ................................................................................. R600
Local interest ........................................................................................ R500
Foreign interest ..................................................................................... R200
Less: Exemptions ...................................................................................... (R1 533)
Local dividend exemption (s 10(1)(k)) against R700 since payment
is not an annuity ........................................................................................ (R700)
Foreign dividend exemption (s 10B(3)) is 25/45 × R600 since payment
is not an annuity and Samuel is a natural person ..................................... (R333)
Local interest exemption (s 10(1)(i)) of R500, max R23 800 and only
R4 500 already used ................................................................................. (R500)
Taxable income ......................................................................................... R13 967
Note
Samuel may not use the local and foreign dividend exemptions (ss 10(1)(k) and 10B(3)) because
the payment is made as an annuity (ss 10(2)(b) and 10B(5)), but the local interest exemption
(s 10(1)(i)) is not specifically prohibited if paid in the form of an annuity. No exemption is availa-
ble against foreign interest.
Any income retained in a trust would normally already have been taxed during the year that the income
arose. A subsequent distribution of retained amounts is not again taxed in the hands of the benefi-
ciary unless it is paid in the form of an annuity (which is specifically included in par (a) of the gross
income definition).
24.5 Person(s) liable for tax on the income earned by trusts (ss 1, 25B and 7)
An income tax assessment may be raised on the trustee, a donor and/or on the beneficiaries. The
following specific order of persons who may be taxed on an amount earned by the trust applies:
l Firstly, the donor
An outright donation of an asset to the trust or the granting of interest-free (or low-interest) credit
in respect of assets sold to the trust may trigger tax consequences for the donor.
The donor will not only be subject to tax on amounts actually received from the trust, but also on
amounts deemed to accrue to the donor (s 7(2) to 7(8)) (since s 25B(1) is made subject to the
donor provisions (s 7) – see 24.6).
l Secondly, a beneficiary with a vested right
The beneficiary will only be subject to tax on amounts that vest in the beneficiary, but only to the
extent that it is not deemed to accrue to the donor (s 25B(1) and 25B(2) read together with s 7(1)).
l Lastly, the trust
The trust will only have taxable income if no beneficiary has a vested right to the income and the
income is not deemed to accrue to the donor (s 25B(1)).
The trustee is the representative taxpayer in respect of any income earned by the trust (par (c) of
the definition of a ‘representative taxpayer’ in s 1).
Careful consideration must be given to the provisions of the trust deed, the relevant sections of the
Act and the legal principles relating to the vesting of rights when determining the liability for tax in
respect of the income of a trust.
946
24.5–24.6 Chapter 24: Trusts
A vested right to income means that the beneficiary will definitely receive it or it will fall into the estate
of the beneficiary should the beneficiary die before payment and it includes
l income due and payable to a beneficiary
l income credited to an account for the benefit of the beneficiary
l income reinvested, accumulated or capitalised in the name of the beneficiary, or
l income that has been dealt with for the benefit of a beneficiary.
If a person has a vested right to income, it means that the person is unconditionally entitled thereto,
even though enjoyment and/or payment may be postponed until a future date when the income
becomes distributable.
If a person does not have a vested right in terms of a trust deed, vesting will occur when the trustees
exercise their discretion and make a distribution to a specific beneficiary (s 25B(2)). Where vesting
occurs at the discretion of the trustees, the trust is often referred to as a discretionary trust.
In contrast to a vested right, a contingent right is merely an expectation or hope that may never realise.
Example 24.2. Section 25B
In whose hands will the annual income be subject to tax in each of the following scenarios?
(1) In terms of a will, the assets of a deceased are vested in a resident trust to be administered
for and on behalf of the deceased’s six minor children. The trustees must use their discre-
tion to disburse the income of the trust necessary for the maintenance and education of the
children. The balance of the income is to be accumulated for the benefit of the children and
to be paid over to them if and when they reach the age of 25. In terms of the trust deed, a
child is not entitled to his share of the accumulated income in the event of his death prior to
reaching the age of 25.
During the year of assessment, the trust derived a net income of R40 000. In terms of the
discretionary powers of the trustees, they spent R18 000 in total for the maintenance and
education of the children whereby each child benefited equally.
(2) In terms of her late father’s will, Thandi was entitled to the balance of his estate. The will
provided that this balance should be placed in a resident vested trust, to be administered
by trustees. The trustees have full discretion to determine how much of the trust income
should be made available to Thandi and how much should be reinvested. It was clear from
the trust deed that Thandi had a vested right to both capital and income. Upon Thandi’s
reaching the age of 30, the trust would terminate and she would receive all the accumulated
income and assets of the trust.
During the year of assessment, R6 000 was awarded to Thandi by the trustees out of the net
income of R30 000, while the balance of R24 000 was reinvested.
SOLUTION
(1) Of the R18 000 expended by the trustees for maintenance and education of the children,
R3 000 is taxed in the hands of each minor child because the children acquired vested
rights in consequence of the exercise by the trustees of their discretion (s 25B(1) and (2)).
Although the balance of R22 000 (R40 000 – R18 000) is being accumulated for the benefit
of the minor children, a child will only become entitled to the accumulated income if he or
she is alive at the age of 25. The children only have contingent rights to the accumulated in-
come. Since no beneficiary is presently entitled to this income, the R22 000 is taxed in the
hands of the trust, with the trustees being the representative taxpayers of the trust
(s 25B(1)).
(2) The balance of Thandi’s father’s estate vested in her. The R24 000 not distributed to her was
reinvested by the trustees for her benefit and is deemed to have accrued to her (s 25B(1)).
The retained R24 000 as well as the amount of R6 000 awarded to her are taxed in her
hands.
24.6 Liability of the donor for tax on income (s 7(2) to 7(8))

Anti-avoidance provisions deem a different person to be taxed on that income than the person to
whom the income accrues, for example where the income accrues as a result of a donation to a
spouse, minor child or non-resident (s 7(2) to 7(8)). To know exactly in whose hands the income of a
trust is taxable, a thorough knowledge of these provisions is vital since the donor provisions take
preference before considering tax consequences for a beneficiary with a vested right and the trust
(s 25B(1) and (2)).
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24.6.1 Donation, settlement or other disposition (s 7(9) and 7(10))

The anti-avoidance provisions (s 7(2) to 7(8)) may only be invoked if a ‘donation, settlement or other
[similar] disposition’ has taken place. A detailed discussion of its meaning can be found in chapter 7.
These anti-avoidance provisions are not only applicable when a donation is made to a trust; they may
also be invoked on other direct donations between persons.
‘Donation, settlement or other disposition’ in summary refers to any gratuitous disposal. For the
remainder of this chapter, any reference to a ‘donation’ will include a settlement or similar disposition.
It is important to note that the non-charging of market-related interest on a loan is considered to be a
continuous donation for purposes of attributing income to a ‘donor’ (s 7). The non-charging of market-
related interest is, however, not normally a donation for the application of donations tax, but from
1 March 2017, the charging of less than the official rate of interest on certain loans to a trust has dona-
tions tax consequences (s 7C discussed in 24.6.9.2).
Where an asset has been disposed of for a consideration that is less than the market value of the
asset, the amount by which the market value exceeds the consideration is also deemed to be a
donation for the purposes of s 7 (s 7(9)) and donations tax (s 58).
A resident who, during any year of assessment, makes a donation for purposes of s 7 is required to
disclose this fact to the Commissioner when submitting his return of income for that year (s 7(10)).
24.6.2 Deemed inclusion in spouse’s income (s 7(2))

To prevent spouses from reducing their liabilities for normal tax by arranging for taxable income to be
split between them, the anti-avoidance provision may apply (s 7(2)). If excessive amounts are paid
out of the trade income of one spouse to the other spouse or where one spouse donates income-
producing assets to the other spouse with the sole or main purpose of reducing his tax liability, the
first-mentioned spouse will be taxed on the excessive amount or the income generated from the
donated asset (see chapter 7 for a detailed discussion of s 7(2)).
In the context of a trust, s 7(2) will only apply if one spouse donates income-producing assets to a
trust with the other spouse as the beneficiary of the trust and the sole or main purpose of the donation
was the reduction of the donor spouse’s tax liability.
24.6.3 Deemed inclusion in parent’s income (s 7(3) and 7(4))

To prevent a parent from diverting his income to a minor child who will normally be taxed at a lower
rate, anti-avoidance provisions were introduced (s 7(3) and 7(4)). These anti-avoidance provisions
are applicable to direct and indirect donations from parents to their minor children (which include
adopted children) or stepchildren. A person is a minor if he or she is unmarried and has not attained
the age of 18 years. The determination of whether the child is a minor is done at the time of ‘vesting’.
The parent is liable for tax on the income produced by reason of or in consequence of the donated
assets, if the income had been received by or had accrued to the child or if it had been expended or
accumulated for the child’s benefit (see chapter 7 for a detailed discussion of s 7(3) and 7(4)).
24.6.4 Retained income not vested due to stipulation or condition (s 7(5))

A specific donor provision applies to retained income in a trust that has not vested in a beneficiary as
a result of a condition (s 7(5)). The condition may have been imposed by the donor or another per-
son. The condition may be that a certain age must be reached, or the beneficiary must marry, or that
the trustees must exercise a discretionary power to pay income to beneficiaries. The latter is implied
in all discretionary trusts and an amount retained in a discretionary trust, which arose from a donated
asset, will therefore be taxed in the donor’s hands since it has not vested in a beneficiary. The donor
is subject only to tax on the retained income that relates to his donation and only until the fulfilment of
the condition or his death, whichever happens first. It is irrelevant if the person who imposed the con-
dition is still alive.
If payment is merely delayed but the beneficiary has a vested right to retained income, then s 7(5)
will not apply, and the beneficiary will be liable for tax on the income. There is, however, a conflicting
view that a condition in the trust deed to delay payment of an amount already vested in a beneficiary
is sufficient to invoke s 7(5).
Based on the first interpretation, it is submitted that if a beneficiary has a vested right to the income,
the application of the vested right principle (s 7(1)) takes preference over the donor provision appli-
cable to retained income (s 7(5)). It must be kept in mind that another donor provision may still lead
to the liability of tax in the donor’s hands. For example, if the retained amount vests in a minor child,
the retained amount is taxed in the donor parent’s hands (s 7(3)).
948
Remember
The following specific order of persons who may be taxed on an amount earned by the trust
applies:
l firstly, the donor (s 7(2) to 7(8)) (since s 25B(1) is made subject to the donor provisions (s 7))
l secondly, a beneficiary with a vested right (s 25B(1) and 25B(2) read together with s 7(1)),
and
l lastly, the trust (s 25B(1)).
Example 24.3. Section 25B(1) subject to s 7

Joseph donated a rent-producing asset to a trust. His two children (Mary and Margaret) are the
beneficiaries of the trust. Mary is a minor and Margaret is a 22-year-old full-time student. During
the 2022 year of assessment, the trust earned R50 000 net rental income. The trustees exercised
their discretion and distributed R10 000 to each beneficiary. No beneficiary has a vested right to
the retained amount of R30 000 (R50 000 – (R10 000 × 2)).
Determine who will be liable for income tax on the rentals earned by the trust.
SOLUTION
Firstly: Apply the relevant donor provisions. The donor (Joseph) will be taxed on the income that
accrues to his minor child (Mary) by reason of his donation (s 7(3)), as well as the retained in-
come of the trust (s 7(5)). Joseph is therefore taxed on R40 000 (R10 000 + R30 000).
Secondly: Include the income in the tax calculation of the beneficiary who has a vested right to it
(s 25B(1)). Margaret will thus be taxed on her R10 000.
Lastly, tax the trust on any retained amount that was not subject to s 7(5) and to which no benefi-
ciary has a vested right. There is thus no amount to be included in the taxable income of the
trust.
In summary:
Amount received or accrued to the trustees................................................................. 50 000
Deemed to accrue to:
Joseph (s 7(3)) .......................................................................................................... (10 000)
Joseph (s 7(5)) .......................................................................................................... (30 000)
Margaret (s 25B(1)) ................................................................................................... (10 000)
Taxable income of the trust........................................................................................... Rnil
Example 24.4. Section 7(5)

Edward created a trust for the benefit of his minor grandson, Adam, his major grandson, Brian,
and his married granddaughter, Caroline. He donated a rent-producing property to the trust to
be administered by the trustees for the benefit of his grandchildren. Charles (Edward’s friend)
who does not have any family of his own, donated another rent-producing property to the trust.
The trust deed provides that the trustees have discretionary powers with regard to distributing
rental income to the beneficiaries (namely Adam, Brian and Caroline) as they deem necessary.
The deed provides further that accumulated rental must be split equally between the benefi-
ciaries alive on 20 December 2030.
During the year of assessment, the trust received ‘taxable’ rental income of R40 000 from the
property donated by Edward and R20 000 from the property donated by Charles. The trustees
distributed R5 000 to each beneficiary pro rata from the total rental of R60 000 and accumulated
the balance of R45 000 (R30 000 relating to the property donated by Edward and R15 000 relat-
ing to the property donated by Charles).
Determine who is liable for tax on the R60 000 taxable income.
SOLUTION
There is clearly a stipulation in the trust deed that prevents the beneficiaries from acquiring a
vested right to the rental income until the trustees exercise their discretionary power whether to
distribute any income or until 20 December 2030 that results in the application of the donor pro-
vision (s 7(5)). The R5 000 distributed to each beneficiary will be taxable in their hands due to the
exercise of the discretion of the trustees (s 25B(1) and (2)). The retained amount of R45 000 is
deemed to have accrued to Edward (R30 000) and Charles (R15 000) (s 7(5)), as both donations
are subject to the condition contained in the trust deed that prohibits the beneficiaries from re-
ceiving the retained income or attaining a vested right to it.
Section 7(3) does not apply to Edward being a donor-grandparent who benefits his minor grand-
child.
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Remember
l The person making the donation, settlement or other disposition must still be alive for the
application of s 7(5). The person who imposed the condition may already be dead, but s 7(5)
will still apply with regard to the other living donors.
l If there is more than one donor, then s 7(5) will apply to the pro rata retained income of each
donor resulting from his specific donation that is subject to the condition imposed.
l Section 7(5) applies until the date of the event or stipulation, or the date of death of the donor,
whichever occurs first. It is therefore submitted that the retained income in the trust at the
date of death of the donor will be subject to s 7(5). Any income that accrues after date of
death will be deemed to be either the beneficiary’s or the trust’s income (s 25B(1)).
24.6.5 Amount vested that could have been revoked (s 7(6))

A specific anti-avoidance provision aims to prevent a donor from leaving a backdoor open in order to
revoke a beneficiary’s right to receive any income (s 7(6)). This provision leads to a donor being
taxed on income that has already vested in a beneficiary and does not apply where a beneficiary
only has a contingent right to income.
Example 24.5. Section 7(5) and (6)

Edward created a trust for the benefit of his minor grandson, Adam, his major grandson, Brian,
and his married granddaughter, Caroline. He donated assets to the trust to be administered by
the trustees for the benefit of his grandchildren. The trust deed provides that the trustees have
discretionary powers with regard to distributing income to the beneficiaries as they deem neces-
sary. The deed provides further that the remaining annual income is to be accumulated for the
beneficiaries, who will be entitled to receive it on Edward’s death or when the beneficiaries reach
the age of 30, whichever happens first. If a beneficiary should die before attaining the age of 30,
the other beneficiaries will proportionally be entitled to that amount.
Edward has, however, also reserved for himself in the trust deed the right to confer Caroline’s
right to receive the income on Adam and Brian in equal shares at any time. So far he has not
exercised this right.
During the year of assessment, the trust received ‘taxable’ income of R6 000 from the assets. The
trustees distributed R500 to each beneficiary and accumulated the balance of R4 500.
Determine who is liable for tax on the R6 000 taxable income.
SOLUTION
The donor has clearly reserved for himself the right to revoke Caroline’s right to receive income
at any time and to confer it on Adam and Brian. Thus, the income of R500 accruing to Caroline is
deemed to be the income of Edward (s 7(6)).
There is clearly a stipulation in the trust deed which prevents the beneficiaries from acquiring a
vested right until the happening of an event (s 7(5)). The events contemplated by the trust deed
are the death of the donor or the attainment of the age of 30 by the beneficiaries, whichever
takes place first, or the exercise by the trustees of their discretionary power whether to distribute
any income. The R500 distributed to each beneficiary would normally be taxable in the hands of
the beneficiaries (s 25B(1)), but s 7(6) overrides this provision as discussed above. The retained
amount of R4 500 is deemed to be Edward’s since the condition prohibits the beneficiaries from
receiving the money or acquiring a vested right to it (s 7(5)).
To sum up, Adam and Brian are each liable for tax on the R500 that they receive from the trust-
ees (s 25B(1)), while Edward is liable for tax on R5 000 (R4 500 (s 7(5)) and R500 paid to Caro-
line (s 7(6)). Caroline is not liable for tax on the R500 paid to her.
Remember
Differences between s 7(5) and 7(6):
l For s 7(5) to be applicable, no beneficiary may have a vested right to the retained amount,
whereas in s 7(6) a beneficiary acquires a vested right, but due to the power to revoke the
beneficiary’s right to benefit, the donor is taxed.
l For the application of s 7(5), any person could have imposed the condition and then s 7(5)
applies to all donors. Section 7(6) applies only to the donor who has the right to transfer a
beneficiary’s right to receive the income to someone else. If A makes a donation to a trust for
example, but in terms of the trust deed, B has the power to revoke a beneficiary’s right to re-
ceive any income, the provisions of s 7(6) will not apply to the income as a result of A’s dona-
tion. The reason for this is because the donor and the person who has the right to transfer the
income to another are not the same person.
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24.6.6 Donation of the right to income (s 7(7))

To prevent schemes where a taxpayer cedes the right to receive income generated by his asset, a
specific anti-avoidance provision was introduced (s 7(7)). This section is applicable if a taxpayer
cedes the right to receive income to another person, while the taxpayer retains the ownership of the
asset (or retains the right to regain the ownership at a future date). Without this anti-avoidance provi-
sion, a taxpayer can cede his right to income (before its accrual) for a period and thereby decrease
his taxable income for that period.
Any rent, dividends, interest, royalties (and other similar income) in respect of movable or immovable
property received by or accrued to another person as a result of a donation, while the donor remains
the owner of the property, is deemed to be that of the donor. The donor provision is also applicable if
the donor is entitled to regain ownership of the property. Examples of property for purposes of this
donor provision include fixed property, shares, marketable securities, deposits, loans, copyrights,
designs and trademarks.
The donor will be taxed even if the income would have been exempt from tax in the hands of the
actual recipient (for example a church or welfare organisation).
Nsizwa created an inter vivos trust and donated a residential property to the trust. The trust deed
stipulates that the rental income produced by the property must be paid to a specified charitable
organisation. Ownership of the property must, however, be transferred back to Nsizwa if he so
notifies the trust in writing.
Who will be liable for income tax on the rental earned by the trust and paid to the charitable
organisation during the year of assessment?
SOLUTION
Nsizwa is entitled to regain ownership of the property, and the rental income produced by the
property is therefore taxed in the hands of Nsizwa, even though the charitable organisation
receives all the rental income (s 7(7)).
Note: The application of s 7(7) (and possibly also s 7(6)) may further trigger a specific anti-avoidance
provision in the Estate Duty Act, which deems property of the deceased to include any property that
he was competent to dispose of for his own benefit (s 3(3)(d)). For example, where the donor is the
only trustee and also a capital beneficiary of the trust, the property will be included in the amount on
which estate duty is payable.
Remember
l Section 7(7) relates only to income generated by property and does not apply to income from
services rendered. This is because income as a result of services rendered is taxable in the
hands of the person who rendered the services, irrespective of who received the income
(par (c) of the definition of ‘gross income’).
l Section 7(7) is applicable to all the income resulting from the specific property, not only to the
distributed income.
24.6.7 Resident benefiting a non-resident (s 7(8))

South Africa applies a residence-based (or worldwide) system of taxation to its ‘residents’ (as defined
in s 1) and a source-based system of taxation to non-residents. It is therefore possible that South
African ‘residents’ could attempt to reduce their South African tax obligation by shifting income that is
not from a South African source to non-residents or attempt to use exemptions that are only available
to non-residents (for example s 10(1)(h)). In order to avoid an erosion of the tax base where a dona-
tion by a resident benefits a non-resident, another specific anti-avoidance donor provision exists
(s 7(8)).
An amount that accrues to a person who is not a resident (either a non-resident beneficiary or a non-
resident trust) by reason of a donation made by a resident can be included in the income of the
resident donor. This will be the case if the amount would have constituted income had that non-
resident benefiting from the donation been a resident (s 7(8)(a)). There are two schools of thought on
the application of s 7(8)(a). The one interpretation is that if the non-resident would have had any
income as defined, then the full amount that is received by or accrued to the non-resident must be
951
included in the gross income of the resident (subject to relevant exemptions available to the resi-
dent). This interpretation is based on the fact that if a provision requires an amount to be included in
the income of a person, it is gross income as defined (refer to par (n) of the definition of ‘gross in-
come’). The alternative view is that only the amount that would have constituted ‘income’ as defined
had the non-resident been a resident, must be included in the ‘income’ of the donor and not the full
amount that is received by or accrued to the non-resident. The donor would then not qualify for
exemptions against such amounts, but only deductions as discussed below (s 7(8)(b)). The net effect
of both views will normally be the same, but if local interest accrues to the non-resident, the answer
will be different if the resident donor has already used his interest exemption (s 10(1)(i)).
The resident is allowed to deduct any expenditure, allowance or loss incurred by the non-resident
that would have been allowable as a deduction in the determination of taxable income (s 7(8)(b)).
The deduction is limited to the amount included in the income of the resident. It seems as if the same
provision is not necessary in s 7(2) to (7) because the term ‘income’ used in those sections refers to
profits according to the judgment in CIR v Simpson (1949 (4) SA 678 (A)). Deductions are taken into
account to calculate profits.
John, a resident of South Africa, created an inter vivos resident trust and obtained SARB approv-
al to donate a foreign interest-bearing investment to the trust. The trust deed stipulates that the
interest income earned by the trust must be paid to his son, Jeff, who emigrated from South Afri-
ca to Australia during the previous year of assessment and did not return to South Africa during
the current year of assessment. Jeff does not carry on a business in South Africa.
Discuss who will be liable for tax on the interest income.
SOLUTION
In terms of s 9(4), the interest is not from a source in the Republic and would therefore not have
constituted gross income (or income) for Jeff since he is a non-resident. It would, however, have
been income had Jeff been a resident (worldwide income) and s 7(8) is therefore applicable. In
terms of s 7(8), John will be liable for income tax on the amount that would have been ‘income’ in
the hands of Jeff. The full gross amount of the interest must therefore be included in John’s in-
come as no exemption is available for foreign interest. Jeff may, however, have a tax liability in
Australia on the interest and John will then qualify for a rebate because the amount is deemed to
have been received by or accrued to John in terms of s 7 (s 6quat(1)(f) and (1A)(f) – see chapter 21).
Donations made by a resident to a non-resident public benefit organisation and amounts that accrue
to a controlled foreign company in relation to the resident donor (s 9D) fall outside this specific anti-
avoidance donor provision (s 7(8)).
Remember
From 1 March 2019 the participation exemption must be disregarded in certain instances when
determining if an amount would have constituted income (see chapter 21.7.2.1).
24.6.8 Recovery of tax (s 91(4) and first proviso to s 90)

Any tax payable by a donor due to the inclusion of income deemed to have been received by him in
his taxable income may be recovered from the person entitled to the actual receipt of the income so
included (first proviso to s 90). The tax on the income may be recovered from the assets that gener-
ated the income (s 91(4)).
24.6.9 Interest-free and low-interest loans (ss 7, 7C, 7D)

A person could sell an asset to a trust at market value, but leave the selling price outstanding on an
interest-free (or low interest) loan. In this situation one will have to separate the sale of the asset and
the failure to charge sufficient interest on the outstanding loan. The non-charging of market-related
interest on a loan is considered to be a continuous donation for purposes of attributing income to a
‘donor’ (s 7) (see 24.6.9.1). This market-related interest rate for attributing income to the ‘donor’ is not
linked to the official rate of interest.
Please take note that the charging of less than the official rate of interest on certain loans may also
result in donations tax consequences (s 7C – see 24.6.9.2). This may differ from the market-related
interest rate used for the attribution of income.
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24.6.9.1 Normal tax consequences

Interest-free loans
For normal tax purposes, the causal relationship between the failure to charge interest and any
income accruing to the trust (or beneficiaries) affects the application of s 7 (CIR v Berold 1962 (3) SA
748 (A), confirmed in CSARS v Woulidge (2000 (1) SA 600 (C))). The deemed interest is calculated
annually, based on the difference between a market-related interest and the actual interest charged.
This amount indicates the maximum amount of income that may be attributed to the donor. Should
there be no income to attribute to the donor during that year of assessment, the maximum amount
that may be attributed in the following year includes the unused amount from previous years. The
limitation is thus applied cumulatively.
The deemed interest for purposes of attributing income to the donor (s 7) is not limited to the out-
standing capital. The amount of deemed interest must therefore always be determined without regard
to the in duplum rule that prohibits the interest to exceed the outstanding capital (s 7D).
Example 24.8. Interest-free loans
Mark created an inter vivos discretionary trust on 28 February 2021 by selling a rent-producing
property to the trust at its market value of R10 000 000. The purchase price was not paid by the
trust but credited to an interest-free loan account. Assume SARS considers that a market-
related interest of 5% should have been charged. The trust earned gross rentals of R950 000
and incurred tax deductible expenditure of R250 000. Mark’s minor stepdaughter and major son
are the beneficiaries of the trust and each beneficiary received R10 000 of the net rental income
during the 2022 year of assessment. No beneficiary has a vested right to the retained income of
the trust.
Calculate the taxable income of the relevant parties.
SOLUTION
The non-charging of market-related interest on the loan is considered to be a continuous dona-
tion for purposes of attributing income to Mark and the following amounts are subject to the
donor provisions (s 7):
Rentals of minor stepchild as a result of parent’s donation (s 7(3)) .............................. R10 000
Retained rentals (R950 000 – R250 000 – R10 000 – R10 000) as a result of a
donation and no beneficiary has a vested right (s 7(5)) .............................................. R680 000
R690 000
But the total application of the donor provisions (s 7) is limited to the interest that Mark should
have charged. Based on the information that Mark should have levied R500 000 interest (5% ×
R10 000 000), only R500 000 of the net rental will be taxed in Mark’s hands (s 7) and the excess
rental of R190 000 (R690 000 less R500 000) will be taxed pro rata in the hands of his minor
stepdaughter’s and in the hands of the trust. To establish who must be taxed on the excess,
one has to look at where the R690 000 arose. The minor stepdaughter did receive the R10 000
and therefore the amount that vested in her in terms of s 25B(2) read with s 25B(1), and the pro
rata excess in respect of that amount that cannot be taxed in Mark’s hands, must be taxed in
her hands. The pro rata excess of the retained rentals must be taxed in the trust’s hands in
terms of s 25B(1) since the donor cannot be taxed and no beneficiary has a vested right there-
to. Mark’s minor stepdaughter’s pro rata share is R2 754 (R190 000 × (R10 000/R690 000)) and
the trust’s pro rata share is R187 246 (R190 000 × R680 000/R690 000).
Mark will thus be taxed on............................................................................................. R500 000
Mark’s minor stepdaughter will be liable for normal tax on pro rata excess (calculat-
ed above) ...................................................................................................................... R2 754
The trust will be taxed on the pro rata excess of the retained amount (calculated
above) .......................................................................................................................... R187 246
Mark’s major son will be liable for normal tax on the full R10 000 that accrued to him (s 7 is not
applicable; apply s 25B(1)).
Although an interest-free loan is regarded as a continuous donation for the purpose of attributing
income to a ‘donor’, the actual interest-free loan granted to a trust does not usually lead to a taxable
benefit for the trust. When the lender, however, receives something in exchange for the granting of
953
the loan to the trust, then an amount may be included in the trust’s gross income. The judgment in
CSARS v Brummeria Renaissance (Pty) Ltd ([2007] 4 All SA 1338 (SCA)) whereby a developer had to
include the value of an interest-free loan received in his gross income was based on the quid pro quo
principle (i.e., the developer granted a ‘life right’ in return for the receipt of the loan). The value of the
benefit of the interest-free loans to the developer was determined by applying the weighted prime
overdraft rate for banks to the average amount of the interest-free loans.
Low-interest loans
Where interest is levied, for example, at 4% instead of an assumed market-related rate of 12%, then a
partial donation for purposes of s 7 arises. The Act does not prescribe an apportionment method and
different views therefore exist on the tax treatment. One view is that income earned may be attributed pro
rata to an element of gratuitousness. The element of gratuitousness is then based on the portion that does
not carry interest of 8% (12% – 4% in the example) versus the total interest that should have been
charged (12%). Section 7 will thus be applied to two-thirds (8%/12%) of the income earned. Another view
is to use a ratio of the amount of the forfeited interest divided by the amount of the net income to deter-
mine how much of each payment is by reason of or in consequence of a donation. The example below
addresses both interpretations.
Example 24.9. Low-interest loans
Mark created an inter vivos discretionary trust on 28 February 2021 by selling a rent-producing
property to the trust at its market value of R10 000 000. The purchase price was not paid by the
trust but credited to a 2% interest-bearing loan account. Assume SARS considers that a market-
related rate of 5% should have been charged. The trust earned gross rentals of R950 000 and
incurred tax-deductible expenditure of R250 000. The tax-deductible expenditure of R250 000
includes the 2% interest payments. Mark’s minor stepdaughter and major son are the beneficiar-
ies of the trust and each beneficiary received R10 000 of the net rental income during the 2022
year of assessment. No beneficiary has a vested right to the retained income of the trust.
Calculate the taxable income of the related parties.
SOLUTION
The retained net rental of R680 000 (R950 000 – R250 000 – R10 000 – R10 000) can be taxable
in Mark’s hands if it is attributable to or arose in consequence of a donation (s 7(5)).
The R10 000 distributed to the minor stepchild can be taxable in Mark’s hands if it accrues by
reason of or in consequence of a donation (s 7(3)).
The Act does not provide an apportionment method and different views therefore exist on the tax
treatment. One view is that 60% of the income (being 3% (5% market-related rate – 2% actual
interest) divided by 5%) accrues by reason of or in consequence of a donation and is thus sub-
ject to the application of s 7. The rest of the example is based on this view, but the alternative
view is provided in the note. The amount to be attributed to the donor is limited to R300 000,
being the extra interest of 3% on the R10 000 000 that should have been charged.
The following amounts are subject to the donor provisions (s 7):
Rentals of minor stepchild as a result of parent’s donation (s 7(3)) (60% × R10 000). R6 000
Retained rentals as a result of a donation and not vested (s 7(5)) (60% × R680 000) R408 000
R414 000
But the total application of the donor provisions (s 7) cannot exceed R300 000
(calculated above). Mark will thus only be taxed on R300 000. .................................. R300 000
The difference of R114 000 (R414 000 – R300 000) will be taxed pro rata in his
minor stepdaughter’s and the trust’s hands. Mark’s minor stepdaughter’s pro rata
share is R1 652 (R114 000 × (R6 000/R414 000)) and the trust’s share is R112 348
(R114 000 × R408 000/R414 000)).
Mark’s minor stepdaughter will therefore be liable for normal tax on the excess of
R1 652 (calculated above) and .................................................................................. R1 652
the non-donation portion of the distribution of R4 000 (40% × R10 000) ..................... R4 000
R5 652
Mark’s major son will be liable for normal tax on the full amount that accrued
to him (s 7 is not applicable; apply s 25B(1)) .............................................................. R10 000
The trust will be taxed on
the excess of R112 348 (calculated above) and the non-donation portion of the R112 348
retained amount of R272 000 (40% × R680 000) ........................................................ R272 000
R384 348
continued
954
Note
Another view is that R300 000/R700 000 of each amount is by reason of or in con-
sequence of a donation. The R300 000 is the forfeited interest of (5% – 2%) ×
R10 000 000 and the R700 000 is the net income of R950 000 – R250 000.
If we follow this view, the amount to be included in Mark’s gross income is:
Rentals of minor stepdaughter as a result of parent’s donation (s 7(3))
(300 000/700 000 × R10 000) ...................................................................................... R4 286
Retained rentals as a result of a donation and not vested (s 7(5))
(300 000/700 000 × R680 000) ................................................................................... R291 429
R295 715
Mark’s minor stepdaughter will be taxed on the remaining 400 000/700 000 ×
R10 000 (portion not considered to be by reason of on in consequence of
donation) ...................................................................................................................... R5 714
The trust will be taxed on 400 000/700 000 x R680 000 (portion not considered to
be by reason of or in consequence of a donation) ...................................................... R388 571
Mark’s major son will still be taxed on the full distribution made to him....................... R10 000
Remember
The amount that is subject to donor provisions (s 7) is limited to the aggregate of the interest
forfeited. In other words, this calculation is cumulative. For example, let us assume that the total
interest forfeited (during previous and current years of assessment) is R150 000 and that the
donor has already been taxed on R60 000 during previous years of assessment due to the appli-
cation of s 7. The total amount (including attributed capital gains (see 24.9.1) that may then be
attributed to the donor in the current year of assessment may not exceed R90 000 (R150 000 –
R60 000).
24.6.9.2 Donations tax consequences

From 1 March 2017, an anti-avoidance provision resulting in donations tax applies to the charging of
less than the official rate of interest on amounts owed by certain trusts (s 7C). If Mark (in Example 24.8)
has therefore made no donations during the 2022 year of assessment and the official rate of interest
is assumed at 7,5% for the period 1 March 2021 to 28 February 2022, Mark will be liable for dona-
tions tax of R150 000 over and above the normal tax consequences on the R500 000 rental as calcu-
lated in the example. The donations tax is calculated as 20% of R650 000 (being ((7,5% ×
R10 000 000) – R100 000)). Section 7C will only have potential donations tax consequences for a
natural person and never any consequences for the trust as the debtor. See chapter 26 for more
detail.
Remember
Both ss 7 and 7C can apply to the same loan granted, namely s 7 can deem income to accrue to
the ‘donor’ based on a market-related interest rate that should have been charged and s 7C can
result in donations tax based on the official rate of interest (see chapter 26.10).
24.7 Deductions and allowances (s 25B(3))

To the extent to which an amount is deemed to be a beneficiary’s or the trust’s, the deduction or
allowance will be deemed to be a deduction or allowance that may be made in the determination of
the taxable income derived by the beneficiary or trust (s 25B(3)). One must keep basic principles in
mind; for example, if local dividends are exempt (s 10(1)(k)), no expense may be deducted from the
dividends, as the expense is not incurred in the production of income (ss 11(a) and 23(f)).
Example 24.10. Section 25B(3)
Bill created a trust in terms of his will and bequeathed a rent-producing property to it. Rental
earned during the current year of assessment amounted to R150 000, while the tax-deductible
expenses relating to the property amounted to R60 000. Each of the two beneficiaries obtained a
vested right to half of the rental income.
Who will be taxed on the rental earned by the trust?
955
SOLUTION
Because it is a testamentary trust and there are no living donors, the donor provisions (s 7) are
not applicable. The rental amount of R150 000 accrues in the ratio 50:50 (R75 000 each) to the
two beneficiaries because they obtained a vested right to it (s 25B(2) read with s 25B(1)). The
deduction of R60 000 may also be used by the two beneficiaries in the same ratio of R30 000
each (s 25B(3)). The taxable income of each beneficiary is therefore R45 000 (being R75 000
less R30 000).
24.8 Limitation of losses (s 25B(1), (4), (5), (6) and (7))

Deductions may not exceed the total income accruing to the beneficiary from the trust (s 25B(1) and
25B(4)). If the beneficiary cannot use the full amount of the deduction against trust income, the trust
(if the trust is subject to tax in South Africa) may use it during that year of assessment. If the trust
cannot use the deductions, it will once again be available to the beneficiary in a subsequent year of
assessment. The trust may, for example, not have sufficient taxable income available to use the
deductions or it may not be subject to tax in South Africa and is therefore prohibited from using the
deductions.
The provisions detailing this carry-forward process will further be explained by way of an example.
Example 24.11. Trusts, beneficiaries and losses

A trust’s receipts and accruals comprise rentals of R100 000 and royalties of R50 000. Its deduc-
tions and allowances amount to R165 000, of which R160 000 relates to its rentals and R5 000 to
its royalties. The beneficiary has a vested right to the rentals but not to the royalties. No royalty
income was distributed to the beneficiary.
Determine the taxable income of the beneficiary and the trust for the current year of assessment.
SOLUTION
Beneficiary:
Gross income (rentals) – vested in beneficiary (s 25B(1)) .................... R100 000
Allowances and deductions – follow vested income but limited
(s 25B(3) and (4)) ................................................................................. (100 000)
Taxable income .......................................................................................................... Rnil
Allowances and deductions relating to rental – total ............................ R160 000
Deductions allowed (see above) .......................................................... (100 000)
Carried forward to the trust (s 25B(5)) .................................................. R60 000
Trust:
Gross income (royalties) – accrual to the trust (s 25B(1))..................... R50 000
Allowance and deductions
Actual deduction relating to the royalty accrued to the trust (s 25B(3)) (5 000)
Taxable income before deemed deduction ............................................. R45 000
Deemed deduction available to trust (s 25B(5)): R60 000 from benefi-
ciary but limited to taxable income of the trust (s 25B(5)) ........................ (45 000)
Taxable income .................................................................................... Rnil
Beneficiary – Year 2
Available expenditure (R60 000 – R45 000) (s 25B(6))......................... R15 000
Example 24.12. Section 25B(4), (5) and (6)

Daisy created a trust in terms of her will for the benefit of her two children, Bobby (30 years) and
Rob (34 years). She bequeathed two rent-producing properties as well as an interest-bearing
investment to the trust. Interest of R44 000 was earned by the trust during the year, and the rental
and expenditure relating to the two properties for the 2022 year of assessment were as follows:
Property 1: Rental R50 000; Expenditure R80 000
Each of the two beneficiaries also has a vested right to half of the gross rental income of Prop-
erty 1. A distribution of R20 000 was made to each of the beneficiaries from the interest earned
by the trust. No beneficiary has a vested right to any income of Property 2 or the interest, and no
further amount was distributed during the year of assessment.
Calculate the taxable income of the beneficiaries and the trust for the 2022 year of assessment.
Assume each beneficiary earns a salary of R100 000 and has no other income for the year.
956
SOLUTION
Bobby and Rob’s taxable income is the same:
Salary ......................................................................................................... R100 000
Vested income from the trust (s 25B(1)) (50% × R50 000) + R20 000 ...... R45 000
Interest exemption (s 10(1)(i)) (R23 800 limited to actual) ......................... (20 000)
25 000
Allowable deductions (s 25B(3)) ................................................................ (25 000)
50% × R80 000 = R40 000, but limited to R25 000 (s 25B(4)).
The excess of R15 000 (R40 000 – R25 000) is available to the trust
for the 2022 year of assessment.
Taxable income from trust ......................................................................... nil
Taxable income of Bobby and Rob ........................................................... R100 000
Taxable income of the trust
Accrual to the trust (s 25B(1))
Property rental of Property 2................................................................. R118 000
Interest (R44 000 – R20 000 – R20 000)
No interest exemption is available to the trust because the trust is
not a natural person ............................................................................. 4 000
Deductions available to the trust (s 25B(3))
Expenditure in relation to Property 2 .................................................... (105 000)
17 000
Deemed deductions available to the trust (s 25B(5))
Excess deductions to be used by the trust = R30 000
(R15 000 of Bobby + R15 000 of Rob), but limited to taxable income
of trust. The excess of R13 000 (R30 000 – R17 000) is available
to the beneficiaries (R6 500 each) during the 2023 year (17 000)
of assessment. .....................................................................................
Taxable income ......................................................................................... Rnil
The limitation provisions (s 25B(4), (5) and (6)) do not apply to income that is deemed to accrue to a
beneficiary (s 25B(1)) where the beneficiary is not subject to tax in South Africa on that income
(s 25B(7)).
Example 24.13. Section 25B(7)
Julie created a trust in terms of her will for the benefit of her two children, Brad and Marty. Brad
is 30 years old and not a resident of the Republic. He earned no other income from the Republic
and did not visit the Republic during the current or previous year of assessment and does not
carry on a business through a permanent establishment in the Republic. Marty is 34 years old
and is a resident of the Republic. Apart from earning a salary of R100 000, he has no other
income for the 2022 year of assessment.
Julie bequeathed two rent-producing properties (not situated in the Republic) as well as a South
African interest-bearing account at a local bank, to the trust. Interest of R44 000 was earned by
the trust during the year, and the rental and expenditure relating to the two properties for the
2022 year of assessment were as follows:
Property 2: Rental R118 000; Expenditure R105 000.
Each of the two beneficiaries has a vested right to half of the gross rental income of Property 1.
A distribution of R20 000 was made to each of the beneficiaries from the interest earned by the
trust. No beneficiary has a vested right to any income of Property 2 or the interest, and no further
amount was distributed during the year of assessment.
Calculate the taxable income of the beneficiaries and the trust for the 2022 year of assessment.
Ignore the application of any double taxation agreement.
957
SOLUTION
Marty’s taxable income:
Salary ......................................................................................................... R100 000
Vested income from the trust (s 25B(1)) (50% × R50 000) + R20 000 ...... R45 000
Interest exemption (s 10(1)(i)) (R23 800 limited to actual) ......................... (20 000)
25 000
Allowable deductions (s 25B(3)) ................................................................ (25 000)
50% × R80 000 = R40 000, but limited to R25 000 (s 25B(4)). The
excess of R15 000 (R40 000 – R25 000) is available to the trust for
the 2022 year of assessment
Taxable income from trust ......................................................................... nil
Taxable income of Marty............................................................................ R100 000
Brad’s taxable income:
Rental of R25 000 (50% × R50 000) is deemed to have accrued to Brad,
but it is not from a source in the Republic and is thus not his gross in-
come. The R20 000 interest vested in him is gross income (s 25B(1)) ...... R20 000
Interest exemption available to non-residents (s 10(1)(h)) ........................ (20 000)
Allowable deductions are R40 000 (50% × R80 000) (s 25B(3)), but
since the rental was not included in Brad’s gross income, Brad is not
able to deduct the expenses incurred in generating the rental income.
The deduction amount is, however, not limited and also not available
to the trust because Brad is not subject to tax in South Africa on that
income (s 25B(7)). The deduction of the R40 000 is effectively ‘lost’
forever ........................................................................................................ nil
Rnil
Taxable income of the trust
Accrual to the trust (s 25B(1))
Property rental of Property 2 ...................................................................... R118 000
Interest (R44 000 – R20 000 – R20 000)
No exemption is available to the trust to be used against the interest
because the trust is not a natural person................................................... 4 000
Deductions available to the trust (s 25B(3))
Expenditure in relation to Property 2 .......................................................... (105 000)
17 000
Deemed deduction available to the trust (s 25B(5))
Only Marty’s excess deductions to be used by the trust .......................... (15 000)
Taxable income of the trust ........................................................................ R2 000
Apart from income vesting and attribution rules (ss 7 and 25B), transactions involving a trust might
also have CGT effects.
24.9 Capital gains tax consequences of trusts (paras 11(1)(d), 13(1) and 38))
(All paragraph references in the rest of this chapter are to the Eighth Schedule of the Act.)
A trust will have a disposal for capital gains tax (CGT) purposes in one of two ways:
l either by the disposal of an asset to a third party (for example the sale of a trust asset to a third
party), or
l by vesting a trust asset in a beneficiary (par 11(1)(d)).
A disposal of an asset to a third party at arm’s length will result in a normal capital gain calculation.
The selling price will be the proceeds, and the base cost for the trust will normally be the market
value when the trust acquired the asset, by way of either a bequest, donation or purchase.
Vesting means that the beneficiary is unconditionally entitled to the asset, even though the date of
enjoyment (delivery or registration) might be postponed. Vesting can occur before or at distribution.
When an asset vests in a beneficiary, the proceeds will be deemed to be the market value (par 38),
because the trust and the beneficiary are connected persons as defined (s 1). The base cost for the
trust will usually be the value when the trust acquired the asset, by way of either a bequest, donation
or purchase.
To the extent that the beneficiary has a vested interest in an asset, the time of disposal of that asset is
the date on which the interest vested in the beneficiary (par 13(1)(a)(iiA)).
958
Vesting might arise in terms of the trust deed or in consequence of the exercise of a trustee’s discre-
tion. However, even though a beneficiary might be entitled to 50% of the capital of the trust, for
example, it doesn’t mean that an interest in an asset vests in that beneficiary. The trustee may decide
to sell the asset to a third party and distribute an amount of cash to the beneficiary or even jointly
distribute some assets between the beneficiaries. For the application of CGT, it specifically requires
the vesting of an interest in an asset (par 11(1)(d)). The question to ask is whether or not the benefi-
ciary may insist upon a distribution of a specific asset.
Remember
In the context of a vested trust, the asset already belongs to the beneficiary because vesting
took place at the creation of the trust. CGT consequences will therefore always be determined in
the beneficiary’s hands when the asset is disposed of.
24.9.1 Capital gain in respect of a disposal by a trust (paras 62, 64E, 68, 69, 70, 71, 72, 73,
80(1) and 80(2))
When the trust disposes of an asset, the trust is liable for CGT unless a special rule applies to divert
the CGT liability to another person. The special rules only allow for a capital gain (not a capital loss)
to be shifted to either a donor or a resident beneficiary.
When a resident beneficiary acquires an interest in an asset (par 80(1)) or when the resident benefi-
ciary acquires a vested interest in the gain and not the asset (par 80(2)), the gain must be disregard-
ed by the trust and is included in the resident beneficiary’s calculation of his aggregate capital gain
or loss. These special rules are subject to the donor provisions (attribution rules in paras 68, 69 and
71) that will effectively shift the liability for CGT to a person who made a ‘donation, settlement or other
disposition’, i.e., a spouse, parent of a minor child or a person retaining the power of revocation.
When a capital gain vests in a non-resident beneficiary, the trust will be liable for the CGT unless it is
attributable to a donation, settlement or other disposition made by a resident donor, in which case
the donor will be liable for CGT (par 72).
Any capital gain retained in the trust due to a contingent event could not vest in a beneficiary and
can therefore not be subject to the special rules (paras 80(1) and 80(2)). The donor provision may
apply in such a scenario (par 70).
The total amount of the income that is deemed to accrue to a donor in terms of the donor provisions
in the main Act (s 7) and the capital gain attributed to him in terms of the Eighth Schedule (paras 68
to 72) may not exceed ‘the amount of the benefit derived from the donation, settlement or other
disposition’ (par 73). Section 7 must be applied first (even if attribution relates to exempt income,
such as local dividends) and the balance is then available for the CGT attribution.
Example 24.14. Limitation of attribution rules
On 1 March 2021, Amogelang Nawa lent R100 000 interest-free to his family discretionary trust.
Had the trust borrowed the funds from a bank, it would have paid market-related interest of 10%
per annum. The trust used the funds to purchase South African-listed shares. During the 2022
year of assessment dividends of R3 000 accrued to the trust. On 28 February 2022 the shares
were sold for R122 000. This disposal resulted in a capital gain of R22 000 (R122 000 – R100 000),
which did not vest in any beneficiary.
Explain the CGT consequences of the disposal of the shares.
SOLUTION
The benefit derived by the trust from the loan is R100 000 × 10% = R10 000. First, R3 000 of the
benefit is attributed to Amogelang (s 7(5)) despite the fact that it will be exempt in his hands.
Secondly, the remaining benefit of R10 000 – R3 000 = R7 000 is used to attribute R7 000 of the
capital gain to Amogelang (paras 70 and 73). The remaining portion of the capital gain (R22 000
– R7 000 = R15 000) is then taxed in the trust.
This limitation provision has the effect of applying the Woulidge principle of the limitation of the
amount that could be diverted to the donor to the amount of the benefit actually received by the trust.
959
Remember
Deemed donation event Section in the Act Paragraph in the Eighth Schedule
Spouse 7(2) 68
Minor children 7(3) and 7(4) 69
Retained income not vested 7(5) 70
Revocable vesting 7(6) 71
Resident benefiting a non-resident 7(8) 72
There is no provision equal to s 7(7) in the Eighth Schedule because the donor has a right to
regain or keep ownership of the asset and the asset may therefore not be disposed of.
If a gain is distributed to a non-resident beneficiary and par 72 is not applicable (for example the
donor is deceased), then the trust will be subject to tax on the capital gain.
Paragraph 69 has not been amended (similar to s 7(3) and (4)) to also include minor step-
children.
Example 24.15. Attribution rules
After 1 October 2001 George donated a fixed property valued at R800 000 to the Zorba Trust (a
discretionary resident trust). George’s aged mother and his 12 year-old daughter, Angela, were
the beneficiaries of the trust.
In the current year of assessment, the trustees sold the property for R2 000 000. The trustees
distributed 60% of the proceeds to Angela and 40% of the proceeds to George’s mother, after
which the trust dissolved.
Determine who will be taxed on the capital gain made by the trust.
SOLUTION
Firstly, the capital gain on the disposal by the trust needs to be calculated. The proceeds are
R2 000 000 and the base cost R800 000. The trust therefore made a capital gain of R1 200 000
(R2 000 000 – R800 000).
Secondly, the attribution rules need to be applied, and in this scenario par 69 is applicable be-
cause a minor child benefits in consequence of the parent’s donation. The capital gain to be
taken into account in George’s calculation of his aggregate capital gain or aggregate capital loss
is 60% of R1 200 000, i.e., R720 000.
The distribution to George’s mother will result in R480 000 (40% of R1 200 000) being taken into
account in the calculation of her aggregate capital gain or aggregate capital loss (par 80(2)). No
attribution rule is applicable.
The full gain of R1 200 000 is taxed (R720 000 in George’s hands and R480 000 in George’s
mother’s hands), thus no portion of the gain is taxable in the trust.
Notes for different scenarios:
(1) If the gain had been retained in the discretionary trust, George would have been liable for
tax on the full capital gain (par 70).
(2) If the gain had been distributed to Angela, but George had the right to revoke Angela’s right
to benefit, the gain would also have been attributed to George (par 71).
(3) If George’s mother had been a non-resident, her portion of the gain would have been attri-
buted to George (par 72).
These provisions are also subject to the exclusion available on the disposal of an asset by a trust in
terms of a share incentive scheme (par 64E) (see chapter 17).
24.9.2 Capital gain distributions to another trust (par 80(2))

If a gain arises in a trust during the year of assessment and it vests in another trust (second trust), the
special attribution rules (par 80(2)) cannot apply to the beneficiaries of the second trust. In other
words, the capital gain that vests in the second trust cannot be further attributed. Furthermore, the
distribution thereof to the beneficiaries of the second trust, will not be taxed in their hands as the gain
has already been taxed in the second trust’s hands. It follows that a capital gain of a trust can only be
attributed once.
960
Example 24.16. Capital gain distributed to another trust as beneficiary
Trust B is a beneficiary of Trust A and Walter is a beneficiary of Trust B. Trust A disposed of an

asset, which gave rise to a capital gain that the trustee vested in Trust B. The trustee of Trust B
then distributed the amount to Walter. All parties are residents and the vesting of all capital gains
took place during the same year of assessment.
Determine how the taxable gain should be taxed.
SOLUTION
In terms of par 80(2) the capital gain must be disregarded by Trust A and accounted for by
Trust B. The capital gain vests in Trust B in terms of par 80(2) and can therefore not be taxed in
Walter’s hands.
24.9.3 Distributions to an exempt entity (paras 38, 62, 80(1) and 80(2))
If a trust distributes an asset to a beneficiary that is an exempt entity (as listed in par 62(a) to (e)), the
resultant capital gain that arises in the trust on this vesting may not be attributed to the exempt entity
(par 80(1)). The trust may then disregard this capital gain in the same way as any donation by any
person to these entities (par 62). In contrast, if a trust distributes a capital gain to a beneficiary that is
an exempt entity (as listed in par 62(a) to (e)), the resultant capital gain may still not be attributed to
the exempt entity (par 80(2)), but now the trust will be taxed on the capital gain since the entity does
not acquire an asset (par 62).
24.9.4 Treatment of capital losses in respect of a disposal by a trust (s 1 and par 39)
The special rules allow for only a gain to be shifted from a trust to a resident beneficiary or donor. It is
therefore clear that a loss is trapped in the trust (paras 80(1), (2) and 68 to 72). If there is no ‘donor’
and the attribution rules (paras 68 to 72) are not applicable, there are two possible ways whereby a
gain can be kept in the trust for purposes of using any ‘trapped’ losses, namely
l distribute a gain to a non-resident (exchange control provisions need to be considered as the
funds might be blocked in South Africa), or
l delay vesting of a gain in a beneficiary until a subsequent year.
A loss that arises from a transaction between connected parties is ring-fenced (par 39). The trust and
its beneficiaries are connected persons (definition of ‘connected person’ in s 1). The planning
aspects mentioned above are thus relevant only if the loss is not ring-fenced.
24.9.5 Base cost of a discretionary interest (par 81)
A person’s interest in a discretionary trust has a base cost of Rnil (par 81). It is submitted that this
implies that the beneficiary’s spes or hope to receive something from the trust is Rnil, but once an
asset vests in a beneficiary, the market value of that asset may be used as the base cost of the
beneficiary when the asset is disposed of at a future date.

Example 24.17. Different trust scenarios
The Starteri Trust (a resident trust) was created when Mr Frank Starteri passed away in 2010 and
bequeathed R5 000 000 in cash to it. The cash was deposited in a South African bank to earn
interest and pay any expenses of the trust. The trust also owns two properties:
Property 1 is situated in South Africa (SA property) and Property 2 is situated in a foreign country
(foreign property – assume that approval was obtained from the SA Reserve Bank).
These properties were owned by Mrs Barbara Starteri (48-year-old surviving spouse of Mr Frank
Starteri) until 1 March 2015, when the market value was as follows:
SA property R3 000 000
Foreign property R2 800 000
Barbara and Frank’s three children are the beneficiaries of the trust. They are:
l Megan, 15-year-old daughter (resident)
l Joe, 22-year-old son (resident), and
l Keith, 24-year-old son (not a resident of South Africa with no business venture in South Africa).
Keith never spends more than 30 days in South Africa during any 12-month period.
(The ages of the beneficiaries are given as at 28 February 2022.)
continued
961
Three independent trustees manage the trust on behalf of the beneficiaries. The trust deed
specifies that any distribution should be pro rata out of all the receipts and accruals of the trust.
The following information (in respect of the 2022 year of assessment) relates to the trust, and the
foreign income has correctly been converted to rand:
Taxable rental income: SA property.......................................................................... R350 000
Taxable rental income: Foreign property .................................................................. 250 000
Interest earned from a bank in South Africa (only because of Frank’s bequest) ...... 400 000
R1 000 000
Less: Trustees’ remuneration paid from R1 000 000 net income.............................. (60 000)
Distributed to Megan ................................................................................................ (100 000)
Distributed to Joe ...................................................................................................... (160 000)
Distributed to Keith ................................................................................................... (200 000)
Retained (current year) ............................................................................................. R480 000
Required
(a) Indicate for each of the following scenarios the taxable income in South Africa of each party to
the trust regarding the distributions and retained amount during the 2022 year of assessment:
Scenarios 1 2 3 4
Right of each beneficiary to ¹/3 of the R480 000
Vested Contingent Vested Contingent
retained (and not distributed)
Barbara sold the properties to the trust at market
value. The trust paid the purchase price in full 9 9
Barbara donated the properties to the trust 9 9
SOLUTION
Starteri Trust: 2022 year of assessment
Rental Rental income: Interest
income: Foreign from Total
SA Property Property SA Bank
Accrued – 2022 year of assessment 350 000 250 000 400 000 1 000 000
Less: 35% 25% 40%
Trustees’ remuneration ...................... (21 000) (15 000) (24 000) (60 000)
Less: Distributions
Distributed to Megan (minor child) .... (35 000) (25 000) (40 000) (100 000)
Distributed to Joe (major resident) ..... (56 000) (40 000) (64 000) (160 000)
Distributed to Keith (non-resident) ..... (70 000) (50 000) (80 000) (200 000)
Retained in current year 168 000 120 000 192 000 480 000
If ¹/3 vested right to retained amount
(with reference to different
scenarios above)
Megan (minor).................................... 56 000 40 000 64 000 160 000
Joe (major) ......................................... 56 000 40 000 64 000 160 000
Keith (non-resident) ........................... 56 000 40 000 64 000 160 000
(a) 2022 year of assessment – Taxable income in South Africa of each party to the trust in
respect of the distributions and retained amount:
Scenario 1 2 3 4
Barbara Rnil Rnil Taxable income = R372 000 Taxable income = R468 000
S 7(3) = R156 000 S 7(3) = R60 000
(R35 000 + R25 000 + R56 000 + (R35 000 + R25 000)
R40 000) S 7(8) = R120 000
S 7(8) = R216 000 (R70 000 + R50 000)
(R70 000 + R50 000 + R56 000 +
S 7(5) = R288 000
R40 000)
Only rental income from the two (R168 000 + R120 000)
properties is attributable to Barbara’s Only rental income from the two
donation, thus rental income distrib- properties is attributable to
uted to Megan or in which Megan has Barbara’s donation. Retained
a vested right is taxed in Barbara’s rental is subject to the condition
hands (s 7(3)). Rental income distrib- that trustees must exercise their
uted to Keith (non-resident) or in discretion and therefore taxable in
which he has a vested right is taxed Barbara’s hands (s 7(5)).
in Barbara’s hands (s 7(8)).
continued
962
Scenario 1 2 3 4
Megan Taxable income = Taxable income = Taxable income = Taxable income =
(minor) R236 200 R76 200 R80 200 R16 200
R260 000 R100 000 distributed Rental income is Rental income is
(R100 000 less R23 800 interest taxed in Barbara’s taxed in Barbara’s
distributed + exemption. hands (s 7(3)). hands (s 7(3)).
R160 000 Frank is deceased Frank is deceased
(R480 000/3 and Megan will be and Megan will be
retained)) taxed on the interest taxed on the interest
distributed distributed
less R23 800
(R40 000) and (R40 000) less
interest exemption.
retained (R64 000) R23 800 interest
less R23 800 interest exemption.
exemption.
Joe Taxable income = Taxable income = Taxable income = Taxable income =
(major) R296 200 R136 200 R296 200 R136 200
R320 000 R160 000 distributed R320 000 R160 000
(R160 000 less R23 800 interest (160 000 distributed distributed less
distributed + exemption. + R160 000 R23 800 interest
R160 000 (R480 000/3 exemption.
(R480 000/3 retained))
retained)) less R23 800
less R23 800 interest exemption.
interest exemption.
Keith Taxable income = Taxable income = Taxable income = Taxable income =
(non-resident) R126 000 R70 000 Rnil Rnil
Even though Even though Amounts relating to Amounts relating to
R360 000 R200 000 accrued to the properties are the properties are
(R200 000 + Keith, only amounts subject to s 7(8) subject to s 7(8)
R160 000) accrues from a source in and the interest of and the distributed
to Keith, as a non- South Africa are R80 000 interest of R80 000
resident only South taxable. The interest (distributed) + is exempt
African source is exempt (s 10(1)(h)), R64 000 (retained) (s 10(1)(h)).
income is taxable. thus only R70 000 is exempt
Only rental from the (rental distributed (s 10(1)(h)).
SA property and the from SA property) is
interest are from a taxable.
source in South
Africa. The interest
is exempt
(s 10(1)(h)), thus
only R126 000
relating to the rental
from the SA
property (R70 000
distributed +
R56 000 retained) is
taxable.
Trust Taxable income = Taxable income = Taxable income = Taxable income =
Rnil R480 000 Rnil R192 000
Beneficiaries have Beneficiaries have no Beneficiaries have Amounts relating to
vested rights to vested rights to vested rights to the properties are
retained amounts retained amounts, retained amounts taxed in Barbara’s
(s 25B(1)). and the trust is thus (s 25B(1)). hands (s 7(5)). The
taxed. The trust is not trust will be taxed
a natural person and on the retained
therefore not entitled interest of R192 000
to the interest because no
exemption (s 10(1)(i)). beneficiary has a
vested right to
retained income.
963
Required
(b) What would the tax consequences be if the trust sold the SA property and the foreign
property for R4,2m and R3,5m respectively to independent third parties on 1 March 2022
and distributed the proceeds equally between the three beneficiaries in the following
scenarios?
Scenarios 1 2
Barbara sold the properties to the trust at market value.
The trust paid the purchase price in full. 9
Barbara donated the properties to the trust and paid
the donations tax. 9
SOLUTION
(b) Liability for CGT on SA property:
Proceeds (R4,2 million) less base cost (R3 million) = R1 200 000, of which each beneficiary
receives R400 000. Even though each beneficiary receives a third of the proceeds, only the
capital gain as calculated in terms of the Eighth Schedule is subject to tax. An amount of a
capital nature is excluded from the gross income definition in s 1. The amount shown in the table
must be taken into account in calculating the aggregate capital gain or loss of that person.
Scenarios 1 2
Barbara Rnil R400 000 (par 69)
+
R400 000 (par 72) (note)
Megan (minor) R400 000 Rnil
(par 80(2))
Joe (major) R400 000 R400 000
(par 80(2)) (par 80(2))
Keith (non-resident) Rnil Rnil
Trust R400 000 Rnil
Par 80(2) is not applicable because the
beneficiary is not a resident of South
Africa. The portion of the gain
distributed to the non-resident is still
taxable in the hands of the trust.
Note
The interpretation of this is not clear. The intention according to the SARS CGT Guide is to attribute
a gain that vests in a non-resident beneficiary to a resident donor (where applicable). Para-
graphs 80(1) and (2) are, however, no longer subject to par 72 and it is unclear if the capital gain
that vests in a non-resident beneficiary must remain in the trust or be attributed to the resident donor.
(b) Liability for CGT on foreign property

Proceeds (R3,5 million) less base cost (R2,8 million) = R700 000, of which each beneficiary
receives R233 333.
Even though each beneficiary receives a third of the proceeds, only the capital gain as
calculated in terms of the Eighth Schedule is subject to tax. An amount of a capital nature is
excluded from the gross income definition in s 1. The amount shown in the table must be
taken into account in calculating the aggregate capital gain or loss of that person.
Scenarios 1 2
Barbara Rnil R233 333 (par 69)
+
R233 333 (par 72)
Megan (minor) R233 333 (par 80(2)) Rnil
Joe (major) R233 333 (par 80(2)) R233 333 (par 80(2))
Keith (non-resident) Rnil Rnil
Trust R233 333 Rnil
Par 80(2) is not applicable because
the beneficiary is not a resident of
South Africa. The portion of the gain
distributed to the non-resident, how-
ever, is still taxable in the hands of
the trust.
964
24.11 Non-resident trusts (s 25B(2A) and par 80)

A trust is a conduit pipe, as discussed earlier, and the residency of the trust does not influence the
source of the income that flows through it and is received by a beneficiary. The income retains its
nature and will, in most cases, be taxed in a donor or beneficiary’s hands. Only when the trust is
liable for tax (s 7 is not applicable and no beneficiary has a vested right to the income) is the
residency of the trust important, as a non-resident trust is liable for tax in South Africa only on South
African source income or income that is deemed to be from a source in South Africa.
An obiter statement was made in SIR v Rosen (1971 A) that income retains its nature only if it accrues
to the beneficiaries in the same year of assessment as it accrued to the trust. Any accumulated
income in the trust thus effectively ‘loses’ its identity. Accumulated income distributed in subsequent
years is usually tax free. A special anti-avoidance measure was enacted when residence-based
taxation was introduced in 2001 to avoid, for example, non-South African source income being retained
by a non-resident trust (i.e., not subject to tax) and only distributed during a subsequent year to a
resident who would have been taxed on worldwide income had it been distributed during Year 1
(s 25B(2A)). A resident who acquires a vested right to any capital (retained or accumulated income) of
a non-resident trust during a year of assessment is required to include that amount in his income for
that year. The inclusion applies in respect of
l capital that consists of or is derived from receipts or accruals that would have constituted income
of the trust if it had been a resident during any previous year of assessment in which the resident
had a contingent right to that amount; and
l the amounts have not already been subject to tax in South Africa.
Example 24.18. Section 25B(2A)

Porto Trust is a discretionary non-resident trust with two beneficiaries, Ricco (a resident of South
Africa) and Natasha (a non-resident). The testamentary trust was created by their grandmother,
who bequeathed South African shares and a foreign property to the trust. During the 2021 year
of assessment, dividends of R10 000 and rental with a rand-equivalent of R40 000 accrued to the
trust. The trustees did not distribute any amount during the 2021 year of assessment, but
distributed R5 000 to each of the beneficiaries during the 2022 year of assessment from the
retained R50 000 (R10 000 + R40 000).
Determine the tax implications of the distribution of the R5 000 to each of the beneficiaries.
SOLUTION
During the 2021 year of assessment, the trust is liable for tax on the retained amounts, because
the provisions of s 7 are not applicable and the beneficiaries do not have vested rights to the
retained amounts. The trust is a non-resident and will only include amounts from a source in
South Africa in gross income. Therefore, the gross income of the trust will include only the
dividends of R10 000. The dividend exemption (s 10(1)(k)(i)) may also be used by the non-
resident trust, and the tax liability for the trust for the 2021 year of assessment is Rnil.
When a distribution is made in a subsequent year, it is taxable only if s 25B(2A) is applicable.
The requirements for its application are as follows:
l A resident acquires a vested right.
l The right is to the capital (accumulated income) of a non-resident trust.
l The capital consists of accruals that would have constituted income of the trust if it had been
a resident.
l The amount has not already been subject to tax in South Africa.
Consequently, the payment to Natasha is not taxable as she is a non-resident beneficiary.
Ricco is a resident and will be taxed if the requirements as set out above are met (s 25B(2A)).
The R5 000 payment consists of R1 000 (R10 000/R50 000 × R5 000) dividends and R4 000
(R40 000/R50 000 × R5 000) rental.
The dividend would still not have constituted income had the trust been a resident, because the
resident trust would also have used the dividend exemption (s 10(1)(k)(i)). The amount of R1 000
is therefore not taxable (s 25B(2A)).
The rental would have constituted income if the trust had been a resident and the amount had
not been subject to tax in South Africa yet. Ricco is therefore subject to tax on R4 000.
965
An amendment (effective from 1 March 2019) prohibits in certain instances the use by the trust of the
participation exemption applicable to foreign dividends when determining the amount that would
have constituted income had the trust been a resident (s 25B(2B)). This amendment is aimed at
interests of foreign trusts in companies that may have been controlled foreign companies had the
trust been a resident (see chapter 21.7.2.1).
The anti-avoidance provision (s 25B(2A)) can also be triggered when an asset of a non-resident trust
vests in a resident beneficiary. This will be the case if the asset was financed with foreign income that
has not yet been subject to tax in South Africa. The capital gain relating to the vesting of the asset will
be dealt with in terms of the Eighth Schedule (par 80).
The Eighth Schedule applies only to non-residents in respect of the disposal of permanent
establishment assets and immovable property or an ‘interest’ in immovable property in South Africa
(par 2). Therefore, if a non-resident trust sells an asset that is not subject to the Eighth Schedule but
would have been subject to CGT had the trust been a resident, the gain will be taxed in South Africa
when a resident beneficiary receives an interest in that capital gain in a succeeding (not current) year
of assessment (par 80(3)). From 1 March 2019, however, the resident beneficiary will also be taxed if
a disposal would have resulted in a capital gain subject to CGT in the current year, had the trust
been a resident (par 80(1) and (2A)). It seems that it is only a correction of an anomaly that existed
whereby a capital gain that is not subject to CGT (par 2) could have been retained in a non-resident
trust and only distributed in a subsequent year to a resident beneficiary without triggering any tax
consequences.
Example 24.19. Section 25B(2A) and par 80(1)

Foreign Trust is a discretionary non-resident trust with two resident beneficiaries, Luke and Dean.
The testamentary trust was created in 2002 by a non-resident who bequeathed a foreign rent-
producing property (worth R1 200 000) to the trust. The trust has never distributed any portion of
the foreign rental income to the beneficiaries but instead accumulated the rental income and
purchased another foreign property at a cost of R700 000 (rand-equivalent) during 2008. During
the 2022 year of assessment Luke acquired a vested right to this second property (worth
R1 100 000 at date of vesting).
Determine the tax implications of the vesting of the property in Luke.
SOLUTION
The rental income was not from a source in South Africa and the trust (a non-resident) was thus
not subject to tax thereon in South Africa during any year of assessment. The fact that the
income was accumulated and capitalised by way of purchasing an asset will not affect the
application of the special anti-avoidance provision (s 25B(2A)). Luke will have to include
R700 000 in his income during the 2022 year of assessment because this amount represents
receipts and accruals that would have been income had the trust been a resident (s 25B(2A)).
Whether the accumulated profits not previously taxed in the Republic are distributed to the
beneficiary in cash or as an asset should not influence the tax implications.
Luke will also be taxed under the normal CGT provision on the R400 000 capital gain that would
have arisen had the trust been a resident (i.e., R1 100 000 less R700 000) (par 80(1)).
Another amendment (also effective from 1 March 2019) prohibits in certain instances the use of the
10% participation exemption (par 64B(1) and (4)) when a non-resident trust disposes of an interest in
a controlled foreign company and is required to determine if an amount would have been a capital
gain had the trust been a resident (par 80(4)). This is similar to dividend exemption discussed in
chapter 21.7.2.1, but applies where value is realised by a disposal rather than by way of receiving a
dividend.
966
Remember
(1) If we assume the following: Trust = Non-resident and Donor = Resident
Beneficiaries: A = Resident (major) and B = Non-resident (major)
Trust distributes income to beneficiary A
Taxable income from SA source Tax beneficiary (s 25B(1) and (2))
Income from foreign source Tax beneficiary (s 25B(1) and (2))
Trust distributes income to beneficiary B
Taxable income from SA source Tax donor (s 7(8))
Income from foreign source Tax donor (s 7(8))
Trust retains income and no beneficiary
has a vested right
Taxable income from SA source Tax donor (s 7(5) or (8))
Income from foreign source Tax donor (s 7(5) or (8))
Trust distributes the retained income No tax consequences (all amounts were already
in subsequent year to beneficiaries. subject to tax)
(2) If we assume the following: Trust = Non-resident and No donor
Beneficiaries: A = Resident (major) and B = Non-resident (major)
Trust distributes income to beneficiary A
Income from foreign source Tax beneficiary (s 25B(1) and (2))
Trust distributes income to beneficiary B
Income from foreign source No tax consequences
Trust retains income and no beneficiary
has a vested right
Taxable income from SA source Tax trust (s 25B(1))
Income from foreign source No tax consequences
Trust distributes the retained income
in subsequent year to:
Beneficiary A Tax beneficiary on income from foreign source
(as not yet subject to tax in SA) (s 25B(2A))
Beneficiary B No tax consequences
967
25 Insolvent natural persons
Rudi Oosthuizen and Madeleine Stiglingh

l explain the tax consequences for an insolvent natural person before sequestration
l explain the tax consequences for the insolvent estate of a natural person who has
been sequestrated
l explain the tax consequences for an insolvent natural person after sequestration
l explain the tax consequences when an order for sequestration of a natural person
has been set aside
Contents
Page
25.1 Overview ............................................................................................................................. 969
25.2 The effect of sequestration on various taxpayers (ss 1 and 24H) ..................................... 969
25.3 The insolvent natural person before sequestration (taxpayer one) (ss 6(4), 8B,
8C, 10(1)(i), 20(1)(a), 24A(5), 25C and 66(13)(a)(ii)(aa)) (s 25 of the
Tax Administration Act) ..................................................................................................... 971
25.4 The insolvent estate (taxpayer two) (ss 1, 8(4)(a), 10(1)(i), 11(a), 11(e), 11(i), 11(j),
12C, 12T, 19, 20, 22(2), 24C and 25C; par 83 of the Eighth Schedule) (ss 153(1),
154 and 155 of the Tax Administration Act) ...................................................................... 972
25.5 The insolvent person after sequestration (taxpayer three) (ss 1, 6(4), 10(1)(i), 20(1)(a)
and 66(13)(a)(ii)(bb)) (s 25 of the Tax Administration Act) ............................................... 973
25.6 The effect of the setting aside of an order of sequestration (ss 20(1)(a) and s 98 of the
Tax Administration Act) ...................................................................................................... 974
25.7 Other tax consequences (s 5(10), par 19(5) of the First Schedule, s 53 of the VAT Act) .... 974
25.8 Comprehensive example ......................................................................................................... 975
25.1 Overview
This chapter deals with the normal and other tax consequences of the insolvency of a natural person.
Insolvency of a natural person means that the person’s liabilities exceed his/her assets and that
he/she is unable to pay his/her debts as and when they become payable. Either the person him-
self/herself or the person’s creditors can apply to the court to have the estate of the insolvent person
sequestrated. When an order of sequestration is granted by the court, the estate of the insolvent
person vests in the Master of the High Court. The Master appoints a trustee to liquidate assets of the
insolvent estate and to pay creditors and costs to the extent that there are available funds in the
estate.
There are various normal tax consequences that need to be considered in respect of the insolvent
person, for example the tax liability from the beginning of the person’s tax year until the date of se-
questration. Income could also accrue or be received after sequestration, and it should be estab-
lished who is liable for tax on that income. There could also be other tax consequences, for example
where the insolvent person was a VAT vendor at the date of sequestration.
25.2 The effect of sequestration on various taxpayers (ss 1 and 24H)

When a natural person becomes insolvent, three taxpayers have to be considered:
l the insolvent natural person for the period before sequestration (taxpayer one)
l the insolvent estate (taxpayer two)
l the insolvent natural person for the period from sequestration onwards (taxpayer three).
969
When a natural person (taxpayer one) becomes insolvent, his/her current tax status is terminated on
the day before the date of sequestration of his/her estate. On the date of sequestration, a new tax-
payer, namely the insolvent estate (taxpayer two), comes into existence. The purpose of taxpayer two
(the insolvent estate) is to sell all the assets of the person and to use the money to pay the outstand-
ing debt. The insolvent natural person himself/herself is regarded as a new taxpayer (taxpayer three)
from the date of sequestration. The insolvent natural person (taxpayer three) will be taxed on any
income that he/she derives in his/her personal capacity from that date. For ease of reference, the rest
of this chapter will generally refer to ‘taxpayer one’, ‘taxpayer two’ and ‘taxpayer three’.
Schematically the three taxpayers can be illustrated as follows:
Insolvent estate
(taxpayer two – see 25.4)
SEQUESTRATION
Insolvent natural person
before sequestration
(taxpayer one – see
25.3)
Natural person after
sequestration (taxpayer
three – see 25.5)
The Insolvency Act (24 of 1936) (‘the Insolvency Act’) provides for two possible routes to follow to
sequestrate the estate of a natural person:
1. The person can apply to the courts to have his/her own estate voluntarily sequestrated (voluntary
surrender). The court may grant such an order if certain requirements are met.
2. The person’s creditors may approach the court to request the sequestration of the person’s estate
(compulsory sequestration). Once again, certain requirements must be met before the court will
grant such an order.
It is also possible that, once the court has granted a sequestration order, the person’s circumstances
could change, resulting in him/her being able to settle his/her outstanding debts. In such a case the
court may set the sequestration order aside, so that the person can carry on as before, as if the
sequestration order had never been granted.
In the case of voluntary surrender, the date of sequestration is the date on which the surrender of the
estate is accepted by the court. In the case of compulsory sequestration, the date of sequestration is
the date of the provisional sequestration order, provided such order is subsequently made final (i.e.,
not set aside by the court) (s 1(1) definition of ‘date of sequestration’).
For persons who carry on business activities in the form of a partnership, it is important to understand
the consequences of sequestration for the partnership as well as for the individual partners. For the
purposes of the Insolvency Act, the partnership has an estate that is separate from the estates of the
individual partners. The Insolvency Act provides that if the estate of a partnership is sequestrated, the
estates of each individual partner (subject to certain exclusions) must generally be sequestrated at
the same time. However, if the personal estate of one of the partners is sequestrated, it does not
necessarily result in the estates of the partnership or other partners also being sequestrated.
The insolvency of a partner brings about the dissolution of the partnership, as the sequestrated
partner’s share in the partnership is withdrawn. A new partnership agreement is entered into between
the remaining and any new partners.
Although the partnership itself is regarded as a separate legal entity for the purposes of insolvency
legislation (as explained above), the partnership is not regarded as a separate taxable person for
income tax purposes. Even though the insolvent estate of a person constitutes a separate ‘person’ (as
defined in s 1), the taxable income of a partnership is taxed in the hands of the individual partners in
accordance with the profit share agreement between the partners (s 24H). Therefore, the tax conse-
quences that are discussed in the rest of this chapter will only apply to individual partners, either in the
case of their own sequestration (separate from the partnership) or when their estate is sequestrated as
a result of the partnership being sequestrated.
970
25.3 Chapter 25: Insolvent natural persons
25.3 The insolvent natural person before sequestration (taxpayer one)

(ss 6(4), 8B, 8C, 10(1)(i), 20(1)(a), 24A(5), 25C and 66(13)(a)(ii)(aa))
(s 25 of the Tax Administration Act)
A final income tax return has to be completed for taxpayer one for the period from the first day of the
year of assessment to the day before the date of sequestration (s 66(13)(a)(ii)(aa) of the Act read with
s 25 of the Tax Administration Act).
Although certain amounts may be received or may accrue only after the date of sequestration, they
are still deemed to accrue to taxpayer one. The following are examples of such deemed accruals:
l An employee must include in income any gain on the sale of qualifying equity shares derived from a
broad-based employee share plan if the shares are sold within five years from the granting thereof
(s 8B). However, sequestration of the employee within five years will not result in any inclusion in in-
come for either taxpayer one or taxpayer two (s 8B(1)(c)). Amounts received by the trustee upon
the sale of these shares will be subject to capital gains tax in the hands of taxpayer two (s 25C(c)).
Taxpayers one and two will be deemed to be one and the same person for the purposes of deter-
mining the base cost and capital gain or loss in respect of the disposal by the trustee.
l Equity instruments acquired by directors and employees of a company (on or after 26 Octo-
ber 2004) are taxed when they vest in the director or employee (s 8C). The vesting date depends
on the type of equity instrument. The Act is not clear on what happens if a natural person is
sequestrated before vesting takes place. Section 8C does deal with the scenario where a natural
person dies before vesting takes place. It provides that vesting takes place immediately before
death, but only if all conditions are or may be lifted upon death (it therefore depends on what the
agreement stipulated when the options were awarded to the director or employee) (s 8C(3)(b)(iv)).
It is submitted that one should also determine the vesting consequences in the case of insolv-
ency from the underlying agreement between the employer and the employee or director. If all
restrictions are lifted upon insolvency, the vesting would occur in the hands of taxpayer one.
However, if certain restrictions are still applicable (for example if the shares have to be sold back
to the employer), vesting will only take place in the hands of taxpayer two.
l Shares received under certain circumstances before 1 October 2001 in exchange for fixed prop-
erty or other shares are deemed to have been disposed of by taxpayer one on the day before the
date of sequestration (s 24A). This disposal is deemed to be for a consideration equal to the
lesser of the market value on that day and the market value on the date of the original exchange
(s 24A(5)).
The primary and secondary rebates available to taxpayers one and three will be apportioned propor-
tionately between the periods before and after sequestration (SARS Interpretation Note No. 8). It is
unclear whether the limited local interest exemption (s 10(1)(i)) will also be apportioned between
taxpayers one and three.
Remember
The apportionment of rebates should usually be calculated on the ratio where the completed
months included in the assessment represents the numerator and 12 the denominator (com-
pleted months assessed/12) (s 6(4)). It is, however, the practise of SARS to apportion the
rebates on a daily basis (days included in assessment/(365 or 366)).
An assessed loss of taxpayer one can be set off against the income of taxpayer two from the carrying
on of any trade in South Africa (s 20(1)(a) read with s 25C(a); note that s 20(1)(a) is to be renumbered
to s 20(1)(a)(ii) at the date that the corporate tax rate is reduced by the Minister of Finance – this date
has not been confirmed at the date of this publication). This will happen if the trustee of the insolvent
estate continues with a trade that was carried on by taxpayer one before sequestration.
An assessed loss of taxpayer one cannot be carried forward to taxpayer three unless the order of
sequestration has been set aside. If the order is set aside, the amount to be carried forward to tax-
payer three will be reduced by the amount that was allowed to be set off against the income of tax-
payer two from the carrying on of a trade (proviso to s 20(1)(a)). This could happen if the trustee
continued with a trade of taxpayer one and taxpayer two has already been registered as a taxpayer
before the sequestration order is set aside (see 25.2.4).
Please note that when taxpayer one’s assets pass to taxpayer two at sequestration, there is no actual
or deemed disposal of assets by taxpayer one (such as in the case at the death of a natural person).
Since taxpayers one and two are deemed to be one and the same for purposes of determining allow-
ances, recoupments and capital gains or losses (s 25C), it follows logically that a person cannot
dispose of his/her assets to himself/herself. The assets are realised only when they are sold by the
trustee out of the insolvent estate (taxpayer two).
971
The trustee of the insolvent estate (taxpayer two) is responsible for the tax affairs of taxpayer one for
the period prior to the date of sequestration. Any tax payable by taxpayer one on income earned
prior to the date of sequestration, even if it has become payable only after that date, is a debt due to
SARS by taxpayer two. The trustee must admit the claim and accord it the preference to which it is
entitled in terms of the Insolvency Act.
25.4 The insolvent estate (taxpayer two) (ss 1, 8(4)(a), 10(1)(i), 11(a), 11(e), 11(i),
11(j), 12C, 12T, 19, 20, 22(2), 24C and 25C; par 83 of the Eighth Schedule)
(ss 153(1), 154 and 155 of the Tax Administration Act)
The definition of a ‘person’ includes both a natural person and an insolvent estate (s 1). Therefore,
taxpayer two exists separately from taxpayer one and is registered as a separate tax entity. A sep-
arate income tax reference number is allocated to taxpayer two. Its first period of assessment will
commence on the date of sequestration and end on the last day of February that follows thereafter.
The second and subsequent years of assessment will commence on 1 March of a year and end on
the last day of February that follows thereafter. Its last period of assessment will end on the date
when the insolvent estate is finally wound up.
Taxpayers one and two are, however, deemed to be one and the same person for the purposes of
determining the following:
l The amount of any allowance, deduction or set-off to which taxpayer two may be entitled (s 25C(a)).
The following are examples:
– Closing stock of taxpayer one in his or her last assessment will become opening stock of tax-
payer two in its first assessment (s 22(2)).
– The write-off of business assets can continue in taxpayer two (for example in terms of s 11(e)
or s 12C).
– Assume that taxpayer two disposes of depreciable assets in respect of which taxpayer one
previously claimed capital allowances. In determining the possible deduction of a s 11(o)
allowance, the cost and tax value of the assets to taxpayer two will be taken as the cost and
the tax value of taxpayer one.
– If an amount that has previously been included in the income of taxpayer one later becomes
irrecoverable (by the trustee), taxpayer two could be entitled to a bad debt deduction (s 11(i)).
– Any assessed loss (s 20) from taxpayer one’s final tax calculation may be carried forward to
taxpayer two.
l Any amount which is recovered or recouped by or otherwise required to be included in the income of
taxpayer two (s 25C(b)). The following are examples:
– Assume that taxpayer one has previously written off a debtor and claimed a deduction (in
terms of s 11(i)). If the debt is later collected by the trustee, the recoupment (s 8(4)(a)) of the
previously allowed deduction must be included in the income of taxpayer two.
– If taxpayer one previously claimed any wear-and-tear allowances (for example in terms of
s 11(e) or s 12C), they could be recouped in the hands of taxpayer two when those assets are
sold by the trustee (s 8(4)(a)).
– Any deduction that taxpayer one claimed in his/her final period of assessment in respect of
doubtful debts will be added back to the income of taxpayer two in its first period of assess-
ment (s 11(j)).
– An allowance claimed by taxpayer one in his/her final period of assessment for future expendi-
ture in respect of a contract will be added back to the income of taxpayer two in its first period
of assessment (s 24C).
– The provisions relating to the concession or compromise of debt may lead to recoupments if a
debt is reduced by more than the amount of consideration received, for example if a debt is
reduced in terms of a compromise with a creditor (s 19 – see chapters 13 and 17).
l Any taxable capital gain or assessed capital loss of taxpayer two (s 25C(c) and par 83(1) of the
Eighth Schedule). The base cost of any asset for taxpayer two, is equal to taxpayer one’s base
cost. Taxpayer two is entitled to the same capital gains tax exemptions and exclusions as well as
the same inclusion rate that taxpayer one would have been entitled to as a natural person, for ex-
ample, the primary residence exclusion and the personal-use asset exclusion. In the year of se-
questration, taxpayers one, two and three (in that order) share the R40 000 annual exclusion
(par 3.8 of SARS Interpretation Note No. 8). In subsequent years, taxpayers two and three will
each be entitled to a full annual exclusion of R40 000.
972
25.4–25.5 Chapter 25: Insolvent natural persons
l The annual and lifetime contributions in respect of tax-free investments (s 12T(1)(b)). Any amount
received by or accrued to taxpayer two in respect of a tax-free investment held by taxpayer one
on date of sequestration will be exempt from normal tax (s 12T(2)).
For all other purposes not specifically covered in s 25C, taxpayers one and two remain separate
entities. This needs to be borne in mind when considering whether or not the estate is entitled to a
specific exemption. For example, the estate is not entitled to the local interest exemption (s 10(1)(i))
because it is not a natural person. It is, however, entitled to the local dividend exemption
(s 10(1)(k)(i)).
Taxpayer two can claim any deductions for which it qualifies, for example administration charges,
such as the trustee’s remuneration (s 11(a)). It pays normal tax at the rates applicable to natural
persons. It does not, however, qualify for any of the personal rebates (ss 6, 6A and 6B).
Example 25.1. Disposal by the insolvent estate (taxpayer two)
The trustee of Al’s insolvent estate (taxpayer two) disposes of Al’s primary residence for a gain of
R750 000.
Explain the capital gains tax consequences for the insolvent estate.
SOLUTION
This amount will be disregarded in the same way as if the residence had been disposed of by
Al himself (par 83(1) of the Eighth Schedule).
Remember
l Any assessed capital loss from taxpayer one’s final tax return may also be carried forward to
taxpayer two and set off against capital gains arising for taxpayer two. However, any assess-
ed capital loss remaining in taxpayer two at the time it is terminated, is lost and cannot be
carried forward to taxpayer three (par 83(2) of the Eighth Schedule and s 25C(c)).
l The 40% inclusion rate applicable to an individual is also applicable to taxpayer two
(par 83(1) of the Eighth Schedule).
The trustee of an insolvent estate is the representative taxpayer in respect of the income received by
or accrued to taxpayer two (par (f) of the definition of a ‘representative taxpayer’ in s 1, read with
s 153(1) of the Tax Administration Act).
The trustee is responsible for the administration and liquidation of an insolvent estate. He/she must
complete a return of the income derived by the insolvent estate and submit the resulting claim for tax
against the assets of the estate. He/she must generally represent the insolvent estate in all matters
relating to taxation (s 154 of the Tax Administration Act).
The trustee could be held personally liable for any tax payable in his/her capacity as representative
taxpayer (of both taxpayer one and taxpayer two), if he/she disposes of any property with which
outstanding taxes could have been paid (s 155 of the Tax Administration Act).
25.5 The insolvent person after sequestration (taxpayer three) (ss 1, 6(4), 10(1)(i),
20(1)(a) and 66(13)(a)(ii)(bb)) (s 25 of the Tax Administration Act)
As already mentioned, taxpayer three comes into existence from the date of sequestration and exists
separately from taxpayers one and two. An insolvent person who (with the consent of his/her trustee)
enters into employment or carries on a profession or business after his/her sequestration, is liable for
tax on that income in his/her own right as taxpayer three, even if the income is paid to the trustee
(par (c)(ii) of the ‘gross income’ definition in s 1). Taxpayer three is registered as a separate taxpayer
with a new income tax reference number. The first period of assessment of taxpayer three will com-
mence on the date of sequestration and end on the last day of February that follows thereafter. The
second and subsequent years of assessment will commence on 1 March of a year and end on the
last day of February that follows thereafter.
The primary and secondary rebates for taxpayers one and three are apportioned proportionately
between the periods before and after sequestration (SARS Interpretation Note No. 8). It is unclear
whether the limited local interest exemption (s 10(1)(i)) will also be apportioned between taxpayers
one and three.
973
The first tax period for taxpayer three runs from the date of sequestration to the last day of that year of
assessment (s 66(13)(a)(ii)(bb) read with s 25 of the Tax Administration Act).
An assessed loss of taxpayer one cannot be carried forward to taxpayer three; it may only be carried
forward to taxpayer two. If the order of sequestration has been set aside, the amount to be carried
forward from taxpayer one to taxpayer three is reduced by the amount which was set off against the
income of taxpayer two from the carrying on of a trade (proviso to s 20(1)(a)). Any assessed loss and/or
assessed capital loss of taxpayer two may not be carried forward to taxpayer three since they are not
deemed to be one and the same person for tax purposes.
25.6 The effect of the setting aside of an order of sequestration (ss 20(1)(a) and
s 98 of the Tax Administration Act)
When an order of sequestration is set aside, the existence of taxpayer two is terminated and can-
celled as if it never existed. Any transactions that took place in taxpayer two while it existed must be
accounted for in the hands of the person who has been released from sequestration. This means that
the Commissioner must withdraw the final assessment issued in respect of taxpayer one as well as all
assessments issued to taxpayer two (s 98(1) of the Tax Administration Act). The tax position of the
person that would have been sequestrated (taxpayer one) therefore continues as if his/her estate had
not been sequestrated (par 3.6 of Interpretation Note No. 8).
New returns have to be submitted for taxpayer one as if taxpayer two never existed, and taxpayer
one will be re-assessed accordingly. Taxpayer one will combine all the tax consequences of both
taxpayers one and two, until the date when the order was set aside, in his/her newly rendered
return(s).
If a taxpayer three was registered, that taxpayer will continue to exist and will be the one which
relates to the individual in future. Taxpayer one will cease to exist from the date of setting aside of the
sequestration order. The balance of any assessed loss of taxpayer one (after reducing that assessed
loss by the amount that was set off against trade income of taxpayer two, which has now been
‘moved’ to taxpayer one) may be carried forward to taxpayer three (proviso to s 20(1)(a)). The effect
of this is that any assessments raised on taxpayer three will also have to be withdrawn and re-issued
to take into account any assessed losses and assessed capital losses from taxpayer one.
These provisions will only be applicable where the provisional order of sequestration has been set
aside and will not be applicable where an insolvent person has become rehabilitated (in accordance
with the provisions of the Insolvency Act).
25.7 Other tax consequences (s 5(10), par 19(5) of the First Schedule,
s 53 of the VAT Act)
If the estate of a VAT vendor (taxpayer one) is sequestrated and the trustee continues carrying on the
enterprise or makes supplies while terminating the enterprise, then taxpayer two is deemed to be a
vendor (s 53(a) of the VAT Act). Taxpayers one and two are deemed to be one and the same person
for VAT purposes (s 53(b) of the VAT Act). This means that taxpayer two does not have to be regis-
tered as a vendor under a new registration number, but simply continues using taxpayer one’s regis-
tration number.
If the insolvent’s trading activities are being continued, taxpayers one and two are also deemed to be
the same employer for the purposes of employees’ tax (definition of ‘employer’ in par 1 of the Fourth
Schedule), skills development levies (definition of ‘employer’ in the Skills Development Levies Act) and
unemployment fund contributions (definition of ‘employer’ in the Unemployment Insurance Contributions
Act). This means that taxpayer two does not have to register as an employer under a new registration
number.
The trustee of the insolvent estate may elect that the normal tax chargeable on the taxable income
from farming be determined in accordance with the rating formula (par 19(5) of the First Schedule
and s 5(10) of the Act). This could be done if the farming operations carried on by taxpayer one were
continued by taxpayer two in the period of assessment commencing immediately after insolvency
(that is, commencing on the date of sequestration). The election must be made within three months
after the end of such period of assessment or within such further period as the Commissioner may
approve. Once the election has been made, it is binding on taxpayer two for that period of assess-
ment and all future periods of assessment, and taxpayer two will be taxed in accordance with the
rating formula. The average taxable income from farming will be calculated having regard to the
figures determined for taxpayer one before the date of sequestration (Interpretation Note No. 8).
974
25.8 Chapter 25: Insolvent natural persons
Example 25.2. Insolvent natural person
The estate of Kabelo, married out of community of property without the accrual system, was
sequestrated on 1 June 2021. Kabelo traded in his own name but was not registered as a VAT
vendor. The trustee continued with Kabelo’s business for the benefit of the creditors and the
following is the income statement for the nine months from 1 June 2021 to 28 February 2022:
Income statement
Commission paid ............................ R400 Gross profit on trading ..................... R11 700
Office expenses .............................. 200 Rent received .................................. 200
Salaries and wages ......................... 9 600
Net profit ......................................... 1 700
R11 900 R11 900
The trustee employed Kabelo in the business. Included in ‘Salaries and wages’ is R9 000 paid to
Kabelo. Kabelo incurred an assessed loss of R1 750 for the tax year ended 28 February 2021.
The trustee drew up accounts for Kabelo’s business activities from 1 March 2021 until 31 May
2021 that disclosed a net profit of R550.
The trustee ceased trading on 28 February 2022. Specialised equipment, being the only asset
owned by Kabelo, was sold for R42 000. The accounting profit on the sale is not included in the
income statement above.
Kabelo paid R1 800 for the equipment and claimed a wear-and-tear allowance of R1 800 in
respect of this equipment, which had a tax value of Rnil on 1 March 2021.
What are the income tax effects for Kabelo and his insolvent estate for the 2022 year of assessment?
SOLUTION
Taxpayer one – Assessment of Kabelo for period 1 March 2021 to day before sequestration
(31 May 2021)
Net profit ....................................................................................................................... R550
Less: Assessed loss from previous year ...................................................................... (1 750)
Assessed loss at 31 May 2021 (note 1) ........................................................................ (R1 200)
Taxpayer two – The insolvent estate for the period 1 June 2021 to 28 February 2022
Net profit ....................................................................................................................... R1 700
Add:
Recoupment: equipment (s 25C) ................................................................................. 1 800
Add:
Taxable capital gain: equipment (s 25C)
R200 (R42 000 proceeds – R1 800 recoupment – Rnil base cost) = R40 200 capital
gain less R40 000 annual exclusion) × 40% ................................................................. 80
Less:
Assessed loss at date of sequestration (s 25C) (note 1) .............................................. (1 200)
Taxable income ............................................................................................................ R2 380
Taxpayer three – Assessment of Kabelo for period 1 June 2021 to 28 February 2022
Taxable income (salary) (note 2) .................................................................................. R9 000
Notes
(1) Kabelo’s assessed loss of R1 200 incurred before sequestration cannot be set off against
his salary of R9 000 (taxpayer three) (proviso to s 20(1)(a)). It will be set off against the trad-
ing income of the insolvent estate (taxpayer two) (s 25C).
(2) Kabelo receives the salary in his own right and is personally liable for any tax thereon.
(3) Appropriate s 6(1) rebates in the year of sequestration must be reduced, since the period of
assessment is less than 12 months. (This only applies to taxpayers one and three.)
975
26 Donations tax

l identify when a disposal of property is a donation
l identify situations where certain transactions could be deemed donations
l explain which donations are specifically exempt from donations tax
l calculate the amount of the general annual exemption from donations tax available
to a taxpayer, if any
l calculate the donations tax payable on any donation at the applicable tax rate
l identify the person liable for the payment of donations tax
l indicate the time period in which donations tax must be paid
l explain the other tax consequences that may result from making a donation.
Contents
Page
26.1 Overview (ss 7C, 54 to 64) .................................................................................................. 978
26.2 Levying of donations tax (ss 54 and 64).............................................................................. 978
26.3 Definitions (s 55(1)) .............................................................................................................. 979
26.3.1 Property .................................................................................................................. 979
26.3.2 Donation .................................................................................................................. 980
26.3.3 Donee ..................................................................................................................... 980
26.4 When a donation takes effect (s 55(3))................................................................................ 980
26.5 Deemed donations (ss 8C, 58(1) and 58(2)) ....................................................................... 980
26.6 Exemptions .......................................................................................................................... 981
26.6.1 Specific exemptions (ss 1, 56(1) and 56(2)(c)) ...................................................... 981
26.6.2 General exemption for a donor other than a natural person (s 56(2)(a)) ............... 982
26.6.3 General exemption for a natural person (ss 56(2)(b), 60(2)) ................................. 983
26.7 Donations by spouses married in community of property (s 57A) ...................................... 983
26.8 Disposal of the right to receive or use an asset received or accrued in respect of
services rendered or to be rendered (ss 1, 7, 56(1)(k)(i) and 57B, par 16 of the
Seventh Schedule and par 1 of the Eighth Schedule) ....................................................... 984
26.9 Donations by companies (ss 1 and 57) ............................................................................... 984
26.10 Valuation: Property (ss 55(1) and 62) .................................................................................. 985
26.10.1 Valuation: Property other than limited interests (s 55(1)) ...................................... 985
26.10.2 Valuation of limited interests: Fiduciary, usufructuary or other like interests
(s 62(1)(a), (2) and (3)) .......................................................................................... 985
26.10.3 Valuation: Annuity (s 62(1)(b)) ............................................................................... 988
26.10.4 Valuation: Bare dominium (s 62(1)(c)) .................................................................. 989
26.11 Interest-free or low-interest loans to trusts or companies (ss 1, 7C, 7D and 8EA) ............. 991
26.12 Payment and assessment of tax (ss 59 and 60, Chapter 8 of the
Tax Administration Act) ........................................................................................................ 995
26.13 Other tax consequences of donations................................................................................. 996
26.14 Comprehensive donations tax examples ............................................................................ 996
977
26.1 Overview (ss 7C, 54 to 64)

Donations tax is payable on certain transfers of assets from one person to another person. The dona-
tions tax provisions are contained in ss 54 to 64 of the Income Tax Act 58 of 1962. Section 7C brings
certain interest-free or low-interest loans, advances or credit to trusts into the scope of the donations
tax provisions. Donations tax is not tax on income; it is a separate tax on the transfer of wealth. Dona-
tions tax can be illustrated schematically as follows:
Donation of property by a
resident
(see 26.3 and 26.4)
Calculate value of
property donated
(see 26.10)
Deemed donation by a resident

(see 26.5)
Interest-free or low-interest
loans to trusts
(see 26.11)
Specific exemptions
(see 26.6.1)
General exemption
(see 26.6.2 and 26.6.3)
Tax @ 20% or 25%

(see 26.2)
The tax fulfils two functions: it imposes a tax on persons who may want to donate their assets to avoid
l normal income tax on the income derived from those assets, and/or
l estate duty when those assets are excluded from their estates.
Remember
Donations made to certain public benefit organisations can be deducted in the normal tax calcu-
lation. This deduction is regulated by s 18A of the Income Tax Act (see chapter 7). This deduc-
tion must not be confused with the donations tax regulations.
26.2 Levying of donations tax (ss 54 and 64)

Donations tax is payable on the value of any property disposed of by a South African resident in
terms of a donation, whether directly or indirectly (s 54). Non-residents are not liable for donations
tax. The tax is levied at a rate of 20% of the value of the property donated if the aggregate value of
all property donated does not exceed R30 million. If the aggregate value of donations exceeds
978
26.2–26.3 Chapter 26: Donations tax
R30 million, the first R30 million of the aggregate value is taxed at 20%, while the excess is taxed at
25% (s 64). This dual rate came into effect on 1 March 2018. Before this date donations tax was
levied at a flat rate of 20% on the value of property donated. Donations made prior to 1 March 2018
are not taken into account in determining the R30 million aggregate, but only taxable donations on or
after that date.
Even though the aggregate value must be determined to establish the applicable rate, donations tax
is payable on each donation separately.
When determining the rate of the donations tax to be levied on a specific donation
(the current donation on which donations tax must be calculated) made on or
Please note! after 1 March 2018, the aggregate value of all property disposed of under taxable
donations from 1 March 2018 until the date of the current donation has to be cal-
culated.
The following steps are followed in the calculation of donations tax:

1. Identify the disposal of property (see 26.3.1) by a resident. Disposals must be identified in chrono-
logical order.
2. Determine whether the disposal constitutes a ‘donation’ as defined (see 26.3.2) or if it is deemed
to be a donation (see 26.5).
3. Determine whether an interest-free or low-interest loan made to a trust or company is treated as a
donation to a trust (see 26.11).
4. If the disposal is a donation or is deemed to be a donation, or if a loan to a trust or company is
treated as a donation, determine whether it is specifically exempt from donations tax (see 26.6.1).
5. If it is not specifically exempt, determine the value of the donation (see 26.10). If the donee paid
any consideration for the property, the consideration paid must be deducted from the value of the
donation.
6. Deduct the balance of the general exemption available to the taxpayer (per year of assessment)
from the value of the taxable donation (see 26.6.2 and 26.6.3).
7. Multiply the value of the taxable donation by the relevant rate to determine the donations tax
payable. Multiply with 20% if the aggregate value of property disposed of under taxable donations
(from 1 March 2018) does not exceed R30 million. If the aggregate value exceeds R30 million, the
part of the taxable donation that brings the aggregate value up to R30 million is taxed at 20%,
while the excess of the donation is taxed at 25%. If the aggregate value has already reached
R30 million before the current donation, the rate is 25% on the entire taxable value of the current
donation.
26.3 Definitions (s 55(1))
26.3.1 Property
The term ‘property’ is defined as
l any right in or to property
l whether it is movable or immovable
l whether it is corporeal or incorporeal
l wherever it is situated (s 55(1)).
Donations tax is therefore levied on donations by residents of property situated inside or outside
South Africa. Examples of corporeal (tangible) property are cash, land, buildings, and machinery.
Examples of incorporeal (intangible) property are items such as copyrights, patents and trademarks.
The rendering of services for free is not subject to donations tax, as there is no
Please note!
‘property’ that is disposed of.
979
26.3.2 Donation
The term ‘donation’ is defined as ‘any gratuitous disposal of property, including any gratuitous waiver
or renunciation of a right’ (s 55(1)). For a disposal to be gratuitous, it needs to be for no consideration
or free. The following are examples of donations:
l Masego gives a holiday apartment in Greece to his brother for no consideration.
l Kagisho (creditor) is owed R150 000 by Lerato (debtor). If Kagisho releases Lerato from her
obligation to pay the amount, Kagisho donates that amount to Lerato.
The courts have held that a donation will only exist if it were motivated by ‘pure liberality’ or ‘disin-
terested benevolence’. If a creditor writes off a loan owed to him/her because the debtor cannot
repay due to being insolvent, the creditor is not motivated by ‘pure liberality’.
An important question is whether the granting of an interest-free loan by a lender to a borrower may
constitute a donation. In respect of the capital amount of the loan granted to the borrower, an imme-
diate obligation arises to re-pay the amount received and as such there is no gratuitous disposal.
However, in respect of the lack of an interest charge, further investigation is required.
As the definition of ‘property’ includes any right in or to property, it must be established whether the
lender had any ‘right’ to interest, which is then waived. In this regard it is important to look at the loan
agreement. If the lender is entitled to charge interest in terms of that agreement but then decides not
to charge interest, there is a gratuitous waiver of his right to the interest. If no provision is made for
interest in the agreement, however, no inherent right to interest arises. In such a case there can be no
waiver of any right to interest and no donation will arise.
It may, however, be possible to argue that the granting of an interest-free loan may lead to a deemed
donation (see 26.5). When the lender disposes of his money to the borrower and agrees to receive it
back some time in the future at its face value, it could mean that he will receive inadequate consider-
ation for the property he disposed of. This is due to the effect of the time value of money. It is submit-
ted that this could be a problem if the loan is made for a specified term, in which case it is possible to
determine the ‘lost’ value of the funds lent. However, if the loan is re-payable on demand, it will be
practically impossible to calculate such a value. In order to avoid possible donations tax conse-
quences on interest-free loans, it is therefore advisable that the loans be made payable on demand.
It is not SARS’ practice to treat interest-free loans as donations for donations tax purposes. However,
certain interest-free and low-interest loans made to trusts are treated as donations to the trusts and
are subject to donations tax (see 26.11).
26.3.3 Donee
The term ‘donee’ is defined as ‘any beneficiary under a donation’. It includes the trustee of a trust that
receives property under a donation for the benefit of beneficiaries. Donations tax payable by a trus-
tee in his/her capacity as such, may, however, be recovered by him/her from the assets of the trust
(s 55(1)).
26.4 When a donation takes effect (s 55(3))

A donation takes effect on the date on which all the legal formalities for a valid donation have been
complied with (s 55(3)). In most cases this is the date stipulated in a written contract which should be
signed by the donor and two witnesses. There must also be acceptance by the donee for a valid
donation to be constituted.
An oral donation takes effect on the date of delivery of the property donated. A promise to donate
takes effect when the donor commits the promise to writing and signs the relevant document.
26.5 Deemed donations (ss 8C, 58(1) and 58(2))

Property disposed of for a consideration that is not adequate (enough) in the opinion of the Commis-
sioner is deemed to have been disposed of under a donation. The amount of the deemed donation will
be the value of the property less the consideration payable by the person acquiring it (s 58(1)).
For example, if Arthur disposes of an asset worth R200 000 to Zonke for R20 000, there is a deemed
donation by Arthur of R180 000 (R200 000 – R20 000).
There could possibly be a deemed donation of restricted equity instruments (see chapter 8) in certain
circumstances (s 58(2)). The taxation of restricted equity instruments is usually deferred until a later
date so that the full gain on the instrument is properly taxed at ordinary rates (s 8C). Taxpayers could
try to avoid tax by selling such instruments at an earlier date before the instruments have fully in-
creased in value. They could do this by selling restricted equity instruments at an earlier date, either
in a non-arm’s-length transaction or to connected persons (s 8C(5)). These avoidance schemes are
prevented by deeming the restricted instrument to be donated at the time that it is deemed to vest if a
980
person disposes of the instrument under certain circumstances (ss 8C(5)(a) or (b) read with s 58(2)).
The value of the donation is the fair market value of the instrument at that time, reduced by any
amount of consideration in respect of that donation.
26.6 Exemptions
Certain donations are not subject to donations tax, as a result of being specifically exempt (see 26.6.1).
No part of the value of such property donated will be subject to donations tax. If a donation is not
specifically exempt, it will be subject to donations tax, but a taxpayer has an annual general exemp-
tion that may be used before donations tax becomes payable (see 26.6.2 and 26.6.3).
When calculating the aggregate value of property donated on or after 1 March 2018
(for the purposes of establishing the rate of donations tax), only taxable donations
Please note!
are taken into account. Any donations that were exempt from donations tax under
either a specific exemption or the general exemption are therefore not added to
the aggregate value.
26.6.1 Specific exemptions (ss 1, 56(1) and 56(2)(c))

Donations tax is not payable on the following types of donations:
l Donations made to or for the benefit of the donor’s spouse under a registered antenuptial or
postnuptial contract. This also applies to donations made as a result of couples changing their
matrimonial property system (s 56(1)(a) and s 21 of the Matrimonial Property Act). The term
‘spouse’ is defined in s 1.
Donations to a trust in which a spouse has a vested interest will also be exempt. Donations of this
kind are included in this exemption by virtue of the words ‘or for the benefit of’ in s 56(1)(a).
l Donations made to or for the benefit of the donor’s spouse, provided that the parties are not
separated under a judicial order or notarial deed of separation (s 56(1)(b)). Donations to a vested
trust are included by virtue of the words ‘or for the benefit of’. For example, if an asset is donated
to a trust in which a spouse has a 60% vested right, it means that 60% of the value of the property
is donated ‘for the benefit of’ the spouse. As a result, 60% of the value of the property donated
will be exempt from donations tax. However, if property is donated to a discretionary trust of
which the spouse is not the only beneficiary and the trustees have the right to allocate capital and
or income to any beneficiaries, the spouse does not have a vested right to any property. Dona-
tions to such a trust will not qualify for this exemption.
l A donation made in contemplation of death (as a donatio mortis causa) (s 56(1)(c)). The deciding
factor for this exemption is that the donor anticipates death and therefore gives away a specific
asset. For example, Pablo is about to attempt a dangerous stunt and promises his gold watch to
his friend should he die while performing the stunt. If Pablo indeed dies while performing the
stunt, the watch goes to his friend. This is not regarded as a donation because the property is
transferred as a result of death. There are no donations tax consequences, but such asset is in-
cluded in Pablo’s deceased estate as property deemed to be property and is subject to estate
duty.
l A donation in terms of which the donee will not obtain any benefit under the donation until the
death of the donor (s 56(1)(d)). The deciding factor here is not the anticipation of death. The donor
merely undertakes to donate an asset to the donee upon the donor’s death. For example, Mpho
agrees to donate his farm to Jayden on his (Mpho’s) death. Thus, when Mpho dies, the farm is
given to Jayden. This is not seen as a donation, but the farm is included in Mpho’s estate as
property deemed to be property for estate duty purposes and then transferred to Jayden as the
heir.
l A donation that is cancelled within six months of the date upon which it took effect (s 56(1)(e)).
l A donation made by or to any traditional council or traditional community or any tribe as referred to
in s 10(1)(t)(vii) (s 56(1)(f)).
l A donation of any property (such as shares, debts, land and movable assets) situated outside
South Africa if that property was acquired by the donor
1. before he became a resident of South Africa for the first time, or
2. by inheritance from a person who at the date of his death was not ordinarily resident in South
Africa, or
3. by a donation if at the date of the donation the original donor was a person (other than a com-
pany) not ordinarily resident in South Africa, or
981
4. out of funds derived by him from the disposal of any property referred to in the first three items
listed above, or
5. out of funds derived by him from the disposal of or from revenue from replacement properties,
where the donor disposed of the property referred to in the first three items above and replaced
it successively with other properties (all situated outside South Africa and acquired by him out
of funds derived by him from the disposal of any of the properties referred to in the first three
items above).
(Section 56(1)(g).)
l Donations made by or to any person referred to in the following income tax exemptions:
– the Government of the Republic in the national, provincial or local sphere (s 10(1)(a)), or
– certain persons conducting scientific, technical or industrial research (s 10(1)(cA)), or
– any political party (s 10(1)(cE)), or
– public benefit organisations (s 10(1)(cN)), or
– recreational clubs (s 10(1)(cO)), or
– small business funding entities (s 10(1)(cQ)), or
– funds, including pension funds, pension preservation funds, provident funds, provident preserva-
tion funds, retirement annuity funds and benefit funds (s 10(1)(d)), or
– share block companies or institutions s 10(1)(e).
(Section 56(1)(h).)
l A voluntary award which is included in the gross income of the recipient in terms of one of the
following specific inclusions in ‘gross income’ in s 1:
– certain amounts derived for services rendered (par (c)), or
– certain amounts derived on, amongst others, the termination of services (par (d)), or
– taxable fringe benefits (par (i)).
(Section 56(1)(k)(i).)
l A voluntary award the gain in respect of which is required to be included in the income of the
donee in respect of share options (s 56(1)(k)(ii)).
l Distributions by a trust to the beneficiaries of the trust (s 56(1)(l)). Donations made to a trust are,
however, subject to donations tax.
l A donation of a right (other than a fiduciary or usufructuary interest) to the use or occupation of
farming property to the donor’s child (see 26.9.2) (s 56(1)(m)).
l A donation made by a public company (s 56(1)(n)).
l A donation of the full ownership in immovable property to a beneficiary in terms of the Land
Reform Programme or the National Development Plan: Vision 2030 (s 56(1)(o)).
l Donations between companies where the donor and the donee form part of the same group of
companies (see chapter 19) and the donee company is a resident (s 56(1)(r)).
l Any bona fide contribution to the maintenance of any person, provided that the Commissioner
considers it reasonable (s 56(2)(c)). For example, payments made by a parent for the education
and accommodation of a child studying at university would be bona fide maintenance payments.
26.6.2 General exemption for a donor other than a natural person (s 56(2)(a))
Once it has been determined that a donation is not specifically exempt from donations tax, the value
of the donation after deducting the balance of the general exemption will be subject to donations tax.
If the donor is not a natural person, the general exemption is R10 000 of the sum of all casual gifts
made during any year of assessment (s 56(2)(a)).
SARS regards gifts such as wedding gifts, birthday gifts and Christmas gifts as casual gifts. It does
not necessarily regard the first R10 000 of a larger gift as a casual gift qualifying for the exemption.
When the period concerned exceeds or is less than 12 months – for example, when a company
changes its financial year-end – the amount of R10 000 must be adjusted proportionately.
Example 26.1. General exemption for casual gifts: Donor not a natural person
The year of assessment of a private company is from 1 March 2020 until 28 February 2021. It
then changed its financial year-end to 31 December. What are the maximum amounts of its
casual gifts that would be exempt from donations tax in the year ending 28 February 2021, the
period ending on 31 December 2021, and the year ending 31 December 2022?
982
SOLUTION
Year of assessment Maximum amount exempt
12
1 March 2020 to 28 February 2021.............. × R10 000 = R10 000
12
10
1 March 2021 to 31 December 2021 ........... × R10 000 = R8 333
12
12
1 January 2022 to 31 December 2022 ........ × R10 000 = R10 000
12
26.6.3 General exemption for a natural person (ss 56(2)(b), 60(2))

If the donor is a natural person, the general exemption is R100 000 of the sum of all property donated
during any year of assessment (s 56(2)(b)). This exemption is not decreased proportionately where
the period of assessment is less than a full year. Where a person makes more than one donation
during a year of assessment, the donations are dealt with in chronological order to determine how
much of the general exemption is available (s 60(2) – see 26.12).
Example 26.2. General exemption for natural persons
Samuel made the following donations during the year of assessment ended 28 February 2022:
(1) an amount of R18 000 to his brother on 25 March 2021
(2) an amount of R71 000 to his mother on 10 July 2021
(3) an amount of R15 000 to his son on 6 February 2022.
What amounts will be subject to donations tax during the year of assessment ended
28 February 2022?
SOLUTION
The donations to Samuel’s brother and mother are both exempt, since they total less than
R100 000 – the amount that is allowed as a general exemption during a year of assessment. The
donation to his son, however, is only partly exempt. Since the first two donations absorbed only
R89 000 (R18 000 plus R71 000) of the general exemption, a further amount of R11 000
(R100 000 – R89 000) could still be donated free of donations tax immediately before the dona-
tion was made to the son.
Therefore, R11 000 of the donation to the son is exempt, and the balance of R4 000 (R15 000 –
R11 000) is subject to donations tax. The amount to be exempted when there is more than one
donation during the year is required to be calculated according to the order in which the dona-
tions take effect. This solution assumes that none of the above donations were made for the bona
fide maintenance of the persons concerned.
26.7 Donations by spouses married in community of property (s 57A)

Section 57A covers donations made by spouses married in community of property.
The basic exemption of R100 000 per year for natural persons is available to each of the two spouses.
In other words, a couple married in community of property will together be able to donate property to
the value of up to R200 000 annually without incurring any liability for donations tax.
When a spouse makes a donation of property which forms part of the joint estate, each spouse is
deemed to have made 50% of the donation. For example, when a wife makes a R150 000 donation of
property, which forms part of the joint estate, she and her husband are each deemed to have donated
R75 000 (R150 000 × 50%). As this R75 000 is less that the annual basic exemption of R100 000, no
donations tax liability arises as a result of the donation in either spouse’s hands.
When a spouse makes a donation of property that is excluded from the joint estate, it will be regarded
as having been made solely by that spouse.
983
26.8 Disposal of the right to receive or use an asset received or accrued in respect
of services rendered or to be rendered (ss 1, 7, 56(1)(k)(i) and 57B, par 16 of
the Seventh Schedule and par 1 of the Eighth Schedule)
In certain circumstances, a taxpayer could attempt to undermine the donations tax provisions where
the taxpayer performs services to an employer, either as an employee or as an independent contrac-
tor, in exchange for the right to receive or use an asset.
If any amount is received by or accrues to a taxpayer in respect of employment, the holding of an office or
for services rendered, the amount is included in the gross income of that taxpayer (par (c) of the definition
of ‘gross income’ in s 1). Even if the amount is received by or accrues to someone else (other than the
taxpayer rendering the services), the amount is included in the gross income of the taxpayer who ren-
dered the services (proviso (ii) to par (c)).
However, if the taxpayer receives a benefit or advantage other than cash from an employer, the ‘cash
equivalent’ of that benefit or advantage is determined by applying the rules of the Seventh Schedule and
is included in the gross income of the employee (par (i) of the gross income definition in s 1). Where the
benefit or advantage consists of the right to receive or use an asset, the cash equivalent thereof is gener-
ally calculated with reference to the market value of the asset at the date of its receipt by or accrual to the
employee. Even if the benefit or advantage is provided to someone else (other than the taxpayer render-
ing the services), it is deemed that the benefit or advantage has been granted to the employee and
calculated and included as such in the gross income of the employee (par 16 of the Seventh Schedule).
It is clear from the above discussion that it will always be the person rendering the services to the
employer who will be liable to normal tax on the employment benefits granted by the employer, whether
those benefits or advantages are granted to that person or to someone else. This will also be the case,
even if the employee cedes (makes over) the right to receive future income from such employment or
services rendered to someone else. However, some taxpayers have devised donations tax avoidance
schemes by ceding the right to receive or use an asset at a future date from an employer. In other words,
the employee could cede his or her right to the receipt or use of an asset to which they would normally
only be entitled after rendering the services, to someone else (for example to a family trust), before the
actual services have been rendered. Because it may be difficult or impossible to determine the future
‘value’ of that asset at the time of cession of the right to it, a taxpayer could argue that donations tax
cannot be levied. In this way a taxpayer could achieve the transfer of assets from himself or herself to
someone else without incurring the donations tax liability.
To avoid the above-mentioned avoidance of donations tax, s 57B is introduced with effect from
1 March 2022. This provision deals with the situation where an employee agrees to render services to an
employer in exchange for the receipt or use of an ‘asset’ (as defined in par 1 of the Eighth Schedule). If
the employee disposes of the right to that asset before becoming entitled to it, the disposal must be
disregarded and the employee is treated as having acquired that asset at the date that he/she would
otherwise have become entitled to it (s 57B(2)(a)). The employee is deemed to have acquired that asset
or its use for an amount equal to the amount included in his/her gross income in terms of par (ii) of the
proviso to par (c) or par (i) of the gross income definition in s 1. The employee is then deemed to have
made a donation equal to the amount included in his/her gross income (s 57B(2)(b)). The donee is
deemed to have acquired the asset for the same amount.
Note that the exemption provided in s 56(1)(k)(i) only applies to the employer. If an amount is included in
gross income of the donee as outlined in the requirements of the exemption, the employer is not subject to
donations tax when it transfers the asset, even though it may now be transferred to someone else as a
result of the cession. It is only if the right to receive the asset is ceded by the employee, that a donation is
deemed to be made by the employee (on the date that the asset would have otherwise been received by
or accrued to the employee), and that donation is then subject to donations tax. The provisions of the
relevant parts of s 7 may also be applicable to the income resulting from such a donation for normal tax
purposes.
This provision applies in respect of the disposal of rights to receive or use assets on or after 1 March
2022.
26.9 Donations by companies (ss 1 and 57)

Section 57 deals with donations made by companies at the instance of another person. It stipulates
that such donations are deemed to be made by the person (usually a majority shareholder) who
instructed the company to make the donation. This section is an anti-avoidance section that levies
984
donations tax if value is extracted from a company as a donation to a third party.

The value extracted from the company is also regarded as a dividend from the company to the
person at whose instance the donation was made. This is because the company is transferring or
applying an amount for the benefit or on behalf of a person in respect of a share in the company (see
definition of ‘dividend’ (s 1)). In other words, it is because of the person’s shareholding that the com-
pany is transferring the amount of the donation.
Section 57 levies donations tax on the donation part of the transaction and dividends tax (see chap-
ter 19) will be levied on the dividend part of the transaction.
Example 26.3. Donation by a company
Safeera owns 60% of the shares in ABC (Pty) Ltd. Safeera instructs the company to make a cash
donation of R80 000 to her son. What are the tax consequences of this transaction?
SOLUTION
The donation is deemed to be made by Safeera since it is made at her instance and she will
therefore be liable for donations tax on the donation (taking into account any unused portion of
her annual general exemption of R100 000). The R80 000 cash is being applied to Safeera’s son
in respect of Safeera’s shares in ABC (Pty) Ltd. It should accordingly be viewed as a dividend to
Safeera (see chapter 19).
26.10 Valuation: Property (ss 55(1) and 62)

The various types of property donated are valued according to specific valuation methods (s 62).
26.10.1 Valuation: Property other than limited interests (s 55(1))

The value of property donated, other than limited interests, is the price that a willing buyer and willing
seller in an open market would agree upon in an arm’s-length transaction. This value is known as the
‘fair market value’ at the date on which the donation takes effect. In the case of immovable property
on which bona fide farming activities are carried on in South Africa, the ‘fair market value’ is the price
that a willing buyer and willing seller in an open market would agree upon in an arm’s-length transac-
tion, reduced by 30% (s 55(1)). For such property the fair market value would therefore be the price
between a willing buyer and seller multiplied by 70%. For example, if property can be sold for
R10 million between a willing buyer and seller, the fair market value of the property is R10 million.
However, if the property is used for bona fide farming purposes in South Africa, the fair market value
would be R7 million (R10 million × 70%).
If an unlisted company owns immovable property on which bona fide farming activities take place in
South Africa, the 30% reduction will similarly be applied when the value of the shares of the company
is determined (s 62(1A)).
Any conditions imposed by or at the instruction of the donor which reduce the value of the property
donated must be ignored (s 62(1)(d)).
If, in the opinion of the Commissioner, the amount shown in a return as the fair market value of any
property is too low, he is entitled to determine the fair market value (s 62(4)).
26.10.2 Valuation of limited interests: Fiduciary, usufructuary or other like interests

(s 62(1)(a), (2) and (3))
A fiduciary interest is a limited interest in property. It implies that a person (the fiduciary) does not
have full ownership of the property, but merely the temporary possession and use of it. The property
is owned by the fiduciary on the condition that ownership of the property must pass to another speci-
fied person (the fideicommissary) upon the death of the fiduciary. This condition is usually imposed in
terms of a will or trust deed. As the property in question is usually fixed property, it will be registered
in the name of the fiduciary, but the condition attached thereto will be registered against the title
deed.
The fiduciary is entitled to the fruits of the property during his lifetime, but usually may not dispose of
the property. If the fideicommissary dies before the fiduciary, the fiduciary normally becomes the
outright owner of the property. For example, Dillon donates a house to his brother, Nigel, on the
985
condition that Nigel must leave it to his (Nigel’s) daughter, Stefanie. A fiduciary interest has been
donated by Dillon. It must be valued and donations tax calculated on the value.
A usufructuary interest (usufruct) in property is also a limited interest. Full ownership of property
consists of two parts:
l Usufruct. This is the use of the fruit or income from the property. The holder of this limited interest
cannot dispose of the property or of his limited interest and can also not bequeath it.
l Bare dominium. This is the ownership of property, without the benefit of the use of the fruit or
income from that property. The holder of this limited interest can only sell the property subject to
the usufruct, which belongs to someone else. The bare dominium holder can bequeath the bare
dominium subject to the usufruct.
For example, Matthew donates a holiday home to Ivana, subject to a lifelong usufruct in favour of
Catherine. Full ownership of the property is therefore split. Catherine is known as the usufructuary,
while Ivana is known as the bare dominium holder. In this case, two donations have been made and
must be calculated separately:
l the bare dominium donated to Ivana
l the usufruct donated to Catherine.
The following steps are followed to determine the value of a donation of a fiduciary, usufructuary or
other like interest in property:
1. Determine the fair market value of the property over which the interest is held.
2. Calculate the annual value of the right of enjoyment of the property. The ‘annual value’ is an
amount equivalent to 12% of the fair market value of the full ownership of the property that is sub-
ject to the fiduciary, usufructuary or other like interest (s 62(2)). If the Commissioner is satisfied
that the property cannot reasonably be expected to produce an annual yield of 12%, he may fix
whatever sum may seem reasonable to him as representing the annual yield (s 62(2)).
The annual value of books, pictures, statuary or other objects of art is the average net receipts
derived from the property during the three years preceding the date of the donation (instead of
the 12% of fair market value) (s 62(2)(b)).
3. Determine the following three time periods:
l life expectancy of the donor (the life expectancies of males and females at different ages can
be obtained from Table A (Appendix D)). To determine a person’s life expectancy, look at the
person’s age on his or her next birthday.
l life expectancy of the donee. This is because the Act refers to ‘the extent to which the donee
becomes entitled to the right’.
l a specific time period (if any) attached to the right of enjoyment by the donor (meaning that
the right of use is for a specific period of time, and not necessarily for the lifetime of the
donor or donee).
4. Determine the shortest of the above three periods.
5. Capitalise the annual value (answer to step 2) over the above shortest period, by using the pres-
ent value factors contained in Table A (when a life expectancy is the shortest period) or Table B
(when a fixed period is the shortest period). This means that the annual value is merely multiplied
by the present value factor to determine the present value of the right for the determined period
of time.
(Section 62(1)(a).)
The calculation must be made over 50 years if the person concerned (donor or donee) is not a nat-
ural person, for example a company (s 62(3)). In such a case, the present value factors contained in
Table B (Appendix D) should be used.
Example 26.4. Valuation: Usufructuary interest
Omar (male) donates to Sabelo (male) a usufructuary interest for life in property with a fair market
value of R1 000 000. Omar’s age next birthday is 56 and Sabelo’s age next birthday is 33.
What is the value of the donation for the purposes of donations tax?
986
26.10 Chapter 26: Donations tax
SOLUTION
Annual value of property (12% × R1 000 000) ............................................................. R120 000
This amount is capitalised over the life expectancy of either the donor or the donee, whichever is
the shorter period. Since the donation is ‘for life’, there will be no fixed period to take into account.
Omar has the shorter life expectancy in this case.
Present value factor of R1 a year capitalised at 12% over Omar’s life expectancy
(age 56 next birthday) (see Table A) ........................................................................... 7,144 14
Capitalised value of usufructuary interest (R120 000 × 7,144 14) ............................... 857 297
Value of donation for donations tax purposes...................................................... R857 297
If Sabelo’s age was 67 on his next birthday, the annual value would have to be capitalised as
follows over Sabelo’s life expectancy, which would be shorter than that of Omar:
Present value factor of R1 a year capitalised at 12% ....................................................... 5,871 65
Capitalised value of usufructuary interest (R120 000 × 5,871 65) ............................... 704 598
Value of donation for donations tax purposes...................................................... R704 598
Example 26.5. Valuation: Usufructuary interest donated by person married in community

of property
Fadziso (male, married in community of property to Lebohang (female)) donates a usufructuary

interest in property valued at R2 000 000 to Tshepo (male) for life. This property is not excluded
from the joint estate of Fadziso and Lebohang. Fadziso’s age next birthday is 46, Lebohang’s
age next birthday is 45, and Tshepo’s age next birthday is 35.
What is the value of the donation for the purposes of donations tax?
SOLUTION
Annual value of property (12% of R2 000 000) .......................................................... R240 000
50% of this donation is made by Fadziso and 50% by Lebohang. Therefore, the value of two
separate donations must be calculated:
Donation made by Fadziso:
Fadziso (donor) has a shorter life expectancy than Tshepo (donee). ....................... 24,58 years
Present value factor of R1 a year capitalised at 12% over Fadziso’s life
expectancy (see Table A) .......................................................................................... 7,819 24
Capitalised value of usufructuary interest
(R240 000 × 50% × 7,819 24) ................................................................................... 938 309
Value of donation by Fadziso for donations tax purposes ................................. R938 309
Donation made by Lebohang:
Lebohang (donor) has a shorter life expectancy than Tshepo (donee) .................... 31.01 years
Present value factor of R1 a year capitalised at 12% over Lebohang’s life
expectancy (see Table A) .......................................................................................... 8,085 27
Capitalised value of usufructuary interest
(R240 000 × 50% × 8,085 27) ................................................................................... 970 232
Value of donation by Lebohang for donations tax purposes ............................. R970 232
Note
Both spouses will be entitled to the general exemption of R100 000 each. If the property was
excluded from the joint estate (for example if it was left to Fadziso by his pre-deceased father
who stipulated that it could not form part of any joint estate) the only donation would have been
made by Fadziso (the entire valuation would have been based on Fadziso’s life expectancy).
Only one annual exemption of R100 000 would have been available against the donation. How-
ever, because the property did form part of the joint estate, the couple benefits from having both
their annual exemptions available to reduce the taxable value of the donations.
987
Example 26.6. Valuation: Fiduciary interest
Whitney (female) grants a fiduciary interest in property valued at R2 000 000 to Mariska (female)
for 12 years or for life, whichever is the shorter period. Whitney’s age next birthday is 60 and
Mariska’s is 50.
Determine the value of the donation for purposes of donations tax.
SOLUTION
Annual value of property (12% of R2 000 000) ............................................................... R240 000
This amount must be capitalised over the life expectancy of Whitney or Mariska or over the fixed
period, whichever is the shortest.
From Table A, Whitney’s life expectancy (age 60 next birthday) is 18,78 and Mariska’s (age 50
next birthday) is 26,71. The fixed period is 12 years. The annual value must therefore be capital-
ised over the fixed period of 12 years.
Present value factor of R1 a year capitalised at 12% over 12 years
(see Table B) .................................................................................................................. 6,194 4
Capitalised value of fiduciary interest (R240 000 × 6,194 4) .......................................... 1 486 656
Value of donation for donations tax purposes ........................................................ R1 486 656
If the fiduciary interest were donated for a term of 20 years, the annual value would be capital-
ised over Whitney’s life expectancy, which would be the shortest period.
26.10.3 Valuation: Annuity (s 62(1)(b))

The value of an annuity donated is determined by capitalising the value of the annuity at the rate of
12% over the shorter of the donor’s or the donee’s life expectancy or, if it is to be held for a lesser
period, over this lesser period (s 62(1)(b)). The value of an annuity is not multiplied by 12% (as with
usufructs and fiduciary assets) before the capitalisation is done, as an annuity is already expressed
as an annual amount (unless the annuity is expressed as, for example, a fixed amount per month, in
which case that amount would be multiplied by 12 to arrive at an annual amount). This basically
means that only steps 3 to 5 (as referred to in 26.10.2) are applied for the valuation.
For example, Shakeela donates a right to an annuity of R50 000 per year for life to George. Sha-
keela’s life expectancy is 29 years and George’s is 19 years. No fixed period is applicable; therefore,
the calculation will be done over 19 years.
The right to receive an annuity is a personal right attached to the person of the recipient. This per-
sonal right falls away on death. If the terms of the donation in the above example stipulated that the
donation will be for a period of 25 years, the shorter period is the life expectancy of George, that is,
19 years.
However, if the terms of the donation stipulated that, should George die, he could transfer the annuity
to someone else in his will, the fixed period of 25 years (which is shorter than the life expectancy of
29 years of the donor) would be used. The personal right that falls away on death is not replaced with
a right to receive an annuity for a specified number of years.
If no information to the contrary is provided, it can be assumed that the annuity will cease at the date
of death or the end of the fixed period, whichever happens first.
Example 26.7. Valuation: Annuity
Renesh (male) grants an annuity of R200 000 to Marco (male) for life. Renesh’s age next birthday
is 55 and Marco’s age next birthday is 60.
Determine the value of the donation for purposes of donations tax.
988
SOLUTION
The annuity must be capitalised over the life expectancy of the donor or the donee, whichever is
the shorter period.
Present value factor of R1 a year capitalised at 12% over Marco’s life expectancy
(age 60 next birthday) (see Table A) ............................................................................ 6,742 06
Capitalised value of annuity (R200 000 × 6,742 06) ..................................................... 1 348 412
Value of donation for donations tax purposes....................................................... R1 348 412
If the annuity were granted for a fixed term of, say, ten years or for the life of the donee, which-
ever is the shortest period, it would be capitalised over the life expectancy of the donee or of the
donor or over ten years, whichever is the shortest period. Marco’s life expectancy (age 60 next
birthday) is 14,61 (see Table A) and Renesh’s (age 55 next birthday) is 17,86. Thus, ten years is
the shortest period.
Present value factor of R1 a year capitalised at 12% over ten years
(see Table B) ................................................................................................................ 5,650 2
Capitalised value of annuity (R200 000 × 5,650 2) ....................................................... 1 130 040
Value of donation for donations tax purposes....................................................... R1 130 040
26.10.4 Valuation: Bare dominium (s 62(1)(c))

The following steps are followed to determine the value of a bare dominium that is donated:
1. Determine the fair market value of the full ownership of the property in which the bare dominium is
held.
2. Calculate the annual value of the right of enjoyment of the property by the holder of the usufruct
(i.e., 12% × fair market value).
3. Determine the life expectancy of the holder of the usufruct (therefore, do not look at the life expect-
ancy of the donor). Also determine whether the usufruct is enjoyed by the holder thereof for a cer-
tain fixed period.
4. Determine the shorter of the two above periods.
5. Calculate the value of the usufruct by capitalising the annual value (step 2) over the above period
(i.e annual value × present value factor).
6. The value of the bare dominium is the fair market value determined in step 1 less the value of the
usufruct as determined in step 5 (s 62(1)(c)(i)).
Example 26.8. Valuation: Bare dominium
Ricky (male) donates a farm (on which bona fide farming activities are carried on in South Africa)
that is subject to the life usufruct of Ben (male), to Aidan (male). The price which can be obtained
between a willing buyer and seller for the full ownership of the farm is R2 000 000. Ben’s age
next birthday is 58.
Determine the value of Ricky’s donation to Aidan for purposes of donations tax.
SOLUTION
Price for full ownership of farm .................................................................................... R2 000 000
Fair market value (price less 30% (see 26.9.1) (R2 000 000 – 30%) ........................... 1 400 000
Annual value of property (12% of R1 400 000) ............................................................ 168 000
Present value factor of R1 a year capitalised at 12% over Ben’s life expectancy
(age 58 next birthday) (see Table A) ........................................................................... 6,952 25
Capitalised value of usufructuary interest (R168 000 × 6,952 25) ............................... 1 167 978
Value of full ownership of farm ..................................................................................... 1 400 000
Less: Value of Ben’s usufructuary interest ................................................................. (1 167 978)
Value of donation for donations tax purposes .......................................................... R232 022
continued
989
If the farm were subject to the usufruct of Ben not for life but only for a fixed period, the annual
value would be capitalised over Ben’s life expectancy or the balance of the term of the usufruct,
whichever is the shorter period. For example, if at the date of the donation to Aidan the term of
the usufruct is seven years and four months, the annual value would be capitalised over this
period (Ben’s life expectancy being 15,86 years) and the value of the donation to Aidan would
be determined as follows:
Present value factor of R1 a year capitalised at 12% over seven years (see Table B) . 4,563 8
Capitalised value of Ben’s usufructuary interest (R168 000 × 4,563 8) ........................ 766 718
Value of full ownership of farm ...................................................................................... 1 400 000
Less: Value of Ben’s usufructuary interest .................................................................... (766 718)
Value of donation for donations tax purposes....................................................... R633 282
The same principles will apply if property is subject to the payment of an annuity. This means that the
owner of a property is obliged to pay an annuity to someone else from the income derived by that
specific property (s 62(1)(c)(ii)). The effect of this is that the owner of the property owns a right which
is similar to a bare dominium as at least some of the fruits of the property go to someone else.
The following steps are followed to determine the value of property subject to an annuity:
1. Determine the life expectancy of the person entitled to the annuity. Also determine whether the
right will be enjoyed for a specific fixed period.
2. Determine the shortest of the above two periods.
3. Capitalise the annual value (the amount of the annuity per year) over the above shortest period, by
using the relevant present value factors contained in Table A or Table B.
4. Deduct the value of the annuity as determined in step 3 from the fair market value of the property
on the date of the donation.
Example 26.9. Valuation: Property subject to annuity
Anzelle (female) donates a property with a fair market value of R3 000 000 to Euliza (female). The
property is charged with an annuity of R60 000 in favour of Anastasia (female) for a period of
twenty years. So far, Anastasia has enjoyed the annuity for 12,5 years. Anastasia’s age next
birthday is 69.
Determine the value of Anzelle’s donation to Euliza for purposes of donations tax.
SOLUTION
The first step is to capitalise the annuity over the life expectancy of Anastasia or the balance of
the term over which the annuity is still to run, whichever is the shorter period. Anastasia’s life
expectancy (aged 69 next birthday) is 12,57 years (Table A), while the balance of the term over
which the annuity is still to run is seven-and-a-half years.
The annuity must be capitalised over seven years, as the remaining expected period during which
the annuity will be paid (similar to the age ‘next birthday’ when calculating life expectancies).
Present value factor of R1 a year capitalised at 12% over seven years
(see Table B) ................................................................................................................ 4,563 8
Capitalised value of annuity (R60 000 × 4,563 8) ......................................................... 273 828
Value of full ownership of property ............................................................................... 3 000 000
Less: Capitalised value of Anastasia’s annuity ............................................................. (273 828)
Value of donation for donations tax purposes ...................................................... R2 726 172
990
26.11 Interest-free or low-interest loans to trusts or companies (ss 1, 7C, 7D and

8EA)
It is very important to take note of the parts of the ‘connected person’ definition (s 1) that relate to
trusts and trust beneficiaries, as the provisions discussed here always require the parties to be
connected persons.
Certain loans, advances or credit (for ease of reference all of these types of advances will be referred
to as ‘loans’ hereafter) granted to a trust (or certain companies) by a connected person to the trust,
may result in the application of the donations tax provisions to interest foregone on such loans (s 7C).
As stated by National Treasury, the policy rationale behind this provision was to move towards pre-
venting the avoidance of donations tax and estate duty through schemes involving trusts and interest-
free or low-interest loans.
For this provision to apply, the lender must be either a natural person, or a company who granted the
loan at the instance of a natural person (who is a connected person in relation to the company in
terms of par (d)(iv) of the definition of ‘connected person’ in s 1) (s 7C(1)).
The following loans could be subject to these provisions:
1. a loan granted to a trust in relation to which the lender (as explained above) is a connected
person
2. a loan granted to a trust in relation to which a connected person of the lender (as referred to in 1
above) is a connected person
3. a loan granted to a company in which a trust, as mentioned in 1 or 2 above, directly or indirectly
holds at least 20% of the equity shares or voting rights. This will apply if the trust holds the 20%
on its own, or if the trust and related other persons together hold at least 20%. The related other
persons are any beneficiary (or a spouse of a beneficiary) of the trust, or any connected person
to that beneficiary (or spouse of that beneficiary) within the second degree of blood relationship.
The foregone interest (the difference between the amount of interest incurred by the trust or company
and the interest that would have been incurred at the official rate of interest) is deemed to be a con-
tinuing, annual donation for purposes of donations tax (s 7C(3)). The interest is calculated as simple
interest on a daily basis (s 7D(b)). This donation is deemed to be made by the lender on the last day
of the year of assessment of the trust. If the loan is granted by a company at the instance of a natural
person, the natural person is deemed to have made the loan.
Example 26.10. Interest-free loan advanced to a trust

Cynthia created an RSA inter vivos trust on 28 February 2021 by selling a rent-producing prop-
erty to the trust at its market value of R10 000 000. The purchase price was not paid by the trust
but credited to an interest-free loan account. Cynthia’s minor daughter and major son (both
South African residents) are the beneficiaries of the trust (not a special trust as defined). Cynthia
has not used any portion of her annual R100 000 donations tax exemption and has not made any
donations before. Assume that the official rate of interest remained unchanged at 9% during the
2022 year of assessment. The full loan was still outstanding on 28 February 2022.
The trust received net RSA rentals of R800 000 during the 2022 year of assessment. Assume that
SARS considers a market-related interest rate to be 5% for the entire 2022 year of assessment.
The beneficiaries of the trust do not have vested rights in the income or capital of the trust. The
trustees of the trust decided to distribute the entire amount of the net rentals earned by the trust
during the 2022 year of assessment to the beneficiaries of the trust in equal portions on
28 February 2022.
Explain all the tax consequences that arise during the 2022 year of assessment.
991
SOLUTION
Donations tax consequences
Cynthia’s children are connected persons to the trust as they are beneficiaries of the trust
(par (b)(i) of the definition of ‘connected person’ in s 1). Cynthia is a connected person to her
children (par (a)(i) of the definition of ‘connected person’ in s 1) and therefore Cynthia is a con-
nected person to the trust (par (b)(ii) of the definition of ‘connected person’ in s 1). Cynthia is
deemed to make a donation to the trust on 28 February 2022. The donation is calculated as the
interest foregone during the year. Since the loan was outstanding for the full year of assessment
and it is assumed that the official rate of interest remained unchanged for the year of assess-
ment, the deemed donation is R10 000 000 × (9% – 0%) = R900 000. Cynthia must pay dona-
tions tax of R160 000 (20% × (R900 000 – R100 000)) by 31 March 2022.
Normal tax consequences
The normal tax consequences are determined by the application of s 7 (see chapter 24). It is
important to note that both s 7 and s 7C can therefore apply to the same scenario.
The net rental distributed to her minor daughter (R400 000) will be deemed to be Cynthia’s income
(s 7(3)). However, the amount that can be attributed to Cynthia as the donor is limited to the
interest that she has forfeited, being the difference between the market-related interest rate of 5%
and the rate that was charged on the loan (0%). Please note that this interest rate is not
necessarily the same as the ‘official rate of interest’. The cumulative amount that can be deemed
to be Cynthia’s income is therefore limited to R500 000 (R10 000 000 × 5% (5% – 0%)). The full
R400 000 distributed to the minor daughter will therefore be taxed in Cynthia’s hands. The minor
daughter will not be taxed as her mother is taxed on the full amount. As the full cumulative
amount of R500 000 has not been used in the first year of assessment, an amount of R100 000
(R500 000 – R400 000) can be carried forward to the 2023 year of assessment.
The R400 000 distributed to the major son will be included in his gross income, since he has a vest-
ed right to it (s 25B(2)).
Example 26.11. Low-interest loan advanced to a trust

Assume the same information as for Example 26.10, except that the purchase price of the prop-
erty is credited to a 2% interest-bearing loan account.
Explain all the tax consequences that arise during the 2022 year of assessment.
SOLUTION
Donations tax consequences
The same donations tax consequences as in Example 26.10 apply, except that the amount of the
deemed donation is R10 000 000 × (9% – 2%) = R700 000 and the donations tax payable by
Cynthia is R120 000 (20% × (R700 000 – R100 000)).
Normal tax consequences
The net rental distributed to her minor daughter (R400 000) will again be deemed to be Cynthia’s
income (s 7(3)). However, the amount that can be attributed to Cynthia as donor is limited to the
interest that she has forfeited, being the difference between the market-related interest rate of 5%
and the rate that was charged on the loan (2%). The cumulative amount that can be deemed to
be Cynthia’s income is therefore limited to R300 000 (R10 000 000 × 3% (5% – 2%)). Of the net
rental distributed to the minor daughter, a ratio of 60% (3%/5%) can be attributed to the gratui-
tous nature of the property transferred to the trust. An amount of R240 000 (R400 000 × 60%) can
therefore be said to be attributed to the donation to the trust by Cynthia and will therefore be
taxed in Cynthia’s hands. As the full cumulative amount of R300 000 has not been used in the first
year of assessment, an amount of R60 000 (R300 000 – R240 000) can be carried forward to the
2023 year of assessment. The remaining net rental of R160 000 (R400 000 – R240 000) distrib-
uted to the daughter will be included in the daughter’s gross income, since it is not attributable to
the gratuitous nature of the property transferred to the trust and she has a vested right to it
(s 25B(2)).
The R400 000 distributed to the major son will be included in his gross income, since he has a
vested right to it (s 25B(2)).
992
If a person acquires a claim to an amount owing by a trust or company as outlined in s 7C(1), that
person is deemed to have made a loan to that trust or company (s 7C(1A)). The person acquiring
such a claim must be a connected person to the trust or to the person who made the loan to the trust
or company. The deemed loan will be for an amount equal to the amount of the claim acquired.
Example 26.12. Low-interest loan acquired

Penelope created an inter vivos discretionary trust on 31 August 2021 by advancing a cash
amount of R1 000 000 to the trust. The amount constituted a loan to be repaid by the trust. The
loan carries no interest. Penelope’s father and mother are the beneficiaries of the trust. On
30 September 2021 Penelope sold 50% of the loan account to her brother, Isaac, for which he
paid her R500 000 (you may assume that this is the market value of the loan) on that date.
Assume that the official rate of interest remained unchanged at 9% during the 2022 year of
assessment.
What are the donations made by Penelope and Isaac in respect of the loan to the trust for the
2022 year of assessment?
SOLUTION
Penelope is deemed to have made a donation to the trust on 28 February 2022. The donation is
calculated as the interest foregone during the year. The donation made by her is therefore
R7 397 (R1 000 000 × 9% × 30/365) plus R37 542 (R500 000 × 9% × 151/365) = R18 616.
Isaac is also deemed to have made a donation to the trust on 28 February 2022. The donation is
calculated as (R500 000 × 9% × 151/365) = R18 616. This is because Isaac is deemed to have
made 50% of the loan to the trust on the date on which he acquired it from Penelope.
Please note that the loan is only advanced to the trust on 31 August 2021, resulting in it receiving
the interest benefit only from that date until the end of February 2022 (181 days). However, as the
interest rate of 9% is expressed as an annual rate, the amounts of the deemed donations are
arrived at by dividing by 365, and not by 181.
If a natural person or a company at the instance of a natural person (who is a connected person to
the company in terms of par (d)(iv) of the definition of ‘connected person’ in s 1) takes up preference
shares (as defined in s 8EA(1)) in another company (on or after 1 January 2021) the amount of the
consideration received by or accrued to the company in exchange for the preference shares could in
certain instances be deemed to be a loan for the purposes of s 7C(3). This will be the case if 20% or
more of the equity shares or voting rights of the company (which issues the preference shares) are
held (directly or indirectly) by a trust that is a connected person in relation to the natural person or the
company (which takes up the preference shares at the instance of a natural person). This will apply if
the trust holds the equity shares or voting rights alone or together with any beneficiary of the trust
(s 7C(1B)). If this provision applies and the consideration received by the company in exchange for
the preference shares is deemed to be a loan, any dividend or foreign dividend accrued in respect of
the preference shares will be deemed to be interest in respect of the loan. The calculation of the
deemed donation is therefore done in the same manner as for a normal loan on which the foregone
interest is calculated as discussed above. In other words, the dividend or foreign dividend on the
preference shares is compared to interest at the official rate of interest to determine any possible
deemed donation.
Example 26.13. Preference shares issued to a natural person

Davita is a beneficiary of the ABC Trust. Davita and the ABC Trust hold 10% and 15% respect-
ively of the equity share capital and voting rights of DEF (Pty) Ltd. The financial year of DEF (Pty)
Ltd ends on 31 December. On 1 January 2022 Davita takes up 100 4% cumulative preference
shares in DEF (Pty) Ltd at their par value of R5 000 each. Assume that the official rate of interest
remained unchanged at 9% during the 2022 year of assessment and that all persons are resi-
dents of South Africa.
Calculate the donations tax consequences in respect of the preference shares issued by DEF
(Pty) Ltd and taken up by Davita. Assume that Davita has already used up her R100 000 annual
donations tax exemption for the 2022 year of assessment and that she has never made any other
donations before the current year of assessment.
993
SOLUTION
Davita is a connected person to ABC Trust (par (b)(i) of the definition of ‘connected person’).
Davita and the trust collectively hold 25% (10% and 15% respectively) of the equity shares and
voting rights of DEF (Pty) Ltd. The amount of R500 000 (100 × R5 000) received by DEF (Pty) Ltd
in exchange for the preference shares issued to Davita is deemed to be a loan for the purposes
of s 7C(3) (s 7C(1B)). At the official rate of interest, DEF (Pty) Ltd would have paid interest on the
deemed loan at 9%, amounting to R7 274 (R500 000 × 9% × 59/365). As the holders of cumula-
tive preference shares are guaranteed to receive the preference dividend, a preference dividend
of R3 233 (R500 000 × 4% × 59/365) has accrued to Davita for her year of assessment ended
28 February 2022. A donation of R4 041 (R7 274 – R3 233) is deemed to be made by Davita to
DEF (Pty) Ltd on 28 February 2022. As Davita has already utilised her annual donations tax
exemption, she is liable for donations tax of R808 (R4 041 × 20%). The donations tax must be
paid by the end of March 2022.
If the loan by a company (the advancing company) to the trust (or another company as outlined
above) is at the instance of more than one connected person in relation to the advancing company,
the deemed donation must be apportioned. The apportionment is based on the ratio of equity shares
or voting rights in the advancing company (s 7C(4)).
Example 26.14. Low-interest loan at the instance of connected persons

Fanie and Shivani hold 60% and 40% respectively of the equity shares of XYZ (Pty) Ltd. The
company grants an interest-free loan of R1 000 000 to a trust (the company is a beneficiary of the
trust) at the instance of the shareholders. The loan is granted on 31 August 2021. Assume that
the official rate of interest remained unchanged at 9% during the 2022 year of assessment.
Calculate the donations tax consequences for Fanie and Shivani during the 2022 year of assess-
ment as a result of the loan granted to the trust. Assume that both Fanie and Shivani have
already used up their R100 000 annual donations tax exemptions and that they both made dona-
tions to the value of R10 million (on or after 1 March 2018 and before this donation).
SOLUTION
Section 7C is applicable because a loan was made to a trust by a company at the instance of
natural persons who are connected persons to the company since they each hold more than
20% of the equity share capital of the company (par (d)(iv) of the definition of ‘connected per-
son’).
At the official rate of interest, the trust would have paid interest on the loan at 9%, amounting to
R44 630 (R1 000 000 × 9% × 181/365). However, as the trust pays no interest, there is a deemed
donation of R44 630 (R44 630 – Rnil). Fanie is deemed to have made a donation of R44 630 ×
60% = R26 778 to the trust on 28 February 2022. Shivani is deemed to have made a donation of
R44 630 × 40% = R17 852 on the same date. As they have used their annual general exemption,
Fanie will be liable for donations tax of R5 356 (R26 778 × 20%) and Shivani will be liable for
donations tax of R3 570 (R17 852 × 20%). The rate of 20% is used as neither Fanie nor Shivani
has made more than R30 million in donations since 1 March 2018. Both amounts of donations tax
must be paid by the end of March 2022 (s 60(1)).
Although s 7C deals mainly with the deemed donation resulting from the making of certain loans, it
also has some normal tax consequences. No deduction, loss, allowance or capital loss may be
claimed in respect of a loan on which no interest is charged or where interest is charged at a rate that
is less than the official rate of interest (s 7C(2)). The disposal, reduction, waiver or failure to claim for
payment of any amount owing in respect of such a loan, advance or credit will thus result in no tax
benefit for the lender.
The following loans, advances and credit to a trust or company will be specifically excluded from the
application of the donations tax provisions in s 7C(2) and (3) (s 7C(5)):
l If the trust is a special trust that is created solely for the benefit of minors with a disability
(s 7C(5)(c))
l If the trust or company is a public benefit organisation or small business-funding entity (s 7C(5)(a))
l If the trust is a vesting trust (in respect of which the vesting rights and contributions of the benefi-
ciaries are clearly established) (s 7C(5)(b))
l If the loan is used to fund the acquisition of a primary residence. This exclusion is applicable if
the loan was advanced to the trust by a natural person (or a company at the instance of a natural
person), and the natural person or the spouse of that person used the residence as a primary
residence for the entire period that the trust owned the residence during the year of assessment
(s 7C(5)(d))
994
l Loans that constitute affected transactions and are subject to transfer pricing provisions (see s 31
in chapter 21; s 7C(5)(e))
l Loans provided to a trust or company in terms of sharia-compliant financing arrangement
(s 7C(5)(f))
l Loans that are subject to dividends tax in terms of s 64E(4) (see chapter 19.3.8; s 7C(5)(g)), or
l Loans by a company to a trust that was created solely to set up a share incentive scheme. The
loans may be for the trust to acquire shares in that company or any other company in the same
group of companies. This exemption applies if equity instruments (as defined in s 8C) are offered
by the trust to full-time employees and or directors of the company. However, the scheme must
not be available to connected persons of the company (natural persons holding 20% or more of
the equity or voting rights of the company) (s 7C(5)(h)).
When the amount of interest that would have been charged on a loan is calculated for the purposes
of the Act, any common law principles or provisions in any other Acts that limit the amount of interest
that can be charged, are disregarded (s 7D(a)).
26.12 Payment and assessment of tax (ss 59 and 60, Chapter 8 of the Tax
Administration Act))
Donations tax is payable by the end of the month following the month during which a donation takes
effect. The Commissioner can allow for a longer period (s 60(1)). This means that donations tax is
calculated per donation made and not for a year or period of assessment.
The donor is the person who is liable for the payment of donations tax. If he or she fails to pay it within
the prescribed period, both he or she and the donee will be liable jointly and severally (s 59).
The Commissioner may at any time assess either the donor or the donee, or both the donor and the
donee, for any donations tax payable (in accordance with Chapter 8 of the Tax Administration Act).
The Commissioner may also assess them for any shortfall in the tax paid if he or she is satisfied that
the tax has not been paid in full (s 60(5)).
When a donor makes more than one donation during a year of assessment, the amount of the general
exemption must be determined according to the order in which the donations took effect (s 60(2)).
Should payment of the tax be demanded from a donee, he or she will be liable to pay the tax only if
the donor’s general exemption has been exhausted at the time of the donation.
When a donor has made more than one donation on the same date, the donor may choose the order
in which the donations are deemed to have been made. If he or she fails to make a choice within
14 days of being informed by the Commissioner to make such a choice, the Commissioner may
determine the order (s 60(3)).
The payment of donations tax has to be accompanied by a return (s 60(4)).
Example 26.15. Donees held liable for donations tax
Nick donated R95 000 each to Garth and Selina (in this sequence) on 30 September 2021. He
therefore donated R190 000 on that date. Nick fails to pay the donations tax and the Commis-
sioner now holds Garth and Selina liable for the donations tax. What amount will be subject to
donations tax in Garth and Selina’s hands respectively? Assume that Nick made no other dona-
tions during that year of assessment or any other year of assessment.
SOLUTION
Since the first donation was made to Garth, there will be no donations tax payable on it due to the
general exemption, which will be used to the extent of R95 000. Since the balance of the exemp-
tion of R5 000 (R100 000 less R95 000) will be available on the second donation to Selina,
R90 000 (R95 000 – R5 000) will be subject to donations tax, which will amount to R18 000 (20%
of R90 000). The Commissioner can assess Selina for this amount (s 60(5)). Nick has chosen the
order in which he made the donations in order to establish which of the donees would be liable
for the donations tax.
995
The Tax Administration Act, 28 of 2011 was introduced to align the administration
of tax Acts. It deals with issues such as the rendering of returns, penalties and
Please note! interest, and the dispute resolution process. As far as the administrative aspects
with regards to donations tax are concerned, the provisions of this Act have to be
adhered to.
26.13 Other tax consequences of donations

Whether a donation is exempt from donations tax or not, it might have other tax consequences.
l Under certain circumstances the donation might be deductible in the calculation of normal
income tax in terms of s 18A (see chapter 12).
l When a person donates an asset on which a deduction was previously allowed to that person, the
person is deemed to have disposed of that asset at the market value of the asset at the date of
the donation (s 8(4)(k)). Therefore, a recoupment of previously allowed deductions will be included
in the income tax calculation of the donor (see chapter 13).
l Income resulting from amounts donated could activate the stipulations of s 7 of the Act. The result
is that the income may then be taxed in the donor’s hands, although he or she did not receive it
himself or herself (s 7(1) to 7(11)) (see chapters 7 and 24).
l The donation of an asset is included in the definition of ‘disposal’ for capital gains tax purposes
(par 11(1)(a) of the Eighth Schedule). When a person donates an asset, that person is deemed to
have disposed of the asset at market value and the donee is deemed to have acquired the asset
at market value for CGT purposes (par 38 of the Eighth Schedule to the Act). A portion of the
donations tax paid can be added to the base cost of the asset when calculating the capital gain
(paragraph 22 of the Eighth Schedule) (see chapter 17).
l When a farmer donates livestock or products (par 11 of the First Schedule to the Act – see chap-
ter 22), or when a person utilises trading stock for the purpose of making a donation (s 22(8) –
see chapter 14), certain amounts have to be included in the calculation of income tax.
l When a person (creditor) waives a right to a debt owed by a debtor, certain recoupments and or
capital gains tax consequences could arise for the debtor (s 19 and par 12A of the Eighth Sched-
ule). If the waiver of the debt constitutes a donation or deemed donation and donations tax was
payable in respect of the donation or deemed donation, the provisions regarding recoupments and
or capital gains tax consequences for the debtor may not apply (see chapters 13 and 17).
26.14 Comprehensive donations tax examples
Example 26.16
Ntombi made a cash donation of R28 million to her sister on 31 October 2021. This donation is
not specifically exempt. Calculate the donations tax liability of Ntombi in respect of this donation
under the following different, independent circumstances:
(1) This is the first donation that Ntombi has ever made.
(2) Ntombi had made two other cash donations before. The first donation amounted to R1 million
and was made on 1 July 2021 to her brother (not bona fide maintenance). The second dona-
tion amounted to R4 million and was made on 1 August 2021 to her husband. She has never
made any other donations before this date.
(3) Ntombi had only made one other cash donation before this date. This donation amounted to
R5 million and was made on 1 July 2021 and was not specifically exempt.
(4) Ntombi had only made one other cash donation before. This donation amounted to R35 million
and was made on 1 July 2021 and was not specifically exempt.
996
SOLUTION
Donations tax payable by Ntombi in respect of the donation made on 31 October 2021:
(1) This is the first donation that Ntombi has ever made
Value of property donated before this donation (and on/after 1 March 2018) Rnil
Value of this donation on 31 October 2021 R28 000 000
Total value of all property donated up to and including this donation ......................... 28 000 000
Less: annual general exemption ................................................................................... (100 000)
Taxable value ................................................................................................................. R27 900 000
Donations tax payable @ 20%....................................................................................... 5 580 000
(2) Ntombi had only made two other donations before this donation (and on/after
1 March 2018). The first donation amounted to R1 million and was made on
1 July 2021 to her brother (not bona fide maintenance). The second donation
amounted to R4 million and was made on 1 August 2021 to her husband.
Value of property donated before this donation on 1 July 2021.................................... R1 000 000
Less: annual general exemption .................................................................................... (100 000)
Value of this donation ..................................................................................................... 900 000
Donations tax of R180 000 (R900 000 × 20%) is payable.
Value of property donated to husband on 1 August 2021 ............................................ 4 000 000
Less: Donation to husband specifically exempt (4 000 000)
Value of this donation ..................................................................................................... Rnil
Aggregate value of property donated before the current donation .............................. 900 000
Value of property donated now on 31 October 2021 .................................................... 28 000 000
Aggregate value of property donated (note 1) .............................................................. R28 900 000
As the aggregate value of all property donated is still below R30 million, the rate is
still 20%, therefore donations tax payable now is R28 000 000 × 20% (the annual
general exemption of R100 000 would have been used against the first donation in
the 2022 year of assessment) ....................................................................................... R5 600 000
(3) Ntombi had only made one other donation before this date (and on/after
1 March 2018). This donation amounted to R5 million and was made on
1 July 2021 and was not specifically exempt.
Value of property donated before this donation on 1 July 2021.................................... R5 000 000
Less: Annual general exemption .................................................................................... (100 000)
Value of property donated before current donation 4 900 000
Donations tax of R980 000 (20% x R4 900 000) is payable.
Value of property donated on 31 October 2021 ............................................................ 28 000 000
Aggregate value of property donated ............................................................................ R32 900 000
As the aggregate value of property donated only exceeds R30 million after the
donation on 1 October 2021, the donations tax on the current donation of
R28 000 000 needs to be calculated at two different rates:
@20%
Taxable value of donation taxable at 20% (R30 000 000 – (R4 900 000)) (note 2) ..... R25 100 000
Donations tax thereon @ 20% ........................................................................................ R5 020 000
@25%
Taxable value of the donation to the extent that it is not taxed at 20% (note 2):
(R28 000 000 – R25 100 000) ......................................................................................... R2 900 000
Donations tax thereon @ 25% ........................................................................................ R725 000
(4) Ntombi had only made one other donation before this date (and on/after
1 March 2018). This donation amounted to R35 million and was made on
1 July 2021 and was not specifically exempt
Value of property donated before on 1 July 2021 ......................................................... R35 000 000
Less: annual general exemption .................................................................................... (100 000)
Value of property donated before current donation ...................................................... 34 900 000
Donations tax of R6 122 500 (20% × R30 000 000) plus (25% × R4 900 000) is pay-
able.
Value of property donated on 1 October 2021 .............................................................. R28 000 000
Aggregate value of property donated (R34 900 000) before the current donation
exceeds R30 million, therefore donations tax on the current donation is
R28 000 000 × 25% ........................................................................................................ R7 000 000
continued
997
Notes
1. The rate to be used for the donations tax calculation depends on the ‘value’ of property
donated. However, the aim of the imposition of the tax (s 64) is to determine the total value of
property that will be subjected to tax. The value of the donations therefore has to be deter-
mined after taking into account the annual general exemptions of R100 000 (or R10 000 in the
case of a non-natural person) that would have been used against all donations. Similarly, if a
donation is specifically exempt, the intention of the legislation is that such a donation should
never be subject to donations tax. Specifically exempt donations will therefore not be taken into
account when determining the total value of donations made.
2. A maximum amount of R30 million is taxed at 20%. Since R4 900 000 was already taxed at
20% only the difference between R30 million and the taxable previous donations (R4 900 000),
thus R25 100 000, can be taxed at 20%. The balance of the current donation will be taxed at
25% therefore R2 900 000 (R28 000 000 less R25 100 000). In total the value that is taxed
should add up to R28 000 000 (R2 900 000 + R25 100 000).
Example 26.17
On 1 May 2021 Amogelang Wawa (married out of community of property) celebrated his
60th birthday with a lavish party to which all of his friends and family and even a few of his
employees were invited. Amogelang is very wealthy and loves playing board games and video
games. He decided that, instead of guests having to bring birthday presents for him, he would
be hosting several games at the party and award substantial prizes to the winners of these
games. During the course of the party Amogelang awarded the following prizes in the following
sequence:
l To Adam (male), the winner of a competitive game of ‘FIFA’ on an Xbox Series X, he awarded
10 trucks which Amogelang has used in one of his manufacturing businesses. Amogelang
had purchased these trucks at R150 000 each during 2016 and had claimed their full cost in
terms of wear and tear allowances for normal tax purposes against the income from the
business. The market value of these trucks at 1 May 2021 amounted to R90 000 each.
l To Bernie (the (male) accountant at one of his businesses), who was the winner of a game of
‘Scrabble’, Amogelang awarded ten iTunes gift vouchers to the value of R500 each.
l To Elske (female aged 55), the winner of a game of ‘Monopoly’, Amogelang awarded a
holiday house with a fair market value of R900 000. Elske will receive the house subject to the
lifelong usufruct therein awarded to Fergie (see note below).
l To Fergie (female aged 51), the winner of a game of tennis on a Nintendo Switch console, the
lifelong use of the property awarded to Elske.
Amogelang also made the following other donations during the 2022 year of assessment:
l On 1 August 2021, R70 000 to his son to be used by him for a holiday. His son returned the
R70 000 five months later.
l Ken Owens (a friend of Amogelang’s) owed Amogelang R57 500 but on 1 November 2021
Amogelang accepted R20 000 as the final and full payment on this debt.
l He donated R300 000 cash to his wife on 25 December 2021. His wife will be 65 years old on
her next birthday.
Calculate the donations tax consequences for Amogelang of the above-mentioned transactions,
assuming that he has never made any donations before.
998
SOLUTION
Donations tax payable by Amogelang on donations made during the 2022 year of assessment:
1 May 2021:
Adam: 10 trucks at R90 000 each ..................................................................................... R900 000
Less: s 56(2)(b) exemption – basic annual exemption (note 1)........................................ (100 000)
800 000
Donations tax @ 20% ......................................................................................................... 160 000
Bernie: 10 iTunes vouchers at R500 each ......................................................................... 5 000
Donations tax @ 20% ......................................................................................................... 1 000
Elske: Bare dominium (based on the life of the usufructuary, Fergie):
Annual value 12% × R900 000 = R108 000
Usufructuary (Fergie) age next birthday, 52 years old
Factor female is 7,84646
Usufruct value R108 000 × 7,84646 = R847 418
Full market value of property = R900 000
Bare dominium donated valued at R900 000 – R847 418 ................................................ 52 582
Donations tax @ 20% ......................................................................................................... 10 516
Fergie: Value of usufruct based on the donor’s life, donee’s life or a shorter period:
Annual value 12% × R900 000 = R108 000
Age next birthday: Amogelang is 61 years old
Life expectancy is 14,01 years
Age next birthday of Fergie is 52 years
Life expectancy is 25,06 years
Use factor for Amogelang: 6,63010
Usufruct value donated = R108 000 × 6,63010 ................................................................ 716 051
Donations tax @ 20% ......................................................................................................... 143 210
1 August 2021
Son: Donation cancelled (returned within 6 months) ....................................................... –
(exempt in terms of s 56(1)(e)) (note 2)
1 November 2021
Ken Owens: Debt written off: R37 500 (R57 500 – R20 000) @ 20%................................ R7 500
25 December 2021
Wife: Donation to his wife (exempt in terms of s 56(1)(b)) ................................................ –
Notes
1. Several donations were made on 1 May 2021. The R100 000 annual general exemption
should be applied in the order that donations are made (s 60(2)). This could be relevant if a
donee is held liable for donations tax. The donor has to indicate the order in which the do-
nations are made, otherwise the Commissioner will determine the order (s 60(3)). However,
if the donor pays the donations tax he will usually declare all the donations made on the
same day on the same form and pay the donations tax by the end of the following month.
2. Amogelang had to pay the donations tax liability (R70 000 @ 20% = R14 000) by the end of
September 2021. Amogelang will therefore have to claim this amount already paid back from
SARS.
999
27 The deceased and the deceased estate

l explain the normal tax consequences for a deceased person until the date of death
l explain the normal tax consequences for the estate of a deceased person
l explain the estate duty consequences for the estate of a deceased person.
Contents
Page
27.1 Overview ............................................................................................................................... 1002
27.2 Normal tax: Change in taxpayers upon death ..................................................................... 1003
27.3 Normal tax: The deceased person (s 1) (paras 19 and 21 of the Fourth Schedule)
(ss 153(1) and 154 of the Tax Administration Act) .............................................................. 1003
27.3.1 Income received by or accrued to the deceased person (ss 1, 6(2), 6(4), 6A(3),
6B, 8(4)(a), 8B, 8C, 9HA, 22(8)(b)(iv), 24A and 25) (paras 3, 3A and 4 of the
Second Schedule) .............................................................................................. 1004
27.3.2 Capital gains tax consequences for the deceased person (ss 1, 8C, 9HA, 9HB,
9J and 25) (paras 2(1)(b), 20, 31, 54, 55, 57 and 62 of the Eighth Schedule) ...... 1005
27.4 Normal tax: The deceased estate (ss 1, 6, 6A, 6B, 10(1)(i), 12T, 20 and 25) (par 9 of the
Eighth Schedule) (s 153(1) of the Tax Administration Act) .................................................. 1007
27.4.1 Income of the deceased estate (ss 1, 7B, 11(j), 24 and 25) (s 153(1) of the
Tax Administration Act) .......................................................................................... 1008
27.4.2 In community-of-property marriages (ss 25(1) and 25A)....................................... 1010
27.4.3 Beneficiaries: Distribution or disposal of assets by the deceased estate
(ss 1, 10(1)(k) and 10(2)(b)) ................................................................................... 1010
27.4.4 Capital gains tax consequences for the deceased estate (ss 6, 6A, 6B, 9HA and
25) (paras 2, 5(1), 10(1), 20, 35, 40(3), 48(d), 53 and 57 of the Eighth Schedule)
(s 4 of the Estate Duty Act) .................................................................................... 1010
27.4.4.1 Capital gains tax: Deceased estate ......................................................... 1010
27.4.4.2 Capital gains tax: Beneficiaries of the deceased person (including a
surviving spouse) ....................................................................................... 1011
27.5 Estate duty: General (ss 2(2), 3, 4, 4A, 11, 13, 16 and First Schedule to the Act) .............. 1014
27.6 Estate duty: Property (s 3(2)) ............................................................................................... 1015
27.7 Estate duty: Property deemed to be property (s 3(3)) .......................................................... 1016
27.7.1 Domestic policies of insurance on the life of the deceased (s 3(3)(a),
definitions of ‘child’, ‘domestic policy’, ‘relative’ and ‘family company’) .................. 1016
27.7.2 Property donated under a donatio mortis causa (s 3(3)(b), ss 56(1)(c) and
56(1)(d) of the Income Tax Act) ............................................................................... 1018
27.7.3 A claim against the surviving spouse (s 3 of the Matrimonial Property Act
88 of 1984) (ss 3(3)(cA), 4(lA)) ................................................................................. 1018
27.7.4 Property that the deceased person was competent to dispose of for his/her own
benefit (s 3(3)(d))...................................................................................................... 1019
27.7.5 Excessive contributions to retirement funds (s 3(3)(e), s 11F of the Income Tax
Act, par 5 of the Second Schedule to the Income Tax Act)..................................... 1019
27.8 Estate duty: Valuation of property (s 5) ................................................................................. 1019
27.8.1 Property sold (s 5(1)(a)) ........................................................................................... 1019
27.8.2 Property not sold (ss 3(3)(b), 5(1)(e), 5(1)(g) and 9(1))........................................... 1019
27.8.3 Unlisted shares (s 5(1)(f)bis) .................................................................................... 1019
1001
Page
27.8.4 Immovable property on which bona fide farming operations take place
(s 5(1A)) ............................................................................................................... 1020
27.8.5 Fiduciary, usufructuary and other like interests in property (ss 5(1)(b) and 5(2)) . 1020
27.8.6 Right to an annuity (s 5(1)) ................................................................................... 1022
27.8.7 Bare dominium (s 5(1)(f)) ..................................................................................... 1024
27.8.8 Property that the deceased person was competent to dispose of for his/her
own benefit (s 5(1)(f )ter) ...................................................................................... 1024
27.8.9 Life expectancy of persons other than natural persons (s 5(3)) ......................... 1025
27.9 Estate duty: Allowable deductions (s 4) .............................................................................. 1025
27.9.1 Funeral and death-bed expenses (s 4(a)) ........................................................... 1025
27.9.2 Debts due within South Africa (s 4(b)) ................................................................. 1025
27.9.3 Costs of administration and liquidation (s 4(c)) ................................................... 1025
27.9.4 Costs of carrying out the requirements of the Master or the Commissioner
(s 4(d)) .................................................................................................................. 1025
27.9.5 Foreign property (s 4(e)) ...................................................................................... 1025
27.9.6 Debts due to creditors outside South Africa (s 4(f)) ............................................ 1026
27.9.7 Limited interests reverting to donor (s 4(g)) ........................................................ 1026
27.9.8 Bequests to certain charitable bodies (s 4(h)) .................................................... 1026
27.9.9 Improvements made to inherited property by beneficiaries (s 4(i)) .................... 1026
27.9.10 Enhancement in the value of fiduciary, usufructuary or other like interest
in property through improvements by beneficiary (s 4(j)) ................................... 1027
27.9.11 Accrual claims (s 4(lA)) ........................................................................................ 1027
27.9.12 Usufructuary or other like interest created by predeceased spouse
(ss 3(2)(a), 4(q) and 4(m)).................................................................................... 1028
27.9.13 Books, pictures, statuary and other works of art (s 4(o))..................................... 1028
27.9.14 Policy proceeds taken into account in the valuation of shares (s 4(p), s 1 of
the Income Tax Act) ............................................................................................. 1028
27.9.15 Amounts accruing to the surviving spouse (s 4(q), definition of ‘spouse’) ......... 1029
27.9.16 Abatement (s 4A) ................................................................................................. 1030
27.10 Estate duty: Other rebates .................................................................................................. 1032
27.10.1 Transfer duty (s 16(a)).......................................................................................... 1032
27.10.2 Foreign death duties and double tax agreements (s 16(c)) ................................ 1032
27.10.3 Rapid succession rebate (s 2(2) and the First Schedule to the Act) .................. 1032
27.11 Estate duty: Apportionment (ss 11, 13, 15 and 20) ............................................................ 1034
27.12 Estate duty: Marriage in community of property ................................................................. 1035
27.13 Estate duty: Assessment and payment of the duty (ss 7, 9, 9C, 10, 12, 14, 17 and 18)
(ss 187(2) and 187(3)(c) of the Tax Administration Act) ..................................................... 1036
27.14 Estate duty: Administrative provisions (ss 6, 26, 28 and 29) .............................................. 1037
27.15 Comprehensive example ..................................................................................................... 1037
27.1 Overview
When a person dies, his/her net estate (assets less liabilities) is distributed according to his/her will
(or if there is no will, according to the rules of intestate succession). The will can provide for certain
assets to be awarded to specific persons. Such specific awards are called legacies and the recipi-
ents thereof are called legatees. Persons who share in the rest of the estate that is not specifically
awarded to anyone, will receive inheritances and they are referred to as heirs. For ease of reference,
heirs and legatees are collectively referred to as ‘beneficiaries’ hereafter. In other words, wealth is
transferred from the deceased to beneficiaries.
Although the deceased person ceases to be a taxpayer on the date of death, there will be various
normal tax issues that need to be addressed regarding not only the deceased person, but also
his/her deceased estate. In addition to normal tax consequences, there could also be estate duty
consequences in respect of the deceased estate.
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27.1–27.3 Chapter 27: The deceased and deceased estates
Normal tax and estate duty are two separate taxes that must be calculated in respect of the death of
a person:
l Normal tax consequences arise due to income received or accrued before and after the death of
the deceased person up until the finalisation of the deceased estate, which is when the liquida-
tion and distribution account (the account required to be submitted by the executor of the estate
to the Master of the High Court in accordance with s 35 of the Administration of Estates Act 66 of
1965 (definition of ‘liquidation and distribution account’, s 1)) becomes final. This income can be
taxed either in the hands of the deceased person or in the hands of the deceased estate (or even
in the hands of the beneficiaries). Capital gains can be realised before death (taxed in the hands
of the deceased person), on the date of death (taxed in the hands of the deceased person due to
the s 9HA deemed disposal) and after death when assets are disposed of by the deceased es-
tate (taxed in the hands of the deceased estate).
l Estate duty is calculated on the dutiable value of the estate, of which the actual property and
deemed property (net wealth) transferred to the beneficiaries as a result of death are the starting
point.
This chapter deals firstly with the normal tax (see 27.2–27.4) and then with the estate duty (see 27.5–
27.14) consequences of the death of a natural person.
27.2 Normal tax: Change in taxpayers upon death

The following diagram illustrates the different taxpayers involved in the case of death of a person:
In the case of death of a person, three taxpayers are involved:
The deceased The deceased The beneficiaries of

taxpayer in the final & estate & the deceased
period of assess- (separate taxable
ment before death person)
(see 27.3) (see 27.4)
27.3 Normal tax: The deceased person (s 1) (paras 19 and 21 of the Fourth
Schedule) (ss 153(1) and 154 of the Tax Administration Act)
The executor of a deceased estate is the person who deals with the administrative issues of the
deceased as well as the deceased estate. The executor is the representative taxpayer in respect of
the income received by or accrued to the deceased during his/her lifetime (par (e) of the definition of
a ‘representative taxpayer’ in s 1 read with s 153(1) of the Tax Administration Act). The executor must
generally represent the deceased taxpayer in all matters relating to taxation (s 154 of the Tax Admin-
istration Act).
A natural person’s final period of assessment will end on the day of death, which is not necessarily on
the last day of February. The person will have a final normal tax calculation for the period from the
first day of the year of assessment until the date of his/her death.
In the event of the deceased being a provisional taxpayer, the executor is exempt from having to
submit an estimate on behalf of the deceased. This is in respect of the provisional tax period during
which the deceased died. It will start on either 1 March or 1 September and end on the date of death
(proviso (ii) to par 19(1)(a) of the Fourth Schedule). If a person dies between 1 March and 31 August,
it means that his/her first provisional tax period is shorter than six months. In such a case, no provi-
sional tax return or payment is required for the first provisional tax period (par 21(1A) of the Fourth
Schedule). Any tax owing by the deceased for his/her last period of assessment will be collected on
assessment.
The executor must complete the return of income of the deceased to the date of death and submit
the resulting claim for normal tax payable against the assets of the estate. This means that the final
normal tax payable by the deceased will be paid out of cash in the deceased estate. The tax so paid
will qualify as a deduction in the calculation of the dutiable amount of the deceased estate for estate
duty purposes, subject to certain conditions (s 4(b) of the Estate Duty Act).
1003
With regard to the final normal tax calculation of the deceased person, special rules apply to income
received by or accrued to the deceased (see 27.3.1) and specific capital gains tax consequences
arise (see 27.3.2).
27.3.1 Income received by or accrued to the deceased person (ss 1, 6(2), 6(4),
6A(3), 6B, 8(4)(a), 8B, 8C, 9HA, 22(8)(b)(iv), 24A and 25) (paras 3, 3A and 4
of the Second Schedule)
The final normal tax calculation of the deceased will usually have a proportional period of assessment
that will be less than a year. The following is relevant for this final normal tax calculation:
l A deceased person is deemed to have disposed of his or her assets (subject to certain exclu-
sions and roll-overs – see 27.3.2) at the date of death at the market value of those assets at that
date (s 9HA(1)). An effect of this deemed disposal is, for example, that capital allowances
claimed in respect of an allowance asset may be recouped and included in the gross income of
the deceased (s 8(4)(a)). Another effect is the inclusion of deemed consideration equal to market
value in respect of trading stock held at date of death as a sole proprietor (s 22(8)(b)(iv)).
Example 27.1. Recoupment: Deceased person

Lutendo has been claiming allowances (s 11(e)) on an asset used in his trade as a sole proprie-
tor. The cost of the asset was R10 000 when originally purchased, while the tax value and market
value of the asset at the date of his death were R7 000 and R9 000 respectively.
Explain the income tax consequences on death relating to the above asset.
SOLUTION
At the date of death there is a deemed disposal of the asset, resulting in a recoupment of R2 000
(R9 000 less R7 000) which the executor will include in Lutendo’s gross income in his final
income tax return.
l Any fees paid to a medical scheme by the estate of a deceased taxpayer are deemed to have
been paid by the taxpayer on the day before his/her death (s 6A(3)).
l When a taxpayer dies during the year of assessment, the date used to determine the ages of
children for the purposes of the additional medical tax credit is the date of the taxpayer’s death,
not the last day of February (definition of ‘child’ (s 6B(1)). This means that the ages of the de-
ceased taxpayer’s children are determined at the date of the taxpayer’s death to establish, for
each child, whether the definition of ‘child’ is met.
l If the deceased’s period of assessment is less than a full year, the normal tax rebates to which
he/she is entitled are proportionately reduced (s 6(4)). If the deceased would have been 65 years
old or older at the end of the year of assessment during which he/she died, he/she will also be enti-
tled to the secondary rebate in his/her final income tax period, reduced proportionally for the period
during which he/she was alive (s 6(2)(b)). In addition, if the deceased would have been 75 years
old or older at the end of the year of assessment during which he/she died, he/she will also be enti-
tled to the tertiary rebate in his/her final income tax period, reduced proportionally (s 6(2)(c)). This
means that the age the deceased would have been on 28/29 February had he/she still lived, is
used to determine which of the personal rebate(s) apply. According to the wording of the Act, the
apportionment of the rebate(s) is done based on the number of months in the final period of
assessment relative to 12, but, in practice, the calculation is done based on days in the final
period of assessment relative to 365 or 366.
Although certain amounts may be received by or accrue to the executor of a deceased estate only
after the date of death, they are deemed to accrue to the deceased taxpayer immediately prior to
his/her death. The following are examples of such deemed accruals:
l Equity instruments acquired by directors and employees of a company are taxed when they vest
in the director or employee (s 8C). The vesting date depends on the type of equity instrument. In
the case of a restricted-equity instrument, vesting is deemed to occur immediately before the
date of death of a director or employee if all the restrictions are or may be lifted on or after death
(s 8C(3)(b)(iv)). Whether or not restrictions fall away at death depends on the terms of the award
of the equity instrument by the employer to the employee or director.
If the restrictions are lifted, the gain or loss (market value of the equity instruments at death less
the consideration paid by the deceased for the instrument) is included in or deducted from the
deceased’s income. The capital gains tax consequences of such an instrument also need to be
considered, but the deemed disposal on death will be nil as the market value at death will be
equal to market value at vesting (see 27.3.2). As the equity instrument became the property of
1004
27.3 Chapter 27: The deceased and deceased estate
the deceased immediately before death (and is included as such for estate duty purposes) it is to
be dealt with in terms of the stipulations of the deceased’s will or the provisions of intestate suc-
cession if the deceased had no will. If the restrictions are NOT lifted on or after death (for exam-
ple if the shares must be sold back to the company upon death of the employee or director),
vesting takes place after death and the provisions of s 25(1) apply (see 27.4). However, the de-
ceased director or employee did own the shares at death and it will therefore be included as
property in the estate for the purposes of estate duty. The gain or loss upon vesting with the sale
of the instrument will be included in or deducted from the deceased estate’s income.
l Shares received under certain circumstances before 1 October 2001, in exchange for fixed prop-
erty or other shares are deemed to have been disposed of by the taxpayer on the day before his
death (s 24A). This disposal is deemed to be for an amount equal to the lesser of the market value
on that day and the market value on the date of the original exchange (s 24A(5)).
l Lump sum awards from retirement funds payable to the member or any other person on the
death of the member of the fund are deemed to accrue to the member immediately before his/her
death (paras 3, 3A and 4 of the Second Schedule).
l A lump sum payable in consequence of a person’s death in respect of compensation for the loss
of office or employment is deemed to have accrued to the person immediately before his/her
death (proviso (ii) to par (d) of the definition of ‘gross income’ in s 1). This also applies to any
lump sum received as a severance benefit from an employer (proviso to the definition of ‘sever-
ance benefit’ in s 1).
An employee must include in income, any amounts received or accrued from the sale of qualifying
equity shares derived from broad-based employee share plans if the shares are sold within five years
of receiving the shares (s 8B). If the employee dies within five years of receiving such shares, there is
no income tax liability on the value of the shares (s 8B(4)). The effect is that the amount will only be
subject to capital gains tax in the hands of the deceased.
Example 27.2. Income received by deceased person

Priya died on 1 August 2021 at the age of 55 years. Her income from a business to the date of
her death was R131 500, while her interest income received from a source within South Africa
until date of death was R24 300.
Calculate the taxes payable by Priya for the 2022 year of assessment.
SOLUTION
Taxes payable by Priya
Period of assessment 1 March 2021 to 1 August 2021 (154 days)
Business income ...................................................................................................... R131 500
Interest ........................................................................................................ R24 300
Less: Limited interest exemption (note) ...................................................... (23 800)
500
Taxable income ........................................................................................................ R132 000
Tax on R132 000:
On R132 000 (18% of R132 000) ................................................................................. R23 760
Less: Primary rebate (15 714 × 154/365) (note) .......................................................... (6 630)
Normal tax ................................................................................................................ R17 130
Note
The primary rebate is apportioned but the interest exemption is not. The first R23 800 interest is
therefore exempt even though the year of assessment is shorter than twelve months.
27.3.2 Capital gains tax consequences for the deceased person (ss 1, 8C, 9HA, 9HB, 9J
and 25) (paras 2(1)(b), 20, 31, 54, 55, 57 and 62 of the Eighth Schedule)
A deceased person could have disposed of certain assets during his/her final period of assessment
resulting in capital gains or losses. At the date of death certain assets will, however, still be in his/her
possession. These assets are physically transferred to beneficiaries in terms of the deceased’s will or,
where there is no will, in terms of the rules of intestate succession. For tax purposes, the deceased
person’s assets are theoretically first transferred to the deceased estate and from the estate on to the
beneficiaries or sold by the estate to third parties.
1005
A deceased person is deemed to have disposed of his/her assets to the deceased estate at the date
of his/her death for an amount equal to market value (s 9HA(1) and par 31 of the Eighth Schedule).
This rule does not apply for the following assets:
l assets awarded to a South African resident surviving spouse (s 1 definition of ‘spouse’ and
s 9HA(1)(a); the roll-over treatment under s 9HA(2) read with s 25(4) will then apply). Assets may
be awarded to a surviving spouse in terms of the will (or intestate succession rules if there is no
will), as a result of a redistribution agreement or in settlement of an accrual claim under s 3 of the
Matrimonial Property Act (s 9HA(2)(a)). This includes assets awarded to a trust in which a spouse
has a vested right but excludes assets that are sold by the executor and the proceeds awarded
to the spouse. It also excludes assets that are transferred to the spouse as part of a claim for
maintenance instituted against the estate
l a long-term insurance policy in respect of which the capital gain or loss would have been disre-
garded (par 55 of the Eighth Schedule and s 9HA(1)(b) (see 17.10.2)), and
l an interest of the deceased in a retirement fund if the capital gain or loss in respect of that fund
interest would have been disregarded (par 54 of the Eighth Schedule and s 9HA(1)(c) (see
17.10.2)).
Although assets that are bequeathed to the government, public benefit organisations and certain
exempt institutions are not excluded from the above deemed disposal rule, the deceased must
disregard any capital gain or capital loss on such assets (par 62 of the Eighth Schedule).
Assets awarded to a surviving spouse (who is a resident) are also deemed to be disposed of by the
deceased, but not at market value. This deemed disposal is at either the amount of the current year’s
expenditure (trading stock, livestock or produce) or at the base cost of the assets on the date of
death (ss 9HA(2)(b), 9HB(1) and 9HB(3)). As a result, any potential capital gain or capital loss in
respect of a capital asset is rolled over from the deceased to the surviving resident spouse. There is
in fact a history roll-over to the surviving resident spouse (s 25(4)).
If the surviving spouse is a non-resident, the roll-over relief does not apply as this would have result-
ed in a capital gain being rolled over from a taxable person to a non-taxable person. Therefore, the
normal deemed disposal at market value applies to all assets awarded to a non-resident surviving
spouse. Note that s 9HA does not provide for any exceptions to this rule, as is the case with dona-
tions between living spouses (s 9HB(5)). Therefore, not even South African immovable property or
assets of a permanent establishment in South Africa (whether held as fixed assets or as trading
stock) will qualify for the roll-over relief. According to the Comprehensive Guide to Capital Gains Tax
issued by SARS, this is due to the fact that the s 9HB(5) exclusions only apply where there is a dis-
posal of assets between spouses who are alive at the time of the disposal.
Example 27.3. Capital gain: Deceased person

An asset with a base cost of R100 and a market value of R300 on date of death is bequeathed to
a beneficiary.
Calculate the capital gain/loss in the final tax period of the deceased taxpayer if the asset is
transferred directly to a
(1) beneficiary that is not a surviving resident spouse, or
(2) surviving resident spouse.
SOLUTION
(1) A capital gain of R200 (proceeds of R300 less base cost of R100) must be accounted for in
the deceased’s last income tax return. The beneficiary is deemed to have acquired the
asset at R300. This will also be the case if the asset is transferred to a non-resident surviving
spouse.
(2) If this asset is transferred to the surviving resident spouse, a capital gain of Rnil must be
accounted for in the deceased’s last income tax return and the base cost of R100 is rolled
over to the surviving resident spouse.
When a couple is married out of community of property with the accrual system applicable to their
marriage (see par 27.7.3), an accrual claim is calculated at date of death. The spouse with the smaller
accrual has a claim against the other spouse at that date. From the point of view of a deceased
spouse, an amount can therefore either be owed to the surviving spouse by the deceased’s estate or
an amount can be owed by that surviving spouse to the deceased estate. As part of settling this
claim an asset may be transferred from one spouse to the other. However, this transfer will only be
done after some time has passed, as a claim must be instituted by or against the executor of the
1006
27.3–27.4 Chapter 27: The deceased and deceased estate
deceased estate. If the deceased estate must transfer an asset to a surviving spouse, the disposal is
at the date of death. It will be at base cost if the surviving spouse is a resident (s 9HA(2)(b)) and at
market value if a non-resident (s 9HA(1)). If the surviving spouse transfers an asset to the deceased
estate, the disposal is deemed to take place to the deceased spouse immediately before death
(s 9HB(2)(a)), subject to roll-over relief if applicable. At death, a deemed disposal to the estate will be
accounted for in the deceased’s hands.
It may also happen that an asset is transferred directly to a non-spouse beneficiary of the deceased
and not to the estate first and then to the beneficiary. The disposal by the deceased is then deemed
to be to the beneficiary and not to the estate, but still at market value. That beneficiary is deemed to
have acquired the asset at market value at the date of the deceased person’s death (s 9HA(3)).
In the calculation of the deceased person’s final taxable capital gain, he/she will be entitled to
l an annual exclusion of R300 000 in the year of death (instead of the usual R40 000) which is
never apportioned (par 5(2))
l the personal-use asset exclusion (see 17.10.2)
l a primary residence exclusion (see 17.10.1), and
l a potential small business asset exclusion in terms of par 57 (see 17.10.2) (where any portion
of the R1,8 million exclusion is not used by the deceased, it will not be available to his deceased
estate).
If the deceased person was the holder of a restricted equity instrument (s 8C) and the restrictions are
lifted on or after death, the instrument is deemed to vest in the deceased employee or director imme-
diately before death (see 27.3.1). In addition to the gain or loss on vesting that will be included in, or
deducted from, the deceased’s income, the following capital gains tax consequences arise:
l The base cost of the equity instrument is equal to the market value thereof at date of death
(par 20(1)(h)(i) of the Eighth Schedule).
l There is a deemed disposal of the equity instrument at date of death at market value (s 9HA(2)(b)(ii)
if the instrument is acquired by a surviving resident spouse or s 9HA(1) in all other cases). This
means that the capital gain on deemed disposal of the equity instrument is always nil.
l If the equity instrument is acquired by a surviving resident spouse or an heir or legatee of the
deceased, that spouse or heir or legatee is deemed to have acquired the instrument at the mar-
ket value at date of death (ss 25(4) and 9HA(3) respectively).
If the restrictions on the equity instrument do NOT fall away at or after death (for example if the instru-
ment must be sold back to the company upon the death of the employee or director), vesting will not
take place before death, but only once the shares have been sold by the executor. As the instrument
has not vested in the deceased at date of death yet, there is no deemed disposal for the purposes of
s 9HA.
27.4 Normal tax: The deceased estate (ss 1, 6, 6A, 6B, 10(1)(i), 12T, 20 and 25)
(par 9 of the Eighth Schedule) (s 153(1) of the Tax Administration Act)
A person ceases to be a taxpayer on the date of his/her death. After that date a new taxpayer, the
deceased estate, is created. The estate of a deceased person is a person separate from the de-
ceased for normal tax purposes (definition of a ‘person’ in s 1 of the Act). The executor generally
represents the deceased estate in all matters relating to taxation. The executor must register the
deceased estate as a taxpayer, complete the return of income derived by the deceased estate and
submit the resulting claim for normal tax payable against the assets of the estate. This means that the
final normal tax payable by the deceased estate will be paid out of cash in the deceased estate and
will qualify as a deduction in the calculation of the dutiable value of the deceased estate for estate
duty purposes (s 4(b) of the Estate Duty Act).
The deceased estate must be treated as a natural person (s 25(5)(a)) for normal tax purposes, ex-
cept that it will not qualify for the personal rebates (s 6), or the medical tax credits (ss 6A and 6B).
Because the interest exemption (s 10(1)(i)) is not expressly excluded, it is submitted that the de-
ceased estate qualifies for this exemption, which is available to natural persons only. If the deceased
person was a resident at the time of his death, the deceased estate is also deemed to be a resident
(s 25(5)(b)).
The deceased estate’s year of assessment will end on 28/29 February, unless the liquidation and
distribution account is finalised before that date, in which case the period of assessment for the
deceased estate will end on the date that the liquidation and distribution account is finalised.
1007
The deceased estate is never a provisional taxpayer (par (ff) of the definition of ‘provisional taxpayer’
in the Fourth Schedule).
For the purposes of determining the annual and lifetime contributions in respect of tax-free invest-
ments, the deceased person and his/her deceased estate must be deemed to be one and the same
person (s 12T(1)(b)). Any amount received by or that accrued to the deceased estate in respect of a
tax-free investment held by the deceased person at date of death, will be exempt from normal tax
(s 12T(2)). Any amount in a tax-free investment that was owned by a deceased person (or his/her
estate) and transferred to another individual (an heir or legatee) will be deemed to be a contribution
and will be subject to the annual and lifetime contribution limits of the recipient beneficiaries.
Expenditure incurred in the production of income in the deceased estate, such as administration
charges and commission payable to the executor, could be deductible for normal tax purposes.
Executor’s fees relating to selling the assets of the deceased are not deductible for normal tax pur-
poses, as these relate to the winding up of the asset and not the production of income.
While the deceased estate is treated as a natural person (s 25(5)(a)), it is not deemed to be the same
natural person as the deceased person. Thus, any assessed loss (s 20) or assessed capital loss
(par 9 of the Eighth Schedule) of the deceased person existing at the time of death cannot be carried
over to the deceased estate; it merely falls away.
After assets are transferred to the deceased estate, they could be producing income in the deceased
estate before the assets are distributed to the beneficiaries. This income is generally taxed in the
hands of the deceased estate for the period before the assets are transferred to the beneficiaries
(see 27.4.1). When assets are sold to third parties, capital gains or losses could be realised by the
deceased estate (see 27.4.4).
27.4.1 Income of the deceased estate (ss 1, 7B, 11(j), 24 and 25) (s 153(1) of the
Tax Administration Act)
The executor of the deceased estate is a representative taxpayer in respect of the income received
by or accrued to the deceased estate (par (e) of the definition of a ‘representative taxpayer’ in s 1
read with s 153(1) of the Tax Administration Act). Income received by or accrued to the executor of a
deceased estate in his capacity as executor, is included in the income of the deceased estate
(s 25(1)(a)). This relates to income received or accrued after the deceased’s death up to the date on
which the executor is no longer entitled to the income. Once the executor has handed over or trans-
ferred an asset to, or permitted the use of an asset by, an heir or legatee and that person has an
enforceable right to claim the income flowing from the asset, the income is taxable in that person’s
hands. The income will no longer be received by or accrue to the executor. For liquidation and distri-
bution accounts finalised on or after 1 March 2022, the deceased estate is deemed to have disposed
of that asset at the earlier of the date on which the asset is disposed of or the date on which the
liquidation and distribution account becomes final (s 25(3)(c)).
For example, if a deceased person owned a farm, the income from the farm until the date of death is
included in the income of the deceased person in his/her final period of assessment. The income
generated by the farm after death and until the farm is transferred to an heir or legatee or sold to a
third party, is included in the income of the deceased estate. Income generated by the farm after it
has been transferred to the heir or legatee or third party, will be included in the income of the heir or
legatee or third party.
Income received by or accrued to the executor that would have been included in the income of the
deceased person had he/she been alive, will also be included in the income of the deceased estate.
For example, let’s say an employer decides to award a performance bonus to a person after his
death; the bonus is neither provided for in the employment contract of the employee, nor is it usual
practice for the employer to award such bonuses. The bonus will only be payable to the executor of
the employee’s deceased estate after his death, but because it would have been income of the
deceased had he received it while he was alive (s 7B), it will be included in the deceased estate’s
income (s 25(1)(b)) (this does not apply to lump sums awarded to a person as a result of death,
which will be included in the deceased’s gross income (par (d) of the gross income definition in s 1)).
Leave pay due to a deceased person in terms of his/her service contract that he/she had the right to
claim is also taxable in the deceased estate. The timing provision of s 7B would ordinarily include
such an amount in gross income when it is received by an employee. As the amount is received by
the executor and as it would have been income of the deceased had he/she received it while alive, it
is included in the deceased estate’s income (s 25(1)(b)).
It will also be necessary to determine the capital or non-capital nature of the proceeds on disposal of
assets by the deceased estate, as s 25(1)(b) refers to ‘income’.
1008
The provisions of s 25(1) do not apply to allowances granted to the deceased in the year of assess-
ment preceding his/her death (for example, the allowances for doubtful debts (s 11(j)) or for credit
agreements (s 24). These allowances are usually included in the income of the taxpayer in the follow-
ing year of assessment. The deceased estate and the deceased person are two separate taxpayers,
and an allowance granted to one taxpayer may not be included in the income of another in a subse-
quent year. Therefore, the allowances granted to the deceased in the year of assessment preceding
his/her death, are included in the income of the deceased’s final period of assessment and not in the
income of the deceased estate. The deceased will not be entitled to any of these allowances in
respect of the final period of assessment.
Example 27.4. Deceased estate

Wally died on 30 November 2021. He was married out of community of property. He owned the
following assets at the time of his death:
l A general dealer’s business. Wally was not a VAT vendor. The executors carried on the
business, and for the period 1 December 2021 to the end of February 2022 the gross in-
come amounted to R8 000 and the deductible expenditure was R4 500.
l An interest-bearing investment of R60 000 (not a tax-free investment). The interest is due and
payable at the end of each month. From 1 December 2021 up to the end of February 2022
the executors received interest totalling R2 200.
l A farm. The executors carried on farming, and for the period 1 December 2021 to the end of
February 2022 derived gross income of R2 000 and incurred deductible expenditure
amounting to R4 000.
l Shares in companies. The dividends accruing for the period 1 December 2021 to the end of
February 2022 amounted to R12 000. These dividends are those that qualify for the exemp-
tion from normal tax in terms of s 10(1)(k)(i).
l Cash in the bank. No interest was received on this asset.
Wally’s will contains the following provisions:
l The assets should not be sold, but the liabilities should be paid out of the cash in the bank.
Any surplus cash is bequeathed to his widow, Cathy.
l His sister, Ann, should receive the interest-bearing investment.
l 50% of the remaining assets are bequeathed in equal shares to his son, Bart (unmarried with
no children), and his widow, Cathy.
l The remaining 50% of the assets are bequeathed to the future children of Bart and should be
placed in a trust.
The estate was finally wound up on 28 February 2022 on which day all assets were transferred to
the beneficiaries (including the testamentary trust).
Calculate the taxable income of Wally’s deceased estate for the 2022 year of assessment.
SOLUTION
Deceased estate of Wally:
Gross income
General dealer’s business (s 25(1)) ............................................................................. R8 000
Interest accrued on interest-bearing investment (s 25(1)) ........................................... 2 200
Farming income (s 25(1))............................................................................................. 2 000
Dividends received (s 25(1)) ....................................................................................... 12 000
R24 200
Less: Exempt income
Interest exemption (s 10(1)(i)) ...................................................................................... (2 200)
Dividend exemption (s 10(1)(k)(i)) ............................................................................... (12 000)
R10 000
Less: Expenses
General dealer’s expenses (s 11) ................................................................................ (4 500)
Farming expenses (s 11) ............................................................................................. (4 000)
Taxable income of estate ............................................................................................. R1 500
Note
Although income of the estate will ultimately be paid to the beneficiaries entitled thereto, it is the
estate and not the beneficiaries, who is taxed on the income of the estate until the date that the
estate’s assets are disposed of to the beneficiaries. The normal tax payable by the estate is paid
to SARS out of cash in the deceased estate and is an allowable deduction in the calculation of
estate duty.
1009
27.4.2 In community-of-property marriages (ss 25(1) and 25A)

The South African system of administration of estates determines that when a person who was mar-
ried in community of property, dies, the executor of the deceased estate administers the assets of the
joint estate. He/she pays the liabilities of the joint estate, collects the income derived from the joint
assets and ultimately distributes the deceased person’s half of the net joint estate to the beneficiaries
in terms of the couple’s joint will. The remaining half accrues to the surviving spouse by virtue of
his/her equal share in the joint estate.
The income accruing from half of the joint assets up until the date of death is taxed in the hands of
the deceased spouse. The other half of the income is taxed in the hands of the surviving spouse.
The surviving spouse will be liable for normal tax on his/her one-half of the income accruing from the
joint assets after the date of death of the deceased spouse. This half of the income, even though it is
received by the executor in the joint estate, is received on behalf of the surviving spouse and is not
taxed in the deceased estate. Only the deceased’s half of the income accruing after death on assets
forming part of the joint estate is taxed in the deceased estate (s 25(1)).
If the deceased person was married in community of property but was permanently separated from
his/her spouse, the taxable income of the deceased person could be calculated as if the marriage
were out of community of property (s 25A).
27.4.3 Beneficiaries: Distribution or disposal of assets by the deceased estate

(ss 1, s 10(1)(k) and 10(2)(b))
Inheritances or legacies consisting of assets distributed from the estate, represent receipts of a cap-
ital nature in the hands of the beneficiaries and might therefore have capital gains tax consequences
for the beneficiaries when they dispose of such assets at a later stage. The income produced by
these assets will be income in nature in the hands of the beneficiaries. A legacy in the form of an
annuity, however, is taxable in the hands of the beneficiary (par (a) of the definition of ‘gross income’
in s 1).
If the annuity is paid out of dividends that may normally be exempt (s 10(1)(k)), the dividend exemp-
tion will not be available (s 10(2)(b)).
27.4.4 Capital gains tax consequences for the deceased estate (ss 6, 6A, 6B, 9HA and 25)
(paras 2, 5(1), 10(1), 20, 35, 40(3), 48(d), 53 and 57 of the Eighth Schedule)
(s 4 of the Estate Duty Act)
For tax purposes, the deceased person’s assets are theoretically first transferred to the deceased
estate and from the deceased estate on to the beneficiaries. The deceased estate is deemed to
acquire assets from the deceased person. The assets are then transferred to either the spouse or to
other beneficiaries or sold to third parties.
27.4.4.1 Capital gains tax: Deceased estate

Apart from the rebates (s 6) and medical tax credits (ss 6A and 6B), a deceased estate is treated as
a natural person (s 25(5)(a)). If the deceased person was a resident at the time of his death, the
deceased estate is also deemed to be a resident (s 25(5)(b) and par 40(3) of the Eighth Schedule).
By implication this means that if the deceased person was a non-resident, only certain assets will be
subject to capital gains tax consequences in the deceased estate (par 2(1)(b) of the Eighth Sched-
ule).
Any disposal by the deceased estate is treated for capital gains tax calculation purposes as if it were
made by the deceased (par 40(3) of the Eighth Schedule). Note that this does not mean that the
deceased and his estate are deemed to be one and the same person. A primary residence held by a
deceased estate is, for example, treated as being ordinarily resided in by the deceased person for a
maximum period of two years after his/her death (par 48(d) of the Eighth Schedule). Should the
executor dispose of the residence after two years, the R2 million primary residence exclusion may be
set off only against the portion of the gain applicable to the first two years following the date of death
(CGT Guide (Issue 7) par 16.3.4). This means that both the deceased and the deceased estate could
qualify for the primary residence exclusion. The deceased estate is not entitled to any unused portion
of the deceased person’s small business asset exclusion of R1,8 million (par 57 of the Eighth Sched-
ule) but is entitled to disregard any capital gain or loss on the disposal of any personal-use assets
(par 53 of the Eighth Schedule).
1010
An annual exclusion of R40 000 applies to the net capital gain or assessed capital loss within the
deceased estate (par 5(1) of the Eighth Schedule). Even though the disposals of assets are treated in
the same manner as if the disposals had been done by the deceased, the deceased and the de-
ceased estate are not deemed to be one and the same person and therefore the deceased estate is
only entitled to R40 000 and not the increased amount of R300 000. The annual exclusion is available
to the estate in the year of death and in each year thereafter, until the estate is wound up. This annual
exclusion is not apportioned in the year of death or in the last year of assessment of the estate, even
if that period is shorter than 12 months. The deceased estate uses the same inclusion rate as an indi-
vidual, namely 40% (par 10(1) of the Eighth Schedule). It is taxed using the progressive tax tables
applicable to individuals.
In the deceased estate we can distinguish between assets transferred to a surviving spouse and
assets transferred to other beneficiaries or sold to third parties.
Assets transferred to a resident surviving spouse

Where an asset is awarded to a resident surviving spouse, the deceased estate is treated as having
acquired the asset from the deceased at a cost equal to the deceased person’s base cost
(s 25(2)(b)). This amount, plus any further qualifying costs, constitutes the base cost of the asset to
the deceased estate (par 20 of the Eighth Schedule). The deceased estate is deemed to have dis-
posed of those assets to the resident surviving spouse at its base cost (s 25(3)(a)). No capital gain or
loss therefore arises on these assets in the deceased estate. Note that if the surviving spouse is a
non-resident, the transfer of the asset is treated as a transfer to ‘other beneficiaries’ (see below).
Assets transferred to other beneficiaries (including a non-resident surviving spouse) or sold to third
parties
No capital gain or loss will arise in respect of assets transferred from the deceased estate to other
beneficiaries of the deceased person. The deceased estate is treated as having acquired the assets
from the deceased person at a cost equal to their market value at the date of death of the deceased
person (s 25(2)(a)). The deceased estate is then deemed to have disposed of those assets at this
amount, together with any further expenditure the deceased estate may incur, to the beneficiary
(s 25(3)(a)). No capital gain or loss therefore arises in the deceased estate. Please note that this only
applies to assets that are transferred to beneficiaries of the deceased person (heirs and legatees).
For all assets that are sold to third parties, the proceeds on disposal by the deceased estate will be
the selling price received by the executor of the estate (par 35 of the Eighth Schedule). The base
cost of assets so sold to third parties will be the market value at the date of death of the deceased
person plus any further expenditure incurred by the estate (s 25(2)(a)). Therefore, a capital gain or
loss may arise in the deceased estate in respect of assets sold to third parties.
Remember
Any assessed capital loss from the deceased person’s final tax return may not be carried for-
ward to the deceased estate.
27.4.4.2 Capital gains tax: Beneficiaries of the deceased person (including a surviving spouse)
For the beneficiaries of the deceased person, we should again distinguish between assets trans-
ferred to a resident surviving spouse and assets transferred to other beneficiaries.
Assets transferred to a resident surviving spouse

Assets transferred to a resident surviving spouse are merely ‘rolled over’ to the surviving spouse from
the deceased person, through the deceased estate. Therefore, the base cost of the asset to the sur-
viving spouse will be equal to the base cost of the asset to the deceased spouse at date of death.
Furthermore, the resident surviving spouse is treated as having
l acquired that asset on the date that the deceased person acquired the asset (s 25(4)(a))
l incurred expenditure in respect of that asset of an amount equal to the expenditure incurred by
the deceased person (as contemplated in s 9HA(2)(b)) as well as any expenditure incurred in re-
spect of that asset by the deceased estate (s 25(4)(b)). The expenditure is deemed to have been
incurred by the surviving spouse on the same date and in the same currency in which it was in-
curred by the deceased person or the deceased estate, as the case may be, and
l used that asset in the same manner as that in which the asset had been used by the deceased
person and the deceased estate (s 25(4)(c)).
1011
Assets transferred to other beneficiaries (including a non-resident surviving spouse)

The beneficiary is treated as having acquired an asset from the deceased estate for an amount of
expenditure incurred equal to the expenditure incurred by the deceased estate. The base cost of the
asset for the beneficiary will therefore be the market value of the asset at date of death plus further
qualifying costs incurred by the estate (s 25(3)(b)). If the asset is transferred directly from the de-
ceased to the beneficiary, the base cost will be the market value on date of death of the deceased
(s 9HA(3)).
The executor of a deceased estate normally only transfers assets out of the deceased estate to
beneficiaries after the liquidation and distribution account has been approved by the Master of the
High Court. However, in certain cases (as and when allowed by the Administration of Estates Act) the
executor may transfer assets to beneficiaries prior to the liquidation and distribution account being
approved and becoming final. In accordance with a recent amendment, where an asset is disposed
of by the deceased estate to an heir or legatee of the deceased, the disposal is deemed to take
place at the earlier of the date on which that asset is disposed of or the date on which the liquidation
and distribution account becomes final (s 25(3)(c)). Although this amendment only comes into effect
for liquidation and distribution accounts finalised on or after 1 March 2022, it is submitted that the
clarity provided by the amendment can be applied to all deceased estates.
If an asset is not transferred to a beneficiary but sold to a third party, the third party’s base cost is the
amount paid to the executor of the estate for the asset (par 20 of the Eighth Schedule).
Example 27.5. Capital gains tax: Asset transferred to non-spouse beneficiary

An asset with a base cost of R100 and a market value of R300 on date of death is transferred to the
estate of the deceased before being awarded to the beneficiary (not a resident spouse). Assume
that no further expenditure is incurred in respect of this asset and the asset is later transferred to
the beneficiary at a date when the market value is R350.
Explain the capital gains tax (CGT) consequences of the asset in the deceased estate.
SOLUTION
The deceased estate is treated as having acquired the asset from the deceased at a deemed
base cost of R300 plus further expenditure incurred by the deceased estate (Rnil). The estate will
be treated as having disposed of the assets for proceeds equal to the deemed base cost of
R300, resulting in a capital gain of Rnil (proceeds of R300 less base cost of R300) (s 25(3)(a)). The
R350 market value will have no CGT effect for the deceased estate.
The base cost of the asset to the beneficiary is R300 (s 25(3)(b)) and the beneficiary is deemed to
have acquired the asset at the earlier of the actual transfer of the asset or the date that the liquida-
tion and distribution account becomes final (s 25(3)(c)).
It may happen that the executor of an estate has to sell an asset of the estate to obtain cash for pur-
poses of paying the capital gains tax owing by the deceased person, which arose solely as a result
of the deemed disposals at death contained in s 9HA(1). This means that the asset cannot be distrib-
uted to the beneficiary in terms of the deceased’s will anymore. The beneficiary can elect to still
receive that asset if certain requirements are met (s 25(6)). This will apply where the capital gains tax
as a result of these deemed disposals exceeds 50% of the net value of the estate of the deceased,
as determined in terms of s 4 of the Estate Duty Act, but before taking into account the amount of
capital gains tax due to the deemed disposals upon death.
Furthermore, the beneficiary has to pay the amount of tax that exceeds 50% of that net value to SARS
within three years after the date that the estate has become distributable in terms of s 35(12) of the
Administration of Estates Act.
Any amount of tax so payable by a beneficiary becomes a debt due to the state and must be treated
as an amount of tax chargeable in terms of the Income Tax Act due by that person (s 25(7)).
1012
Example 27.6. Capital gains tax consequences for deceased person and deceased
estate
Mr Ready died on 1 April 2021. He was married out of community of property.

His only assets (at market value on date of death) were
Primary residence (base cost: R1 800 000) .................................................. R4 000 000
Cash .............................................................................................................. R400 000
Shares in listed companies (base cost: R100 000) ....................................... R280 000
Holiday house (base cost: R1 000 000) ........................................................ R2 000 000
Note
Mr Ready left the holiday house to his wife. He left the primary residence to his daughter.
According to the will, the executor of the deceased estate must use the cash to pay all the costs
and liabilities of the deceased estate and if there is a shortfall, he must sell the shares to pay the
costs and the liabilities. Any residue must be split equally between the deceased’s wife and
daughter.
After paying estate costs of R55 000 and settling the outstanding balances on the bonds of
R20 000 on the holiday house and R50 000 on the primary residence, the executor realised that it
was not necessary to sell the shares. He therefore distributed half of the shares to the de-
ceased’s wife and half to the daughter. The shares had a value of R350 000 on the date that they
were distributed to the beneficiaries. The balance of the cash was also split and each of the ben-
eficiaries received 50%. Assume that none of the assets were awarded directly to the beneficiar-
ies, but that the assets were first transferred to the estate and then awarded to the beneficiaries.
Calculate the taxable capital gain for both the deceased person and the deceased estate.
Assume that all taxpayers are residents of South Africa.
SOLUTION
Taxable capital gain – deceased person (Mr Ready)
Primary residence:
Proceeds (s 9HA(1) – market value upon death)...................................................... R4 000 000
Less: Base cost ........................................................................................................ (1 800 000)
2 200 000
Less: Primary residence exclusion ........................................................................... (2 000 000)
Capital gain .............................................................................................................. 200 000
Cash (not an ‘asset’ in terms of the Eighth Schedule) .............................................. Rnil
Shares in listed companies:

Proceeds (half to spouse at base cost of R50 000 (R100 000/2) (s 9HA(2)) plus half
to daughter at market value upon death of R140 000 (R280 000/2) (s 9HA(1)) ....... R190 000
Less: Base cost ........................................................................................................ (100 000)
Capital gain .............................................................................................................. R90 000
Holiday home:
Proceeds (to spouse at base cost of R1 000 000) (s 9HA(2)) .................................. R1 000 000
Less: Base cost ........................................................................................................ (1 000 000)
Capital gain .............................................................................................................. Rnil
Net capital gain......................................................................................................... 290 000
Less: Annual exclusion (limited to R300 000) ........................................................... (290 000)
Taxable capital gain (included in taxable income) @ 40% ....................................... Rnil
Taxable capital gain – Deceased estate

Primary residence:
Proceeds (s 25(3)(a))................................................................................................ R4 000 000
Less: Base cost (s 25(2)(a)) ..................................................................................... (4 000 000)
Rnil
Cash (not an ‘asset’ in terms of the Eighth Schedule) .............................................. Rnil
continued
1013
Shares in listed companies: transferred to spouse

Proceeds ((s 25(3)(a))) ............................................................................................. R50 000
Less: Base cost (s 25(2)(b)) ..................................................................................... (50 000)
Shares in listed companies: transferred to daughter
Proceeds (s 25(3)(a))................................................................................................ R140 000
Less: Base cost (s 25(2)(a)) ..................................................................................... (140 000)
Holiday home:
Proceeds ((s 25(3)(a))) ............................................................................................. R1 000 000
Less: Base cost (s 25(2)(b)) ..................................................................................... (1 000 000)
Total capital gain ...................................................................................................... Rnil
Annual exclusion of R40 000 .................................................................................... Rnil
Net capital gain......................................................................................................... Rnil
Taxable capital gain (include in taxable income) @ 40% ......................................... Rnil
Note
The liabilities (estate costs and outstanding bonds) have no effect on the capital gains tax
calculations.
27.5 Estate Duty: General (ss 2(2), 3, 4, 4A, 11, 13, 16 and First Schedule
to the Act)
From this section onwards, references to the Act and to sections of the Act are references to the
Estate Duty Act 45 of 1955 and its sections, unless otherwise specified.
The deceased estate is not only liable for normal tax on certain income and taxable capital gains, but
in South Africa, a separate tax called ‘estate duty’ is also levied on the deceased estate. The purpose
of estate duty is to tax the transfer of wealth from the deceased estate (referred to simply as the
‘estate’) to the beneficiaries. In this respect, estate duty is similar to donations tax (see chapter 26).
Donations tax is levied on the transfer of wealth during the life of a person and estate duty is levied on
the transfer of wealth at the death of a person, through his/her estate. Estate duty is the liability of the
deceased estate, not that of the deceased person.
Estate duty is payable at 20% of the dutiable amount of the estate that does not exceed R30 million.
The amount by which the dutiable amount of the estate exceeds R30 million is taxed at 25% (s 2(2)
and First Schedule par 1(a)).
Estate duty is payable only if the net value of an estate exceeds R3 500 000, as an abatement of
R3 500 000 may be deducted from the net value when determining the dutiable amount. Under cer-
tain circumstances, the estate of a person is entitled to the ‘unused portion’ of a pre-deceased
spouse’s R3 500 000 abatement. This means that the estate of the surviving spouse may be entitled
to a further R3 500 000 abatement (or portion thereof) when that surviving spouse later dies
(see 27.9.16).
The steps to be followed in calculating the estate duty liability of a deceased estate are as follows:
Property in the estate (s 3(2)) (see 27.6) ................................................................... Rxxx

Property deemed to be property in the estate (s 3(3)) (see 27.7) ............................. xxx
Gross value of the estate (s 3(1))............................................................................... xxx
Less: Allowable deductions (s 4) (see 27.9) .......................................................... (xxx)
Net value of the estate (s 4) ....................................................................................... xxx
Less: Abatement (s 4A) (see 27.9.16) .................................................................... (xxx)
Dutiable amount (s 4A) .............................................................................................. xxx
Estate duty calculated at 20% and/or 25% of the dutiable amount (s 2(2) and the
First Schedule to the Act) .......................................................................................... xxx
Less: Applicable tax rebates (s 16 and the First Schedule to the Act) (see 27.10) (xxx)
Less: Amount of estate duty to be recovered from beneficiaries (s 13) (see 27.11) (xxx)
Estate duty payable by the deceased estate ............................................................ Rxxx
1014
27.6 Estate duty: Property (s 3(2))

If the deceased was ordinarily resident in South Africa at the date of his/her death, the value of all
his/her property, wherever situated, is included as property for estate duty purposes. We refer to
case law to determine whether a person was ordinarily resident in South Africa. To be ordinarily
resident, South Africa must be the country where the deceased person had his/her most regular
place of residence, and a degree of permanence or continuity must be attached to the place of
residence (see chapter 3).
A deceased person who was not ordinarily resident in South Africa at the date of his/her death will be
liable in South Africa for estate duty on his/her South African property only (s 3(2)(c)–3(2)(h)). For ex-
ample, if a resident of the United Kingdom owned fixed property both in the United Kingdom and in
South Africa at the date of his/her death, only the fixed property in South Africa will attract estate duty
in South Africa.
Property is very widely defined in the Act and includes the following:
l Actual property owned by the deceased at the date of his/her death, whether movable or immov-
able, tangible or intangible, as well as any right in or to such property (s 3(2)), for example fixed
property, shares, fixed deposits, tax-free investments, goodwill and patents. Income earned by the
deceased prior to death and which is part of a bank account on the date of death will also form
part of property, for example interest earned on the deceased’s savings account up to the date of
death. Income earned by the estate after the date of death is not included as property in the estate.
l Fiduciary interests held by the deceased person at the date of his/her death (s 3(2)(a)): This is a
limited interest in property, which implies that the deceased person (the fiduciary) does not have
full ownership of that property. A fiduciary interest will be valued using special rules (see 27.8.5).
The property is owned by the fiduciary, usually in terms of a will or trust deed, on the condition that
ownership of the property must pass to another specified person (the fideicommissary) upon the
death of the fiduciary. The fiduciary is entitled to the fruits of the property during his/her lifetime
but may usually not dispose of the property. If the fideicommissary dies before the fiduciary, the
fiduciary normally becomes the outright owner of the property. For example, in his will, Sam
leaves his house to his son, Pete, on the condition that Pete must leave it to his daughter, Ann.
The following possible scenarios could relate to the house:
– When Sam dies, the house is not a fiduciary asset in his estate. He had full ownership of the
house, which will be included as such in property for estate duty purposes after Sam’s death.
– When Pete later dies, the house is a fiduciary asset held by him and is included as such in
property for estate duty purposes after Pete’s death. Full ownership of the asset is obtained by
Ann upon Pete’s death.
– If Ann dies before Pete, Pete will obtain full ownership of the house (provided Sam did not
provide for an alternate beneficiary in such a case). The house is not included in Ann’s prop-
erty in her deceased estate; she has not obtained any right to the house as Pete is still alive.
Upon Pete’s subsequent death, the house will be included in his estate as full ownership prop-
erty and not as a fiduciary asset. The house will be dealt with according to the stipulations of
Pete’s will or the rules of intestate succession if there is no will.
l A usufructuary interest (usufruct) in property held by the deceased person at the date of his/her
death (s 3(2)(a)). Full ownership of property consists of two parts:
– Usufruct: The use of the fruit or income from the property. The holder of this limited interest
cannot dispose of the property.
– Bare dominium: Ownership of property without the benefit of the use of the fruit or income from
that property. The holder of this limited interest can sell the property only subject to the usu-
fruct, which belongs to someone else.
For example, Arthur leaves his holiday home to Bea, subject to a lifelong usufruct in favour of
Chloe. Upon Arthur’s death, ownership of the property is split. Chloe is known as the usufructu-
ary, while Bea is known as the bare dominium holder. The following scenarios relate to the holi-
day home:
l The full ownership of the holiday home belongs to Arthur. It is included in full in his deceased
estate.
l Upon Chloe’s death a limited interest (usufruct) in the property is valued (using special rules) and
included in her deceased estate as property. The usufruct over the property then usually passes
to the bare dominium holder (Bea), who obtains full ownership of the property.
1015
l If Bea (holder of the bare dominium) dies before Chloe, that limited interest (bare dominium) in
the property must be valued. The value of the usufruct of the property is usually calculated first
and then deducted from the fair market value to determine the value of the bare dominium. This
value (not the full market value) is included in Bea’s estate as property for estate duty purposes.
The bare dominium is disposed of in terms of the will of the deceased (Bea), subject to the ori-
ginal usufruct (of Chloe).
l A right to an annuity charged upon property held by the deceased person immediately prior to
his/her death (s 3(2)(a)): This means that a person has a right to be paid an annuity from the in-
come of a specific asset. If, for example, the deceased had the right to an annual payment from
the profits of a business owned by his brother, he was receiving an annuity that was charged upon
his brother’s property (the business). This annuity must be valued and included in the deceased’s
estate. It is irrelevant whether the annuity accrues to someone else after that person’s death or
whether it ceases.
l Any other right to an annuity enjoyed by the deceased immediately prior to his/her death, but only
if it accrues to another person on his/her death (s 3(2)(b)). An example of this is where the de-
ceased person was receiving an annuity payable in terms of a contract of sale that becomes
payable to another person on the death of the original annuitant (the deceased person). If the an-
nuity falls away upon death, it is not included as property in the estate of the deceased.
Remember
It is specifically provided that no benefit (lump sums or annuities) received as a result of the
death of a deceased person, is included in property for estate duty purposes (s 3(2)(i)).
27.7 Estate duty: Property deemed to be property (s 3(3))

The deceased’s property includes certain assets and rights owned or enjoyed by the deceased at
the date of his/her death. ‘Deemed property’ refers to certain property items that did not exist at the
date of death but originate due to the death of the deceased person. Although these items did not
exist at the date of death, they are included in the dutiable estate of the deceased (s 3(3)).
27.7.1 Domestic policies of insurance on the life of the deceased (s 3(3)(a), definitions
of ‘child’, ‘domestic policy’, ‘relative’ and ‘family company’)
Any proceeds from a domestic insurance policy on the deceased person’s life will be included as
deemed property for estate duty purposes (subject to certain exclusions). The deciding requirement
here is that the policy must be on the deceased person’s life (s 3(3)(a)), regardless of who the owner
or the beneficiary of the policy is. The following are examples of situations that can arise with regard
to life insurance policies:
l If Gerhard owns a life insurance policy on Anton’s life, it will pay out to Gerhard if Anton dies.
Although the cash proceeds are not included in the estate’s bank account, the proceeds are
deemed to be property after Anton’s death for estate duty purposes.
l Annette takes out a life insurance policy on her own life. She nominates Tim as the beneficiary of
the policy. When Annette dies, the proceeds are paid out to Tim, but are included as property
deemed to be property for estate duty purposes.
l Zaheer takes out a life insurance policy on his own life. He does not specify any beneficiaries in
the policy. When Zaheer dies, the policy proceeds will be collected by the executor of the de-
ceased estate and paid into the estate’s bank account. The proceeds are not ‘property’ as de-
fined, as these have not been received yet at date of death. However, the proceeds are included
as deemed property for estate duty purposes.
l Divan takes out a life insurance policy on the life of Kayla. If Divan dies before Kayla, the policy
on Kayla’s life will have a cash (‘surrender’) value at the date of Divan’s death. This value is ob-
tained from the insurer and collected by the executor. The value of the policy is not included as
property deemed to be property if Divan dies, as it was not on the life of the deceased (Divan).
However, it is ‘property’ as defined, as the right to receive the amount existed at the date of
Divan’s death.
A ‘domestic policy’ is one that pays out in South Africa upon the insured’s death.
The policy proceeds can be reduced by the amount of any premiums on the policy that were paid by
the person entitled to the proceeds, plus interest on the premiums, calculated at 6% per annum from
the date of payment until the date of death. The Act does not specify whether simple or compound
1016
interest should be used. It is current practice use compound interest. Premiums paid by the de-
ceased person cannot be deducted.
If the deceased person were married in community of property and the couple took out a policy on
the life of the deceased person, the premiums would have been paid out of the joint estate. If the
surviving spouse is the beneficiary of the policy, 50% of the premiums on the policy are deemed to
have been paid by the surviving spouse. Half the premiums paid plus interest at 6% can therefore be
deducted from the proceeds of the policy.
There are three situations in which the proceeds of a policy on the deceased person’s life are not
included as property deemed to be property, i.e.,
l When the proceeds are payable to the surviving spouse or child of the deceased person under a
duly registered antenuptial or postnuptial contract (proviso (i) of s 3(3)(a)). ‘Child’ is defined in the
Act to include any adopted person. If policy proceeds are paid out to a surviving spouse, but not
in terms of a registered antenuptial or postnuptial contract, the proceeds will be included in
property deemed to be property, but it will qualify for a deduction (s 4(q)) in the calculation of the
dutiable amount.
l When the proceeds are payable to a person who, at the date of the deceased person’s death,
was
– a partner of the deceased person, or
– a co-shareholder in a company in which the deceased person also held shares, or
– a co-member in a close corporation of which the deceased person also was a member
provided that
– the deceased person paid no premium on the policy, and
– the policy was taken out for the purpose of enabling that person to acquire the deceased
person’s share in the partnership, company or close corporation (proviso (iA) to s 3(3)(a)).
l Except for the above exemptions, where the Commissioner is satisfied that
– the policy was not taken out by or at the instruction of the deceased person
– no premiums were borne or paid by the deceased person
– no amount in terms of the policy is payable to the estate of the deceased person, and
– no amount in terms of the policy is payable to or used for the benefit of any relative or depend-
ant of the deceased person or any family company of the deceased person (proviso (ii) of
s 3(3)(a)).
A relative in relation to any person means the spouse of such person or anybody related to
him/her or his/her spouse within the third degree of consanguinity, or any spouse of anybody so
related. An adopted child shall be deemed to be related to his/her adoptive parent within the first
degree of consanguinity (s 1(1)).
A family company is defined as any unlisted company that at any time was controlled or capable
of being controlled, directly or indirectly, by the deceased or by the deceased and one or more of
his/her relatives (s 1(1)).
Example 27.7. Life insurance policies on the life of the deceased person
After the death of Grace, certain domestic life insurance policies paid out benefits. Grace was
married out of community of property to Henry.
l Policy A paid out R100 000 to Henry. This policy was taken out after Grace married Henry.
Premiums amounting to R15 000 on the policy were all paid by Grace during her lifetime.
Interest on the premiums at 6% per annum amounted to R1 100.
l Policy B paid out R500 000 to Zulu, a partner in Grace’s business, to enable him to acquire
Grace’s share in the partnership. All the premiums on the policy were paid by Zulu.
l Policy C paid out R60 000 to Tina, Grace’s sister. Tina paid all the premiums, amounting to
R10 000. Interest calculated on the premiums at 6% per annum amounted to R500.
l Policy D paid out R400 000 to DEF (Pty) Ltd, of which Grace was a director. The policy was
not taken out by Grace or on her instruction. Grace also paid no premiums on the policy.
Grace held no shares in the company. The company used R50 000 of the proceeds to grant
a bursary to Grace’s only daughter. Premiums on the policy paid by the company, including
interest at 6% per annum, amounted to R55 000.
Determine the amounts, if any, of the above policy proceeds that will be included as deemed
property in Grace’s estate.
1017
SOLUTION
Policy A: included, as the policy was not ceded to the spouse in the ante-nuptial
contract (note 1) ......................................................................................................... R100 000
Policy B: taken out by partner – exempt (proviso (iA) of s 3(3)(a)) .............................. Rnil
Policy C: amount paid to Tina less premiums and interest (note 2)
(R60 000 – (R10 000 + R500)) ..................................................................................... R49 500
Policy D: not exempt (note 3) ...................................................................................... R345 000
Notes
(1) Premiums paid by the deceased person are not deductible. The R100 000 will qualify for the
deduction available to a surviving spouse (s 4(q)).
(2) This policy is not exempt, as the proceeds are paid out to a relative of the deceased person
(her sister).
(3) Proceeds used for the benefit of a relative of Grace – the proceeds less premiums and
interest paid by beneficiary (R400 000 – R55 000) will be included in deemed property.
27.7.2 Property donated under a donatio mortis causa (s 3(3)(b), ss 56(1)(c) and 56(1)(d) of
the Income Tax Act)
A donatio mortis causa is a donation in contemplation of death. This type of donation is made where
the donor anticipates death and then donates a specific asset. The donation takes effect only if the
donor dies. If the donor does indeed die, the property is transferred as a result of the death of the
donor, not as a result of the donation. No donations tax is payable on such donations since the
donation is specifically exempt from donations tax (s 56(1)(c) of the Income Tax Act). The property so
donated is then included in the deceased’s estate as property deemed to be property (s 3(3)(b)).
Property donated where no benefit is passed until the death of the deceased is also included as
property deemed to be property, if the donee did not obtain any benefit under the donation until the
death of the donor, and it was exempt from donations tax in terms of s 56(1)(d) of the Income Tax
Act.
27.7.3 A claim against the surviving spouse (s 3 of the Matrimonial Property Act 88 of 1984)
(ss 3(3)(cA), 4(lA))
If the deceased person was married out of community of property under the accrual system, the
spouses retain their respective estates at the beginning of the marriage. Upon the death of the de-
ceased person, the growth (accrual) in both the spouses’ estates must be calculated. The spouse
with the smaller accrual has a claim against the spouse with the higher accrual for half the difference
between their accruals.
If the estate of the deceased person has a claim against the surviving spouse (the surviving spouse’s
accrual is higher), the accrual claim is property deemed to be property for estate duty purposes
(s 3(3)(cA)). If the estate of the deceased person has a higher accrual, the surviving spouse has a
claim against the deceased estate. This claim will be deductible in the calculation of the dutiable
value of the estate (s 4(lA) – see 27.9.11).
Example 27.8. Accrual claim
Malesedi was married out of community of property to Karabo, with the accrual system applic-
able to their marriage. After the death of Malesedi, the executor in his estate calculated the
accrual in his estate since the marriage at R500 000. The accrual in Karabo’s estate amounted to
R600 000.
Calculate the accrual claim.
SOLUTION
Calculation of the accrual claim:
Accrual in Karabo’s estate........................................................................................... R600 000
Accrual in Malesedi’s estate ........................................................................................ R500 000
Difference in the accruals ............................................................................................ R100 000
Half the difference ....................................................................................................... R50 000
As Malesedi (the deceased person) had the smaller accrual, his estate has an accrual claim of
R50 000 against Karabo (the surviving spouse). This claim is included in deemed property after
Malesedi’s death.
1018
27.7.4 Property that the deceased person was competent to dispose of for his or her own
benefit (s 3(3)(d))
Property that the deceased person was competent to dispose of for his/her own benefit or for the
benefit of his/her estate immediately prior to his/her death, is deemed to be property in his/her estate
(s 3(3)(d)).
For example, if the deceased person were the sole trustee and a beneficiary of a trust, he/she could
be considered to have had the power to dispose of the property of the trust for his/her own benefit.
Because he/she had the right to dispose of the property for his/her own benefit, the property of the
trust would be deemed property in his/her estate, even if he/she did not exercise that right.
27.7.5 Excessive contributions to retirement funds (s 3(3)(e), s 11F of the Income Tax Act,
par 5 of the Second Schedule to the Income Tax Act)
Previously, a person may have been tempted to avoid estate duty by contributing large amounts to
retirement funds, thereby reducing his or her accumulated cash at date of death. Although no normal
tax benefit is received initially (because of the limits placed on deductibility of retirement fund contri-
butions (s 11F of the Income Tax Act)), any excess contributions may be deducted from the lump
sum that accrues upon death (Second Schedule to the Income Tax Act). The lump sum received
from the retirement fund is also excluded from ‘property’ for estate duty purposes (s 3(2)(i)). This
means that such contributions would pass to the estate without being subject to normal tax or estate
duty in the hands of the deceased.
For persons who died on or after 30 October 2019, so much of the contributions made on or after
1 March 2016 by the deceased person to retirement funds and which were allowed as a deduction
(under par 5 of the Second Schedule to the Income Tax Act) to determine the taxable portion of a
lump sum upon his death (see chapter 13), is included in deemed property (s 3(3)(e)).
For persons who died on or after 1 March 2016 but before 30 October 2019, any excess contribu-
tions to any retirement funds were included in ‘property’ (the now repealed s 3(2)(bA)).
27.8 Estate duty: Valuation of property (s 5)

Section 5 of the Act sets out valuation rules for the various types of property and deemed property
that can be included in the estate of a deceased person.
27.8.1 Property sold (s 5(1)(a))

If property is sold through a bona fide purchase and sale in the course of the liquidation of the estate,
it is included at the price realised by the sale (s 5(1)(a)).
27.8.2 Property not sold (ss 3(3)(b), 5(1)(e), 5(1)(g) and 9(1))
Property included in the estate as property deemed to be property in terms of s 3(3)(b) (for example
donatio mortis causa) must be valued according to the valuation rules applicable to the valuation of
donations for donations tax (see chapter 26) (s 5(1)(e)).
Property not sold in the course of the liquidation of the estate must be valued at the fair market value
of the property at the deceased person’s death (s 5(1)(g)). If the Commissioner is dissatisfied with the
determined value, he/she can adjust it (s 9(1)). If the value is reduced as a result of conditions im-
posed by any person, the value must be determined as though the conditions had not been imposed
(proviso to s 5(1)(g)). For example, if the deceased had full ownership over a fixed property and
bequeathed the usufruct of the property to an heir in his/her will, the property is included at the full
market value as if the condition had not been imposed on the property.
27.8.3 Unlisted shares (s 5(1)(f)bis)

Shares in a company not listed on a stock exchange, as well as a member’s interest in a close cor-
poration, must always be included at the value of the shares or interest at the date of death
(s 5(1)(f)bis). This value is included in property, even if the shares or member’s interest are sold by
the executor for a different amount.
The person doing the valuation must disregard any restrictions contained in the memorandum and
articles of the company or founding statement and association agreement of a close corporation that
may reduce the value of the shares or interest. If the deceased person had the power to confer upon
1019
himself/herself certain benefits in respect of the assets or profits of the company through his/her
shareholding, these benefits must be taken into account when the shares are valued.
Unlisted shares and member’s interest valuations must always be approved by SARS, unless the full
portion of the shares or member’s interest that the deceased held is bequeathed to a surviving
spouse. This could be in terms of an approved will or the rules of intestate succession. Should any
portion go to another heir or if a spouse obtains it in terms of a re-distribution agreement, then ap-
proval of the valuation by SARS will still be required.
27.8.4 Immovable property on which bona fide farming operations take place (s 5(1A))
In the case of immovable property on which bona fide farming operations take place in South Africa,
the fair market value of the property is obtained by reducing the price between a willing buyer and
seller in an open market (the arm’s length price) by 30% (definition of ‘fair market value’ in s 1).
If an unlisted company owns immovable property on which bona fide farming operations are being
carried on in South Africa, the 30% reduction will also be applied for the purposes of determining the
value of the shares in the company (s 5(1A)).
If farming property is sold, the amount realised is included as property in the estate. The proceeds
are therefore not reduced by 30%.
27.8.5 Fiduciary, usufructuary and other like interests in property (ss 5(1)(b) and 5(2))
The following steps are followed to value fiduciary, usufructuary and other like interests (see explana-
tion of these concepts in par 26.9.2) in property held by the deceased at date of death (i.e., not
created by the deceased person):
1. Calculate the annual value of the right of enjoyment of the property. This value is equal to 12% of
the fair market value of the property (s 5(2)). If the Commissioner is satisfied that the property
cannot yield an annual return of 12%, he/she may decide to use another percentage (first proviso
to s 5(2)).
The annual value of a fiduciary, usufructuary or other right to enjoyment of books, pictures, statu-
ary or other objects of art is the average net receipts (if any) derived from the items during the
three years immediately before the date of death of the deceased (instead of the 12% rule) (se-
cond proviso to s 5(2)). If such items did not generate any income in the three years prior to the
death of the deceased, the annual value of the use thereof will be nil.
2. Identify the person to whom the limited interest is transferred upon the deceased person’s death
(the beneficiary).
3. Determine the life expectancy of the beneficiary (Table A in Appendix D). When using Table A the
person’s age at his next birthday must be used.
4. Determine whether this limited interest is transferred to the beneficiary for a fixed period only, in
other words, not for the rest of his/her life, but only for a certain period.
5. The shorter of the life expectancy of the beneficiary (step 3) and the fixed period (step 4) will be
taken as the period of enjoyment of the right.
6. Capitalise the annual value (step 1) per year over the period determined in step 5 (s 5(1)(b)).
Table A (Appendix D) can be used to determine the present value of R1 per year for the number
of years reflected by the beneficiary’s life expectancy. If a fixed period is used in the calculation,
Table B (Appendix D) can be used. Both tables use a discounting factor of 12%.
Example 27.9. Valuation of a fiduciary interest ceasing

Ditshego (the fiduciary) was the fiduciary owner of property that was valued at R200 000 on his
death. Upon the death of Ditshego, the property must be transferred to Tumelo (the fideicommis-
sary), who is a male aged 38 years and six months. Calculate the value of the fiduciary interest
ceasing on the death of Ditshego that must be included as property in his estate.
1020
SOLUTION
Value of the property...................................................................................... R200 000
Annual value at 12% (R200 000 × 12%) ........................................................ R24 000
Identify person to whom limited interest is transferred .................................. Tumelo
Tumelo’s age next birthday ............................................................................ 39 years
Present value of R1 per year over 39 years per table A ................................ 8,06781
Capitalised value of annual value .................................................................. 8,06781 × R24 000
Value of fiduciary interest ............................................................................... R193 627
First proviso to s 5(1)(b)

When the holder of a usufruct over a property dies, the holder of the bare dominium usually acquires
full ownership of the property. If the bare dominium holder previously paid any consideration for the
bare dominium, the value of the usufruct must be reduced by the amount of the consideration, to-
gether with interest thereon at 6% per year (compound interest). The interest is calculated from the
date of payment of the consideration to the date of the deceased’s death. This is because a smaller
amount of wealth effectively is passed on to the bare dominium holder, as he/she had to pay some-
thing to obtain his/her rights.
Second proviso to s 5(1)(b)

There is a further limitation on the value of a usufructuary interest calculated using the above steps.
This proviso applies when the bare dominium holder becomes the full owner of the property upon the
death of the holder of the usufruct. This will almost always be the case since the holder of a usufruct
cannot bequeath it to another person. The value of the usufruct passing to the bare dominium holder
cannot exceed the difference between
l the fair market value of that property as at the date of the deceased’s death, and
l the value of the bare dominium as at the date when it was obtained (the date on which the de-
ceased’s usufructuary interest was created).
This proviso applies only if the bare dominium was acquired under the same transaction that resulted
in the deceased holding the usufruct. For example, if Sbongile donates the bare dominium of her
farm to one of her sons (Kabelo) and the usufruct to another son (Kitso), the bare dominium is
created at the same time that the usufruct is created. The full ownership of the farm was therefore
split into the two components. When Kitso dies, the usufruct will automatically pass to Kabelo and the
second proviso will apply. However, if Sbongile donated the usufruct of the farm to Kabelo and kept
the bare dominium for herself, the situation is different: Sbongile always owned the bare dominium.
The bare dominium was always part of the full ownership that belonged to Sbongile; it was not
created when the usufruct was given to Kitso. If Kitso dies, the usufruct will pass back to Sbongile
(unless the deed of donation stipulates differently) and the second proviso will not apply.
Third proviso to s 5(1)(b)
If the person to whom a limited interest in property is transferred cannot be ascertained until some
future date (for example unborn heirs), a life expectancy of 50 years should be used for that person.
Example 27.10. Valuation of a usufructuary interest ceasing

Carlos (the bare dominium holder), who is a male aged 22, obtained the full ownership of a prop-
erty when Darius (the usufructuary) died. The property was valued at R750 000 on the date of
Darius’ death.
The property was originally left to Carlos, subject to the lifelong usufruct in favour of Darius (a
male, then aged 82 years), when Alex died two years earlier. A condition in Alex’s will stipulated
that Carlos had to pay a bequest price of R10 000 to Alex’s widow. Carlos accepted the condition
and paid the bequest price exactly two years ago. The value of the property at the date of Alex’s
death was R500 000.
Calculate the value of the usufruct ceasing in Darius’ estate.
1021
SOLUTION
Value of the property ..................................................................................... R750 000
Carlos’ age next birthday .............................................................................. 23 years
Present value of R1 per year over Carlos’ life expectancy (Table A) ............ 8,28117
Value of usufructuary interest as per general calculation rules ..................... R745 305
First proviso
Since Carlos, the bare dominium holder, had to pay a consideration (the bequest price) for his
right in the property, the first proviso applies:
Amount of consideration ................................................................................................. R10 000
Period from payment of consideration to date of death ................................................. 2 years
Value of consideration including interest (R10 000 × (1,06)²) ....................................... R11 236
The value of the usufruct is limited in terms of the first proviso (R745 305 – R11 236) R734 069
Second proviso
Since Carlos, the bare dominium holder, acquired full ownership in the property, the further limi-
tation on the value of the usufructuary interest applies.
Value of property on Darius’ death ................................................................................. R750 000
Less:
Value of bare dominium when first acquired by Carlos on Alex’s death (note):
Value of property ............................................................................................................ R500 000
Less:
Value of Darius’ usufruct at the date of Alex’s death:
Annual value at 12% (R500 000 × 12%) ......................................................................... R60 000
Age next birthday of Darius ............................................................................................ 83
Present value of R1 per year over Darius’ life expectancy (Table A) ............................. 3,65276
Value of usufruct held by Darius (3,65276 × R60 000) ................................................... R219 166
Value of bare dominium (R500 000 – R219 166) ............................................................ 280 834
Usufructuary interest ceasing may not exceed (R750 000 – R280 834) ........................ R469 166
Therefore, the smaller of R734 069 or R469 166 must be used. .................................... R469 166
Note
The full market value of property consists of the usufruct and the bare dominium. To obtain the
bare dominium value, the value of the usufruct must be determined and deducted from the mar-
ket value of the property (see 27.8.7).
27.8.6 Right to an annuity (s 5(1))

An annuity is a fixed annual amount paid by one person to another. If the deceased person was the
recipient of an annuity at the date of death, it must be determined whether any benefit is transferred
to someone else in terms of the annuity after the deceased person died.
Right to an annuity charged upon property

An annuity that someone has the obligation to pay out of the rent derived from a fixed property is an
example of an annuity charged upon property. If the deceased person was the recipient of an annuity
charged upon property, the following rules apply:
l If the right to the annuity does not accrue to another person after death, the annuity must be cap-
italised at 12% over the life expectancy of the owner of the property. The owner of the property
therefore receives a benefit, as the annuity no longer has to be paid.
l If the right to the annuity accrues to some other person on the deceased person’s death, the
annuity must be capitalised over the expectation of life of the second annuitant at 12%. If it is to
be held for a period less than the life expectancy of the second annuitant, the annuity will be cap-
italised over the shorter period (s 5(1)(c)).
Example 27.11. Right to an annuity charged upon property
Immediately prior to his death, Patrick held the right to an annuity of R10 000 per year payable
out of the rental derived from a fixed property owned by Tumiso. On the death of Patrick, the
annuity ceased. Tumiso’s age (a male) next birthday at the date of Patrick’s death was 56 years.
Calculate the value of the annuity ceasing that must be included as property in Patrick’s estate.
1022
SOLUTION
Annuity ............................................................................................................. R10 000
Tumiso’s age next birthday .............................................................................. 56 years
Present value of R1 per year over Tumiso’s life expectancy (Table A) ............ 7,14414
Capitalised value of annual value .................................................................... 7,14414 × R10 000
Value of annuity included as property in Patrick’s estate ................................ R71 441
If, on the death of Patrick, the right to the annuity had accrued to Valerie (a female aged 64) for
the rest of her life, the value of the annuity would have been determined as follows:
Annuity ............................................................................................................. R10 000
Valerie’s age next birthday .............................................................................. 65 years
Present value of R1 per year over Valerie’s life expectancy (Table A) ............ 6,84161
Capitalised value of annual value .................................................................... 6,84161 × R10 000
Value of annuity included as property in Patrick’s estate ................................ R68 416
If on the death of Patrick, the right to the annuity had accrued to Valerie (a female aged 64), for
the next ten years, the value of the annuity would have been determined as follows:
Annuity .............................................................................................................. R10 000
Valerie’s age next birthday ............................................................................... 65 years
Life expectancy of Valerie................................................................................. 15,18 years
Fixed period of payment of the annuity ............................................................ 10 years
Shorter of life expectancy of Valerie or the fixed period ................................... 10 years
Present value of R1 per year for 10 years as per Table B ................................ 5,6502 × R10 000
Value of annuity included as property in Patrick’s estate ................................. R56 502
Right to an annuity not charged upon property

If the deceased person was the recipient of an annuity (other than an annuity charged upon property)
immediately prior to his/her death, and the annuity accrues to someone else upon his/her death, the
value of the right is the amount of the annuity capitalised at 12% over the life expectancy of the new
recipient. If the annuity is to be held for a period less than the life of the new recipient, the annuity
must be capitalised over the shorter period (s 5(1)(d)).
If the deceased person was the recipient of an annuity (other than an annuity charged upon property)
immediately prior to his/her death, and the annuity ceases upon his/her death, the right to the annuity
has no value for estate duty purposes. No wealth was transferred to anyone else.
Example 27.12. Right to an annuity not charged upon property
Immediately prior to his death, Franjo held the right to an annuity of R10 000 per year. On the
death of Franjo, the annuity accrued to Gino (a male). Gino’s age next birthday at the date of
Franjo’s death was 56 years.
Calculate the value of the annuity that must be included as property in the estate of Franjo.
SOLUTION
Annuity ........................................................................................................... R10 000
Gino’s age next birthday................................................................................ 56 years
Present value of R1 per year over Gino’s life expectancy (Table A).............. 7,14414
Value of annuity included as property in the estate of Franjo ........................ R71 441
If the annuity ceased on the death of Franjo, there would be no property to be included in
Franjo’s estate.
If on the death of Franjo the right to the annuity had accrued to Hilda (a female aged 64) for a
period of only five years, the value of the annuity would have been:
Annuity ........................................................................................................... R10 000
Hilda’s age next birthday ............................................................................... 65 years
Expectation of life of Hilda ............................................................................. 15,18 years
Remaining period of the annuity .................................................................... 5 years
Present value of R1 per year over five years as per Table B ......................... 3,6048
Value of annuity included as property in the estate of Franjo ........................ R36 048
1023
Right to an annuity from a policy of insurance on the life of the deceased person
The value of a right to an annuity payable under a domestic insurance policy on the life of the de-
ceased person is the amount of the annuity capitalised at 12% over the life of the annuitant (person
receiving the annuity). If the annuity is payable for a period shorter than the life of the annuitant, then
the annuity must be capitalised over the shorter period (s 5(1)(d)bis).
There is a limitation on the value of the annuity if it ceases to be payable within five years after the
deceased person’s death (proviso to s 5(1)(d)(bis). This limitation will apply if the annuity ceases due to
l the death of the annuitant within the five-year period, or
l the remarriage of the annuitant (if the annuitant was the deceased’s widow) within the five-year
period (this applies only if the annuitant was a female, i.e., the deceased person’s widow).
The value of the annuity for estate duty purposes is then deemed to be the lesser of
l the total of the amounts that accrued to the annuitant in respect of the annuity and any amounts that
accrued to him or to his estate as a result of the termination of the annuity, or
l the original capitalised value of the annuity in the deceased person’s estate.
27.8.7 Bare dominium (s 5(1)(f))

If the deceased person was the holder of a bare dominium in property, the full market value of the
property will not be included as property. The value of the bare dominium (limited interest) will be the
difference between the fair market value of the property at the date of his/her death and the value of
the usufructuary interest as calculated over the life expectancy of the usufruct holder.
If the usufructuary interest in the property is to be held for a period shorter than the life expectancy of
the person entitled to the usufruct, the usufructuary interest is valued over the shorter period
(s 5(1)(f)).
Example 27.13. Valuation of a bare dominium

At the date of his death, Martin was the holder of the bare dominium in a property that had a fair
market value of R500 000. The usufruct over the property was held by Yonela, a female aged 64
at the date of Martin’s death.
Calculate the value of the bare dominium at the date of Martin’s death.
SOLUTION
Fair market value of the property ................................................................... R500 000
Value of the usufructuary interest:
Yonela’s age next birthday ............................................................................ 65 years
Present value of R1 per year over the life expectancy of Yonela (Table A) ... 6,84161
Value of the usufruct ...................................................................................... R410 497
Value of bare dominium (R500 000 – R410 497) ........................................... R89 503
27.8.8 Property that the deceased person was competent to dispose of for his/her own
benefit (s 5(1)(f)ter)
This class of property deemed to be property is included in the deceased’s estate at the fair market
value of the property at the date of death. The expenses or liabilities that the deceased would have
had to incur if he/she had disposed of that property at the date of death must be deducted from the
fair market value of the property. For example, Alisha (the deceased person) was the sole trustee of a
trust at the date of her death. The only asset in the trust was a block of flats. In terms of the trust
deed, the trustee of the trust could dispose of the asset as she saw fit. If Alisha was also a beneficiary
of the trust, it means that she could dispose of the asset for her own benefit. The asset would then be
included in Alisha’s estate at its fair market value at the date of death. If Alisha could have sold the
block of flats at the date of death, she probably would have had to incur expenses, for example
auctioneers’ commission, to sell the asset. This cost must be deducted from the fair market value to
be included in the estate.
If the property consists only of profits, the value is calculated by capitalising the annual value of the
profits at 12% over the life expectancy of the deceased immediately prior to his/her death. In the
above example, if the rent from the flats could be applied for Alisha’s benefit, but the asset would
1024
ultimately be transferred to her son, it means that the rental income must be valued over Alisha’s life
expectancy and included in her estate (s 5(1)(f)ter).
27.8.9 Life expectancy of persons other than natural persons (s 5(3))

If a calculation of the value of property needs to be done over the life expectancy of a person who is
not a natural person, for example a company or trust, the calculation must be made over a period of
50 years (s 5(3)).
27.9 Estate duty: Allowable deductions (s 4)

The total value of all the property and deemed property of the deceased person will constitute the
gross estate. The net value of the estate is determined by subtracting the allowable deductions from
the gross estate (s 4). The deductions are as follows:
27.9.1 Funeral and death-bed expenses (s 4(a))

The amount of the funeral, tombstone and death-bed expenses of the deceased person that may be
deducted is that which the Commissioner considers to be fair and reasonable (s 4(a)).
27.9.2 Debts due within South Africa (s 4(b))

All debts due by the deceased person to persons ordinarily resident within South Africa are deduct-
ible. However, for these debts to be allowed as a deduction, they must be settled out of property that
has been included in the estate (s 4(b)). Normal tax payable by the deceased person for his/her last
period of assessment will be allowed as a deduction. However, any tax payable by the deceased on
lump sums accruing from retirement funds upon death, will not qualify as a deduction as the lump
sum is not included in property of the estate (s 3(2)(i)). Normal tax payable by the deceased estate
(as a separate taxpayer) will be allowed as a deduction.
27.9.3 Costs of administration and liquidation (s 4(c))

All costs that have been allowed by the Master in the administration and liquidation of the estate, for
example executor’s fees, Master’s fees and valuation fees, are deductible. As income earned by the
estate after the date of death is not included as property in the estate, expenses incurred in the man-
agement and control of such income are not allowed as a deduction (s 4(c)).
27.9.4 Costs of carrying out the requirements of the Master or the Commissioner (s 4(d))
Expenditure incurred in carrying out the requirements of the Master or the Commissioner in order to
comply with the Act (s 4(d)); an example is the cost of obtaining additional valuations when required
by the Commissioner.
27.9.5 Foreign property (s 4(e))

If the deceased person was ordinarily resident in South Africa, all his/her property, including foreign
property, is included in his/her estate. The value of certain foreign property is, however, allowed as a
deduction from the gross estate. This deduction will be the value of all the deceased person’s prop-
erty situated outside South Africa that
l the deceased person acquired before he/she became ordinarily resident in South Africa for the
first time, or
l the deceased person acquired after he/she became ordinarily resident in South Africa for the first
time
– by way of a donation, if at the date of the donation the donor was a person (other than a com-
pany) not ordinarily resident in South Africa, or
– by way of an inheritance from a person who, at the date of his/her death, was not ordinarily
resident in South Africa, or
l has been acquired out of the profits and proceeds of this deductible property. For example, if a
deductible foreign property is sold and the proceeds used to buy another foreign property, this
second foreign property will also be deductible (s 4(e)).
1025
27.9.6 Debts due to creditors outside South Africa (s 4(f))

Any debts due by the deceased person to persons ordinarily resident outside South Africa that have
been paid out of property included in the estate are deductible. The amount of the foreign debt that is
deductible is
l the total amount of the foreign debts less
l the value of any of the deceased’s assets outside South Africa that are not included in the estate
(s 4(f)).
Please note that this requirement is similar to the requirement that local debts have to be settled out
of property included in the estate (s 4(b) – see 27.9.2). If local debts are settled with the proceeds
from foreign assets that are deductible (and therefore not taxable), the local debts will also not be
deductible.
Example 27.14. Deduction of foreign debts
The following information relates to the deceased estate of Imaan:

Property situated in South Africa ................................................................................ R500 000
Foreign property included in Imaan’s estate .............................................................. R100 000
Value of foreign property (included in the above foreign property) that is
deductible (s 4(e)) ...................................................................................................... R60 000
Calculate the amount of foreign debt that can be deducted if the total foreign debt is:
(a) R50 000
(b) R80 000
SOLUTION
(a) The full amount of R50 000 is deemed to be settled out of the proceeds of non-taxed for-
eign property (total value R60 000). Therefore, no amount of foreign debt will be deductible.
(b) R60 000 of the foreign debts will be settled out of non-taxed foreign property. Therefore,
R20 000 (R80 000 less R60 000) can be deducted. This R20 000 has been settled out of
proceeds of property that have been included in the estate.
27.9.7 Limited interests reverting to donor (s 4(g))

The value of any fiduciary, usufructuary or other like interest in property that was donated to the
deceased person previously and that goes back to the donor upon the death of the deceased person
is deductible. This also applies to annuities charged upon property if the right to the annuity accrues
to the donor of the property upon the deceased person’s death (s 4(g)).
For example, Abram donates the usufruct of a farm to Ben, but keeps the bare dominium in the farm
for himself. Upon the death of Ben, the usufruct goes back to the donor, Abram. The usufruct will be
valued in the estate of Ben over the life expectancy of Abram. A deduction will be allowed of the
value of the usufruct.
27.9.8 Bequests to certain charitable bodies (s 4(h))

The value of any property included in the estate that has not been allowed as a deduction under any
other provision and that accrues to
l any public benefit organisation that is exempt from tax (in terms of s 10(1)(cN) of the Income Tax
Act), or
l any institution, board or body that is exempt from tax and that has as its sole or principal object
the carrying on of any public benefit activity (in terms of ss 10(1)(cA)(i) and 30 of the Income Tax
Act), or
l the State or a municipality (as defined in s 1 of the Income Tax Act)
constitutes a deductible amount (s 4(h)).
27.9.9 Improvements made to inherited property by beneficiaries (s 4(i))

The amount by which the value of any property included in the estate has been enhanced by any
improvements made to the property
l by the beneficiary who receives the property on the death of the deceased person,
1026
l during the lifetime of the deceased person, and

l with the deceased person’s consent,
may be deducted (s 4(i)).
Example 27.15. Improvements made by beneficiary
The following information relates to the deceased estate of Elias:

Market value of fixed property on date of death ......................................................... R950 000
Cost of improvements made to the above property by Jacob .................................... R80 000
The property is bequeathed to Jacob in the will of Elias. The improvements made by Jacob,
during the lifetime of Elias and with Elias’ consent, increased the value of the fixed property by
R150 000.
What is the deduction in for estate duty?
SOLUTION
An amount of R150 000 can be deducted in the estate. This represents the increase in value of
the property and not the cost of the improvements.
27.9.10 Enhancement in the value of fiduciary, usufructuary or other like interest in property
through improvements by beneficiary (s 4(j))
The amount by which the value of any fiduciary, usufructuary or other like interest has been en-
hanced by any improvements made to the property
l at the expense of the person to whom the interest accrues upon the deceased person’s death,
l during the lifetime of the deceased person, and
l with his consent,
is deductible (s 4(j)).
Example 27.16. Calculating deduction for enhancement in value of usufructuary interest
Wisani was the holder of a usufruct over a property until the date of his death. The bare domi-
nium of the property belongs to Simphiwe. During the lifetime of Wisani and with Wisani’s con-
sent, Simphiwe effected improvements on the property that increased the value of the property
by R200 000. At the date of death of Wisani, the fair market value of the property was R900 000
and Simphiwe (a male person) was 32 years old.
What is the deduction for estate duty purposes?
SOLUTION
Fair market value of fixed property on date of death ..................................... R900 000
Age next birthday of Simphiwe ...................................................................... 33 years
Value of the usufruct included in the estate of Wisani ................................... R884 343
Market value excluding the value of improvements (R900 000 – R200 000) ... R700 000
Value of usufruct (R700 000 × 12% = R84 000; R84 000 × 8,18836) ........... R687 822
Enhancement in value of usufruct due to improvements............................... R884 343 – R687 22
Deduction for estate duty purposes (s 4(j)) ................................................... R196 521
27.9.11 Accrual claims (s 4(lA))

The amount of any accrual claim against the estate by the surviving spouse of the deceased person
or by the estate of his/her deceased spouse may also be deducted (s 4(lA)) (see 27.7.3).
1027
27.9.12 Usufructuary or other like interest created by predeceased spouse

(ss 3(2)(a), 4(q) and 4(m))
The value of a usufructuary or other similar interest in property, which was created by a predeceased
spouse of the deceased, could be deductible. This applies if the property formed part of the estate of
the predeceased spouse and no deduction to the surviving spouse (s 4(q)) was available in respect
of the property in the estate of the predeceased spouse (s 4(m)). This also applies to a right to an
annuity charged upon property included as property of the deceased.
This deduction is very seldom encountered in practice, as a surviving spouse deduction (s 4(q)) is
usually allowed in the estate of the predeceased spouse.
27.9.13 Books, pictures, statuary and other works of art (s 4(o))

An amount included in the estate with regard to books, pictures, statuary or other objects of art lent to
the national, provincial or local government of the Republic under a notarial deed can be deducted.
The deduction is only available if the lending period is at least 30 years and the deceased person
died during the lending period (s 4(o)). The deduction is also available in respect of the value of the
shares of a corporate body attributable to such items of art.
27.9.14 Policy proceeds taken into account in the valuation of shares (s 4(p),
s 1 of the Income Tax Act)
If a company owns a policy (which is not an exempt policy – see 27.7.1) on the life of the deceased
person, the proceeds will be deemed property upon the death of the deceased person. If the de-
ceased person owned any shares in that company, the value of the shares (property in the deceased
person’s estate) will also be increased due to the proceeds having been paid into the company’s
bank account. A deduction can therefore be claimed of the amount of the policy proceeds included
in the valuation of the shares owned by the deceased (s 4(p)). This deduction aims to avoid the
policy proceeds being included in the estate twice.
Please note that the policy proceeds could be included in the gross income of the company for nor-
mal tax purposes (par (m) of the gross income definition in s 1 of the Income Tax Act). This will apply
if the deceased person was also an employee or director of the company. This means that the com-
pany could be liable for tax on the proceeds of the policy, usually at 28%. The value of the com-
pany’s shares will therefore only increase by the after-tax amount of the policy proceeds.
Only that part of the value of the property deemed to be property that is not otherwise deductible can
be deducted. For example, if the shares accrue to the spouse out of the estate, a surviving spouse
deduction (4(q)) can be claimed for the full value of the shares and this deduction will then not be
claimed.
Example 27.17. Policy proceeds included in the valuation of shares
James owned 40% of the equity shares of MM (Pty) Ltd at the date of his death. He was also a
director of the company. MM (Pty) Ltd took out a policy on the life of James and paid 50% of the
premiums on that policy, amounting to R100 000 (including interest at 6%). James had paid the
other 50% of the premiums during his lifetime, also amounting to R100 000 including interest.
After James died, the policy paid out R950 000 to MM (Pty) Ltd. James’ shareholding is be-
queathed to his son in terms of his will. James’ shareholding was valued at R2 500 000 at the
date of his death. The valuation of the shares takes the policy proceeds into account, as the
company had a right to the payment at James’ death.
What is the deduction for estate duty purposes?
1028
27.9 Chapter 27: The deceased and deceased estates
SOLUTION
Value of shares on date of death (property in the deceased estate) .......................... R2 500 000
Policy proceeds taken into account in the above valuation:
40% × (R950 000 × 72%) (after-tax proceeds) ........................................................... R273 600
Policy proceeds included as deemed property in the deceased estate: R950 000
less R100 000 (premiums paid by the company) ........................................................ R850 000
Deduction for estate duty purposes (s 4(p)) ............................................................... R273 600
Note
As the deceased paid some of the premiums on the policy, the policy proceeds will not be exempt
(s 3(3)(a) – see 27.7.1). As the policy had the effect of increasing property by R273 600 as well as
R850 000 being included as deemed property, a deduction is allowed to avoid double taxation.
27.9.15 Amounts accruing to the surviving spouse (s 4(q), definition of ‘spouse’)

Any property included in the estate that accrues to the surviving spouse of the deceased person
constitutes a deduction (s 4(q)). This applies only to amounts that have not been deducted already in
terms of any other deduction allowed.
A ‘spouse’ is defined in relation to a deceased person as including a person who at the time of death
of the deceased person was his/her partner
l in a marriage or customary union recognised in terms of the laws of South Africa, or
l in a union recognised as a marriage in accordance with the tenets of any religion, or
l in a same-sex or heterosexual union that the Commissioner is satisfied is intended to be permanent
(s 1(1)).
The marriages or unions contemplated in the last two items above are, in the absence of proof to the
contrary, deemed to be marriages or unions without community of property.
Examples of amounts that could accrue to the surviving spouse are
l bequests to the spouse in the deceased spouse’s will
l the amount due to the surviving spouse in terms of the laws of intestate succession if the de-
ceased had no will
l half of the joint estate accruing in terms of a marriage in community of property
l policy proceeds that are paid out to the surviving spouse
l if a descendant of a deceased person (for example the deceased’s child or grand-child) is entitled
to a benefit in terms of the deceased person’s will and rejects that benefit, the benefit
accrues to the deceased person’s spouse (s 2C(1) of the Wills Act 7 of 1953).
Beneficiaries in terms of a deceased person’s will cannot enter into a re-distribution agreement to
increase the surviving spouse deduction (s 4(q)) by arranging that more is awarded to the spouse.
As the agreement is entered into by the beneficiaries amongst themselves after the death of the
deceased person, the only amount accruing to the spouse is the amount awarded by the will or
intestate succession laws.
If the deceased person’s will stipulates that the surviving spouse must dispose of an amount to any
other person or trust, the surviving spouse deduction (s 4(q)) must be reduced by the amount that
the surviving spouse must dispose of (proviso (i) of s 4(q)).
If a deceased person establishes a trust in his/her will for the benefit of the surviving spouse, certain
assets accrue to the trust. If the trustee of the trust can allocate the property or income of the trust for
the benefit of the surviving spouse only, property accruing to the trust will qualify for the surviving
spouse deduction (s 4(q)). No deduction will be allowed under the surviving spouse deduction
(s 4(q)) if the trustee of the trust has a discretion to allocate the property or any income of the trust to
any person other than the surviving spouse (proviso (ii) of s 4(q)). No deduction is allowed under the
surviving spouse deduction (s 4(q)) when property is bequeathed to a discretionary trust, as the surviv-
ing spouse has no vested right to the income of the trust (Practice Note No. 35 issued by SARS).
Remember
If an amount is due to a surviving spouse in respect of an accrual claim (see 27.9.11), the de-
duction is claimed in terms of s 4(lA). The s 4(q) deduction cannot be claimed for this amount
again, as that would constitute a double deduction.
1029
27.9.16 Abatement (s 4A)

In addition to the specific deductions, an amount of R3 500 000 must be deducted from the net value
of the estate in order to determine the dutiable value of the estate (s 4A(1)).
Remember
The abatement must be deducted from the net value of the estate, not from the estate duty payable.
If the deceased person (D2) is a surviving spouse (in other words, the deceased person had a pre-
deceased spouse (D1)), the estate of the surviving spouse (D2) could benefit from a double abate-
ment at the time of the surviving spouse’s (D2’s) death. The abatement will then be R7 000 000 less
the amount of the abatement used by the estate of the predeceased spouse (D1) (s 4A(2)).
The amount to be deducted from the additional R3 500 000 amount (thus the amount claimed as an
abatement by the predeceased spouse (D1)) cannot exceed R3 500 000 (s 4A(4)).
The executor of the estate of the surviving spouse (D2) has the responsibility to submit a copy of the
estate duty return of the predeceased spouse (D1) or other relevant material that the Commissioner
may regard as reasonable in order for the additional deduction to be claimed (s 4A(5)).
If a person and his/her spouse die simultaneously, the spouse with the smallest net estate is deemed
to have died immediately before the other spouse (s 4A(6)).
Example 27.18. Additional s 4A abatement: Full additional abatement
Andries is married to Marli. Andries passes away. The net value of Andries’ estate is R4 000 000
(after all deductions except the surviving spouse deduction). The entire estate is transferred to
Marli. Marli then passes away. The net value of her estate is R10 000 000.
What are the abatements available to Andries and Marli?
SOLUTION
Andries
Since the entire estate is transferred to Marli, the dutiable value of Andries’ estate is nil since the
surviving spouse deduction (s 4(q)) of R4 000 000 is claimed. This means that Andries’ estate
does not use any portion of the abatement (s 4A).
Marli
Because Andries did not use any portion of the abatement (s 4A), Marli’s estate is now entitled to a
total abatement of R7 000 000 (if a copy of Andries’ estate duty return or other relevant material
regarded as reasonable by the Commissioner, is properly submitted).
Example 27.19. Additional s 4A abatement: Partial additional abatement
Zika is married to Pearl. Zika passes away. The net value of Zika’s estate is R500 000 (after de-
duction of amounts bequeathed to the surviving spouse (s 4(q))). The entire net estate of
R500 000 is transferred to Zika’s children. Pearl then passes away. The net value of her estate is
R10 000 000.
What are the abatements available to Zika and Pearl?
SOLUTION
Zika
Zika’s net estate is entitled to R500 000 of the R3 500 000 abatement. This means that
R3 000 000 of the abatement could be transferred to Pearl’s estate.
Pearl
Pearl’s estate is entitled to a total abatement of R6 500 000 (R7 000 000 less the R500 000
amount used by Zika’s estate). This is, once again, assuming a copy of Zika’s estate duty return
or other relevant material regarded as reasonable by the Commissioner, has been properly
submitted.
1030
Example 27.20. Additional s 4A abatement: Partial additional abatement, surviving

spouse got remarried and spouses dying simultaneously
Hamilton is married to Rebecca. Hamilton passes away. The net value of Hamilton’s estate is
R500 000 (after surviving spouse deduction (s 4(q))). The entire net estate of R500 000 is trans-
ferred to Hamilton’s children. Rebecca subsequently marries Irvin. Irvin was not married pre-
viously. Rebecca and Irvin then die simultaneously in a car accident. The net value of Rebecca’s
estate is R10 000 000 (after the surviving spouse deduction (s 4(q)), while Irvin’s estate is valued
at R15 000 000.
What are the abatements available to Hamilton, Rebecca and Irvin?
SOLUTION
Hamilton
Hamilton’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R3 000 000 of the abatement could be transferred to Rebecca’s estate.
Rebecca
Since Rebecca and Irvin died simultaneously and Rebecca’s estate is smaller than that of Irvin,
Rebecca is deemed to have died immediately before Irvin. Rebecca’s estate is entitled to a total
s 4A abatement of R6 500 000 (R7 000 000 less the R500 000 amount used by Hamilton’s estate).
Irvin
Irvin is entitled to a total abatement of R7 000 000 less the amount used by Rebecca. However,
since Rebecca used an abatement of R6 500 000 (more than R3 500 000), the reduction of
Irvin’s abatement of R7 000 000 is limited to R3 500 000. Therefore, Irvin is entitled to a total
rebate of R3 500 000 (R7 000 000 less R3 500 000).
If a predeceased spouse (D1) has multiple spouses on date of death, the R3 500 000 additional
amount is divided equally among the number of spouses (s 4A(3)). This additional abatement should
again be reduced with the proportional abatement used by the estate of the predeceased
spouse (D1). This reduction is the abatement used by the predeceased spouse equally divided
among the number of spouses.
Example 27.21. Additional abatement: More than one spouse at the date of death
Sakhile is the spouse of Koketso, Karabo, Maria and Mirenda in a customary marriage. Sakhile
dies. The net value of Sakhile’s estate (after surviving spouse deductions) is R500 000. Koketso
subsequently dies (she never got remarried). The net value of her estate is R8 000 000.
What are the abatements available to Sakhile and Koketso?
SOLUTION
Sakhile
Sakhile’s net estate is entitled to R500 000 of the R3 500 000 abatement. This means that
R750 000 of the abatement could be transferred to each of Koketso, Karabo, Maria and Miren-
da’s estates (R3 500 000 – R500 000)/4).
Koketso
Koketso’s estate is entitled to an abatement of R4 250 000 (R3 500 000 plus R750 000 trans-
ferred from Sakhile’s estate).
It is important to note that, if the deceased person is a surviving spouse of more than one marriage,
the deduction is merely doubled as if the surviving spouse had survived only one marriage. There-
fore, the deceased person does not get an additional R3 500 000 for each predeceased spouse.
Amounts subtracted for previously used abatement deductions are limited to one predeceased
spouse.
Example 27.22. Additional s 4A abatement: More than one predeceased spouse
Renesh is married to Sasha. Renesh passes away. The net value of Renesh’s estate is R500 000
(after surviving spouse deductions). The entire net estate of R500 000 is transferred to Renesh’s
children. Sasha then gets remarried to Tyrone. Tyrone later dies and transfers all of his assets to
Sasha. Sasha passes away shortly thereafter. The net value of her estate is R12 000 000.
What are the abatements available to Renesh, Tyrone and Sasha?
1031
SOLUTION
Renesh
Renesh’s net estate is entitled to R500 000 of the R3 500 000 s 4A abatement. This means that
R3 000 000 of the abatement could be transferred to Sasha’s estate.
Tyrone
Tyrone did not use any portion of the abatement, as the surviving spouse deduction reduces the
dutiable estate to Rnil.
Sasha
If the executor submits a copy of the estate duty return of Renesh, Sasha will be entitled to an
abatement of only R6 500 000 (R7 000 000 less the R500 000 used by Renesh). If the executor
submits a copy of the estate duty return of Tyrone, Sasha will be entitled to the full R7 000 000
abatement. It therefore seems as if the executor should rather choose to use the copy of the
estate duty return of Tyrone.
27.10 Estate duty: Other rebates

A rate of 20% or 25% is applied to the dutiable amount of the estate to calculate the estate duty
payable (see 27.5).
If the estate qualifies, the following rebates could be deducted from the amount of estate duty:
l transfer duty paid
l foreign death duties paid, and
l rapid succession rebate.
27.10.1 Transfer duty (s 16(a))

If a beneficiary receives property from an estate and is liable for both estate duty and transfer duty in
respect of that property, the transfer duty can be deducted from the estate duty as calculated
(s 16(a)).
As there is an exemption from transfer duty when an heir or legatee acquires property from an estate
(in terms of s 9(1)(e) of the Transfer Duty Act (Act 40 of 1949)), the deduction for transfer duty is
currently unlikely to be encountered.
27.10.2 Foreign death duties and double tax agreements (s 16(c))

Foreign property owned by a deceased person who was ordinarily resident in South Africa at the
date of death could be included in his/her estate. If the foreign property is not deductible (see
27.10.5), the deceased person is liable for estate duty on it. However, it is possible that the property
has already attracted death duties in the foreign country. If this is the case, there is a deduction of the
amount of foreign death duties paid in respect of that foreign property from estate duty payable in
South Africa (s 16(c)). The deduction for foreign death duties may, however, not exceed the estate
duty imposed on the property in South Africa. If, for example, foreign death duties on foreign property
amounted to R20 000, while the estate duty in South Africa relating to that property amounted to
R18 000, the deduction is limited to R18 000. If the estate duty in South Africa relating to that property
amounted to R22 000, the deduction would be limited to R20 000.
The rebate for foreign death duties may not modify or add to the rights of any person in terms of any
double tax agreement. If the deceased lived in South Africa and at the date of his/her death owned
foreign property in a country with which South Africa had a double tax agreement, relief must be
sought in terms of the double tax agreement. The rebate for foreign death duties will not be available
in this case.
27.10.3 Rapid succession rebate (s 2(2) and the First Schedule to the Act)
If a deceased person owned property that he/she had inherited, and estate duty had been paid on it
when he/she inherited it, that property will again be subject to estate duty in his/her estate. The rapid
succession rebate is a relief measure available when the same property is subject to estate duty
more than once within a period of ten years.
Section 2(2) of the Act provides that estate duty is payable at the rate prescribed in the First Sched-
ule to the Act. The First Schedule prescribes a rate of 20% (to the extent that the dutiable value of the
estate does not exceed R30 million) and 25% (to the extent that the dutiable value of the estate
exceeds R30 million), but also provides for the rapid succession rebate.
1032
To qualify for the rebate

l the first person must have died not more than ten years before the death of the second person, and
l the second person must have borne the estate duty attributable to the property in the estate of
the first person. If the second person was a residuary heir in the estate of the first, he/she is re-
garded as having borne the estate duty attributable to the property he/she inherited.
The rebate is determined as a percentage of the estate duty attributable to the value of the property
in the estate of the second person. The percentage depends on the period of time between the
deaths of the first and second person. The percentages are as follows:
If the deceased dies within two years of the death of the first person ............................................. 100%
If the deceased dies more than two years, but not more than four years after the death of the
first person ....................................................................................................................................... 80%
If the deceased dies more than four years, but not more than six years after the death of the first
person .............................................................................................................................................. 60%
If the deceased dies more than six years, but not more than eight years after the death of the
first person ....................................................................................................................................... 40%
If the deceased dies more than eight years, but not more than ten years after the death of the
first person ....................................................................................................................................... 20%
The amount of the rebate is limited to the amount of the estate duty attributable to the value of the
property in the estate of the first deceased person.
Example 27.23. Rapid succession rebate
John (unmarried) died five years after Tom. The net value of Tom’s estate amounted to R2 100 000.
John inherited one third of Tom’s assets, i.e., R700 000. Estate duty paid was R120 000. Tom’s
estate consisted entirely of fixed property and John paid the estate duty relating to his third of
Tom’s estate, since there was not enough cash available in the estate.
The value of the property inherited from Tom in John’s estate (when John died) was R900 000.
Other assets in John’s estate amounted to R2 800 000. Liabilities and costs in John’s estate
amounted to R45 000, of which R20 000 could be ascribed to the fixed property, R10 000 to
other assets and R15 000 to both the fixed property and the other assets.
Calculate the estate duty payable in John’s estate.
SOLUTION
Step 1: Calculate the estate duty in John’s estate
Fixed property............................................................................................................ R900 000
Other assets............................................................................................................... 2 800 000
Total value of all property in the estate ...................................................................... R3 700 000
Less: Liabilities and costs ...................................................................................... 45 000
Net value of the estate ............................................................................................... R3 655 000
Less: Abatement (s 4A) .......................................................................................... 3 500 000
Dutiable amount ......................................................................................................... R155 000
Estate duty at 20% ..................................................................................................... R31 000
Step 2: Value of the property in John’s estate (note 1)
Value of the same property in John’s estate .............................................................. R900 000
Less: Liabilities and direct costs ............................................................................ 20 000
R880 000
Less: Pro rata share of indirect costs and liabilities
R900 000
× R15 000 .............................................................................................. 3 649
R3 700 000
Dutiable value of the property in John’s estate .......................................................... R876 351
continued
1033
Step 3: Value of property in Tom’s estate (1/3 × R2 100 000) (note 2) ..................... R700 000
Step 4: The dutiable value in John’s estate may not exceed the value of the
property in Tom’s estate, that is, a maximum of ........................................................ R700 000
Step 5: Determine the estate duty that can be attributed to the fixed property in
John’s estate
R700 000
× R31 000............................................................................................. R5 937
R3 655 000
Step 6: Calculation of rebate
John died five years after Tom therefore the rebate per the table is 60%
Rebate 60% × R5 937 = R3 562, with a maximum value of R40 000
(1/3 × R120 000), the applicable duty in Tom’s estate .............................................. R3 562
Step 7: Calculate the net duty payable in John’s estate
Total duty payable (step 1) ........................................................................................ R31 000
Less: Rebate .......................................................................................................... 3 562
Net duty payable ....................................................................................................... R27 438
Notes
(1) The value attributable to the rapidly succeeding property in the estate is calculated after
reducing the current value of the property with the liabilities attributable to that property.
Estate duty in the first dying person’s estate was effectively calculated on the value of the
property less liabilities which were attributable to that property.
(2) Since it is the ‘net’ estate of Tom which was worth R2 100 000, that implies that liabilities
have already been deducted.
27.11 Estate duty: Apportionment (ss 11, 13, 15 and 20)

The executor of the deceased estate is responsible for the calculation and payment of estate duty.
The estate duty on certain property must be borne by the person to whom the property accrues
(s 11). The executor can recover the estate duty in respect of such property from the person liable for
the duty (s 13).
The persons liable for the estate duty are as follows:
l In the case of a fiduciary, usufructuary or like interest: the person to whom that right accrues on
the deceased person’s death (s 11(a)). If the deceased person was the full owner of a property and
he/she leaves the usufruct and the bare dominium of the property to two different legatees, the
legatees cannot be held responsible for the estate duty on those bequests.
l In the case of an annuity (charged upon property) held by the deceased person (recipient)
immediately before death, it will be the owner of the property so charged if the annuity ceases at
the death of the recipient (s 11(a)). If the annuity is payable to another person after the death of the
recipient, such other person will be liable for the estate duty in respect of the annuity.
l In the case of a right to an annuity (other than a right to an annuity charged upon property) held
by the deceased person immediately prior to his/her death, the person to whom the annuity ac-
crues on the deceased person’s death (s 11(a)). This would be the succeeding annuitant.
l In the case of a domestic policy of insurance on the life of the deceased person, the proceeds of
which are paid to a person other than the executor, the person entitled to the proceeds (s 11(b)(i)).
l In the case of a donatio mortis causa or a donation that does not take effect until the death of the
donor, the donee (s 11(b)(ii)). If it happens that the donee has disposed of the property that was
received in this manner for less than full consideration, the donee may recover the relevant estate
duty from the person to whom such property was disposed of (s 15).
The executor may also recover expenses incurred in respect of the property listed above (except for
property donated in terms of a donatio mortis causa or a donation that does not take effect until the
death of the donor) from the person who is liable for the estate duty in respect of that property (s 20).
The executor is liable for the estate duty on any other property in the estate even though it may have
been bequeathed to a specified beneficiary. The executor may not recover the estate duty attribut-
able to specific property in the estate from the heir who inherited that property; for example, if an heir
inherits a motor vehicle, the executor may not recover from the beneficiary the portion of the estate
duty attributable to the vehicle.
1034
Example 27.24. Apportionment of estate duty
The estate duty calculation for the deceased estate of Nolwazi follows:
Residence ................................................................................................................... R2 700 000
Unlisted shares ........................................................................................................... 250 000
Usufruct over farm (accrues to Bongani) .................................................................... 500 000
Cash in bank ............................................................................................................... 100 000
Policy proceeds (to estate) ......................................................................................... 300 000
Policy proceeds (payable directly to Sifundo) ............................................................ 120 000
Total value of all property in the estate ....................................................................... R3 970 000
Less: Liabilities (full amount relates to the residence) ................................................ 70 000
Net value of the estate ................................................................................................ R3 900 000
Less: Section 4A abatement ....................................................................................... 3 500 000
Dutiable amount .......................................................................................................... R400 000
Estate duty at 20% ...................................................................................................... R80 000
The usufruct over the farm, which was held by Nolwazi immediately prior to her death, passed to
Bongani. The proceeds of R120 000 from a policy on the life of Nolwazi were paid directly to
Sifundo.
The estate duty of R80 000 must be apportioned as follows:
Bongani: R500 000 / R3 900 000 × R80 000 .............................................................. R10 256
Sifundo: R120 000/R3 900 000 × R80 000.................................................................. 2 462
Estate: balance ........................................................................................................... 67 282
R80 000
The executor must recover R10 256 from Bongani and R2 462 from Sifundo.
27.12 Estate duty: Marriage in community of property

When a couple is married in community of property, the assets and liabilities of both spouses consti-
tute their joint estate. Certain assets could, however, be specifically excluded from the joint estate.
This could happen if, for example, one spouse owns property that was inherited from a parent who
stipulated that the property may not form part of any joint estate of their child.
When the marriage ends due to the death of one of the spouses, the surviving spouse and the estate
of the deceased spouse are each entitled to a half-share of the joint estate. The assets and liabilities
of both spouses are therefore combined. During their lifetime, the couple would have made a joint will
which details their wishes regarding the distribution of their estate when one of them dies. In terms of
the joint will certain assets are awarded to the surviving spouse. Upon the death of one of the spouses,
the surviving spouse will have a choice to receive either half of the joint estate (as mentioned before)
or the assets listed in the joint will. The surviving spouse can then calculate which option would be
more beneficial – half of the joint estate or the assets awarded by the will. If the surviving spouse
decides to take half of the joint estate, he/she will repudiate (reject) the joint will and only be entitled
to half of the estate. If the will awards assets that total more than half of the estate, he/she will adiate
(accept) the joint will and therefore receive the assets stipulated in the will. The option the surviving
spouse elects will determine the deduction for the surviving spouse accruals (s 4(q)).
A fiduciary or usufructuary interest held by the deceased person does not form part of the joint
estate, as it is a purely personal right. It will be added to the estate of the deceased person only after
his/her half of the joint estate has been calculated. The same principle applies to insurance policy
proceeds received by third parties or the surviving spouse, which are not included in the joint estate.
A right to an annuity held by the deceased person, however, falls into the joint estate, unless it was
expressly excluded from the joint estate by the creator of the right.
In the calculation of the estate duty liability of a spouse who was married in community of property, it
is therefore important to identify which property or deemed property is included in the joint estate and
which property or deemed property is only added after half of the estate has been calculated.
Liabilities that arise only after the death of a spouse, for example funeral expenses, do not form part of
the spouses’ joint estate and are therefore deductible in full in the estate duty calculation of the
deceased spouse.
The estate duty arising on the estate of the deceased spouse is also not a liability of the joint estate
and is therefore payable in full by the estate of the deceased spouse.
1035
Example 27.25. Estate of a person married in community of property
Mpho was married in community of property to Kholofelo. At the date of death of Mpho, the ex-
ecutor in the couple’s joint estate found the following:
Residence ................................................................................................................... R6 850 000
Furniture and household effects ................................................................................. 650 000
Fixed deposit .............................................................................................................. 400 000
Liabilities (including funeral costs of R10 000) ........................................................... 100 000
Mpho was also the holder of a usufruct over a farm that was valued at R150 000. The usufruct
now accrues to Ntokozo. Mpho was never married before.
Calculate the estate duty payable in Mpho’s estate.
SOLUTION
Residence ................................................................................................................. R6 850 000
Furniture and household effects ............................................................................... 650 000
Fixed deposit ............................................................................................................ 400 000
Total value of all property in the joint estate .............................................................. R7 900 000
Less: Liabilities (excluding funeral costs) (R100 000 – R10 000) ............................. 90 000
R7 810 000
Less: One half due to marriage in community of property (R7 810 000/2) (s 4(q)) ..... 3 905 000
Value of Mpho’s half of the joint estate ..................................................................... R3 905 000
Add: Value of usufruct .............................................................................................. 150 000
R4 055 000
Less: Funeral costs ................................................................................................... 10 000
Net estate.................................................................................................................. R4 045 000
Less: Section 4A rebate ............................................................................................ 3 500 000
Dutiable amount ........................................................................................................ R545 000
Estate duty at 20% .................................................................................................... R109 000
27.13 Estate duty: Assessment and payment of the duty (ss 7, 9, 9C, 10, 12, 14, 17
and 18) (ss 187(2) and 187(3)(c) of the Tax Administration Act)
The executor of an estate has the responsibility for the submission of the estate duty return (s 7). After
the submission of the estate duty return, the Commissioner issues an estate duty notice of assess-
ment to the executor or to the person responsible for the payment of the duty (s 9). The duty is pay-
able on a date which may be prescribed in the notice of assessment (s 9C). If the Commissioner is
dissatisfied with any value at which property is reflected, the Commissioner should adjust that value
and raise the assessment accordingly (s 9(1)(1A)).
A situation can arise that additional property is found in an estate within five years of the date on
which an assessment was issued. If this is the case, a supplementary liquidation and distribution
account is required (in terms of s 35 of the Administration of Estates Act, 1965) and a notice of assess-
ment is deemed to have been issued on the date on which the supplementary liquidation and distri-
bution account has become distributable (s 9(4)(b)). This means that the estate will be re-assessed at
that date as if it were the first assessment, including the subsequently discovered property.
We can also have the situation where additional property is found in an estate more than five years
after the date on which the assessment was issued and a liquidation and distribution account is
required (in terms of s 35 of the Administration of Estates Act, 1965). If this is the case, the additional
property will be subject to estate duty as if that property were the sole property of the estate of the
deceased. It is then deemed that the death of the deceased person occurred on the date on which
the additional property was reflected in this liquidation and distribution account (s 9(4)(c)).
Interest at the rate of 6% per annum will be levied on any unpaid estate duty liability. The interest will
be calculated from the earlier of
l 30 days after the date stated in the notice of assessment, or
l 12 months after the date of death of the deceased (s 10(1)).
From a date yet to be proclaimed in the Government Gazette, interest on unpaid estate duty will be
levied in terms of Chapter 12 of the Tax Administration Act (s 10(1)). This means that interest will be
levied at the prescribed rate from the earlier of the date of the assessment or 12 months after the
1036
date of death (s 187(3)(c) of the Tax Administration Act). From a date yet to be proclaimed in the
Government Gazette the interest levied could be simple interest or compounded monthly (s 187(2) of
the Tax Administration Act).
The Commissioner may allow an extension of time for the payment of estate duty without any interest
if he/she is convinced that a delay in the payment of the duty is not caused by the executor or some
other person liable for the duty. The extension of time can be granted provided a reasonable deposit
is paid to the Commissioner and written application is made for the extension (s 10(2)).
The executor is liable for the estate duty payable to the extent contemplated in Chapters 10 and 11 of
the Tax Administration Act (s 12). Under certain circumstances the executor may recover estate duty
paid from beneficiaries (see 27.11). With the consent of the Master of the High Court the person who
is liable for estate duty may mortgage property in respect of which the liability for the duty arises (s 14).
The Master of the High Court may only file an estate’s liquidation and distribution account and dis-
charge the executor from his/her duties once the estate duty has been paid or secured to the satis-
faction of the Commissioner (s 17). No property of the deceased may be delivered or transferred to
any heir or legatee until the executor has satisfied the Commissioner that due provision has been
made for the payment of estate duty (s 18).
27.14 Estate duty: Administrative provisions (ss 6, 26, 28 and 29)

The Commissioner is charged with the administration of the Act (s 6). To assist the Commissioner in
this regard, the Minister of Finance may make regulations for the better carrying out of the objects
and purposes of the Act (s 29). Any administrative requirements and procedures not provided for in
the Act are regulated by the Tax Administration Act, 2011 (s 6).
The South African government may enter into agreements with the governments of other countries to
prevent double taxation of the same property in a deceased’s estate (s 26).
Any person who fails to comply with any reasonable requirement of the Master or Commissioner or
hinders the Commissioner or Master in carrying out any provision of the Act, shall be guilty of an
offence and liable on conviction to a fine or to imprisonment for a period not exceeding two years (s 28).
Remember
The Tax Administration Act, 2011, was introduced to align the administration of tax Acts. It deals
with issues such as the rendering of returns, penalties and interest and the dispute resolution
process. As far as the administrative aspects of estate duty are concerned (except for the levy-
ing of interest), the provisions of this Act must be adhered to (see chapter 33).
Janine Dawnstone died on 1 January 2022 after a long illness. She was born on 15 January 1974.
Janine is survived by her husband, Colin Dawnstone (born on 31 March 1973), to whom she was
married in community of property, as well as a twenty-one-year-old daughter, Christine. The en-
tire family have always been residents of South Africa.
At the date of Janine’s death, Janine and Colin owned the following assets:
l A primary residence in Cape Town, valued at R9 000 000 at the date of Janine’s death. This
property was left to Janine by her late father, Eric Emerald, who died on 9 October 2015,
when the market value of the property was R6 800 000. Janine inherited the property on the
condition that she must leave it to her daughter, Christine. Janine did not pay or bear any
portion of the estate duty payable in her father’s estate.
l A holiday home in Mpumalanga, valued at R3 000 000 at the date of Janine’s death. Janine
and Colin purchased this home for R1 900 000 during 2018 and always used it exclusively for
their own family’s vacation purposes. The executor sold this property for R3 150 000 on
26 February 2022.
l A flat in Egypt, valued at R5 000 000 at the date of Janine’s death. Janine bought this flat
during 2016 for the equivalent of R4 000 000. Death duties amounting to R200 000 (rand
equivalent of the amount in Egyptian pound) were payable in Egypt on the flat. The flat was
registered in Colin’s name on 27 February 2022.
continued
1037
l A 13 meter long yacht, purchased during 2015 for a total cost of R490 000. The value of the
yacht at the date of Janine’s death was R450 000. The yacht was never used for trade purpos-
es. The yacht was transferred to Christine in terms of the joint will on 27 February 2022.
l Janine was the recipient of an annuity of R50 000 per year, paid to her from the profits of a
Waterfront coffee shop left to her brother, Mike (who was born on 19 February 1981), by their
late father. These payments ceased upon Janine’s death. Mike deducted employee’s tax of
R12 500 from this annuity which he paid over to SARS.
l Colin had a fixed deposit at a local bank amounting to R3 450 000 (excluding interest) at the
date of Janine’s death. He made this deposit on 1 March 2021. The executor collected
R3 700 000 (including capitalised interest of R250 000) in respect of this deposit from the
bank on 24 January 2022.
The joint estate of Janine and Colin included the following liabilities:
l Janine owed R355 000 on a local bank overdraft at the date of her death.
l Colin owed R200 000 on a local bank overdraft at the date of Janine’s death.
The following costs were incurred by the executor in winding up the deceased estate:
l Advertising costs: R150.
l Transfer and valuation costs relating to the residence in Cape Town. These costs were paid
by the executor but were later recovered from the beneficiary, Christine.
l Funeral costs: R13 180.
l Master’s fees: R7 000.
l Executor’s remuneration: R145 021.
The following information relates to the income and expenses of Janine and Colin during the
2022 year of assessment:
l Janine was an art director at a local museum. The following information was obtained from
her IRP 5 from the museum for the period of employment from 1 March 2021 until the date of
her death:
– Gross salary: R852 000
– Bonus received in cash: R63 000
– Contributions to the museum’s pension fund: R63 900
– Employee’s tax deducted: R274 165
l A gross amount of R900 000 accrued to Janine from the museum’s pension fund as a result
of her death. All Janine’s contributions to the pension fund until the 2021 year of assessment
were allowed as deductions for normal tax purposes. She has never received any lump sum
from a retirement fund or employer before. The museum’s pension fund obtained a directive
from SARS and withheld and paid over to SARS the correct amount of employee’s tax on the
lump sum before paying the net amount to the executor of the deceased estate.
l Colin received interest on the fixed deposit amounting to R250 000 during the 2022 year of
assessment. This interest was earned evenly throughout the year of assessment until the in-
vestment was liquidated by the executor. This was not a tax-free investment.
The following other information is available:
l Janine and Colin made a valid joint will, which was accepted (adiated) by Colin after Janine’s
death. This means that Colin opted to receive the benefits awarded to him by the joint will, in-
stead of only receiving half of the joint estate. In terms of the joint will Colin receives the flat in
Egypt, as well as R300 000 in cash. Christine receives the rest of the estate.
l Neither Janine nor Colin sold any assets during the period from 1 March 2021 to the date of
Janine’s death.
Required
(1) Calculate the capital gains tax consequences for Janine Dawnstone’s final period of assess-
ment.
1038
SUGGESTED SOLUTION
(1) Capital gains tax consequences for Janine Dawnstone’s final period of assessment
(1 March 2021–1 January 2022)
Fiduciary right:
Proceeds (note 1) ................................................................................... Rnil
Base cost (note 2) ................................................................................. (R6 650 261)
Janine’s age (next birthday) at date of death of her father .................. 42
Annual value of right of use (R6 800 000 × 12%)................................. 816 000
Factor female (Table A) ....................................................................... 8,14983
Present value of fiduciary interest (R816 000 × 8,14983) .................... 6 650 261
Capital loss (disregarded – note 3) ...................................................... (R6 650 261)
Holiday home:
Proceeds (market value at date of death – R3 000 000/2) ................. R1 500 000
Base cost (purchase price – R1 900 000/2) ......................................... (950 000)
Capital gain ........................................................................................... R550 000
Flat in Egypt:
Proceeds (R4 000 000/2 – note 4) ....................................................... R2 000 000
Base cost (R4 000 000/2) ..................................................................... (2 000 000)
No capital gain or loss –
Yacht:
Proceeds (R450 000/2) ........................................................................ R225 000
Base cost (R490 000/2)......................................................................... (245 000)
Capital loss (disregarded – note 5) ..................................................... (R20 000)
Right to an annuity:
Proceeds (note 6) .................................................................................. –
Base cost ............................................................................................... (407 492)
Capital loss (disregarded – note 6) ...................................................... (R407 492)
Colin’s fixed deposit:
Proceeds (R3 450 000/2 – note 7) ....................................................... R1 725 000
Base cost .............................................................................................. (1 725 000)
No capital gain or loss.......................................................................... –
Lump sum from pension fund (note 8) ................................................. –
Sum of capital gains and losses:
Holiday home ....................................................................................... R550 000
Less: Annual exclusion in year of death .............................................. (300 000)
Net capital gain .................................................................................... R250 000
Included in Janine’s final taxable income @ 40% ............................... R100 000
Notes
(1) Although there is a deemed disposal of the fiduciary right at date of death (s 9HA(1)), the
proceeds are Rnil as the right ceases at death. The same principle would apply to a usu-
fruct enjoyed by a person at date of death. Please note that this type of right does have a
value for estate duty purposes (see required (5)).
(2) Base cost of the right enjoyed by Janine is the market value thereof on the date of her father’s
death, as determined under par 31(1)(d) and (2) of the Eighth Schedule. As a fiduciary right
is a personal right, it does not form part of the joint estate and therefore the base cost is not
divided by two.
(3) This capital loss is disregarded to the extent that the asset was not used for trade purposes
(par 15(c) of the Eighth Schedule). As the house was used as a primary residence, the entire
loss will be disregarded. If a capital gain were realised instead of a capital loss, the R2m pri-
mary residence exclusion could apply (par 45).
(4) Worldwide assets are included, but this is left to the surviving spouse, thus the proceeds
equal Janine’s base cost (s 9HA(2)).
(5) This capital loss is disregarded to the extent that it was not used for trade purposes
(par 15(b) of the Eighth Schedule).
(6) The right to the annuity is an ‘asset’ as defined in par 1 of the Eighth Schedule. However,
similar to the principle applicable to the fiduciary right discussed above, the right ceases at
death and it therefore has no proceeds. The base cost of the annuity is the market value of
the right at date of death of her father (R50 000 × 8,14983). As this right to an annuity related
to the profits from a business, it is similar in nature to a fiduciary interest and therefore the
capital loss is disregarded in terms of par 15(c). However, as with the fiduciary right, note that
this right has an estate duty value, as it was charged on property (see required (5)).
continued
1039
(7) This is an ‘asset’ as defined in par 1 of the Eighth Schedule, as it represents a right to claim
payment from the bank. Market value at date of death would be the amount originally invest-
ed plus interest capitalised. A portion of the interest did accrue up until date of death. How-
ever, in terms of par 35(3)(a) of the Eighth Schedule, that interest portion will be excluded
from proceeds as it would have already been included in gross income of the relevant tax-
payers (being Janine and Collin).
(8) The right to the lump sum accumulated in the pension fund is an ‘asset’ as defined in par 1 of
the Eighth Schedule. However, this asset is specifically excluded from the deemed disposal
rules (s 9HA(1)(c)(i)) as any capital gain or loss would be disregarded in terms of par 54.
Required
(2) Calculate the capital gains tax consequences for Janine Dawnstone’s deceased estate for
the period ending 28 February 2022.
SUGGESTED SOLUTION
(2) Capital gains tax consequences for Janine Dawnstone’s deceased estate for the period ended
28 February 2022:
Fiduciary right:
No effect (note 9) .................................................................................. –
Holiday home:
Proceeds (selling price of R3 150 000/2) ............................................ R1 575 000
Base cost (R3 000 000/2 – note 10) ..................................................... (1 500 000)
Capital gain ........................................................................................... R75 000
Flat in Egypt:
Proceeds (note 11)................................................................................ R2 000 000
Base cost (note 11) .............................................................................. (2 000 000)
No capital gain or loss –
Yacht:.....................................................................................................
Proceeds (note 12)................................................................................ R225 000
Base cost (note 12) ............................................................................... (225 000)
No capital gain or loss .......................................................................... –
Right to annuity:
No effect (note 13) ................................................................................ –
Colin’s fixed deposit:
Proceeds (note 7) ................................................................................. R1 725 000
Base cost ............................................................................................... (1 725 000)
No capital gain or loss .......................................................................... –
Sum of capital gains and losses:
Holiday home ........................................................................................ R75 000
Less: Annual exclusion in year of death ............................................... (40 000)
Net capital gain ..................................................................................... R35 000
Included in deceased estate’s taxable income @ 40% (R35 000 ×
40%) ...................................................................................................... R14 000
Notes
(9) Christine acquired the (ultimate) right to the asset when her grandfather died and not when
Janine dies. The fiduciary right that was passed on to Janine, ceased at the date of Janine’s
death, upon which time Christine became the full owner of the property. The base cost of the
property to Christine will be the value of ownership when inherited from her grandfather,
which is the market value less the value of the fiduciary right that was inherited by Janine.
Christine’s base cost will therefore be R149 739 (R6 800 000 – R6 650 261). The property
will be subject to CGT when it is eventually disposed of by Christine.
(10) The deceased estate acquires the asset at the market value at date of death (s 25(2)(a)).
(11) The deceased estate acquires the asset at Janine’s base cost (s 25(2)(b)) and disposes of it
at that same amount (s 25(3)(a)).
(12) The deceased estate acquires the asset at the market value at date of death (s 25(2)(a)). As
the asset is transferred directly to a beneficiary (and not sold), the estate is deemed to have
disposed of the asset at the base cost to the estate (s 25(3)(a)).
(13) The annuity ceases at date of death and therefore no asset is acquired by the estate.
1040
Required
(3) Calculate the final normal tax due to or by SARS at the date of Janine Dawnstone’s death.
Ignore the effect of any possible provisional tax payments made.
SUGGESTED SOLUTION
(3) Janine Dawnstone’s final normal tax liability owed to SARS at the date of her death:
Salary from 1 March 2021 until date of death ........................................ R852 000
Bonus....................................................................................................... 63 000
Annuity received (R50 000 × 10/12)/2 – note 14)................................... 20 833
Interest received (note 15) ...................................................................... 116 288
Interest exemption s 10(1)(i) (note 16).................................................... (23 800)
Income ..................................................................................................... R1 028 321
Add: Taxable capital gain (part 1) .......................................................... 100 000
Subtotal 1................................................................................................. R1 128 321
Less: Pension fund contributions (s 11F) ............................................... (63 900)
Actual contributions R63 900, limited to the lesser of A, B, or C:
A. R350 000 (note 17)
B. 27,5% of the higher of B1 or B2: 27,5% x R1 128 321 = R310 288
B1: Remuneration (R852 000 + R63 000 + R20 833) (note 18) ........ 935 833
B2: Taxable income including capital gains – Subtotal 1 ................ 1 128 321
C. Taxable income excluding capital gains (R1 028 321)
Therefore, the s 11F deduction is limited to the lesser of R350 000,
R310 288, or R1 028 321, which is R310 288. The deduction is,
however, limited to the actual contributions
Taxable income ....................................................................................... R1 064 421
Normal tax per the tax table: on R782 200 ............................................. R229 089
On the excess: (R1 064 421 – R782 200) × 41% ................................... 115 711
R344 800
Less: Primary rebate: R15 714 × 307/365 .............................................. (13 217)
Normal tax payable 331 583
Less: Employee’s tax deducted (R12 500 + R274 165)) ....................... (286 665)
Normal tax due to SARS (note 19) .......................................................... R44 918
Lump sum from pension fund ................................................................. R900 000

Normal tax per retirement lump sum tax table: on R700 000 ................ R36 000
On the excess: (R900 000 – R700 000) × 27% ...................................... 54 000
R90 000
Less: Employee’s tax deducted (pension fund) ..................................... (90 000)
Normal tax due to SARS (note 19) .......................................................... –
Notes
(14) This annuity is not deemed to be a trade in terms of s 7(2C)(b) as it was not purchased from
an insurer and therefore it is not an ‘annuity amount’ for purposes of s 10A. The annuity
income (R50 000 is the annual amount, meaning that Janine only received it for 10 months
out of 12) is therefore part of the joint estate (s 7(2A)(b)). The salary and bonus constitute
income from the carrying on of a trade and are therefore included in full in Janine’s gross
income (s 7(2A)(a)(i)) and not the income of the joint estate.
(15) The interest on the fixed deposit was earned from 1 March 2021 until 24 January 2022
(330 days). Janine is entitled to half of the interest until date of death (only 307 days relate to
the period until death (1 January 2022)). An amount of (R250 000 × 307/330)/2 is therefore
included in her final taxable income.
(16) Note that the interest exemption is not apportioned in the case of a spouse married in com-
munity of property and also not for a proportional period of assessment.
(17) Note that the monetary limits are also not apportioned for a proportional period of assess-
ment (s 11F).
(18) The salary, bonus and annuity are included in the definition of ‘remuneration’ in par 1 of the
Fourth Schedule.
(19) Janine’s final tax liability of R44 918 is a debt owed to SARS and constitutes a deduction for
estate duty purposes (see required (5)).
1041
Required
(4) Calculate the normal tax liability of Janine Dawnstone’s deceased estate for the period of
assessment ended 28 February 2022.
SUGGESTED SOLUTION
(4) Janine Dawnstone’s deceased estate’s normal tax liability for the period ended 28 February
2022:
Interest received (note 20) ............................................................................................... R8 712
Less: Interest exemption s 10(1)(i) (note 21) .................................................................... (8 712)
–
Add: Taxable capital gain (part 2) ................................................................................... R14 000
Taxable income ................................................................................................................. R14 000
Tax payable @ 18% (note 22) .......................................................................................... R2 520
Notes
(20) Interest of R250 000 is collected together with the capital by the executor. Until the date of
death Janine shared in the interest as a result of being married in community of property. As
indicated in required (3) above, half of the interest earned until death is therefore included in
Janine’s final income. As Janine is entitled to half of the joint estate, half of the interest earned
on the fixed deposit after death will accrue to the deceased estate ((R250 000 × 23/330)/2)
(s 25(1)). Colin will be taxed on the other half of the interest.
(21) The deceased estate is deemed to be a natural person (s 25(5)) and is therefore taxed
according to the progressive tax tables applicable to natural persons. It also qualifies for the
interest exemption (no apportionment).
(22) Although the deceased estate is deemed to be a natural person, it does not qualify for a pri-
mary rebate (s 25(5)(a)). The amount of tax owed is a debt owed to SARS and constitutes a
deduction for estate duty purposes (see required (5)).
(23) It is important to note how the normal tax issues addressed by parts 1–4 of the required
affect the estate duty calculation (see part (5)).
Required
(5) Calculate the estate duty payable in Janine Dawnstone’s deceased estate and indicate who
will be liable for the estate duty.
SUGGESTED SOLUTION
(5) Estate duty payable in Janine Dawnstone’s deceased estate:
Property in joined estate:
Holiday home ............................................................................................... R3 150 000
Flat in Egypt ................................................................................................. 5 000 000
Yacht ............................................................................................................. 450 000
Annuity: annual amount................................................................................ 50 000
Beneficiary: Mike, factor male age next birthday 41 years ..................... 8.01067
Value of annuity: R50 000 × 8.01067 ........................................................ 400 534
Colin’s fixed deposit (note 24) ..................................................................... 3 682 576
R12 683 110
Property belonging to deceased only:
Fiduciary right: fair market value ................................................................ 9 000 000
Annual value @ 12% × R9 m ....................................................................... 1 080 000
Beneficiary: Christine, factor female age next birthday 22 years ............. 8.31161
Value of fiduciary right: R1 080 000 × 8.31161 ......................................... 8 976 539
Total value of property in estate .................................................................. R21 659 649
Less: Deductions ..........................................................................................
Janine’s bank overdraft (South African debt) ............................................ (355 000)
Colin’s bank overdraft (South African debt) .............................................. (200 000)
Normal tax due to SARS (Janine) (part 3.) .................................................. (44 918)
Normal tax due to SARS (deceased estate) (part 4.) ............................... (2 520)
Advertising costs .......................................................................................... (150)
continued
1042
Transfer and valuation costs (note 25)...................................................................... –

Funeral costs .............................................................................................................. (13 180)
Master’s fees ............................................................................................................... (7 000)
Executor’s remuneration ............................................................................................ (145 021)
Accruals to surviving spouse (s 4(q)) (R5 m flat in Egypt + R300 000 cash)
(note 26) ...................................................................................................................... (5 300 000)
Net estate of deceased .............................................................................................. R15 591 860
Less: Abatement (s 4A) ............................................................................................. (3 500 000)
Dutiable estate ............................................................................................................ R12 091 860
Estate duty payable (dutiable estate × 20%)............................................................ R2 418 372
Apportionment of estate duty:
Mike (beneficiary of annuity): (400 534/15 591 860 × 2 418 372) ............................ R62 125
Christine (beneficiary of fiduciary right): (8 976 539/15 591 860 × 2 418 372) ...... 1 392 304
Deceased estate: the rest (R2 418 372 – 62 125 – 1 392 304) ............................... 963 943
Notes
(24) Interest earned after date of death does not form part of property in the estate. However,
interest accrued until date of death is included. The balance on the fixed deposit at date of
death is therefore R3 450 000 + (R250 000 × 307/330).
(25) As these costs are not paid out of property included in the estate, they cannot be
deducted.
(26) In this case, the surviving spouse accepted the joint will of the couple and is therefore en-
titled to the benefits awarded by the will. It is therefore not necessary to determine half of the
joint estate. If the surviving spouse rejected the will and opted for half of the joint estate, the
s 4(q) deduction would have amounted to half of the joint estate. The fiduciary right and
funeral costs would in that case only be taken into account after the estate was divided by
two.
(27) The lump sum from the pension fund is specifically excluded from property (s 3(2)(i) of the
Estate Duty Act). Since all Janine’s contributions to the pension fund have been deductible
for normal tax purposes, no amount was deducted from the lump sum (par 5 of the Second
Schedule) and therefore no deemed property is included in the estate with regard to the
contributions either (s 3(3)(e) of the Estate Duty Act).
1043
28 Transfer duty
Madeleine Stiglingh

l calculate the amount of transfer duty that is payable on the acquisition of property
l identify which properties will be subject to transfer duty on acquisition thereof.
Contents
Page
28.1 Overview ........................................................................................................................... 1045
28.2 Imposition of transfer duty (s 2(1)).................................................................................... 1045
28.3 Imposition of transfer duty: Acquisition of property.......................................................... 1047
28.3.1 General (paras (a) and (c) of the definition of ‘property’, s 1)............................. 1047
28.3.2 Interest in a residential property company (paras (d) and (e) of the
definition of ‘property’, ss 1, 2 and 3) .................................................................. 1047
28.3.3 Contingent right in residential property held by a trust (par (f) of the definition
of ‘property’, ss 1, 2 and 3) .................................................................................. 1048
28.3.4 Share in a share block company (par (g) of the definition of ‘property’,
ss 1 and 9) ........................................................................................................... 1048
28.3.5 Suspensive and resolutive conditions (ss 3(1) and 5(2)) .................................... 1048
28.3.6 Cancellations (s 5(2))........................................................................................... 1049
28.4 Imposition of transfer duty: Renunciation of a right (ss 2(1) and 3(1))............................. 1049
28.5 Exemptions from transfer duty (s 9) ................................................................................. 1050
28.6 Value on which transfer duty is payable (ss 5, 6, 7 and 8) .............................................. 1050
28.7 Late payment and underpayment of transfer duty (s 4) ................................................... 1051
28.1 Overview
Transfer duty is a separate tax that is generally payable on the acquisition of immovable property. It
is payable by the purchaser and calculated as a percentage of the purchase price. This means that
the purchaser will be required to pay the tax on the transaction, in addition to the purchase price of
the immovable property to the seller. It is important to note that if an immovable property transaction
is subject to VAT, the transaction will not be subject to transfer duty. The transfer duty rate ranges
between 0% and 13% of the value of immovable property. Transfer duty is provided for in terms of
the Transfer Duty Act 40 of 1949. References to legislation in this chapter are references to the
Transfer Duty Act, unless stated otherwise.
28.2 Imposition of transfer duty (s 2(1))

Transfer duty is imposed on (s 2(1)(a))
l the value of any immovable property acquired by any person by way of a transaction or in any
other manner (see 28.3), and
l the amount by which the value of immovable property is enhanced by the renunciation of an
interest in or restriction upon the use or disposal of the property (see 28.4).
1045
The rate of transfer duty on immovable property acquired on or after 1 March 2020 is determined with
reference to the following table (s 2(1)(b)):
Value of property (Rand) Transfer duty rate

0–1 000 000 0%
1 000 001–1 375 000 3% of the value above R1 000 000
1 375 001–1 925 000 R11 250 + 6% of the value above R 1 375 000
2 475 001–11 000 000 R88 250 + 11% of the value above R2 475 000
11 000 001 and above R1 026 000 + 13% of the value above R11 000 000
The above transfer duty rates apply to all persons, including natural persons, companies, close
corporations and trusts.
Example 28.1. Calculating the amount of transfer duty payable
Fundiswa acquired an apartment in Cape Town on 1 July 2021 for R2 400 000. This transaction
is not subject to VAT.
Calculate the transfer duty payable by Fundiswa.
SOLUTION
Fundiswa will have to pay transfer duty of R82 250 (R44 250 + (8% × (R2 400 000 –
R1 925 000)) before the property can be registered in his name.
Note
In addition to transfer duty, Fundiswa will have to pay transfer costs, which is the fee charged
by a conveyancer, as well as bond registration fees if he financed the purchase with a
mortgage bond (i.e. a home loan).
Where a person acquires an undivided share in property, for example where the person acquires a
property jointly with another person, the transfer duty payable is calculated in accordance with the
following formula (s 2(5)):
y = a/b × c
where
y – represents the duty payable

a – represents the value of the undivided share on which the duty is leviable
b – represents the total value of the property, and
c – represents the duty which would have been leviable on the total value of the property.
Where a person acquires an undivided share in common property, which is in terms of the Sectional
Titles Act 95 of 1986 apportioned to a specific unit, the above provision relating to the acquisition of
an undivided share in property does not apply (s 2(6)).
Example 28.2. Calculating the amount of transfer duty payable on an undivided share
in property
Refer to Example 28.1. Fundiswa sells a 50% interest in his apartment to Bongani on 31 January
2022 for R1 400 000. At the time, the market value of the apartment is R2 800 000.
Calculate the transfer duty payable by Bongani.
1046
28.2–28.3 Chapter 28: Transfer duty
SOLUTION
Transfer duty (representing ‘c’ in the formula) on total value of property
(R88 250 + (11% × (R2 800 000 – R2 475 000)) ................................................. R124 000
Value of Bongani’s undivided share in the property (representing ‘a’ in the
formula)................................................................................................................ R1 400 000
Total value of the property (representing ‘b’ in the formula) ................................ R2 800 000
Transfer duty payable (y = a/b × c; R1 400 000/R2 800 000 × R124 000).......... R62 000
28.3 Imposition of transfer duty: Acquisition of property

28.3.1 General (paras (a) and (c) of the definition of ‘property’, s 1)
Transfer duty is generally imposed when one of two events occurs: the acquisition of property or the
renunciation of a right in property. The most common types of property that are subject to transfer
duty are (definition of ‘property’, s 1)
l land and any fixtures thereon
l any real right in land but excluding any right under a mortgage bond or a lease of property (other
than a lease or sublease of rights to minerals mentioned below), and
l any right to minerals or right to mine for minerals (including a lease or sublease of such a right).
Other types of property that are subject to transfer duty are shares or rights in companies or trusts
that hold immovable property (see 28.3.2).
The above types of property are subject to transfer duty when acquired by way of a transaction or in
any other manner (s 2(1)). In relation to any real right in land and any right to minerals, ‘transaction’
means an agreement whereby one person agrees to sell, grant, waive, donate, cede, exchange,
lease or otherwise dispose of property to another person (definition of ‘transaction’, s 1).
Transfer duty is payable by the person who acquires the property and should be paid within six
months of the date of acquisition of the property (s 3(1)). If a property is acquired by way of a
transaction, the date of acquisition is the date on which the transaction was entered into. This is the
date that the last contracting party signed the agreement, irrespective of whether the agreement
stipulates a different effective date. The fact that the transaction might have been conditional is also
irrelevant, since the date of liability for transfer duty is the date on which the transaction was entered
into and not the date on which the transaction became binding on the parties (see 28.3.5). Where
property is acquired by the exercise of an option to purchase or a right of pre-emption, the date of
acquisition is the date upon which the option or right of pre-emption was exercised (‘date of acqui-
sition’, s 1).
If transfer duty is not paid within six months of the date of acquisition of the property, interest
becomes payable on the unpaid amount (see 28.7).
28.3.2 Interest in a residential property company (paras (d) and (e) of the definition
of ‘property’, ss 1, 2 and 3)
A share in a residential property company qualifies as ‘property’ for transfer duty purposes and the
acquisition thereof is subject to transfer duty (par (d) of the definition of ‘property’, s 1). A residential
property company is a company that holds residential property (or a contingent right to residential
property held by a trust – see 28.3.3) and where the fair value of the residential property (and the
contingent right) comprises more than 50% of the aggregate fair market value of all assets held by
the company (excluding financial instruments or any coin made mainly from gold or platinum) on the
date of acquisition of the interest in the company. A Real Estate Investment Trust (REIT) is specifically
excluded from the definition of a residential property company. The transfer of shares in an REIT is
therefore not subject to transfer duty (definition of ‘residential property company’, s 1).
Residential property is defined as any dwelling-house, holiday home, apartment or similar abode,
and improved or unimproved land zoned for residential use in the Republic (including any real right
thereto), but specifically excludes
l an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held
by a person, which has been used for renting to five or more persons who are not connected
persons in relation to that person, and
1047
l any ‘fixed property’ of a ‘vendor’ forming part of an ‘enterprise’ as defined in s 1 of the Value-
Added Tax Act 89 of 1991 (see chapter 31).
A share in a holding company also qualifies as property for transfer duty purposes where that
company and all of its subsidiaries would be residential property companies, if all such companies
were regarded as a single entity. The acquisition of such a share is subject to transfer duty (par (e) of
the definition of ‘property’, s 1).
The acquisition of a share in a residential property company is subject to transfer duty when acquired
by way of a transaction or in any other manner (s 2(1)). In this regard, ‘transaction’ means an agree-
ment whereby one person agrees to sell, grant, waive, donate, cede, exchange, issue, buy back,
convert, vary, cancel or otherwise dispose of any such shares to another person (par (b) of the
definition of ‘transaction’, s 1).
Transfer duty on the acquisition of a share in a residential property company is payable within six
months from the date of acquisition of the share (s 3(1)). The purchaser is generally liable for the
duty, but if the purchaser fails to pay the duty within the six-month period, the public officer of the
company and the person from whom the shares are acquired are jointly and severally liable for the
duty. The public officer or the person from whom the shares are acquired may recover the transfer
duty from the purchaser (s 3(1A)).
28.3.3 Contingent right in residential property held by a trust (par (f) of the definition
of ‘property’, ss 1, 2 and 3)
A contingent right to residential property held by a discretionary trust qualifies as ‘property’ for trans-
fer duty purposes under certain circumstances, and the transfer thereof may be subject to transfer
duty. The same applies to a contingent right to shares in a residential property company held by a
discretionary trust. The contingent right only qualifies as ‘property’ if the acquisition thereof is
l a consequence of or attendant upon the conclusion of any agreement for consideration with
regard to property held by that trust, or
l accompanied by the substitution or variation of that trust’s loan creditors, or by the substitution or
addition of any mortgage bond or mortgage bond creditor, or
l accompanied by the change of any trustee of that trust.
The acquisition of such contingent right is subject to transfer duty when acquired by way of a trans-
action or in any other manner (s 2(1)). In this regard, ‘transaction’ means the substitution or addition
of beneficiaries that have a contingent right to the above properties (par (c) of the definition of ‘trans-
action’, s 1).
The transfer duty on the acquisition of such contingent right in a discretionary trust is payable within
six months from the date of acquisition (s 3(1)). The person who acquires the contingent right is
generally liable for the duty, but if that person fails to pay the duty within the six-month period, the
trust and the representative taxpayer of the trust are jointly and severally liable for the duty. The trust
or the representative taxpayer of the trust may recover the transfer duty from the purchaser (s 3(1B)).
28.3.4 Share in a share block company (par (g) of the definition of ‘property’, ss 1 and 9)
A share in a share block company, as defined in the Share Blocks Control Act of 1980, qualifies as
‘property’ for transfer duty purposes and the acquisition thereof may be subject to transfer duty
(par (g) of the definition of ‘property’, s 1).
The supply of shares in a share block company is usually subject to VAT (see chapter 31). Since
transactions that are subject to VAT are exempt from transfer duty (s 9(15), see 28.5), the acquisition
of shares in a share block company will only be subject to transfer duty if it is not subject to VAT.
No distinction is drawn between share block companies that hold residential properties and those
holding commercial properties. Therefore, transfer duty may be imposed regardless of the type of
property held by the share block company.
28.3.5 Suspensive and resolutive conditions (ss 3(1) and 5(2))

Transfer duty is payable within six months of the date of acquisition of the property (s 3(1)). The date
of acquisition of property is the date on which the transaction was entered into, irrespective of
whether the transaction was conditional or not (definition of ‘date of acquisition’ in s 1). Property
transfer agreements are often subject to suspensive or resolutive conditions; however, the transfer
duty liability date is unaffected by such conditions.
1048
A suspensive condition is a condition that suspends the rights and obligations until an uncertain
future event occurs. Upon the occurrence of the event, the contract (or suspended part thereof)
becomes effective. Examples of suspensive conditions are
l a clause in a property purchase contract that stipulates that the purchase and sale of a residen-
tial property is subject to the sale of the purchaser’s current residence, and
l a clause in a property purchase contract that stipulates that the purchase and sale of a residen-
tial property is subject to the purchaser obtaining finance for the purchase of the property.
Regardless of whether a suspensive condition is fulfilled within six months of the date that a trans-
action was entered into, transfer duty should be paid within that period. In order to avoid interest
being levied on unpaid transfer duty after the six-month period, a ‘deposit payment’ can be made
that will be refunded if the agreement falls away.
A resolutive condition is a condition that ends the existence of rights and obligations. In the case of a
resolutive condition, there is no suspension or postponement of the terms in a contract. Rights and
obligations come into existence immediately upon agreement between the parties. If a resolutive
condition is fulfilled, the operation of the rights and obligations cease. If a resolutive condition is not
fulfilled, it is as if the contract had been unconditional from the time it was entered into. If a resolutive
condition is fulfilled, the agreement is cancelled. If this happens before the property is registered in
the deeds registry, transfer duty is only payable on the consideration retained by the seller (s 5(2),
see 28.3.6).
28.3.6 Cancellations (s 5(2))

If a transaction whereby property is acquired, is cancelled or dissolved by the operation of a resolu-
tive condition before the acquisition is registered in the deeds registry, transfer duty is only payable
l on the consideration that has been paid to and retained by the seller, and
l consideration payable by the buyer in respect of the cancellation.
This will only be the case if the property reverts completely to the seller, and the buyer relinquishes all
rights and has not received nor will receive any consideration arising from such cancellation or
dissolution (s 5(2)(a)).
Where the seller subsequently disposes of such property, the seller must provide information to the
Commissioner relating to the circumstances of such previous transaction and the cancellation
thereof. The seller must also provide information relating to the payment of transfer duty in connection
with the cancellation. Any transfer duty that is still unpaid at that time must be paid by the seller. The
seller may recover the duty from the person who was obliged to pay the duty on cancellation of the
previous transaction (s 5(2)(b)).
28.4 Imposition of transfer duty: Renunciation of a right (ss 2(1) and 3(1))
The liability for transfer duty arises mostly as a result of the acquisition of property. However, transfer
duty is also imposed on the amount by which the value of any property is enhanced by the renun-
ciation of an interest in or restriction upon the use or disposal of that property (s 2(1)). The definition
of ‘transaction’ in s 1 includes any act whereby any person renounces any right in or restriction in his
or her favour upon the use or disposal of property. Renunciation is the act or instance of relin-
quishing, abandoning, repudiating, or sacrificing something such as a right. A person renounces a
right if the person voluntarily does something whereby he or she gives up the right. If an interest or
restriction in property lapses or ends for any reason other than the act of renunciation, no liability for
transfer duty arises.
Where a usufructuary renounces his or her right to property in favour of the owner of the bare
dominium, the transaction will be subject to transfer duty. However, if a usufruct comes to an end due
to the death of the usufructuary, or the passing of time, the usufructuary does not renounce his or her
right in the property and no transfer duty will be payable.
Examples of rights that will be subject to transfer duty if the holder thereof renounces the right, are
personal servitudes, such as usufruct, usus, habitatio, fideicommissum and access rights. The
person in whose favour or for whose benefit the right is renounced, is liable for the transfer duty
(s 3(1)).
1049
28.5 Exemptions from transfer duty (s 9)

Some properties acquired are exempt from transfer duty. Following are some examples of properties
acquired that are exempt from transfer duty (s 9(1)):
l property acquired by public benefit organisations and other bodies or organisations that are
exempt from income tax (ss 9(1)(c) and (d))
l property acquired by heirs or legatees by ab intestato or testamentary succession, or by way of a
redistribution of the assets of a deceased estate, or where the value of property is enhanced by
the renunciation of an interest or restriction on the use of the property acquired by an heir or lega-
tee (s 9(1)(e))
l surviving or divorced spouse who acquires property as a result of the death of a spouse or disso-
lution of the marriage (s 9(1)(i))
l acquisition of an interest in property by virtue of a marriage in community of property (s 9(1)(k))
l property acquired under a transaction that qualifies as a taxable supply for VAT purposes that is
subject to VAT at the standard rate or at the zero rate (s 9(15)), and
l property acquired under an asset-for-share transaction contemplated in s 42 of the Income Tax
Act, where the supplier and recipient are deemed to be one and the same person in terms of
s 8(25) of the VAT Act (s 9(15A)).
28.6 Value on which transfer duty is payable (ss 5, 6, 7 and 8)

The value on which transfer duty is payable where consideration is payable by the person who
acquired the property, is the amount of the consideration. Where no consideration is payable, the
value is the declared value of the property (s 5(1)). Any commission or fees payable by the person
who acquired the property must be added to the consideration payable for the acquisition of the
property when determining the value on which transfer duty is payable (s 6(1)(a)). Similarly, if the
property is acquired by way of option or a right of pre-emption, any consideration paid for such
option or right should be added to the consideration payable for the acquisition of the property when
determining the value on which transfer duty is payable (s 6(1)(b)). If the person who acquires the
property has agreed to pay any consideration to any person over and above the consideration paid
for the acquisition of the property, such consideration should be added to the consideration payable
for the acquisition of the property when determining the value on which transfer duty is payable
(s 6(1)(c)).
For purposes of determining the amount of transfer duty payable, the consideration payable for the
acquisition of the property should exclude any transfer duty or other duty or tax payable on the pur-
chase of the property, as well as the amount payable in respect of the registration of the acquisition
of the property (s 7).
Where the whole or a part of the consideration is in the form of rent, royalties, share of profits or any
other periodic payment and the actual amount of the periodic payments is fixed, the value is deter-
mined as the aggregate amount of all such amounts payable over the period for which the property is
acquired (including renewal periods). If the period is not fixed, or the property is acquired for an
indefinite or unlimited period, or for the natural life of any person, the value must be determined by
the Commissioner (ss 5(3) and 8(a)).
Where the whole or a part of the consideration is in the form of goods, services, rights or privileges,
the value is the market value of such goods, services, rights or privileges at the date of the trans-
action. If the market value is not ascertainable, the value must be determined by the Commissioner
(ss 5(3) and 8(b)).
Where the whole or a part of the consideration is in the form of listed shares or securities of a
company, or in the form of rights to acquire such listed shares or securities, the value is the middle
market price on the date of the transaction. In the case of any other shares or securities, the value
must be determined by the Commissioner (s 8(c)).
If the Commissioner is of the opinion that the consideration payable or the declared value is less than
the fair value of the property, he may determine the fair value of the property. The duty will then be
payable on the greater of the fair value determined by the Commissioner, the consideration payable,
or the declared value (s 5(6)). In determining the fair value of property, the Commissioner must
consider the following (s 5(7)):
l the nature of the real right in land and the period for which it has been acquired, or, where it has
been acquired for an indefinite period or for the natural life of any person, the period for which it
is likely to be enjoyed
1050
l the municipal valuation of the property concerned

l any sworn valuation of the property concerned furnished by or on behalf of the person liable to
pay the duty, and
l any valuation made by the Director-General: Mineral Resources or by any other competent and
disinterested person appointed by the Commissioner.
28.7 Late payment and underpayment of transfer duty (s 4)

Transfer duty is payable within six months of the date of acquisition, which is the date on which the
transaction was entered into. If transfer duty remains unpaid after the six-month period, interest
becomes payable at a rate of 10% per annum of the amount unpaid. Interest is calculated for each
completed month in the period from the date that the duty should have been paid to the date of
payment (s 4(1A)).
The underpayment of transfer duty may be subject to an understatement penalty of between 5% and
200% of the amount underpaid. Understatement penalties are levied in terms of the Tax Administra-
tion Act (see chapter 33).
1051
29 Securities transfer tax
Pieter van der Zwan

After studying this chapter, you should be able to
l calculate the amount of securities transfer tax (STT) that is payable on the transfer
of listed and unlisted securities
l identify the person who is liable for the payment of STT in respect of the transfer of
listed and unlisted securities
l determine whether a specific transfer of securities qualifies for an exemption from
STT
l determine the date on which STT is payable, and
l identify the consequences of failing to pay STT on the prescribed due date.
Contents
Page
29.1 Introduction ...................................................................................................................... 1053
29.2 Imposition of STT (s 2) ..................................................................................................... 1053
29.3 Important definitions (s 1) ................................................................................................ 1053
29.4 Transfer of listed securities (ss 3, 4, 5 and 7) ................................................................. 1054
29.5 Transfer of unlisted securities (ss 6 and 7) ..................................................................... 1055
29.6 Exemptions from STT (s 8) .............................................................................................. 1055
29.7 Payment of STT (s 3 of the Securities Transfer Tax Administration Act) ......................... 1058
29.8 Interest and penalties on overdue payments (ss 5 and 6A of the Securities Transfer
Tax Administration Act) ................................................................................................... 1058
29.1 Introduction
Securities transfer tax (STT) is levied on the transfer of shares. The Securities Transfer Tax Act, 25 of
2007 (STT Act) provides for this tax. All references to legislation in this chapter are references to the
STT Act, unless stated otherwise.
With effect from 1 July 2008, STT replaced two different tax types on security transfers with a single
tax. Prior to the introduction of STT, the transfer of unlisted securities was subject to Stamp Duty and
the transfer of listed securities was subject to Uncertified Securities Tax.
29.2 Imposition of STT (s 2)

STT is levied at 0,25% of the taxable amount of a security that is transferred. Any transfer of a
security issued by a South African close corporation or company, as well as a foreign company listed
on a South African stock exchange attracts this tax (s 2(1)(a)).
STT is also levied on any reallocation of securities from a member’s bank-restricted stock account or
a member’s unrestricted stock account and security-restricted stock account to a member’s general-
restricted stock account (s 2(1)(b)).
29.3 Important definitions (s 1)

The following definitions are central to STT:
A ‘security’ refers to any share or depository receipt in a company or a member’s interest in a close
corporation. It excludes the debt portion in respect of a share linked to a debenture.
1053
‘Transfer’ is defined broadly. It includes the transfer, sale, assignment or cession, or disposal in any
other manner, of a security, or the cancellation or redemption of that security. It does not include
l any event that does not result in a change in beneficial ownership
l any issue of a security, or
l a cancellation or redemption of a security if the company that issued the security is being wound
up, liquidated or deregistered, or its corporate existence is being finally terminated.
29.4 Transfer of listed securities (ss 3, 4, 5 and 7)

Listed shares trade on a stock exchange through authorised users, such as stockbrokers. The follow-
ing transfers or purchases of listed securities trigger STT:
Listed securities purchased through or from a member
The STT Act refers to an authorised user as a ‘member’ (definition of ‘member’, s 1). Where listed
securities are transferred as a result of a purchase through or from a member, the STT is determined
as 0,25% of the consideration for which the security is purchased (s 3(1)). The member is liable for
the STT (s 3(2)). The member may recover the tax from the person to whom the security is transferred
or the person who cancels or redeems the security (s 7(1)).
Transfer of listed shares effected by a participant
A ‘participant’ is a person who is authorised to hold listed securities in custody and to administer
listed securities (definition of ‘participant’, s 1). Where a participant effects the transfer of a listed
security and the STT is not payable by an authorised user, the STT is determined as 0,25% of the
consideration declared by the person who acquired the security. If no consideration is declared, or if
the consideration is less than the lowest price of the security, the STT is determined on the closing
price of the security (s 4(1)). The participant is liable for the STT (s 4(2)). The participant may recover
the tax from the person to whom the security is transferred or the person who cancels or redeems the
security (s 7(1)).
l The ‘lowest price’ is the lowest price on the date of the transaction at which
a security was traded on the exchange on which it is listed, as determined
by that exchange on each day on which trade in that security occurs on that
exchange.
Please note!
l The ‘closing price’ is the closing price on the date of the transaction at which
the security was traded on the exchange on which it is listed, as determined
by that exchange on each day on which trade in that security occurs on that
exchange.
Any other transfer

For any other transfer of a listed security, the person to whom the security is transferred is liable for
the STT (s 5(2)). The STT is determined as 0,25% of the consideration declared by the person who
acquired the security. If no consideration is declared, or if the consideration is less than the lowest
price of the security, the STT is determined on the closing price of the security (s 5(1)). Although the
person to whom the security is transferred is liable for the STT, the tax is paid through the member or
a participant holding the security in custody. In the case where the security is not held in custody by
either a participant or a member, the STT must be paid by the company that issued the listed security
(s 5(3)).
Example 29.1. STT payable on the transfer of listed shares
Lungelo acquired 10 000 shares in OilCo Ltd on 15 April 2022 through his broker, Invest-Insure
(Pty) Ltd on the JSE. The shares in OilCo Ltd are listed shares and Lungelo paid R10,20 per
share.
Invest-Insure (Pty) Ltd is liable for R255 (10 000 × R10,20 × 0,25%) STT on the transfer of OilCo
Ltd shares to Lungelo, but may recover this amount from him.
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29.5–29.6 Chapter 29: Securities transfer tax
29.5 Transfer of unlisted securities (ss 6 and 7)

In the case of an unlisted security, the company that issued the unlisted security is liable for the tax
payable on the transfer of the security (s 6(2)). It may recover the tax from the person to whom the
security is transferred (s 7(2)). The taxable amount in respect of an unlisted security is the market
value of the consideration given for the security. If no consideration is given, or if the consideration is
less than the market value of the security, the taxable amount is the market value of the security
(s 6(1)(a)). Where an unlisted security is redeemed or cancelled, the taxable amount is the market
value of the security immediately prior to the cancellation or redemption, which must be determined
as if the security was never cancelled or redeemed (s 6(1)(b)).
Example 29.2. STT payable on the transfer of unlisted shares
On 18 June 2022 Jabulile acquired 50% of the shares in FoodCorp (Pty) Ltd from its previous
shareholder. FoodCorp (Pty) Ltd is an unlisted company. Jabulile paid R1 000 000 for the shares.
FoodCorp (Pty) Ltd is liable for R2 500 (R1 000 000 × 0,25%) STT on the transfer of the shares to
Jabulile, but may recover this amount from her.
29.6 Exemptions from STT (s 8)

The following transfers of securities are exempt from STT:
l Securities transferred to a person in terms of a corporate reorganisation transaction (see chapter 20).
A corporate reorganisation transaction refers to an asset-for-share transaction, a substitutive
share-for-share transaction, an amalgamation transaction, an intra-group transaction, an un-
bundling transaction, or a liquidation distribution that complies with ss 42 to 47 of the Income Tax
Act. The exemption applies regardless of whether the person acquires the security as a capital
asset or trading stock. In respect of an asset-for-share transaction and an amalgamation trans-
action, the exemption applies regardless of the market value of the asset disposed of in exchange
for the security. The public officer of the relevant company must make a sworn affidavit or solemn
declaration that the acquisition of the security complies with these requirements (s 8(1)(a)).
l The transfer of a security from a lender to a borrower, or vice versa, in terms of a lending arrange-
ment. The person to whom the security is transferred must certify to the member or participant
that the change is in terms of a lending arrangement (s 8(1)(b)). Securities lending is an arrange-
ment that involves the lending of a security to another person, the borrower. When a security is
lent, title and ownership in the security are transferred to the borrower. The borrower intends to
profit by selling the security and buying it back at a lower price, which is referred to as short
selling. In order to qualify for the STT exemption, the lending arrangement should comply with the
following requirements (definition of ‘lending arrangement’, s 1):
– The security loaned should be a listed security or a bond issued by the Government (in the
national or local sphere), or any sphere of government of any country other than South Africa, if
the bond is listed on a recognised exchange.
– The transferor should transfer the security to the transferee in order to enable the borrower to
effect delivery of that security or bond within 10 business days after the date of transfer of that
security from the lender to the borrower in terms of that arrangement.
– The borrower may not deliver the security to any lender in relation to that borrower, unless the
borrower can demonstrate that the arrangement was not entered into for the purposes of the
avoidance of tax and was not entered into for the purposes of keeping any position open for
more than 12 months.
– The borrower should contractually agree in writing to deliver an identical share or bond to the
lender within 12 months from the date of transfer.
– The borrower is contractually required to compensate the lender for any distributions in respect
of the listed share (or any other security that is substituted for the listed share in an arrange-
ment that is announced and released as a corporate action in the JSE SENS) or bond, which
that lender would have been entitled to receive during that period had that arrangement not
been entered into.
– The arrangement may not affect the lender’s benefits or risks arising from fluctuations in the
market value of that listed share (or any other security that is substituted for the listed share in
an arrangement that is announced and released as a corporate action in the JSE SENS) or any
bond.
– The arrangement does not qualify as a lending arrangement where the borrower has not on-
delivered the security or bond within the 10 business day period referred to above.
1055
– The arrangement also does not qualify as a lending arrangement where the borrower fails to
return an identical share or bond to the lender within the 12-month period, unless its failure to
return the identical share or bond is due to an arrangement that is announced and released as
a corporate action in the JSE SENS.
l The transfer of a security from a registered pension fund to another registered pension fund
where the transfer is made in pursuance of an amalgamation of funds or qualifying transfer
between funds (referred to in s 14(1) of the Pension Funds Act) (s 8(1)(c)).
l The security is transferred to a public benefit organisation that is exempt from income tax in terms
of s 10(1)(cN) of the Income Tax Act, if the tax thereon would, had it not been for this exemption,
be legally payable and borne by that public benefit organisation (s 8(1)(d)).
l If that security is transferred to an institution, board or body that is exempt from income tax in
terms of s 10(1)(cA)(i) of the Income Tax Act, and that has as its sole or principal object the
carrying on of any public benefit activity referred to in s 30 of that Act, if the tax thereon would be
legally payable and borne by that institution, board or body (s 8(1)(e)).
l If the security is a participatory interest in a collective investment scheme regulated in terms of
the Collective Investment Schemes Control Act, 2002 (Act 45 of 2002) (s 8(1)(f)).
l If the security is transferred to a beneficiary entitled thereto under a trust created in accordance
with a will (s 8(1)(g)).
l If the person to whom that security is transferred is an heir or a legatee who has acquired that
security ab intestatio or by way of testamentary succession or as a result of a redistribution of the
assets of a deceased estate in the process of liquidation (s 8(1)(h)).
l If the person to whom that security is transferred is a spouse in a marriage in community of
property who acquires an undivided half-share in that security by operation of law by virtue of the
contraction of such marriage, if that security was acquired by the other spouse prior to the date of
that marriage (s 8(1)(i)).
l If the person to whom that security is transferred is a surviving or divorced spouse who acquires
a security from his or her deceased or divorced spouse where that security is transferred to that
surviving or divorced spouse as a result of the death of his or her spouse or dissolution of their
marriage or union (s 8(1)(j)).
l Securities transferred to any sphere of the Government of the Republic or to any sphere of the
government of any other country (s 8(1)(k)).
l Securities transferred to any ‘water services provider’ as defined in s 1 of the Income Tax Act
(s 8(1)(l)).
l If the security is an unlisted security, which in terms of the Transfer Duty Act of 1949 constitutes a
transaction for the acquisition of property that is subject to transfer duty (see chapter 28) or a
share that represents a supply of goods, which is subject to VAT in terms of the Value-Added Tax
Act of 1991, when transferred (i.e., share block shares) (s 8(1)(n)).
l Securities transferred to any traditional council as referred to in the Communal Land Rights Act of
2004 on or before a date that may be determined by the Minister by notice in the Gazette
(s 8(1)(p)).
l If the person to whom the security is transferred is a member who acquires the security and
allocates it to that member’s bank-restricted stock account or that member’s unrestricted and
security-restricted stock account (s 8(1)(q)).
l If the security was transferred during a month in respect of which
– in the case of an unlisted security, the company that issued that security, or
– in the case of a listed security, the relevant member, relevant participant or the company that
issued that security where that security is not held in custody by either a member or a
participant,
would have had to pay tax of less than R100 to the Commissioner (s 8(1)(r)).
l If that security is a share in a headquarter company as defined in s 1 of the Income Tax Act
(s 8(1)(s)).
l If the security is a share in an REIT as defined in s 1 of the Income Tax Act (s 8(1)(t)), or
l If the transfer is from a transferor to a transferee, or vice versa, in terms of a collateral arrangement
and the person to whom that security has been transferred has certified to the member or partici-
pant that the change is in terms of that collateral arrangement (s 8(1)(u)). A collateral arrange-
ment is an arrangement whereby one person transfers a security to another for the purpose of
providing security in respect of an amount owed to that person. In order to qualify for the STT
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29.6 Chapter 29: Securities transfer tax
exemption, the collateral arrangement should comply with the following requirements (definition
of ‘collateral arrangement’, s 1):
– The security transferred should be a listed security or a bond issued by the Government (in the
national or local sphere), or any sphere of government of any country other than South Africa, if
the bond is listed on a recognised exchange.
– The transferor should transfer the security to the transferee for the purpose of providing
security in respect of an amount owed by the transferor to the transferee.
– The transferor should be able to demonstrate that the arrangement was not entered into for the
purposes of the avoidance of tax.
– The arrangement should not be entered into for the purposes of keeping any position open for
more than 24 months.
– The transferee should contractually agree in writing to deliver an identical share or bond to the
transferor within 24 months from the date of transfer.
– The transferee is contractually required to compensate the transferor for any distributions in
respect of the listed share (or any replacement share if the share is substituted in terms of an
arrangement announced or published as a corporate action on the JSE SENS) or bond, which
that transferor would have been entitled to receive during that period had that arrangement not
been entered into.
– The arrangement may not affect the transferor’s benefits or risks arising from fluctuations in the
market value of that listed share (or any replacement share if the share is substituted in terms
of an arrangement announced or published as a corporate action on the JSE SENS) or any
bond.
The arrangement does not qualify as a collateral arrangement if:
• The transferee has not transferred the identical share or bond to the transferor within the 24-
month period. Failure to return the identical share or bond is due to an arrangement that is
announced and released as a corporate action, as contemplated in the JSE Limited Listings
Requirements in the Stock Exchange News Service as defined in the JSE Limited Listings
Requirements or a substantially similar corporate action in the listings requirements of
another exchange, does not disqualify an arrangement from being a collateral arrangement.
• From 1 January 2023, the transferee subsequently transfers the listed share or bond in a
manner not contemplated in the requirements above, unless the transfer is in terms of a
repurchase with the South African Reserve Bank in terms of s 10(1)(j) of the South African
Reserve Bank Act, to comply with Regulation 28 of the Pension Funds Act or to secure
overnight cash placement to comply with the Basel III Supervisory Framework.
l If that security is transferred to a foreign central bank (s 8(1)(v)).
l If that security is transferred to any multinational organisation that provides foreign donor funding
in terms of an official development assistance agreement in terms of s 231 of the Constitution, to
the extent that
– the security is transferred pursuant to the organisation supplying goods or rendering services
in relation to projects approved by the Minister
– that arrangement provides that the transfer of the security to that organisation must be exempt
(s 8(1)(w)).
l If that security is transferred to the
– African Development Bank
– World Bank, including the International Bank for Reconstruction and Development and the
International Development Association
– International Monetary Fund
– African Import and Export Bank
– European Investment Bank
– New Development Bank (s 8(1)(x)).
No provision in any other law, except for a provision in an international agreement contemplated in
s 231 of the Constitution, must be construed as applying or referring to STT payable (s 10).
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29.7 Payment of STT (s 3 of the Securities Transfer Tax Administration Act)

STT payable in respect of the transfer of listed securities must be paid by the 14th day of the month
following the month during which the transfer occurred. In the case of unlisted securities, the STT is
payable within two months from the end of the month in which the security was transferred (s 3(1)).
STT can only be paid by an electronic payment. This is done by using e-STT on the SARS eFiling
system (s 3(5)).
29.8 Interest and penalties on overdue payments (ss 5 and 6A of the Securities
Transfer Tax Administration Act)
If STT is not paid on the due date, SARS must impose a penalty of 10% of the unpaid STT. This is a
percentage-based penalty. The full penalty or a portion thereof may be remitted in accordance with
the provisions of the Tax Administration Act (see chapter 33) (s 6A).
If STT is not paid in full within the prescribed period, interest is payable at the prescribed rate on the
balance of STT outstanding, reckoned from the day following the last date for payment to the date of
payment (s 5).
1058
30 Customs and excise duty
Evádne Bronkhorst and Madeleine Stiglingh

l identify and explain the purpose of customs and excise duties
l explain the difference between customs and excise duties
l identify the different types of customs and excise duties.
Contents
Page
30.1 Overview ......................................................................................................................... 1059
30.2 Different types of customs and excise duties ................................................................ 1060
30.3 Basic concepts of customs duty .................................................................................... 1060
30.3.1 The value of the imported goods (customs valuation) ................................... 1060
30.3.2 The classification of the imported goods (tariff classification) ....................... 1061
30.3.3 The country of origin of the imported goods (origin) ...................................... 1061
30.4 Customs duty calculations ............................................................................................. 1062
30.5 Rebates, drawbacks and refunds .................................................................................. 1062
30.6 Anti-dumping and countervailing duties ........................................................................ 1063
30.1 Overview
Customs duties are levied on the importation of goods. It is usually calculated as a percentage of the
value of goods (ad valorem) or as an amount per unit (specific) (such as an amount per kilogram or
metre). The imposition of customs duties has a dual purpose. Firstly, it is a mechanism to generate
revenue for a government. Secondly, in an attempt to promote the competitiveness of locally manu-
factured goods, customs duties are imposed on imported goods to increase the resulting cost there-
of to the consumer.
Excise duties and levies are imposed on locally manufactured and imported goods. High-volume
consumable products (such as petroleum, alcohol and tobacco products) as well as certain non-
essential or luxury items (such as electronic equipment and cosmetics) are examples of goods
subject to excise duties. Excise duties are imposed on locally manufactured goods at a duty as
source (DAS) basis immediately after production. It also serves more than one purpose. Similar to
customs duties, it is a mechanism that is used to generate government revenue. Furthermore, it is
also a mechanism that is used to discourage consumption of certain harmful products (for example,
products that are harmful to human health or to the environment). Due to the cost-raising effect of
excise duties, it could facilitate behavioural change by encouraging consumers to increase their
consumption of alternative goods that are not subject to excise duties.
Customs and excise duties are indirect taxes. This means that, although the consumer of the goods
ultimately pays these duties, it is the importer or manufacturer of the goods that pays the duties to
SARS. Usually the importer or manufacturer will then recover these duties from the consumer by
increasing the selling price of the goods. Customs and excise duties are also typically imposed in
addition to other indirect taxes, such as VAT (see chapter 31).
Customs and excise duties are levied in terms of the Customs and Excise Act 91 of 1964 (including
the Schedules to the Act, which are also referred to as the Tariff Book), and the Rules to the Act. The
Act will be replaced by the Customs Duty Act 30 of 2014, the Customs Control Act 31 of 2014, and
the Customs and Excise Amendment Act 32 of 2014. These Acts will come into operation on dates
still to be announced. This chapter discusses the general principles of customs and excise duties,
which will not necessarily be impacted by the new Acts when they become effective.
1059
30.2 Different types of customs and excise duties

The following types of customs and excise duties are levied in terms of the Customs and Excise Act:
Schedule
Part no Description
to the Act
1 Part 1 Ordinary customs duty imposed on all types of goods imported.
1 Part 2A Specific Excise Duties on locally manufactured or on imported goods of the same
class or kind. These duties are referred to as ‘sin taxes’ and are imposed on items
such as liquors, tobaccos, chemicals and fuel.
1 Part 2B Ad Valorem Excise Duties on locally manufactured goods or on imported goods of
the same class or kind. These are duties on certain items such as motor vehicles,
electronic equipment, cosmetics, perfumeries and other products generally regard-
ed as ‘luxury items’.
1 Part 3 Environmental Levy.
1 Part 3A Environmental Levy on Plastic Bags.
1 Part 3B Environmental Levy on Electricity Generated in the Republic.
1 Part 3C Environmental Levy on Electric Filament Lamps.
1 Part 3D Environmental Levy on Carbon Dioxide (CO2) Emissions of Motor Vehicles.
1 Part 3E Environmental Levy on Tyres.
1 Part 5A Fuel Levy, which is imposed on petroleum oils and oils, such as petrol, kerosene
and diesel.
1 Part 5B Road Accident Fund (RAF) Levy, which is imposed on petroleum oils and oils, such
as petrol.
1 Part 6 Export duty on scrap metal imported into or manufactured in the Republic and which
is subsequently exported.
1 Part 7A Levy on Sugary Beverages, which is imposed on locally manufactured beverages or
on imported beverages with reference to their sugar content.
1 Part 8 Ordinary Levy, which is imposed on goods of any description that are manufactured
in or imported into the common customs area, and that are exclusively used by any
department in the national or provincial sphere of government, including motor
vehicles that are imported, being the bona fide property of the importer, by employ-
ees of that government and that serves outside the Republic of South Africa.
2 Anti-dumping, Countervailing and Safeguard Duties on Imported Goods.
30.3 Basic concepts of customs duty

The amount of customs duty payable on the importation of goods is calculated by taking the follow-
ing into account:
l the value of imported goods (referred to as the customs value of the goods)
l the volume or quantity of goods
l the classification of goods according to the tariff classification codes as contained in the Tariff
Book (referred to as the tariff classification), and
l the determination of where the goods were made (referred to as the origin of the goods).
30.3.1 The value of the imported goods (customs valuation)

The values of goods for customs duty purposes are set by the World Trade Organisation’s (WTO’s)
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (the GATT
Agreement). The GATT Agreement, which involves six valuation methods, has been accepted by all
major trading countries.
The GATT Agreement prescribes six valuations methods which are applied in hierarchical order:
l the transaction value of the goods, which refers to the price that was actually paid or is payable
for the goods
l the transaction value of identical goods
l the transaction value of similar goods
l the ‘deductive’ method, where the customs value is derived from the selling price of the imported
goods in the Republic
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30.3 Chapter 30: Customs and excise duty
l the ‘computed’ method, where the customs value is derived from the built-up cost of the imported
goods, and
l the ‘fall back’ method, where the customs value is determined by applying one of the other five
methods more flexibly.
The majority of goods imported are valued by applying the first method, which is the price paid or
payable by the buyer of the goods. This price is the free-on-board (FOB) price of the goods, which is
the price of the goods including transport and insurance costs up to the point of departure from the
country from where the goods are being exported.
30.3.2 The classification of the imported goods (tariff classification)

The World Customs Organisation (WCO) developed an identification and coding system for products
for customs duty purposes, which is referred to as the Harmonized System (HS code). The HS code
consists of between 4 and 10 digits and is used to classify specific goods for purposes of determin-
ing the rate of customs duty payable. Below is an extract from Schedule 1 Part 1 of the Customs and
Excise Act, which illustrates how the HS code is used to classify different types of cocoa beans and
chocolate:
Statis- Rate of Duty

Heading/
Article Description tical EU/ MERCO-
Subheading Unit General UK EFTA SADC SUR AfCFTA
1801.00 Cocoa beans, whole kg free free free free free free
or broken, raw or
roasted
1802.00 Cocoa shells, husks, kg free free free free free free
skins and other
cocoa waste
18.03 Cocoa paste, whether or not defatted:
1803.10 – Not defatted kg free free free free free free
1803.20 – Wholly or partly kg free free free free free free
defatted
1804.00 Cocoa butter, fat kg free free free free free free
and oil
1805.00 Cocoa powder, not kg free free free free free free
containing added
sugar or other
sweetening matter
18.06 Chocolate and other food preparations containing cocoa:
1806.10 – Cocoa powder, containing added sugar or other sweetening matter:
1806.10.05 – Preparations for kg 17% free 17% free 17% 13,4%
making bev-
erages
1806.10.90 Other kg 17% free 17% free 17% 13,4%
30.3.3 The country of origin of the imported goods (origin)

The origin of goods refers to the country where a product was manufactured and impacts the amount
of duty paid on importation. Refer to the extract from Schedule 1 Part 1 of the Customs and Excise
Act under 30.3.2 above. The extract illustrates how the origin of goods impact the amount of duty
payable on importation of cocoa powder, containing added sugar or other sweetening matter. If
imported from the EU (European Union) or SADC countries (Southern African Development Commu-
nity countries), no customs duties are imposed. However, customs duties of 13,5% are imposed if
imported from AfCFTA (African Continental Free Trade Area) members, and customs duties of 17%
are imposed if imported from EFTA (European Free Trade Associations) members, Mercosur coun-
tries and all other countries (general).
Governments may enter into trade agreements that, amongst other, impact the rate of duty payable
on the importation of goods from the relevant countries.
The origin of a product is also relevant in determining whether the product is subject to anti-dumping
or countervailing duties (see 30.6).
1061
30.4 Customs duty calculations

If, for example, a golf cart, which was manufactured in Germany and sold for the rand equivalent of
R35 000, is imported into South Africa, the importer will be liable for the following customs duties:
As per Schedule 1 Part 1 the Ordinary Duty payable on importation of a golf cart is:
Article Rate of Duty

Heading/ Subheading Statistical Unit
Description General EU EFTA SADC MERCOSUR AfCFTA
Golf carts,
pedestrian
8704.90.05 type u free free free free free free
The importation of a golf cart is therefore free from ordinary duty. However, the manufacture or impor-
tation of golf carts is subject to the following ad valorem excise duty (Schedule 1 Part 2B):
Tariff item Tariff Subheading Article description Rate of Excise Duty
126.04.55 8704.90.05 Golf carts, pedestrian type (See Note 2 to this Part)
Note 2 to Part 2B
For the purposes of items 126.02 to 126.05 the rate of excise duty on:
Vehicles imported into the Republic shall be
(i) ((0,00003 × B) – 0,75)% with a maximum of 30%, and
(ii) ‘B’ means the value for the ad valorem excise duty on imported goods as prescribed in
s 65(8)(a) of the Act.
In accordance with s 65(8)(a) of the Act, the value for ad valorem purposes is the
customs value of the imported goods plus 15% of such value plus any non-
Please note!
rebated customs duties payable in terms of Part 1 and Part 2A of Schedule No. 1
to the Act.
The rate of ad valorem excise duty payable on importation of the golf cart is:
((0,00003 × (R35 000 × 115%)) – 0,75)%
= 45,75%
Which is then limited to the maximum rate of 30%.
The ad valorem excise duty payable on importation of the golf cart is:
(R35 000 × 115%) × 30%
= R12 075,00
30.5 Rebates, drawbacks and refunds

There are three mechanisms in terms of which relief is provided to importers with respect to the
payment of customs duties, namely a rebate, drawback, and refund.
A rebate provides for the full or partial remission of customs duties on the importation of product
inputs (intermediate goods) used in the manufacturing of products for export and/or domestic con-
sumption, subject to compliance with the rebate item’s prescribed condition(s).
A drawback represents a refund of customs duties paid upon importation of product inputs (interme-
diate goods) if they are used in the manufacturing, processing and packaging of products that will
subsequently be exported.
A refund can be obtained by an importer in respect of the overpayment of customs duties or where
products and product inputs were exported in the same condition in which they were imported.
There are two provisions in terms of which relief is provided to domestic manufacturers with respect to
the payment of excise duty, namely a rebate and refund.
A manufacturer can apply for a rebate of the rate of excise duties with respect to manufactured
products and excisable products used in the manufacturing of another excisable product. In such
instance the rebate ensures that the excise duty is only paid once.
A manufacturer can apply for a refund in respect of the overpayment of excise duties or when excis-
able products are exported to a country outside of the Southern African Customs Union (SACU) and
not consumed in the local market.
1062
30.5–30.6 Chapter 30: Customs and excise duty
There are two provisions in terms of which relief is provided to domestic manufacturers with respect to
the payment of excise duty, namely a rebate and refund.
A manufacturer can apply for a rebate of the rate of excise duties with respect to manufactured
products and excisable products used in the manufacturing of another excisable product. In such
instance the rebate ensures that the excise duty is only paid once.
A manufacturer can apply for a refund in respect of the overpayment of excise duties or when excis-
able products are exported to a country outside of the Southern African Customs Union (SACU) and
not consumed in the local market.
30.6 Anti-dumping and countervailing duties

Anti-dumping duties are tariffs imposed by a government to protect its local market when it is of the
view that specific goods imported from specific countries are priced below fair market value. Dump-
ing refers to the process where a company exports goods at a price lower than the price it normally
charges its local market.
Countervailing duties are tariffs that are levied on imported goods to offset subsidies made to the
producers of the goods in a specific export country. Subsidised imports can have a negative impact
on a country’s local market. Countervailing duties are aimed at levelling the playing field between the
local producers and foreign producers of a product (who can afford to sell the product at a lower
price due to the subsidy they receive).
Anti-dumping and countervailing duties are listed in Schedule 2 of the Act, and are payable on
importation of specific goods from specific countries in addition to any other duties levied.
1063
31 Value-added tax (VAT)
Madeleine Stiglingh

l explain how the VAT system works
l identify when and at what rate VAT is levied
l state when a person needs to register as a vendor
l list the requirements for the documents that are the driving force of the VAT system
l explain how zero-rating of supplies works
l state when a supply is an exempt supply
l identify in which other special circumstances output tax must be raised
l say when input tax will be denied
l list and explain the timing rules for supplies
l determine the value of a supply.
Contents
Page
31.1 Overview ........................................................................................................................... 1068
31.2 Calculation of VAT ............................................................................................................ 1068
31.2.1 Basics of output tax........................................................................................... 1069
31.2.2 Basics of input tax ............................................................................................. 1070
31.2.3 Calculation of VAT payable or VAT refundable ................................................ 1070
31.3 The accounting basis (s 15) ............................................................................................. 1071
31.3.1 Invoice basis ..................................................................................................... 1071
31.3.2 Payments basis ................................................................................................. 1072
31.4 Tax periods (s 27) ............................................................................................................ 1072
31.5 Output tax: Supply of goods or services (s 7(1)) ............................................................. 1073
31.5.1 Supply ............................................................................................................... 1073
31.5.2 Goods ................................................................................................................ 1074
31.5.3 Services ............................................................................................................. 1074
31.6 Vendor (ss 23, 50, 50A, 51(2) and 22 of the Tax Administration Act) ............................. 1074
31.6.1 Vendor: Compulsory registration (ss 23, 24, 26, 50 and 50A) ......................... 1075
31.6.2 Vendor: Voluntary registration (ss 23(3), 24(5), (6) and (7))............................. 1076
31.7 Output tax: In the course or furtherance of an enterprise (s 7(1)(a)) ............................... 1077
31.7.1 Enterprise or activity carried on continuously or regularly ............................... 1077
31.7.2 Goods or services are supplied for a consideration (definition of
‘consideration’ in ss 1(1) and 3)........................................................................ 1078
31.7.3 Specifically included in the definition of an ‘enterprise’ ................................... 1078
31.7.4 Specifically excluded from the definition of an ‘enterprise’ .............................. 1078
31.8 VAT levied: Importation of goods (ss 7(1)(b) and 13)...................................................... 1079
31.8.1 Importation of goods from BLNS countries ...................................................... 1079
31.8.2 Importation of goods from other countries ....................................................... 1080
31.8.2.1 Time of importation (proviso (i) to s 13(1)) ...................................... 1080
31.8.2.2 Calculation of VAT on importation (s 13(2)(a))................................ 1080
31.9 VAT levied: Imported services (ss 7(1)(c) and 14) .......................................................... 1081
31.9.1 Imported services: Meaning of ‘supply’ ............................................................ 1081
31.9.2 Imported services: Time of supply (s 14(2)) ..................................................... 1083
31.9.3 Imported services: Value of the supply (s 14(3)).............................................. 1083
1065
Page
31.10 Output tax: Zero-rated supplies (s 11)............................................................................. 1084
31.10.1 Zero-rated supply: Exported goods (definition of ‘exported’ – paras (a), (c)
and (d) and ss 11(1)(a)(i), (ii) and 11(3)) .......................................................... 1084
31.10.1.1 Direct exports (that is, goods consigned or delivered to an
export country (definition of ‘exported’ – par (a)))........................ 1084
31.10.1.2 Indirect exports (that is, goods delivered in South Africa to
non-residents (definition of ‘exported’ – par (d))) ........................ 1085
31.10.2 Zero-rated supply: Exported services (s 11(2) and (3)) ................................... 1085
31.10.2.1 Exported services: Transportation (s 11(2)(a), (b), (c), (d)
and (e)) ......................................................................................... 1085
31.10.2.2 Exported services: Services rendered outside South Africa
(s 11(2)(k)) .................................................................................... 1086
31.10.2.3 Exported services: Arranging services for non-residents
(s 11(2)(i)) ..................................................................................... 1086
31.10.2.4 Exported services: Services to non-residents (s 11(2)(l)) ............ 1086
31.10.3 Zero-rated supply: The sale of a going concern (ss 8(7), 8(15), 11(1)(e),
18A and 23(3)) .................................................................................................. 1087
31.10.3.1 General ......................................................................................... 1087
31.10.3.2 Specific examples relating to going concern sales ..................... 1088
31.10.4 Zero-rated supply: Other (ss 11(1)(h), (j), (k), (l), (q), (w) and 11(2)(f),
(r) and (w)) ........................................................................................................ 1088
31.11 Output tax: Exempt supplies (s 12) .................................................................................. 1090
31.11.1 Exempt supply: Financial services (ss 2 and 12(a))......................................... 1090
31.11.2 Exempt supply: Residential accommodation (s 12(c))..................................... 1092
31.11.3 Taxable supply: Commercial accommodation ................................................. 1092
31.11.3.1 Meaning of ‘supply’: Commercial accommodation ...................... 1092
31.11.3.2 Value of the supply: Commercial accommodation (s 10(10))...... 1093
31.11.4 Exempt supplies: Other (s 12(g), (h), (i), (j), (m)) ............................................. 1095
31.12 Output tax: Deemed supplies (ss 8 and 18(3)) ................................................................ 1095
31.12.1 Deemed supply: Ceasing to be a vendor ......................................................... 1096
31.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor (s 8(2)) .................. 1096
31.12.1.2 Value of the supply: Ceasing to be a vendor (s 10(5)) ................ 1096
31.12.1.3 Time of supply: Ceasing to be a vendor (ss 8(2) and 9(5)) ......... 1098
31.12.2 Deemed supply: Indemnity payments .............................................................. 1098
31.12.2.1 Meaning of ‘supply’: Indemnity payments (s 8(8)) ....................... 1098
31.12.2.2 Value of the supply: Indemnity payments (s 8(8)) ....................... 1098
31.12.2.3 Time of supply: Indemnity payments (s 8(8)) ............................... 1099
31.12.3 Deemed supply: Supplies to independent branches ....................................... 1100
31.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(par (ii) of the proviso to the definition of ‘enterprise’, ss 8(9),
11(1)(i) and 11(2)(o)) .................................................................... 1100
31.12.3.2 Value of the supply: Supplies to independent branches
(s 10(5)) ........................................................................................ 1101
31.12.3.3 Time of supply: Supplies to independent branches (s 9(2)(e)) ... 1102
31.12.4 Deemed supply: Fringe benefits....................................................................... 1102
31.12.4.1 Meaning of ‘supply’: Fringe benefits (s 18(3)).............................. 1102
31.12.4.2 Value of the supply: Fringe benefits (s 10(13)) ............................ 1103
31.12.4.3 Time of supply: Fringe benefits (s 9(7)) ....................................... 1106
31.12.5 Deemed supply: Payments exceeding consideration ...................................... 1106
31.12.5.1 Meaning of supply: Payments exceeding consideration
(ss 8(27) and 16(3)(m)) ................................................................ 1106
31.12.5.2 Value of supply: Payments exceeding consideration
(s 10(26)) ...................................................................................... 1107
31.12.5.3 Time of supply: Payments exceeding consideration (s 8(27))..... 1107
31.12.6 Deemed supplies: Other (ss 8(1), 8(10), 8(15), 8(21), 9(8) and 10(16)) .......... 1107
31.13 Output tax: Non-supplies (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11)) ............... 1108
31.14 Output tax: No apportionment (s 8(16)(a)) ....................................................................... 1110
31.15 Time of supply (s 9) .......................................................................................................... 1110
31.15.1 Time of supply (ss 9(1) and 9(2)(d)) ................................................................. 1110
31.15.2 Time of supply: Connected persons (s 9(2)(a)) ................................................ 1110
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Chapter 31: Value-added tax (VAT)
Page
31.15.3 Time of supply: Rental agreements (ss 8(11) and 9(3)(a))............................... 1111
31.15.4 Time of supply: Progressive supplies (s 9(3)(b)) .............................................. 1111
31.15.5 Time of supply: Undetermined consideration (s 9(4)) ...................................... 1112
31.16 Value of the supply (s 10(2)) ............................................................................................ 1112
31.16.1 Value of the supply: General rule (s 10(3)) ....................................................... 1112
31.16.2 Value of the supply: Connected persons (s 10(4)) ........................................... 1113
31.16.3 Value of the supply: Vouchers (ss 10(18) and (19)) ......................................... 1113
31.16.3.1 Voucher entitling bearer to specific monetary value (s 10(18)) ... 1114
31.16.3.2 Voucher entitling bearer to specific goods and services
(s 10(19)) ...................................................................................... 1114
31.16.4 Value of the supply: Discount vouchers (s 10(20))........................................... 1114
31.16.4.1 Discount vouchers issued and redeemed by the same
supplier ......................................................................................... 1114
31.16.4.2 Discount vouchers issued and redeemed by two different
suppliers ....................................................................................... 1114
31.16.5 Value of the supply: Entertainment (s 10(21)) .................................................. 1114
31.16.6 Value of the supply: Dual supplies (s 10(22)) ................................................... 1115
31.16.7 Value of the supply: Supply for no consideration (s 10(23)) ............................ 1115
31.17 Basics of input tax (ss 16 and 17) .................................................................................... 1115
31.18 Tax invoices (ss 16(2) and 20) ......................................................................................... 1116
31.19 Debit notes, credit notes and errors on tax invoices (ss 20(1B) and 21) ........................ 1117
31.19.1 Debit notes ........................................................................................................ 1117
31.19.2 Credit notes ....................................................................................................... 1118
31.20 The determination of input tax (s 17)................................................................................ 1119
31.20.1 Turnover-based method ................................................................................... 1120
31.20.2 Special apportionment method......................................................................... 1121
31.21 Input tax: Denial of input tax (s 17(2)) .............................................................................. 1121
31.21.1 Denial of input tax: Entertainment ..................................................................... 1121
31.21.2 Denial of input tax: Club membership fees and subscriptions......................... 1122
31.21.3 Denial of input tax: Motor car ............................................................................ 1122
31.22 Input tax: Deemed input tax on second-hand goods (ss 1(1), 18(8) and 20(8))............. 1123
31.22.1 Zero-rating of movable second-hand goods exported (proviso s 11(1)
and s 10(12)) ..................................................................................................... 1125
31.23 Special rules: Instalment credit agreements .................................................................... 1126
31.23.1 Meaning of ‘supply’: Instalment credit agreements.......................................... 1126
31.23.2 Value of the supply: Instalment credit agreements (s 10(6)) ........................... 1126
31.23.3 Time of supply: Instalment credit agreements (s 9(3)(c)) ................................ 1126
31.24 Special rules: Fixed property ........................................................................................... 1128
31.24.1 Meaning of ‘supply’: Fixed property ................................................................. 1128
31.24.2 Value of the supply: Fixed property .................................................................. 1128
31.24.3 Time of supply: Fixed property ......................................................................... 1128
31.24.3.1 Time of supply: Fixed property that is supplied in the course or
furtherance of an enterprise ......................................................... 1129
31.24.3.2 Time of supply: Fixed property not supplied in the course or
furtherance of an enterprise ......................................................... 1129
31.25 Adjustments: 100% non-taxable use (ss 9(6), 10(7), 16(3)(h) and 18(1)) ....................... 1130
31.25.1 Property developers change of use (ss 9(13), 10(29), 16(3)(o) and 18D) ........ 1132
31.26 Adjustments: Subsequent taxable use (s 18(4)) .............................................................. 1135
31.27 Adjustments: Increase and decrease of taxable use (ss 9(5), 18(2), 18(5),
18(6) and 10(9))................................................................................................................ 1136
31.28 Adjustments: Game viewing vehicles and hearses (ss 8(14)(b), 8(14A), 9(10),
10(24) and 18(9)).............................................................................................................. 1138
31.29 Adjustments: Supplies of going concerns (s 18A) ........................................................... 1139
31.29.1 100% taxable usage by the seller..................................................................... 1139
31.29.2 More than 50% taxable usage by the seller ..................................................... 1139
31.29.3 Less than 50% of the selling price relates to the going concern ..................... 1141
31.30 Adjustments: Leasehold improvements (ss 8(29), 9(12), 10(28) and 18C)..................... 1142
1067
Page
31.31 Adjustments: Irrecoverable debts (ss 16(2)(f) and 22) ................................................ 1144
31.32 Agents (ss 8(20), 16(2), 19 and 54) .............................................................................. 1147
31.32.1 Pre-incorporation expenses (s 19) ................................................................... 1147
31.32.2 Agents (ss 8(20), 16(2) and 54) ....................................................................... 1148
31.33 Foreign electronic services (s 1(1) definition of ‘enterprise’, ss 23(1) and 54(2B)) ......... 1149
31.34 The influence of VAT on income tax calculations ............................................................ 1150
31.35 Tax returns and payments (s 28 and s 25 of the Tax Administration Act) ....................... 1150
31.36 Penalties and interest (s 39 and Chapter 15 of the Tax Administration Act) ................... 1151
31.37 Refunds (s 44 and Chapter 13 of the Tax Administration Act) ........................................ 1151
31.38 Comprehensive examples ................................................................................................ 1152
31.1 Overview
Almost every time a consumer purchases goods or services from a business in South Africa, the
consumer has to pay a price that includes value-added tax (VAT). VAT is a tax on the consumption of
goods and services in South Africa, and is levied in terms of the Value-Added Tax Act 89 of 1991.
VAT is an indirect tax, which means that the tax is not directly assessed by SARS, but indirectly
through the taxation of consumption of goods and services. Since 1 April 2018 VAT is levied at a rate
of 15% (previously 14%).
Before a person continues with the technical details of the VAT system, an understanding of relevant
terminology is required. It is firstly important to note that a business that is registered for VAT and that
levies VAT on the selling price of its goods (services rendered) is referred to as a VAT vendor. For
VAT purposes, the business activities that are carried on by such VAT vendor are referred to as an
enterprise. If a VAT vendor, in the carrying on of an enterprise (business), sells goods (renders
services) to another person, the VAT vendor selling the goods (rendering the services) is also
referred to as the supplier of the goods (services). The person buying the goods (acquiring the
services) is referred to as the recipient of the goods (services).
A VAT vendor carrying on an enterprise sells (supplies) goods (services) to the buyer (the recipient)
and levies VAT on the selling price. The VAT that the supplier levies on the selling price is referred to as
output tax. The VAT vendor must pay the output tax, levied on the supply of goods (services), to SARS.
The buyer (recipient) of the goods (services) is the one who paid the VAT when the goods (services)
were purchased. VAT is therefore a direct cost to the buyer (recipient) if the buyer is a final consumer.
A final consumer cannot claim the amount of VAT paid back from SARS. However, in certain
instances, if the buyer (recipient) also carries on a business and is registered as a VAT vendor, that
recipient may claim the VAT it has paid on certain goods or services back from SARS. VAT paid by a
recipient on certain goods and services that may be claimed back from SARS, is referred to as input
tax.
VAT is essentially an inclusive tax, which means that any price charged by a vendor includes VAT.
This means that any price tag, advertisement, tender, quotation or other statement of a price must
include VAT, unless the price is clearly broken down into the different components, namely, value,
VAT and consideration (ss 64 and 65). The term ‘VAT inclusive’ is used where VAT is already
included in the price. ‘VAT exclusive’ is where VAT is not included in the price – the price, as stated,
excludes VAT.
VAT collected during the first few months of 2020/2021 dropped sharply due to
the coronavirus pandemic. A weak import outlook and a sharp reduction in con-
sumption lowered the domestic VAT collection. In April 2020, government intro-
duced tax (including VAT) relief measures to provide temporary assistance to
businesses and households during the lockdown. Since October 2020, there has
COVID-19 Note been a stronger-than-expected rebound in VAT flowing from the rise in con-
sumption once lockdown restrictions were eased. The temporary coronavirus-
related VAT relief measures expired and is not applicable any more.
31.2 Calculation of VAT

A simplified VAT calculation is the amount of output tax (see 31.2.1) less the amount of input tax
(see 31.2.2). Not all VAT calculations are simple, and some require adjustments to be taken into
account (see 31.25 to 31.31).
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Chapter 31: Value-added tax (VAT)
31.2.1 Basics of output tax

Output tax is the tax charged by a vendor on the supply of goods or services by him (s 7(1)(a)). A
person registered as a vendor levies VAT on all business transactions in respect of taxable supplies.
Output tax is the VAT levied on services rendered or supplied, and the sale of both capital assets
and trading stock.
The VAT Act provides for two types of supplies, namely
l taxable supplies where output tax is levied either
– at the standard rate (presently 15%), or
– at the zero rate (0%) (see 31.10), and
l exempt supplies (see 31.11).
Supplies or transactions are usually taxable at the rate of 15% (standard rate) unless they are taxed
at 0% (zero rate) or are specifically exempt. It is thus important to know exactly which supplies are
taxed at 0% (see 31.10) and which supplies are exempt (see 31.11), as all the other supplies will be
taxable at the standard rate of 15%. The following diagram summarises the different types of supplies
for VAT purposes:
Taxable supply Exempt supply
Standard-rated supply Zero-rated supply
@ 15% @ 0% No VAT applicable
All other supplies Listed in VAT Act Listed in VAT Act

(not zero-rated or exempt) (s 11) (s 12)
In order to be able to calculate the VAT component of a VAT inclusive price, it is necessary to apply
the tax fraction to the VAT inclusive price of such a supply. In the case of a standard-rated taxable
supply, the tax fraction is 15/115.
Example 31.1. Calculation of output tax

Supplier Ltd.’s sales (all standard-rated taxable supplies) for a specific tax period amounted to
R39 100 (including VAT).
You are required to calculate output tax in respect of the supplies.
SOLUTION
Tax fraction × taxable supplies .......................................................................................... R5 100

= (15/115) × R39 100
This output tax collected by the supplier from the recipient, must be paid over to
SARS.
If the zero rate was applied to Supplier Ltd.’s supplies, the output tax would be:
Tax fraction × taxable supplies
= (0/100) × R39 100........................................................................................................... Rnil
Rnil output tax has been levied, and Rnil is payable to SARS.
1069
31.2.2 Basics of input tax

Input tax is the VAT component of the payment for goods and services supplied to a vendor for the
purpose of making taxable supplies that can usually be claimed back. A vendor who purchases, for
example, stationery to be used in the making of taxable supplies, can claim the VAT part of the
expense as input tax. This input tax can be deducted from the output tax collected on behalf of SARS
on supplies made by the vendor, in order to calculate the total VAT payable to or refundable by
SARS.
Not all input tax can, however, be deducted. Some expenses, by their very nature, have a private and
business purpose embedded in them. Two such expenses are entertainment and motor cars. A
vendor is therefore usually not allowed to claim the input tax on entertainment and motor cars
supplied, even if the vendor can argue that the entertainment and motor car are used for the making
of taxable supplies (see 31.21). The VAT Act states that these inputs are denied.
Example 31.2. Basics of input tax
Recipient Ltd, a vendor who only makes taxable supplies, acquired the following goods from
vendors during the tax period:
l computer: R12 397 (including VAT)
l stationery: R4 807 (including VAT)
l entertainment: R1 150 (including VAT), and
l motor car: R250 000 (including VAT).
Calculate input tax for the goods acquired.
SOLUTION
Tax fraction × goods acquired

Computer: 15/115 × R12 397 ......................................................................................... R1 617
Stationery: 15/115 × R4 807 ........................................................................................... 627
Entertainment: input tax denied ..................................................................................... –
Motor car: input tax denied ............................................................................................ –
The total amount of input tax for the period .................................................................... R2 244
To determine whether a VAT amount (which is not denied) may be claimed as an input tax deduction,
it is important to determine the purpose for which the goods or services acquired will be used.
If a vendor uses the goods or services wholly in the course of making taxable supplies, the vendor
will be entitled to claim the full input tax. If the vendor uses the goods or services partly for taxable
supplies, only a portion of the input tax can be claimed.
31.2.3 Calculation of VAT payable or VAT refundable

A vendor collects VAT on behalf of SARS (output tax) and incurs VAT on expenses that the vendor
can claim back from SARS (input tax). If the output tax payable exceeds the input tax claimable, the
difference is payable by the vendor to SARS. If the input tax claimable exceeds the output tax
payable, the difference is refundable to the vendor by SARS. In calculating the VAT payable or
refundable, the following steps can be followed:
Step 1: Calculate output tax (see 31.5 to 31.14).
Step 2: Calculate input tax (see 31.17 and 31.20 to 31.22).
Step 3: Determine whether there are any VAT adjustments that must be taken into account (see
31.25 to 31.31).
Step 4: Total the results of Step 1 to Step 3 as illustrated below:
Tax payable/
Output tax Input tax Adjustments
Less Add/Less Equals (refundable)
(Step 1) (Step 2) (Step 3)
(Step 4)
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31.2–31.3 Chapter 31: Value-added tax (VAT)
Example 31.3. Calculation of VAT payable or refundable

A vendor carries on an enterprise and supplied goods and services for R115 000 (including VAT
of R15 000) during a tax period. The vendor makes 100% taxable supplies.
You are required to calculate the VAT payable by or refundable to the vendor if the vendor paid
the following input tax on goods and services supplied to him during the tax period:
(a) R6 000
(b) R16 000
SOLUTION
(a) Output tax ............................................................................................................. R15 000

Less: Input tax ....................................................................................................... (6 000)
VAT payable ......................................................................................... 9 000
(b) Output tax ............................................................................................................. 15 000
Less: Input tax ....................................................................................................... (16 000)
VAT (refundable) .................................................................................. (R1 000)
Remember
The VAT calculation is the amount of output tax less the amount of input tax. Input tax may, how-
ever, not be claimed for certain goods or services (s 17(2)). The input tax is denied although the
VAT was charged to the vendor when the goods or services were acquired, and despite the
vendor using the goods or services wholly for the making of taxable supplies. The input tax is
usually denied to the extent that such goods or services are acquired for the purposes of, for
example, entertainment or relate to the supply of a motor car (see 31.21).
31.3 The accounting basis (s 15)

The timing of the VAT payable or refundable depends on the specific VAT accounting basis of a ven-
dor as well as the tax period (see 31.4).
Two accounting bases may be applied by a vendor to account for VAT:
l the invoice basis, and
l the payments basis.
The accounting basis determines the time of supply for VAT purposes. The two accounting bases are
discussed in the following two paragraphs.
31.3.1 Invoice basis

In general, vendors are registered for VAT on the invoice basis (s 15(1)). VAT on the invoice basis is
generally accounted for when
l an invoice is issued, or
l any payment is received,
whichever occurs first (s 9(1)).
(See 31.15 for the other time-of-supply rules.)
Example 31.4. The invoice basis
A vendor, registered on the invoice basis, supplied the following goods:

(a) On 2 February 2022 goods are delivered at one of the clients’ premises and the invoice for
the goods was issued on the same date. Full payment for the goods was only received on
31 March 2022.
(b) On 29 April 2022 a client paid R100 000 for goods delivered on the same date. The invoice
was only issued on 14 May 2022.
Determine the time of the above supplies for VAT purposes.
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SOLUTION
(a) As the invoice for the goods was issued before payment was made, the time of the supply is
the date on which the invoice was issued, which is 2 February 2022. The actual date of
payment of 31 March 2022 is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of the
supply is 29 April 2022 when the payment was made. The actual date of delivery of the
goods is irrelevant.
31.3.2 Payments basis

VAT on the payments basis is generally accounted for when
l payments are made (purchases), and
l payments are received (sales).
Specified vendors may account for VAT on the payments basis if the vendor applied to the Commis-
sioner in writing. An example of such vendors is specified natural persons or unincorporated bodies
of persons where all members are natural persons. These vendors can apply to be registered on the
payments basis if the total value of the taxable supplies in a 12-month period has not exceeded
R2,5 million (s 15(2)(b)).
Any vendor that is voluntarily registered for VAT purposes with the value of its taxable supplies not
exceeding R50 000 yet (but with a reasonable expectation to exceed within 12 months), must register
on the payments basis until R50 000 is exceeded (s 15(2B)).
In most cases, vendors registered on the payments basis still have to account for supplies of goods
(except fixed property) and services on the invoice basis if the consideration in money exceeds
R100 000 (s 15(2A)).
Example 31.5. The payments basis

A vendor, registered on the payments basis, supplied the following goods:
(a) On 2 February 2022 goods were delivered at one of the clients’ premises and the invoice for
R15 000 for the goods was issued on the same date. The payment for the goods was
received on 31 March 2022.
(b) On 29 April 2022 a client paid R50 000 for goods delivered on the same date. The invoice for
the goods was issued on 14 May 2022.
You are required to determine the time of the above supplies for VAT purposes.
SOLUTION
(a) The time of the supply is the date the payment was received – that is, 31 March 2022.
(b) The time of the supply is the date the payment was received – that is, 29 April 2022.
31.4 Tax periods (s 27)

Normal tax is calculated with reference to a year of assessment, which is usually a period of 12 months.
VAT is calculated and paid for each tax period. Every vendor is registered for a specific tax period or
VAT assessment period.
The following different tax periods exist (s 27(1)):
Category A: Periods of two months ending on the last day of January, March, May, etc. (odd-num-
bered months).
Category B: Periods of two months ending on the last day of February, April, June, etc. (even-num-
bered months).
Category A and Category B are applicable to:
l vendors with taxable supplies that do not exceed R30 million over 12 months, or
l farmers with taxable supplies that exceed R1,5 million over 12 months.
Category C: Periods of one month ending on the last day of each month.
Category C vendors are mainly vendors whose taxable supplies exceed R30 million
over 12 months.
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Category D: Periods of six months ending on the last day of February and August respectively.
Category D vendors only carry on farming activities with taxable supplies of less than
R1,5 million over 12 months.
Category E: Periods of 12 months ending on the last day of their year of assessment for normal tax
purposes.
Category E vendors include specific entities who solely earn rental and management
fees from connected persons.
The Commissioner may permit a vendor’s tax period to end within either 10 days before or after the day
the period was originally supposed to end. The future tax period, as approved by the Commissioner,
must be used by the vendor for a minimum period of 12 months (s 27(6)(ii)). A vendor could use the
10-day rule if the cut-off date is
l a fixed day of the week
l a fixed date in a calendar month, or
l a fixed day in accordance with ‘commercial accounting periods’ applied by the vendor (Interpre-
tation Note No. 52).
31.5 Output tax: Supply of goods or services (s 7(1))

VAT is levied if any of the following three situations arise:
l supply of goods or services (s 7(1)(a))
l importation of goods into South Africa (s 7(1)(b) – see 31.8), or
l supply of imported services (s 7(1)(c) – see 31.9).
It is thus important to understand the different definitions to be able to decide whether or not a
specific transaction attracts VAT.
For a ‘supply of goods or services’ to attract VAT, there should be
l a supply (see 31.5.1)
l of goods or services (see 31.5.2 and 31.5.3)
l by a vendor (see 31.6)
l in the course or furtherance of an enterprise (see 31.7).
31.5.1 Supply
The first requirement for a transaction to attract VAT is that the transaction should constitute a supply
for VAT purposes.
The definition of ‘supply’ includes a sale, rental agreement, an instalment credit agreement, whether
voluntary, compulsory or by operation of law, irrespective of where the supply is effected (s 1(1) of
the VAT Act). The definition of ‘supply’ would also include the expropriation of property, this being
when a person’s property is taken in order to use it for a public purpose. However, for a supply to
occur, it appears that there must be at least two persons involved, namely the supplier and the
recipient of the goods or services. The ‘recipient’ is the person to whom the supply is made.
It is clear from the definition of ‘supply’ that a supply also includes supplies under barter transactions.
A barter transaction is when goods are supplied for a consideration that is not money. In the case of
South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] ZAWCHC 8, the taxpayer staged annual jazz
festivals in Cape Town and concluded sponsorship agreements. The sponsors (SAA, City of Cape
Town, SABC and Telkom) provided money, goods and services. In return, the taxpayer provided
goods and services to the sponsors in the form of branding and marketing. These therefore
constituted barter transactions. The taxpayer and sponsors were registered VAT vendors; however,
they levied no VAT on transactions on the grounds that the sponsorship agreements stipulated that
all amounts were exclusive of VAT. The courts held that VAT had to be accounted for by the taxpayer
and sponsors in respect of taxable supplies, despite the fact that the sponsorship agreements
stipulated that the supplies excluded VAT. In this barter transaction, the values received by the
taxpayer were evident and determinable based on sponsorship agreements. Such agreements also
afforded sufficient records of the supplies to enable SARS to be satisfied that input tax claims were
genuine despite no tax invoices being issued.
Certain transactions are deemed to be a supply for VAT purposes, although they do not meet the
requirements of the general definition of ‘supply’ (ss 8 and 18(3) – see 31.12).
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31.5.2 Goods
The second requirement for a transaction to attract VAT is that the supply should be either a supply
of goods or a supply of services.
‘Goods’ are defined in s 1 as
l movable property
l fixed property
l any real right in movable or fixed property, and
l electricity.
The supply of ‘electricity’ is specifically included as part of the definition of goods to clarify that
electricity falls within the ambit of goods and not services. VAT is calculated on the final price of the
electricity supplied, including the amount of the environmental levy.
The following are not included in the definition of ‘goods’:
l Money (as defined in s 1), which includes coins or paper currency of South Africa or any other
country. The supply of cash, for example through the granting of a loan by a bank, will therefore
not attract VAT as it is not goods. Money excludes coins made from a precious metal as defined
in s 1(1) (other than silver), such as gold, platinum and iridium. Money is not excluded from
goods when held as a collector’s piece or investment article. This implies that a person who
collects coins or medals could be a vendor and will have to levy VAT when the coins are sold.
Krugerrands are coins made from gold and are thus not money and are therefore goods. If
Krugerrands are supplied, they could attract VAT, but their sale is zero-rated (see 31.10.4). Take
note that cryptocurrency is not money as defined as it is not legal tender (see 31.11.1).
l Certain rights. These are rights arising from a mortgage bond or pledge of goods and are
excluded from the definition of ‘goods’.
l Revenue stamps. These are not included in the definition of ‘goods’, except when acquired by
stamp collectors. It is important to note that this does not include normal postage stamps, but
refers to a stamp issued by the State as proof of payment of any tax (revenue stamp). Normal
postage stamps will attract VAT under the normal rules, since they constitute proof of payment for
services rendered by the postal company. However postal stamps disposed of or imported as
collectors’ items will also attract VAT as they are goods.
31.5.3 Services
The second requirement for a transaction to attract VAT is that the supply should either be a supply
of goods or a supply of services.
The term ‘services’ is also defined very widely in s 1(1) and includes the granting, cession or
surrender of any right or the making available of any facility or advantage.
Services, for example, include hair dressing services, repair and plumbing services as well as insurance
and transport services. If a supply is not a supply of ‘goods’ and also not specifically excluded in the
definition of ‘goods’, the supply will be the supply of a service.
For example: A buys a business from B. He pays R100 000 for the fixed assets and R50 000 for the
goodwill in the business. The fixed assets are clearly property and are therefore ‘goods’. The goodwill
is clearly not included in the definition of ‘goods’ and will therefore constitute the supply of services.
The supply of services will include, for example, trademarks, goodwill, patents and know-how.
It is important to note that certain transactions are deemed to be either a supply of goods or a supply
of services, even though they do not at first glance seem to be so (see 31.12).
31.6 Vendor (ss 23, 50, 50A, 51(2) and 22 of the Tax Administration Act)
The third requirement for a transaction in South Africa to attract VAT is that the transaction should
constitute a supply of goods or services by a vendor.
If a person is a vendor, VAT has to be levied on taxable supplies (the selling price of goods or services
supplied includes VAT), and input tax may be claimed on certain purchases and expenses incurred in
the course of making taxable supplies. If, on the other hand, a person is not a vendor, VAT is not levied
on supplies (the selling price of goods or services supplied does not include VAT) and no input tax can
be claimed on the purchases or expenses.
A ‘vendor’ is any person who is, or is required to be, registered under the VAT Act.
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31.6 Chapter 31: Value-added tax (VAT)
The definition of a ‘person’ includes not only an individual, but also a company, a close corporation, a
body of persons (whether vested with a legal persona or not, for example a partnership), a deceased
or insolvent estate and a trust fund.
It is clear from the above that not only registered persons are vendors, but also every person that should
have been registered. It is thus important to know the registration requirements (as listed in s 23).
Un-incorporated body of persons

SARS regards a partnership as an unincorporated body of persons for VAT purposes. Although a
partnership is not a separate person for income tax purposes, it is a separate person for VAT pur-
poses, and the partnership, not the individual partners, should register as a VAT vendor (s 51). When
a partnership is dissolved as the result of a member leaving or a new partner joining, and a new
partnership is formed, the old and new partnerships are regarded as one and the same vendor
(s 51(2)).
Spouses married in community of property are also regarded as an unincorporated body of persons
for VAT purposes in the same way as a partnership.
31.6.1 Vendor: Compulsory registration (ss 23, 24, 26, 50 and 50A)
A person is required to register as a VAT vendor
l at the end of the month during which the total value of the taxable supplies for the preceding
12 months from all his businesses carried on, exceeded R1 million (s 23(1)(a)),
l at the beginning of the month if it is anticipated that the total value of the taxable supplies in terms
of a written contractual obligation from all his businesses carried on for the following 12 months
will exceed R1 million (s 23(1)(b)), or
l at the end of the month where the total value of the taxable supplies made by a foreign supplier
of electronic services has exceeded R1 million for any consecutive 12-month period (s 23(1A))
(see 31.33).
It is important to note that there is no reference to tax periods or financial years; therefore, SARS will
look at any consecutive period of 12 months.
The amount of R1 million refers to the value of the taxable supplies (thus both standard and zero-
rated supplies, but excluding exempt supplies), and ‘value’ excludes VAT levied (s 23(6)). In deter-
mining whether the value (turnover) exceeds R1 million, the following must be excluded (proviso to
s 23(1)):
l the supplies arising out of the cessation of an enterprise, or a substantial and permanent reduction
in the size or scale of an enterprise
l supplies resulting from the replacement of capital assets, and
l supplies resulting from temporary abnormal circumstances, for example when the grasslands of
a sheep farmer that the sheep use for grazing, are destroyed in a fire and the farmer is therefore
forced to sell all his sheep.
Where a person carries on two distinct types of businesses, he must register when the joint taxable
supplies of the two businesses exceed R1 million. It is the ‘person’ who conducts the enterprise, not
the ‘enterprise’, that registers for VAT. If each business is conducted in a separate company (or other
legal person), each company is required to register only when the taxable supplies of that company
exceed R1 million.
Example 31.6. Registration
Mrs Monageng carries on three different enterprises that only make taxable supplies. All three
enterprises are carried on in her own name (sole trader).
Enterprise 1: Turnover of R360 000 For 12 months (excluding VAT)
R1 020 000
Determine whether Mrs Monageng is obliged to register for VAT purposes if the above
information applies to the 12 months ending 31 December 2022.
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SOLUTION
Mrs Monageng has to register as a vendor since the three enterprises together make taxable
supplies of R1 020 000, which is above the R1 million threshold. It is the person, Mrs Monageng,
who has to register, and therefore all her taxable supplies must be considered to determine
whether she meets the registration threshold.
Business activities are sometimes split between different persons to avoid the registration threshold
of R1 million. The Commissioner may then deem such separate persons to be a single person carry-
ing on one enterprise and the person will be required to register (s 50A). This decision of SARS is
subject to objection and appeal (s 32(1)(c)).
Example 31.7. Registration: Separate persons carrying on the same enterprise

Amogelang is a plumber and carries on business as a sole trader. His turnover (excluding VAT)
for the last 12 months ending 31 December 2022 amounted to R550 000. He is also the sole
member of a close corporation called ‘Amogelang’s Plumbing Services’ with a turnover (excluding
VAT) of R580 000 for the past 12 months.
Determine whether Amogelang is obliged to register for VAT purposes.
SOLUTION
If the Commissioner makes a decision in this regard, Amogelang will have to register as a
vendor, since the combined value of taxable supplies is R1 130 000 (R550 000 + R580 000),
which exceeds R1 million (s 50A).
A group of companies cannot register as one vendor; each subsidiary (person) must register separ-
ately. Transactions within the group are therefore subject to VAT (unless s 8(25) applies – see 31.13).
However, transactions within the same vendor, such as between different branches and divisions of a
registered company, will not be subject to VAT. Branches or divisions may register as separate
vendors if each branch
l maintains its own independent accounting system, and
l can be separately identified by reference to the nature of the activities carried on or the location
of the branch or division.
All the taxable supplies of all the different branches or divisions should be added together to deter-
mine whether the R1 million threshold has been met (s 50).
The VAT Act provides for certain requirements that must be fulfilled before a person may register, for
example such as having a fixed place of residence, having a bank account, keeping proper account-
ing records and appointing a representative vendor that is a natural person. The onus rests on the
person to register when it becomes necessary. This must be done within 21 days after a person has
become liable for registration (s 22 of the Tax Administration Act).
A person that is required to register must fully complete a VAT 101 form, which is obtainable from
SARS’s website (http://www.sars.gov.za). All required documentation should be attached to the
registration form for the application to be valid. The original form should be submitted in person to the
SARS branch nearest to the enterprise. A person who applies for registration and has not provided all
particulars and documents required by SARS, may be regarded not to have applied for registration
until all the particulars and documents have been provided to SARS. Where a person is obliged to
register and fails to do so, SARS may register that person (s 22 of the Tax Administration Act).
A vendor still carrying on an enterprise could choose to deregister voluntarily if the value of his tax-
able supplies falls below the tax threshold of R1 million (s 24(1)). If a vendor wishes to deregister
voluntarily, he should notify the Commissioner in writing. A vendor who ceases to carry on an enter-
prise, shall notify the Commissioner in writing within 21 days of such cessation of carrying on an
enterprise. The Commissioner would notify the vendor of the date on which the cancellation of his
registration takes effect (s 24(2) and (3)).
Take note that the refusal of the Commissioner to register or cancel the registration of a vendor is
subject to objection and appeal by the taxpayer (s 32(1)(a)(i) and (ii)).
31.6.2 Vendor: Voluntary registration (ss 23(3), 24(5), (6) and (7))
Voluntary registration will also result in the levying of VAT on all taxable supplies made. This will,
however, allow the vendor to also claim input tax in the case of goods or services that he has
acquired from vendors. It is not always beneficial for a person to register voluntarily. The nature of his
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clients and the goods or services rendered will usually determine whether a specific person should
register. A person may wish to register if he mainly supplies to vendors or if he supplies zero-rated
goods (for example farmers or exporters).
A person may register voluntarily if that person is conducting an enterprise and if
l the value of the taxable supplies of all his enterprises was more than R50 000 during the previous
12-months (s 23(3)(b)(i))
l the value of taxable supplies of that person has not exceeded R50 000, but can reasonably be
expected to exceed that amount within 12 months from the date of registration as a vendor.
Please take note that where the value of the taxable supplies has not yet exceeded R50 000,
such vendor should be registered on the payments basis (see 31.3.2) until the value of its taxable
supplies exceeds R50 000. A regulation (R.447) sets out a number of objective tests that will be
applied in determining when a person will be ‘reasonably expected’ to make taxable supplies in
excess of the voluntary registration threshold of R50 000 (s 23(3)(b)(ii), or
l that person is continuously and regularly carrying on an activity. A regulation (R.446) sets out the
type of enterprise activities that the Commissioner may regard as qualifying for registration. The
consequences of the nature of that activity are that it is likely to make taxable supplies only after a
period of time (s 23(3)(d)).
Persons supplying commercial accommodation with a value not exceeding R120 000 in any
12-month period are not carrying on enterprises (proviso (ix) to definition of enterprise in s 1(1)). Such
persons will thus be eligible for voluntary registration only once the supplies exceed R120 000 (and
not R50 000) in 12 months.
A person who intends to purchase an enterprise as a going concern can voluntarily register if the
value of the seller’s taxable supplies was more than R50 000 during the previous 12 months
(s 23(3)(c)).
The Commissioner may cancel a vendor’s registration (s 24(5) and (6)). The Commissioner will cancel a
vendor’s registration where he is satisfied that the vendor no longer complies with the registration
requirements. The Commissioner will also cancel a vendor’s registration if that vendor does not
adhere to the administrative or bookkeeping requirements (s 23(7)). The Commissioner should give
written notice of such deregistration and the date that such deregistration takes effect (s 24(7)).
Please note that the death of a vendor will not automatically trigger deregistration for VAT purposes.
The deceased vendor and his estate shall, for the purposes of VAT, be deemed to be one and the
same person and therefore also deemed to be the same vendor (s 53).
31.7 Output tax: In the course or furtherance of an enterprise (s 7(1)(a))

The fourth requirement for a transaction to attract VAT is that the transaction should constitute a
supply of goods or services by a vendor in the course or furtherance of an enterprise.
An ‘enterprise’ is generally defined as
l any enterprise or activity carried on continuously or regularly in South Africa or partly in South
Africa by any person (see 31.7.1)
l in the course or furtherance of which goods or services are supplied for a consideration (see
31.7.2)
l whether for profit or not.
(Definition of ‘enterprise’ s 1(1), par (a).)
Certain activities are specifically included in the definition of ‘enterprise’ (see 31.7.3) and others, although
they comply with the requirements of the general definition, are specifically excluded (see 31.7.4).
31.7.1 Enterprise or activity carried on continuously or regularly

The definition of an enterprise requires an ongoing activity. Once-off private sales should usually not
attract VAT, as they will not be deemed to be a supply in the course of an enterprise.
Even if a vendor is carrying on an enterprise, all transactions entered into that are not in the course of
that enterprise, will not attract VAT. If, for example, a plumber (vendor) sold his private home, the
supply of his home would not be in the course of the plumbing enterprise and would therefore not
attract VAT. If the plumber (vendor) sold the offices from which he conducted his plumbing
enterprise, the sale of the offices would be in the course of the enterprise and should attract VAT.
Thus, VAT should be levied on all supplies that relate to the enterprise of the vendor, even if it is the
supply of capital goods.
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31.7.2 Goods or services are supplied for a consideration (definition of ‘consideration’ in

ss 1(1) and 3)
Goods or services supplied at no charge (consideration) will not form part of the carrying on of an
enterprise as defined.
The term ‘consideration’ is defined as a payment in money or otherwise for the supply of goods or
services, whether voluntary or not, and whether by the person who received the goods or services or
not. A deposit on a returnable container is a consideration. Any other deposit, whether refundable or
not, is a consideration only if it is applied as such or if it is forfeited.
The value of a supply excludes VAT, and value plus VAT equals consideration for a supply. There-
fore, consideration includes VAT, where applicable.
Consideration = Value plus VAT
If the consideration is not in money, but in the form of goods or services, the open market value of such
goods or services will be the consideration for the supply. The open market value of the goods or
services will be equal to the consideration in money that the supply of those goods or services would
generally fetch if freely offered between two non-connected persons (s 3). Take note that the open
market value of a supply also includes VAT, where applicable (s 3).
Open market value = Value plus VAT

(in open market supply between two non-connected persons)
31.7.3 Specifically included in the definition of an ‘enterprise’

The general definition of an ‘enterprise’ specifically includes the following:
l Anything done in connection with the commencement or termination of an enterprise (proviso (i)).
The activities in connection with the commencement and termination of a business cannot be
regarded to be executed in the course of an enterprise. This specific inclusion is required to
bring these activities into the ambit of the VAT Act. This will ensure that the vendor can claim
input tax on, for example, all its start-up business expenses.
l The supply of electronic services and the facilitation of the supply of electronic services from a
place in an export country is specifically included in the definition of an ‘enterprise’ (par (b)(vi)
and (vii)).
Electronic services can include e-books, music, games and subscriptions to electronic communi-
cation. The suppliers of electronic services from a place in an export country are not included in
the general definition of an enterprise as they do not conduct their business in South Africa. This
specific inclusion in the definition of an enterprise is therefore required to ensure that local and
foreign suppliers of electronic services are treated equitably (see 31.33).
31.7.4 Specifically excluded from the definition of an ‘enterprise’

The following do not constitute the carrying on of an ‘enterprise’ and are specifically excluded from
the general definition:
l The supply of services by an employee to his employer for which he receives remuneration
(proviso (iii)). No VAT is thus levied by an employee on his salary. Any independent contractor,
including a non-executive director, does not receive remuneration and is liable to account for VAT
if the VAT registration threshold is exceeded (BGR 40 and 41 to be read with the Non-Executive
Directors FAQs on BRGs 40 and 41).
l A hobby (proviso (iv)).
l An exempt supply (proviso (v) – see 31.11).
l The supply of commercial accommodation, if the total value of such supplies does not exceed
R120 000 for a period of 12 months (proviso (ix) – see 31.11.3).
l Certain supplies made by branches or main businesses situated outside South Africa. In a
situation where a South African vendor is carrying on an enterprise in South Africa, but the
enterprise has a separate branch outside South Africa, the supplies made by the foreign branch
would not be treated as part of the supplies of the South African vendor. This will also be the case
if the main business is outside South Africa and there is a branch in South Africa. Let us assume
that we have a foreign bank with the head office in the Netherlands. This bank operates in South
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Africa through a branch located in Sandton. All the supplies of the South African branch will be
part of an enterprise carried on in South Africa. However, the supplies of the head office outside
South Africa will be excluded from the definition of an ‘enterprise’. This will be the case only if
– the branch or main business can be separately identified, and
– an independent system of accounting is maintained for that branch or main business.
(proviso (ii))
l Supplies for the use or the right of use of ships, aircraft and rolling stock under any rental agree-
ment shall be deemed not to be the carrying on of an enterprise, notwithstanding that those
goods are supplied for use in the Republic. This is the case where the supplier is neither a
resident of South Africa, nor a registered vendor and if
– the supply is made to a recipient that is a resident of South Africa
– such goods are supplied for use by the recipient wholly or partly in South Africa, and
– the recipient and supplier have agreed in writing that the recipient shall:
(i) in terms of the Customs and Excise Act, enter such goods for home consumption and be
liable for the payment of the tax imposed on the imported services (see 31.8), and
(ii) not be reimbursed by the supplier for the relevant tax imposed.
(proviso (xiii))
31.8 VAT levied: Importation of goods (ss 7(1)(b) and 13)

VAT is levied if any of the following three situations arise:
l supply of goods or services (s 7(1)(a) – see 31.5–7)
l importation of goods into South Africa (s 7(1)(b)), or
l supply of imported services (s 7(1)(c) – see 31.9).
In the case of the importation of goods into South Africa, VAT is levied at importation and paid over to
SARS. The VAT so levied is not defined as output tax (s 1(1)), as the payment is not supported by a
VAT return but levied and paid upon entry into the Republic. The importer of the goods must pay the
VAT, even if he is not a vendor (s 7(2)).
VAT is levied on the importation of goods as it would be to the disadvantage of local suppliers if
persons could buy the same merchandise from an overseas supplier at a lower price. This will be
possible as the overseas supplier does not have to increase the price with 15% VAT. To level the
playing field to some extent, the VAT cost is borne by the importer of the goods.
Please take note that VAT is aimed at taxing final consumption. An importing vendor is not the final
consumer of goods imported to be used or supplied in the course of making taxable supplies. The
VAT paid on importation would then still qualify as input tax (par (a)(ii) of the definition of ‘input tax’ in
s 1(1)) and would indirectly be refunded to the vendor via the VAT system. (For example, R11 400
VAT paid on the importation of goods would be reduced with R11 400 claimed as input VAT on the
VAT return.) Therefore, the VAT paid on the importation of goods would only result in a ‘cost’ for the
importer if he is the final consumer. This will be the case if he is a non-vendor, or if he is a VAT vendor
to the extent that the imported goods will not be used in the course or furtherance of his enterprise.
Smaller items are often imported through the mail. The Commissioner may then require the postal
company to collect the VAT and provide the importer with the necessary information with regard to
such imported goods.
Provision is made, however, for certain imported goods to be exempt from VAT upon importation
(Schedule 1 to the VAT Act (s 13(3)). The rules applicable to VAT on imports from customs union
member countries are slightly different to those applied to imports from other countries. The customs
union member countries are Botswana, Lesotho, Namibia and Swaziland (BLNS countries).
31.8.1 Importation of goods from BLNS countries

The customs union member countries do not levy any customs duty on imports from each other. VAT
may however be charged. There are designated commercial ports, i.e., the different border posts
through which imports are obliged to pass. VAT is collected at these designated commercial ports.
The ‘time of supply’ for goods imported from BLNS countries is the time when goods enter South
Africa. This is usually when goods physically enter South Africa via a designated commercial port
(proviso (iii) to s 13(1)).
VAT payable on goods imported from BLNS countries is equal to 15% of the customs duty value
(s 13(2)(b)).
1079
31.8.2 Importation of goods from other countries

If goods are imported from other countries to South Africa, they have to be cleared for home
consumption by Customs and Excise, which also collects the VAT. It might be that they are cleared
on the same date of actual importation. It also might be that there is a difference between the date of
actual importation and the date that the goods are cleared. The goods are usually entered into a
storage warehouse before they are cleared for home consumption.
31.8.2.1 Time of importation (proviso (i) to s 13(1))

The time of importation is when the importation of goods is deemed to take place. ‘Importation’, in
relation to goods, means when goods
l enter South Africa, or
l are cleared for home use
in terms of the Customs and Excise Act.
31.8.2.2 Calculation of VAT on importation (s 13(2)(a))

VAT payable on goods imported from countries other than the BLNS countries is 15% of the total of
l customs duty value (which may differ from the actual purchase price), plus
l 10% of customs duty value, plus
l non-rebated customs duty payable and any import surcharges.
Example 31.8. VAT on importation of goods
Sedzani Siaga Construction (Pty) Ltd imported marble that has a cost price and a value for cus-
toms duty purposes of R120 000 from Zimbabwe. Import surcharges of R5 600 were levied.
Determine the amount of the VAT levied on importation.
SOLUTION
Customs duty value .................................................................................................... R120 000

Add: 10% of customs duty value ................................................................................ 12 000
Add: Importation surcharges ...................................................................................... 5 600
137 600
× 15%
VAT levied on importation ........................................................................................... R20 640
Note
In order to distinguish between the subsequent use of the imported item to make taxable versus
non-taxable supplies, consider the following:
(a) Sedzani Siaga imported the marble for use in her own home. This is not a taxable supply so
she cannot claim the R20 640 VAT paid at the border post as input tax.
The journal entries for the purchase of the marble would have been as follows:
Transaction 1 R R
Improvements to home (R120 000 + R5 600) .................................. Dr 125 600
Bank (R120 000 + R5 600) .............................................................. Cr 125 600
Marble purchased to effect improvements to private residence.
Transaction 2
Improvements to home .................................................................... Dr 20 640
Bank................................................................................................. Cr 20 640
The non-refundable VAT paid on the importation of marble to improve private residence.
(b) Sedzani Siaga imported the marble in order to use it in one of her clients’ homes in the
course of making taxable supplies. She charges the client R230 000 (including VAT) for the
rendering of her services. Sedzani would now be entitled to claim the VAT of R20 640 paid at
the border post as input tax, and would need to account for output tax of R30 000 (R230 000 ×
15/115) on the supply made to her client.
continued
1080
The journal entries for the purchase of the marble would have been as follows:
Transaction 1
Trading stock (R120 000 + R5 600)................................................. Dr 125 600
Bank (R120 000 + R5 600) .............................................................. Cr 125 600
Marble purchased as trading stock.
Transaction 2
Input tax ........................................................................................... Dr 20 640
Bank................................................................................................. Cr 20 640
The input tax paid on the importation of marble as trading stock.
Remember
l A vendor usually levies output tax on the supply of goods and services by him (thus on his
turnover). It is received by the supplying vendor on behalf of SARS and is then recorded as
output tax in his VAT 201 return and paid over to SARS. The VAT relating to the importation
of goods is an amount that was not received by the foreign seller (supplier) on behalf of
SARS. It is therefore not output tax, but VAT levied by SARS. It is paid by the importer
(recipient) in addition to the purchase price. It is referred to as a ‘reverse charge’ as the
seller does not collect it on behalf of SARS as is usually the case, but it is paid directly by the
importer to SARS.
l Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid as
input tax in their returns subject to the normal conditions pertaining to input tax deductions
(see 31.17 and 31.20 to 31.22).
l The VAT levied on importation is levied on the customs duty value which does not include
any VAT, therefore the amount should be multiplied by 15% and not by the tax fraction.
31.9 VAT levied: Imported services (ss 7(1)(c) and 14)

VAT is levied if any of the following three situations arises:
l supply of goods or services (s 7(1)(a) – see 31.5-7), or
l importation into South Africa of goods (s 7(1)(b) – see 31.8), or
l supply of imported services (s 7(1)(c)).
Under qualifying circumstances, VAT must therefore also be paid to SARS when services are imported
into South Africa.
31.9.1 Imported services: Meaning of ‘supply’

‘Imported services’ are defined in s 1(1) as the supply of services
l by a supplier who is a non-resident or who carries on business outside South Africa
l to a recipient who is a resident of South Africa
l to the extent that the services are used in South Africa for the purposes of making a non-taxable
supply.
In respect of imported services, VAT is payable only if the service is imported by a non-vendor or if
the service is imported by a vendor for purposes other than the making of taxable supplies
(s 7(1)(c)). VAT is not payable if the services are imported and fully used for the purposes of making
taxable supplies.
The VAT levied on imported services is a self-assessment mechanism, commonly referred to as a
‘reverse charge’. The rationale behind the levying of VAT on imported services is to prevent unfair
competition. Private individuals or businesses making exempt supplies might be tempted, if imported
services are not subject to VAT, to acquire them from non-resident suppliers rather than buy them
locally and pay irrecoverable VAT on the purchase price. The levying of VAT on the imported
services would thus partly prevent such persons from paying a lower price to non-residents.
If the recipient of the imported services is not a vendor, the recipient is required to pay the VAT within
30 days from the time of supply (s 14(1)). The income tax reference number of the non-vendor is
required in order to make the payment. The non-vendor is required to obtain, complete and retain a
VAT 215 form.
If the recipient of the imported services is a vendor, the vendor is required to include the VAT in the
VAT 201 return corresponding to the tax period in which the supply was made (proviso to s 14(1)).
1081
The case of CSARS v De Beers Consolidated Mines Ltd [2012] 3 All SA 367 (SCA) related to
imported services. In this case, the taxpayer, De Beers Consolidated Mines, engaged the services of
a London-based financial advisor in order to advise on a complex restructuring transaction. The
advice was on whether an offer received by De Beers to conclude the restructuring was fair and
reasonable. The London-based financial advisor was a non-resident and not a vendor. De Beers was
invoiced US$19,8 million for these services.
The question was whether such services were acquired for the purpose of making ‘taxable supplies’
in furthering the ‘enterprise’ of De Beers. The courts held that the restructuring transaction was not for
the purpose of enhancing the ‘enterprise’ of mining, therefore it was exclusively for non-taxable
supplies. The entire amount invoiced to De Beers consequently constituted an ‘imported service’ and
was subject to VAT (in terms of s 7(1)(c)).
In Consol Glass (Pty) Ltd v CSARS (1010/2019) [2020] ZASCA 175 (18 December 2020), the com-
pany refinanced its debt structure. Consol Glass initially issued Eurobonds in 2007 to fund the acqui-
sition of three glass-manufacturing enterprises. To reduce the cost of servicing the debt in Euros and
to limit the foreign currency risk exposure, the Eurobond debt was then in 2012 in essence replaced
with funding denominated in rand. In doing so, it procured services, some from local vendors and
from suppliers resident outside of South Africa. SARS disallowed the input tax deduction claimed on
the service fees paid to the local vendors and imposed output tax on the ‘imported services’ pro-
cured from the suppliers outside of South Africa. The issue before the court was if Consol Glass used
the services of the local and foreign suppliers who assisted with the refinancing transaction for the
purpose of making taxable supplies.
Consol Glass’ grounds of appeal as to the application of the law to the facts relied upon the conten-
tion that the Eurobonds were used in 2007 to acquire the assets in order to make taxable supplies,
that is, to manufacture and sell glass containers. The refinancing transactions in 2012 substituted
foreign debt with local debt with the same object. The Supreme Court of Appeal found that the 2007
Eurobond debt was to effect the reorganisation of the Consol Glass group of companies and that
there was no functional link between the issue of the 2007 Eurobonds and the acquisition of assets
for the making of taxable supplies. The 2007 Eurobonds were mainly used to facilitate the reorganisa-
tion of the business and not to acquire assets to use in the business. Similarly, the 2012 refinancing
was just to replace the 2007 reorganisation financing and also lacks the functional link with the
making of taxable supplies. The refinancing was therefore not for the purpose of making taxable sup-
plies and the Commissioner was correct in disallowing the input tax claimed on the service fees paid
to the local vendors and to impose output tax on the ‘imported services’ procured from the suppliers
outside of South Africa.
Remember
l VAT is usually levied on the supply of goods and services (thus the turnover) of an enterprise
and is usually received by the supplying vendor on behalf of SARS. The reverse charge VAT
relating to imported services is an amount of VAT that the supplier did not receive on behalf
of SARS, but an amount that the recipient paid directly to SARS. The recipient pays the VAT
in addition to the charge for the service he must pay to the supplier.
l Where vendors have paid VAT on imported services, such vendors are NEVER permitted to
claim the VAT paid as input tax, as it relates to non-taxable supplies only.
l The VAT paid on imported services is a non-refundable cost for the South African taxpayer
recipient and could be deducted for income tax purposes if the related expense is deduct-
ible for income tax purposes or could be included as part of the base cost of an asset if it
falls within the ambit of par 20(1) of the Eighth Schedule to the Income Tax Act.
l The extent of non-taxable supplies determines the proportional amount which constitutes an
‘imported service’ and that is subject to VAT. Output tax is only apportioned for taxable
supplies in two instances (31.14). Although this is not output tax, it does not relate to the
apportionment of the reverse charged VAT either. This is simply a ‘short cut’ and instead of
the recipient paying VAT on the full amount of the service and claiming the portion relating to
taxable supplies, as is the case with imported goods.
Example 31.9. VAT on importation of services
A bank in South Africa received professional advice relating to their business as a whole from a
foreign company (not a resident of South Africa nor a VAT vendor). The bank’s business entails
the making of both taxable and exempt supplies in a ratio of 80:20. The non-resident company
charges the bank R60 000 for such services.
Determine the amount of the VAT that should be paid to SARS.
1082
SOLUTION
Since the bank acquired the services partly for the purposes of making exempt supplies
(i.e., 20%), the bank will be required to account for VAT on 20% of the value of the services
(i.e., R60 000 × 20% × 15% = R1 800).
The journal entries for the transaction would be as follows:
R R
Journal entry 1
Professional services ........................................................................ Dr 60 000
Bank .................................................................................................. Cr 60 000
Professional services paid that are rendered to the bank.
Journal entry 2
Professional services ........................................................................ Dr 1 800
Bank .................................................................................................. Cr 1 800
The reverse charge VAT on the professional services that constitute imported services, to the
extent that the service is not applied in the course of making taxable supplies – in this case:
exempt supplies (i.e., R60 000 × 20% × 15% = R1 800).
The taxpayer would be able to claim an income tax deduction (s 11(a) of the Income Tax Act) of
R61 800 (R60 000 + R1 800) for the professional services provided that it was incurred in the
production of income and for the purposes of trade.
However, a private individual who does not make taxable supplies or who is not a vendor and
who seeks professional advice overseas to be used in South Africa will have to account for VAT
on the total value of that advice.
The journal entries for the transaction would be as follows:
R R
Journal entry 1
Professional services ...................................................................... Dr 60 000
Bank ................................................................................................ Cr 60 000
Professional services paid that are rendered to the private individual.
Journal entry 2
Professional services ...................................................................... Dr 9 000
Bank ................................................................................................ Cr 9 000
The reverse charge VAT on the professional services that constitute imported services, to the
extent that the service is not applied in the course of making taxable supplies – in this case:
private purposes (i.e., R60 000 × 100% × 15% = R9 000).
The individual is then legally obliged to pay the reverse charge VAT to SARS, but this is not very
practical and very difficult for SARS to administer.
The following imported services will not attract VAT (s 14(5)):

l a supply of services that was already subject to VAT at 15%
l a supply that, if made in South Africa, would be subject to VAT at 0% (see 31.10) or would have
been an exempt supply (see 31.11)
l the supply of educational services rendered by foreign educational institutions to South African
students
l the rendering of services by an employee to his employer or the rendering of services by a holder
of office in performing the duties of his office. This will thus result in excluding the supply of certain
services by a non-resident, for example a director, from falling within the ambit of imported
services, and
l for supplies of a service of which the value per invoice does not exceed R100.
31.9.2 Imported services: Time of supply (s 14(2))

A supply of imported services is deemed to take place on the earlier of the dates of
l the issue of an invoice, or
l the making of any payment by the recipient
in respect of that supply (s 14(2)).
31.9.3 Imported services: Value of the supply (s 14(3))

The value of the supply is the greater of
l the value of the consideration for the supply, or
l the open market value of the supply (s 14(3)).
1083
31.10 Output tax: Zero-rated supplies (s 11)

All supplies are taxable at the rate of 15% unless they are taxed at 0% or are specifically exempt. It is
important to know exactly which supplies are taxed at 0% and which are exempt (see 31.11). All the
other supplies will be taxable at the standard rate of 15%.
Supplies charged at the zero rate, often referred to as zero-rated supplies, are taxable supplies
although charged with VAT at 0%. These zero-rated taxable supplies enable the vendor to claim all
input tax on goods and services acquired in connection with the zero-rated supply.
Exempt supplies are supplies that are not charged with VAT at all. These differ from zero-rated
supplies in that no input tax in connection with such supply may be claimed.
All zero-rated supplies are listed in s 11, namely goods in s 11(1) and services in s 11(2). For
example, VAT aims to tax local consumption of goods and services. Goods exported are not usually
consumed in South Africa. Both goods (see 31.10.1) and services (see 31.10.2) exported are
therefore zero-rated.
31.10.1 Zero-rated supply: Exported goods (definition of ‘exported’ – paras (a), (c) and (d)
and s 11(1)(a)(i), (ii) and 11(3))
The export of movable goods by a vendor to an overseas country may be zero-rated in certain
circumstances.
The word ‘exported’ intends a transaction whereby ownership passes or is to pass from one person to
another. Goods are exported where such movable goods are supplied in any one of the following ways:
l direct exports (par (a) of the definition of ‘exported’), or
l indirect exports (par (d) of the definition of ‘exported’), or
l goods delivered by the vendor to a foreign-going ship or aircraft for use in such ship or aircraft
(par (b) and (c) of the definition of ‘exported’).
31.10.1.1 Direct exports (that is, goods consigned or delivered to an export country
(definition of ‘exported’ – par (a)))
Goods exported are regarded as direct exports and would therefore qualify for the zero rate under
the following circumstances:
l It must be a supply of moveable goods under a sale or instalment credit agreement.
l The goods must be directly exported to an address in an export country.
l The goods must be exported through a designated commercial port (as set out in Interpretation
Note No. 30).
l The supplier must obtain and retain all documentary proof (as set out in Interpretation Note No. 30).
Direct exports refer to a situation where the supplying vendor exports the movable goods
l in the supplying vendor’s baggage (luggage), or
l by means of the supplying vendor’s own transport, or
l the South African vendor uses a contractor to deliver the goods on the vendor’s behalf to the
recipient at an address in an export country, and
– the contractor is contractually liable to the South African vendor to effect delivery of the goods,
and
– the South African vendor is invoiced and liable for the full cost relating to such delivery (Inter-
pretation Note No. 30).
In order for the supplying vendor to apply VAT at the zero rate for the supply of the movable goods
by means of direct exports, the supplying vendor must obtain and retain documentary proof that is
acceptable to the Commissioner (s 11(3) and Interpretation Note No. 30).
The supplying vendor must obtain the required documentary proof within 90 days (unless the reason
that the prescribed time periods cannot be met is beyond the control of the vendor – see BGR 52).
These 90 days are calculated from the date that the movable goods are required to be exported.
Generally, 90 days from the earlier of
l the time an invoice is issued, or
l the time any payment is received.
When the supplying vendor does not obtain the required documentation within 90 days, the supply
may be deemed to be at the standard rate. The time of such supply is in the tax period within which
the period of 90 days ends. An output tax adjustment may be deducted should the documentation be
1084
obtained at a later stage. This will only be allowed if the documentation is obtained within five years.
The vendor should also provide the necessary proof to the Commissioner (see Interpretation Note
No. 30).
As already pointed out, only movable goods can be ‘exported’. The supply of vouchers entitling the
purchaser to a service, for example a phone recharge voucher, a prepaid card, or a ticket to watch a
rugby match, cannot be regarded as a supply of movable goods, as it relates to the supply of a service.
31.10.1.2 Indirect exports (that is goods delivered in South Africa to non-residents

(definition of ‘exported’ – par (d)))
A special Regulation (R.316) deals with the indirect export of movable goods. Part 1 of the Regulation
deals with transactions where movable goods are supplied by a vendor to a qualifying purchaser and
the qualifying purchaser is responsible for exporting the goods from South Africa. An indirect export
is thus where B (a qualifying purchaser) buys goods from A (a vendor in South Africa) and the risk
associated with ownership is transferred from A to B in South Africa. VAT is levied on indirect exports
at the standard rate and the purchaser has to apply for a VAT refund upon exporting the goods. For
example, tourists leaving South Africa may apply for a VAT refund at the airport for goods purchased
in South Africa which they are taking out of the country.
Part 2 of the Regulation provides for an exception to the rules in part 1 of the Regulation, in which
case the supplier (that is the South African vendor) may at his own discretion and risk decide to
apply the zero rate.
31.10.2 Zero-rated supply: Exported services (s 11(2) and (3))

In line with the objective to tax only local consumption, exported services will qualify for the zero rate.
The zero rate is only applicable if the documentary requirements are adhered to (Interpretation Note
No. 31 (Table B) and s 11(3)).
31.10.2.1 Exported services: Transportation (s 11(2)(a), (b), (c), (d) and (e))
The rendering of an international transport service to passengers or goods, by any mode of transport,
is zero-rated, if transported from
l a place outside South Africa to another place outside South Africa, or
l a place in South Africa to a place outside South Africa, or
l a place outside South Africa to a place in South Africa (s 11(2)(a)).
A typical example of this type of zero-rated service would be tickets bought from SAA for a flight from
Australia to Rome, Johannesburg to Rome, or Rome to Johannesburg. The zero-rating is applicable
to both South African residents and non-residents.
If the flight from Australia to Rome has a connecting flight and has to land in Johannesburg and Cape
Town as well, the Johannesburg-Cape Town leg will also be zero-rated as it forms part of the
Australia-Rome ticket (s 11(2)(b)). Interpretation Note No. 103 explains that a supply of a domestic
leg of international transport will be zero-rated to the extent that the transport constitutes ‘international
carriage’ as defined and must be
l contracted or booked at the same time as the international flight, and
l referenced to the international flight (that is, the ticket must reflect all flights).
The same principle is also applicable to goods. Take, for example, goods exported to Australia from
Johannesburg. If the same supplier who transport the goods from Johannesburg to Australia also
transports the goods from Cape Town to Johannesburg, the transport of the goods from Cape Town
to Johannesburg will be zero-rated (s 11(2)(c)). Interpretation Note No. 103 clarifies that a vendor
may zero-rate the domestic leg of a supply of an international transport service or ancillary transport
services made to a resident or a non-resident if
l the vendor is contractually obliged to supply an ‘international transport service’
l that international transport service incorporates a domestic transport leg or an ancillary transport
service, and
l the vendor supplying the international transport service is also contractually supplying the domestic
leg of that international transport service or the ancillary transport services.
Any services relating to the insuring or arranging of insurance or transport for any of the above
passengers or goods will also be zero-rated (s 11(2)(d)). The zero-rating of the arranging service will
only apply if the international transport services being arranged are a zero-rated transport service.
1085
Where goods are exported and additional services are supplied, which is an integral part of or directly
in connection with an international movement of goods, the additional services, such as the transport
of goods, will also be zero-rated. This zero-rating is, however, only applicable if the additional
services are supplied directly to a non-resident that is not a vendor and in connection with the
l exportation of goods from South Africa
l importation of goods into South Africa, or
l movement of goods through South Africa from one export country to another export country
(s 11(2)(e)).
Take note that these additional services can only be zero-rated if supplied directly to the non-resident
and not through an agent (see s 54(6) in 31.32.2).
31.10.2.2 Exported services: Services rendered outside South Africa (s 11(2)(k))

A service is zero-rated if it is physically rendered outside South Africa. The place where the service is
rendered is relevant for this zero-rate provision. The residency of the person to whom the service is
rendered is therefore not relevant.
31.10.2.3 Exported services: Arranging services for non-residents (s 11(2)(i ))

Services rendered to non-residents can be zero-rated even if the services are rendered in South
Africa. The services of
l arranging the supply of goods or services to foreign ships or aircraft (s 11(2)(i )(i) and (ii)), or
l arranging transport of goods within South Africa (s 11(2)(i )(iii))
for a person who is not a resident of South Africa and is not a vendor are zero-rated.
31.10.2.4 Exported services: Services to non-residents (s 11(2) (l ))

In some instances, the residency of the recipient as well as the location of the recipient at the time the
service is rendered, are the relevant qualifiers for zero-rating. Both the residency as well as the
location of the recipient should be outside South Africa. This zero-rated provision is therefore only
applicable if the services are supplied directly to a non-resident who is not in South Africa at the time
the services are rendered (s 11(2)(l )(iii)).
The zero rating will not be applicable if the service supplied to the non-resident is directly in con-
nection with
l land, or improvements thereto, situated in South Africa (s 11(2)(l )(i)), or
l movable property situated inside South Africa at the time the services are rendered (s 11(2)(l)(ii))
– except when the movable property is exported by the South African vendor to the non-resident
subsequent to the supply of such service (s 11(2)(l )(ii)(aa)), or
– forms part of a supply that the non-resident makes to a registered vendor (s 11(2)(l)(ii)(bb))
l the acceptance of a restraint of trade with an obligation to refrain from carrying on an enterprise
that would have occurred in South Africa.
For example:
l If a South African tour operator sells a tour to a foreign tour operator, the services are supplied to
a non-resident, but if the actual tourists benefit from the services in South Africa, the supply
cannot be zero-rated (see Interpretation Note No. 42, which also deals with VAT implications for
travel agents, tour operators and travel brokers).
l Accounting services rendered to a local branch of a non-resident company will not be zero-rated
as the non-resident has a presence (the branch) in South Africa while the services are rendered.
l The supply of a tax opinion by a South African resident to a foreign company will be zero-rated if
the services were rendered while the foreign company did not have any presence in South Africa.
In the case of Stellenbosch Farmers’ Winery Limited v CSARS [2012] ZASCA 72, the taxpayer, Stellen-
bosch Farmers’ Winery, received compensation to the amount of R67 million from a United Kingdom-
based company, United Distillers plc (Distillers). The compensation was for the early termination of
the distribution agreement that was entered into between the parties. In terms of the distribution
agreement, Stellenbosch Farmers’ Winery had the exclusive right to distribute Bell’s whisky in South
Africa for a specified period. The question was whether the compensation amount of R67 million
received could be zero-rated (s 11(2)(l )). The courts confirmed that the surrendering of a right con-
stitutes the supply of a service. The service was, however, rendered to a non-resident (Distillers) and
not in connection with property situated in South Africa and therefore could be zero-rated (s 11(2)(l )).
1086
The Supreme Court of Appeal in Master Currency v CSARS (155/2012 [2013] ZASCA 17) has
confirmed that foreign exchange services supplied in the duty-free area of an international airport are
subject to VAT at the standard rate. The zero-rating is not applicable if the non-resident is in South
Africa at the time the services are rendered. The duty-free area of an international airport is therefore
not regarded to be outside South Africa. This judgment confirms a basic VAT principle that goods or
services consumed within the borders of South Africa are subject to VAT at the standard rate unless
the VAT Act specifically provides for an exemption or zero-rating.
Master Currency sought to rely on a ruling issued by the Commissioner (under s 72) which indicates
that supplies of goods in duty-free areas were subject to VAT at the zero rate. The court concluded
that Master Currency could not rely on the ruling because the ruling was limited in its application to
goods supplied by duty-free shops in duty-free areas and therefore did not apply to services. In
addition, the ruling was a special arrangement. It was intended to relieve a non-resident of the
burden of having to apply for a VAT refund. If the goods were not zero-rated, VAT would otherwise
have been paid on goods purchased in the duty-free area and subsequently refunded by the VAT
Refund Administrator. The non-resident would be able to qualify for the refund as the goods are to be
exported. The non-resident does not qualify for any refund in relation to the services, and the ruling
would thus not apply to services (see Interpretation Note No. 85).
In the case of XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160, the VAT vendor, XO Africa
Safaris, organised and assembled tour packages to South Africa for a foreign tour operator (a non-
resident). The VAT vendor contended that the service provided was merely organising the tour
packages and should be zero-rated as the vendor did not supply the tour services (accommodation,
meals and entertainment) in South Africa directly to the foreign tour operator or its customers. How-
ever, the facts of the case indicated that the vendor also assigned members of their staff to assist
members of a tour group with additional services, like checking-in at hotels, in South Africa. Further-
more, the foreign tour operator was invoiced for one amount and was not advised of the prices
charged by the local suppliers of the tour services. The court consequently held that the vendor did
not merely organise the tour packages but rather provided services in South Africa to customers who
used the tour packages. The services supplied by the taxpayer could therefore not be zero-rated as
they were rendered to persons present in South Africa at the time the services were rendered (the
benefit of the services rendered was enjoyed in South Africa).
31.10.3 Zero-rated supply: The sale of a going concern (ss 8(7), 8(15), 11(1)(e), 18A
and 23(3))
31.10.3.1 General
To eliminate cash flow difficulties with the sale of a business as a going concern, it is common prac-
tice to zero rate the sale of a going concern (ss 11(1)(e) and 18A and Interpretation Note No. 57).
The disposal of an enterprise as a going concern is a zero-rated supply if the parties agreed in
writing that the enterprise, or part thereof, is disposed of as a going concern. The following criteria
should be met for the zero-rate to apply:
l At the time of conclusion of the contract the parties have agreed in writing that the enterprise will
be an income-earning activity on the date of its transfer. (The intention to transfer it as an income-
earning activity is sufficient. The purchaser should not necessarily continue with the same
income-earning activity after the date of transfer.)
l All the assets necessary for carrying on the enterprise are disposed of by the supplier to the
recipient. (It is not required that all the assets be disposed of; only those necessary for carrying
on the enterprise. The phrase ‘disposed of’ includes an outright sale as well as a lease or rental of
the assets necessary for carrying on of the enterprise.)
l At the time of the contract the parties have agreed in writing that the consideration for the supply
is inclusive of VAT at the rate of 0%.
l Both parties (supplier and recipient) must be registered vendors for VAT purposes. The supplier
must obtain and retain a copy of the recipient’s Notice of Registration as proof (form VAT 103). If
not a vendor, the purchaser can register voluntarily based on the supplier’s history (s 23(3)(c)).
The sale of a business as a going concern is deemed to be a taxable supply of goods. The whole
business including any services (for example goodwill) is deemed to be goods (s 8(7)).
More than 50% taxable usage for the purposes of the going concern
If more than 50% of the assets of the going concern were used for the making of taxable supplies,
the seller levies output tax at the rate of 0% on the supply.
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Less than 50% of the selling price relates to the going concern
If the goods or services of the enterprise were less than 50% applied by the seller for purposes of the
going concern, the selling price must be apportioned and only to the extent that it relates to the going
concern may it be zero-rated. Each type of transaction (going concern vs non-going concern) shall be
deemed to be a separate supply. The seller must make the following apportionment (s 8(15)):
l The seller must charge VAT at the standard rate in respect of the non-going concern portion.
l The seller must charge VAT at the zero rate in respect of the going concern portion.
(For adjustments by both the seller and purchaser, see 31.29.)
31.10.3.2 Specific examples relating to going concern sales

The following examples provide guidelines on what will constitute an income-earning activity (Inter-
pretation Note No. 57). It is clear that the intention of the disposal of a going concern should be the
selling of an income-earning activity, not merely the sale of a business structure.
Farming activities
The mere sale of a farm property constitutes the supply of the capital asset structure of a business
and not the farming enterprise. In order to supply a farming enterprise as a going concern, the seller
and the purchaser must agree that an operative income-earning activity in the form of the farm, its
equipment, grazing, crops, etc., will be transferred.
Leasing activities
Where the seller of fixed property conducts a taxable leasing activity, the contract must provide for
the leasing activity to be disposed of together with the fixed property in order to constitute an income-
earning activity. If the agreement does not provide for a tenanted property to be transferred, an asset
is merely sold. Take note that the sale of a residential leasing business can never be zero-rated, as it
does not constitute the carrying on of an enterprise as it is an exempt supply (residential accommo-
dation – s 12(c)).
Fixed property sold to tenant
An agreement to sell a tenanted property to the tenant does not constitute the disposal of a going
concern. The income-earning activity (being the leasing activity) is not sold to the purchaser. The
purchaser of the property obtains a capital asset without the capacity to continue the leasing activity.
He cannot lease it to himself.
Seller leases back building
There is no agreement to sell an income-earning activity where the agreement provides that the
seller-occupier of a commercial building will lease it back.
Usufruct and bare dominium
The bequest of the usufruct of an asset can qualify as the supply of an income-earning activity. This
is the case if the same enterprise that was carried on in respect of the asset can be carried on by the
usufructuary.
The supply of the bare dominium cannot be zero-rated. The person to whom the bare dominium of an
asset is bequeathed cannot proceed with the activities of the enterprise.
Business yet to commence or dormant business
Property that is merely capable of being operated as a business does not constitute an income-
earning activity. An actual or current operation is required. For this reason, the agreement to dispose
of a business yet to commence or a dormant business does not comply with the requirement.
The zero rate can apply where the supplier is obliged to get the business going and income-earning
in terms of the contract before transfer thereof.
Sale of shares in a company
There is no supply of a going concern where ownership of an enterprise changes through the sale of
shares of a company. The supply of shares is exempt from VAT (ss 2(1)(d) and 12(a), see 31.11.1).
31.10.4 Zero-rated supply: Other (ss 11(1)(h), (j), (k), (l), (q), (w) and 11(2)(f), (r) and (w))
The following types of supplies are also classified as zero-rated (this list is not exhaustive and other
zero-rated supplies therefore exist):
l The supply of fuel levy goods is zero-rated. For example: petrol and diesel, including biofuels
(s 11(1)(h)).
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l Certain basic foodstuffs are zero-rated, for example: brown bread, whole wheat brown bread,
cake wheat flour, white bread wheat flour, maize meal, samp, mealie rice, rice, pilchards, milk
and milk powder, fresh fruit and vegetables (including mealies, but excluding popcorn), vege-
table oil (excluding olive oil), eggs and lentils (s 11(1)(j) as set out in Part B of Schedule 2).
Dehydrated, dried, canned or bottled fruit and nuts would not qualify for the zero rating.
l The supply of gold coins, such as Krugerrands, which are issued by the Reserve Bank are zero-
rated (s 11(1)(k)).
l Paraffin for use as fuel for lighting or heating and not mixed or blended with another substance is
zero-rated (s 11(1)(l)).
l Goods supplied by a vendor (the supplier) on behalf of a foreign company to another vendor (the
final recipient) in South Africa can be zero-rated. The zero rate will only be applicable if the goods
are used by the recipient wholly for the purposes of making taxable supplies (s 11(1)(q)).
Example 31.10. Goods supplied to foreign company, but delivered in South Africa
A foreign company, ABC Plc, is contracted to supply goods to Recipient Ltd, a client in South
Africa. ABC Plc in turn contracts with Supplier Ltd, a local supplier, to supply certain goods
which are to be delivered on his behalf to Recipient Ltd in South Africa. Recipient Ltd is going to
use the goods wholly for taxable supplies.
Discuss the VAT implications of the above.
SOLUTION
The supply of the goods from Supplier Ltd (South African vendor) to ABC Plc (foreign company)
is a zero-rated supply. The supply of the goods from ABC Plc (foreign company) to Recipient Ltd
(South African vendor that is final recipient) does not carry any VAT, as ABC Plc is not a vendor.
The goods are also not imported goods. Recipient Ltd will not be entitled to input tax, as no VAT
has been paid on this transaction.
Since the goods were supplied by Supplier Ltd, they will have to obtain a declaration from
Recipient Ltd that states that the goods will be used wholly for the purposes of making taxable
supplies. Only then can Supplier Ltd make the supply at the zero rate. If at a later stage it is
discovered that Recipient Ltd made a false declaration, the VAT that should have been charged
at the standard rate on the supply by Supplier Ltd on behalf of ABC Plc will be recovered from
Recipient Ltd (s 61).
l The supply of certain female sanitary products, namely sanitary pads and panty liners, are zero-
rated (s 11(1)(w) as set out in Part C of Schedule 2).
l Services supplied directly in connection with land or any improvements to land, where the land
are situated in an export country is zero-rated (s 11(2)(f)).
l Services comprising job-related training of employees (but not educational services being an
exempt supply) for the benefit of an employer who is not a resident and is not a vendor, are zero-
rated (s 11(2)(r)).
l The charging of municipal rates (property rates and taxes) by a municipality is zero-rated
(s 11(2)(w)).
The zero-rating of municipal rates is, however, not applicable where such rate is charged as a flat
rate to
– the owner of the rateable property for rates and other goods and services (such as supplies of
electricity, gas, water, drainage, disposal of sewage and garbage), or
– any person exclusively for the supply of the other goods and services as mentioned above
(definition of ‘municipal rate’ in s 1).
Such flat rate will be taxed at the standard VAT rate of 15%.
When zero-rated municipal rates are charged by the owner of a property to a tenant using the
property for commercial purposes, the owner should levy VAT at the standard rate on the
recovery of the rates and taxes (the British Airways case (see 31.12.6)). The owner incurs the
municipal rates as principal (being the owner of the property) and not as the tenant’s agent. The
municipal rates charged to the tenant is purely a disbursement, namely an item making up the
total rental value which is subject to VAT at 15% if the owner is a vendor.
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*
Remember
l A zero-rated supply is a taxable supply and a vendor can claim all input tax in connection
with such a supply.
l The vendor has to obtain and retain the documentary proof listed in Interpretation Note
No. 31 in order to substantiate a zero rate (s 11(3)).
Example 31.11. Zero-rated supplies
Joyce Lubuma (a VAT vendor) carries on the business of a dairy, and for the VAT period under
review she received R300 000 (VAT inclusive) for the sale of milk. During the same period, she
incurred the following expenses (VAT inclusive):
Purchase of cows from vendors ....................................................................................... R115 000

Fuel ................................................................................................................................... R8 000
Purchase of packing materials from vendors ................................................................... R57 500
Calculate the VAT payable or refundable for the applicable VAT period.
SOLUTION
Output tax
Sale of milk (zero-rated) .................................................................................................... Rnil
Input tax
Purchase of cows (R115 000 × 15/115) ............................................................................ 15 000
Fuel (zero-rated) ................................................................................................................ nil
Purchase of packing materials (R57 500 × 15/115) .......................................................... 7 500
Total input tax .................................................................................................................... 22 500
An amount of R22 500 is to be refunded to Joyce by SARS (Rnil – R22 500) ...................(R22 500)
Note
It is clear from the example that although Joyce Lubuma made zero-rated supplies, these
supplies are also taxable supplies and that she will still be able to claim the input tax incurred in
making these supplies.
31.11 Output tax: Exempt supplies (s 12)

An exempt supply is a supply on which no VAT is levied and no input tax relating to the expenditure
incurred in respect of these supplies may be claimed.
31.11.1 Exempt supply: Financial services (ss 2 and 12(a))

In South Africa, banks and insurance companies are the biggest providers of financial services and
some of these financial services are exempt (ss 2 and 12(a)). The reason why financial services are
exempt is because it is difficult to always determine the value of a supply for VAT purposes. The most
common financial services that are exempt include:
l The exchange of currency (s 2(1)(a)).
l The issue or transfer of ownership of a debt security. A debt security means
– an interest in or right to be paid money, or
– an obligation or liability to pay money.
(s 2(1)(c))
It is important to note that this type of financial service refers to an arrangement that is tradable
where the ownership can be transferred, for example a debenture or government bond. It
includes typical bonds and certain types of financial instruments, but a normal loan agreement is
clearly not necessarily tradable.
In the Consol Glass case (see 31.9.1) it was argued that the vendor, Consol Glass, could not
deduct input tax related to a refinancing agreement as the input tax was incurred in the course of
making exempt supplies. The court found that the vendor, Consol Glass, who was the manufac-
turer and seller of glass containers did not supply exempt financial services when it entered into a
refinancing transaction where it borrowed money. The Supreme Court of Appeal firstly stated that
when a vendor borrows money, it is the recipient of a financial service and it does not then
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become the supplier of a financial service. To hold otherwise, is to confuse a borrower with a
lender. The lender or bank supplies the financial service, the borrower, in this case Consol Glass,
receives that service. Consol Glass, therefore, never became the supplier of an exempt financial
service by merely entering into a borrowing agreement. The court further submitted that a
conventional loan agreement does not fall within the ambit of a financial service as contemplated
in s 2(1)(c).
l Issue or transfer of ownership of a share or member’s interest is exempt (s 2(1)(d)).
The most common example of this is shares in a company or member’s interests in a close cor-
poration. Thus, when A sells his shares in a Company to B, the sale of the shares will be an
exempt supply, and no VAT will be levied.
l The provision of credit and paying of interest is exempt (s 2(1)(f)).
When A borrows R100 from B, B in essence provides a loan to A. This provision of the loan does
not attract VAT, as it constitutes an exempt supply. It is, however, not only the principal loan but
also the interest thereon that will be a financial service and therefore exempt.
l The provision or transfer of ownership of a life insurance policy or the reinsurance of such a
policy, is exempt (s 2(1)(i )).
A life insurance policy includes any policy of insurance issued in the ordinary course of carrying
on a life insurance business. It is important to note that only the premiums and proceeds on such
policies are exempt from VAT. The administration and management fees in respect of a life insur-
ance policy are, however, standard-rated.
l The contributions and proceeds relating to membership of a retirement or medical aid fund is
exempt (s 2(1)(j )). The management of these funds is, however, not an exempt supply (see
BGR 34).
l The issue, acquisition, buying, selling or transfer of ownership of any cryptocurrency is an exempt
financial service (s 2(1)(o)). A cryptocurrency is a decentralised digital currency that is not con-
trolled by a central banking system. Bitcoin is generally considered to be the first decentralised
digital currency.
Any fee, commission or similar charge relating to an exempt financial service will attract VAT at the
standard rate. Similarly, where any fee is charged for the giving of advice on any of the exempt finan-
cial services, this service will be a taxable supply. For example, the bank charges on the overdraft
account will attract VAT at the standard rate, whereas the interest, that is the consideration for
providing the overdraft facility, will be exempt.
Example 31.12. Financial services
The following items appeared on Soweto Spaza’s bank statements for September:
Internet banking fee ........................................................................................................... R92,00
Service fee (bank charges) ................................................................................................ R184,00
Transaction costs ............................................................................................................... R69,00
Administration costs........................................................................................................... R23,00
Interest charged on overdraft ............................................................................................ R116,40
Interest received on positive bank balance ....................................................................... R83,20
Indicate which of the above amounts include VAT and, if so, how much VAT is included.
SOLUTION
Internet banking fee (R92,00 × 15/115) ............................................................................. R12

Service fee (R184,00 × 15/115) ......................................................................................... R24
Transaction costs (R69,00 × 15/115) ................................................................................. R9
Administration costs (R23,00 × 15/115) ............................................................................. R3
Interest charged on overdraft (financial service – s 2(1)(f) exemption) ............................. Rnil
Interest received on positive bank balance (financial service – s 2(1)(f) exemption)
(note) .................................................................................................................................. Rnil
Note
Both interest paid and received represent the consideration for financial services as defined, and
are therefore consideration for exempt supplies (s 12(a)).
Although the provision of financial services is an exempt supply, it will be zero-rated if physically ren-
dered outside South Africa. The zero-rating of financial services therefore takes priority over exemp-
tion. It is important for vendors to determine whether the financial services they supply are zero-rated
or not, as their input tax claim could increase substantially when compared to the input tax credit if
the supply of the services was an exempt supply (see 31.20).
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An example where a service can, on face-value, qualify to be both exempt and zero-rated is services
supplied to a non-resident (even if physically rendered in South Africa). This service may be zero-
rated only if the services are supplied directly to that non-resident or any other person, and both the
non-resident and the other person are not in South Africa at the time the services are supplied
(s 11(2)(l)). For example: B Bank (a resident of South Africa) provides a loan to a non-resident UK
company and charges the UK company 6% interest. The provision of the loan will be a zero-rated
supply (s 11(2)(l)) and the interest will be regarded as the consideration for the supply. The zero-
rating takes priority and the supply is not exempt from VAT. Another example is the supply of a
cryptocurrency (for example Bitcoin). If the cryptocurrency is supplied to a non-resident not phys-
ically present in South Africa at the time of the supply, the supply of the cryptocurrency can be a
zero-rated financial service.
Vendors with a business that usually only makes wholly (100%) taxable supplies have to remember
that the supply of financial services (for example the supply of cryptocurrencies as payment to
suppliers) could alter the nature of their business from making wholly taxable supplies to one making
mixed supplies. Mixed supplies would thus indicate that the vendor makes taxable supplies (either
standard-rated and/or zero-rated) and exempt supplies. Note that in the case of mixed supplies, the
allowable input tax on expenses incurred might require apportionment (see 31.17).
31.11.2 Exempt supply: Residential accommodation (s 12(c))

The supply of a ‘dwelling’ under an agreement for the letting and hiring thereof is exempt from VAT.
A ‘dwelling’ is defined as
l any building, premises or structure
l that is intended for use mainly as a place of residence or home of any natural person
l including fixtures and fittings belonging thereto and enjoyed therewith
l except where it is used in the supply of commercial accommodation.
The above therefore implies that the letting of a house or flat to a person who, in terms of a rental
agreement, will use the house or flat mainly for residential (domestic) purposes, is exempt from VAT
(s 12(c)(i)). Usually, hotels will not qualify for the residential accommodation exemption, as they
supply taxable commercial accommodation.
The exemption will, however, also apply where housing or meals and housing is supplied by an
employer to his employee where
l the employee is entitled to occupy the accommodation as a benefit of employment, or
l the employer operates a hostel or boarding establishment mainly for its employees rather than for
a profit (s 12(c)(ii)).
This exemption is applicable to the supply of a dwelling under an agreement for the letting thereof,
and not applicable to the supply by means of a sale. The normal rules apply regarding the sale of a
dwelling (see 31.24). If a non-vendor sells a dwelling, no VAT is levied. If a vendor sells a dwelling, it
will not attract VAT if it was previously used to earn exempt rental income. This is due to the fact that
any activity involving the making of exempt supplies is specifically excluded from the definition of an
‘enterprise’ (proviso (v) to the definition of ‘enterprise’) and, therefore, the dwelling was not used in
the course of an enterprise (see 31.7).
31.11.3 Taxable supply: Commercial accommodation
31.11.3.1 Meaning of ‘supply’: Commercial accommodation

It is clear from the above definition of a ‘dwelling’ that the supply of accommodation will not qualify for
the exempt status if it is the supply of commercial accommodation. Commercial accommodation is,
therefore, subject to VAT at the standard rate.
‘Commercial accommodation’ refers to the supply of lodging or board and lodging together with
domestic goods and service. In order to understand the meaning of commercial accommodation, it is
important to first understand the term ‘domestic goods and services’.
‘Domestic goods and services’ are defined as any goods and services provided in any enterprise
supplying commercial accommodation, including
l cleaning and maintenance
l electricity, gas, air conditioning or heating
l a telephone, television set, radio or other similar article
l furniture and other fittings
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l meals
l laundry
l nursing services, or
l water.
The provision of domestic goods and services constitutes the provision of a room together with cer-
tain of the services listed in the definition of ‘domestic goods and services’ (for example cleaning
services, meals, etc.) as well as any other goods and services (for example use of a safe) not listed in
that definition which are provided by an enterprise supplying commercial accommodation.
Commercial accommodation mainly includes all accommodation supplied that is not intended for
pure domestic purposes, for example a hotel or holiday apartment. Commercial accommodation, can
however, also include longer-stay type of accommodation – for example an old age home and
student accommodation (unless it forms part of board and lodging provided by an educational pro-
vider in which case the accommodation is an exempt supply (s 12(h)(ii), see 31.11.4)). Another
difference between residential accommodation and commercial accommodation is that other
‘domestic goods and services’ (for example meals) are also sometimes included in the price of the
use of commercial accommodation.
Persons supplying commercial accommodation with a value not exceeding R120 000 in any 12-
month period are not carrying on an enterprise. Such persons will thus be eligible for voluntary
registration only once the supplies exceed R120 000 for a 12-month period (see 31.6.2).
31.11.3.2 Value of the supply: Commercial accommodation (s 10(10))

It is important to distinguish between short-term commercial accommodation (28 days or less) and
longer-term commercial accommodation (more than 28 days):
l Short-term commercial accommodation (28 days or less):
Output tax must be levied on the full value of the supply where accommodation and domestic
goods and services are supplied by a hotel, boarding house or similar establishment intended for
short-term stay (for a period of 28 days or less).
l Longer-term commercial accommodation (more than 28 days):
Output tax must only be levied on 60% of the all-inclusive charge levied on accommodation and
domestic goods and services intended for longer stays (more than 28 days) (s 10(10)). This 60%
will apply from day one if the period exceeds 28 days.
Short-term stays in commercial accommodation establishments are taxed at the full value of such
supplies. Only 60% is taxed where the accommodation constitutes the dwelling (including domestic
goods and services) of the occupant (thus longer-term stays). The reason for this is that persons
resident in their own or rented dwellings are not subject to VAT on the full cost thereof. Mortgage
interest and municipal rates, or, alternatively, residential rent does not result in a VAT cost. The South
African VAT base is roughly 60% of gross domestic product (GDP). Natural persons living in long-
term commercial accommodation establishments should be taxed at an equivalent rate.
Remember
l Despite the fact that an occupant may be taxed only on a portion of the value of the accom-
modation provided to him, the enterprise itself may deduct input tax as if the occupant is
taxed on the full value.
l The enterprise still bills the occupant for the full 100% of the price of the accommodation
and not for only 60%. If the supply of commercial accommodation is for a period exceeding
28 days, only the VAT is calculated on 60% of the value.
l Please note that the value of supply in terms of s 10(10) is only applicable to commercial
accommodation and not to commercial leases that are not used for residential purposes (for
example office buildings).
Example 31.13. Commercial accommodation

Abel is the owner of Rest-a-While, a bed-and-breakfast (B & B) establishment situated in the
Natal Midlands. His total annual receipts from the bed-and-breakfast business amount to
R750 000. Most of the guests do not stay longer than three nights at a time. It does sometimes
happen that a guest stays for a month at a time. Abel charges R220 per night (excluding VAT) for
bed and breakfast.
Explain to Abel the VAT consequences of running his bed-and-breakfast business.
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SOLUTION
The B & B business constitutes the provision of commercial accommodation. As the annual
receipts of the business exceed R120 000, Abel can register voluntarily for VAT (still below the
mandatory registration threshold of R1 million).
Should Abel decide to register, he will have to levy output tax on the supply of the commercial
accommodation (being a taxable supply) as follows:
l guests staying for 28 days and less: 100% of the charge is subject to VAT at 15% (for
example three nights at R220 × 100% × 15% = R99 output tax), and
l guests staying for more than 28 days at a time: only 60% of the charge is subject to VAT at
15% (for example 30 nights at R220 × 60% × 15% = R594 output tax).
Abel will be entitled to an input tax deduction for VAT paid on the acquisition of goods and
services for the purposes of the B & B business. This is because he is making taxable supplies.
Should Abel decide not to register for VAT purposes, he does not have to account for output tax,
but then he will not be entitled to any input tax deductions.
Example 31.14. Commercial and residential accommodation

Jo Ndlovu is a property magnate and a vendor. During the current tax period Jo earned the
following amounts:
l Letting of townhouses (purely for residential purposes) ............................................. R42 000
l Short-term stay (less than 28 days) in bed and breakfast hotels (including VAT) ..... R16 100
l Board and lodging in boarding houses (all periods longer than 28 days –
excluding VAT) ........................................................................................................... R30 000
Calculate the output tax in respect of the income earned.
SOLUTION
Letting of townhouse, hiring of a dwelling, which is an exempt residential supply ...... Rnil
Jo will charge R42 000 in total (R42 000 + Rnil).
Bed and breakfast, commercial accommodation
l R16 100 × 15/115 .................................................................................................. R2 100
Jo will charge R18 200 in total (R16 100 + R2 100).
Board and lodging, long-term commercial accommodation
l R30 000 × 15% × 60% .......................................................................................... R2 700
Jo will charge the lodgers R32 700 in total (R30 000 + R2 700).
Where separate prices are charged for accommodation in a room and any other services (for
example meals, cleaning services, maintenance, etc.), the charge must be apportioned between the
room provided (accommodation) and the other services where the occupant stays for an unbroken
period exceeding 28 days. (VAT will be levied at 100% on the other services and only at 60% on the
fee for the room.) The only exception will be where the services are supplied together with the room
(accommodation) at an all-inclusive price.
Example 31.15. Commercial accommodation: All-inclusive price
Assume the all-inclusive daily rate at a hotel is R500 per day (excluding VAT). Included in the
R500 daily rate is the use of a post box.
Calculate the VAT if
(a) the person stays in the hotel for four days, and
(b) the person stays in the hotel for 35 days.
SOLUTION
(a) Full supply at standard rate (R500 × 4 × 15%) – output tax .................................... R300
(b) Supply of the post box that is included in the all-inclusive daily rate – output tax ... Rnil
Supply of commercial accommodation together with domestic goods and
services (R500 × 35 × 60% × 15%) – output tax ..................................................... R1 575
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It is important to note that each supply for VAT constitutes a separate supply and that the ultimate
use of a building by the end user will not drive the VAT consequences in a chain of transactions.
CSARS v Respublica (Pty) Ltd (1025/2017) [2018] ZASCA 109 is an example where a VAT vendor,
Respublica, supplied a building and related goods and services to an educational institution,
Tshwane University of Technology (TUT). TUT then supplied the building and related goods and
services to its students. The supply between Respublica and TUT is not the supply of commercial
accommodation. TUT is a juristic person who is by its nature incapable of living in accommodation.
TUT is therefore not a ‘lodger’ as required for the definition of commercial accommodation, but only a
lessee. In this case we have two distinct supplies. The first supply between Respublica (lessor) and
TUT (lessee) and a second supply between TUT (lessor) and the student (lodger). The first supply
between Respublica (lessor) and TUT (lessee) is a commercial lease and the supply is a standard-
rated supply. The second supply between TUT and the student is the supply of accommodation by
TUT to its student. This is a supply necessary for and subordinate and incidental to the supply of
educational services and this supply would be an exempt supply (s 12(h)(ii) – see 31.11.4). Even the
fact that the agreement between Respublica and TUT stated that the premises were let to TUT for the
sole purpose of allowing it to offer student accommodation and for no other purposes cannot alter the
nature of the supply between Respublica and TUT.
31.11.4 Exempt supplies: Other (ss 12(g), ( h), ( i), ( j), (m))
There are various other exempt supplies of which the most important ones are listed below (s 12):
l The transport of fare-paying passengers and their personal effects by road or railway is exempt
(s 12(g)), for example transport in a bus, taxi or train. This transport is only exempt if the service is
not subject to VAT at the zero rate (see – 31.10). Furthermore, the transport is only exempt if
– it takes place by road (excluding in a ‘game viewing vehicle’) or railway (excluding a funicular
railway). It therefore is not applicable to air travel
– the transport is not for the purpose of courier services, since the exemption applies to the
transport of passengers and their personal effects, and not to goods, or
– the transport is for fare-paying passengers (thus a supply of transport services by a hotel to
and from the airport will not be an exempt supply if the residents of the hotel are not charged
separately for such service).
Remember
l Travel by road or railway of fare-paying passengers within South Africa is an exempt supply.
l Travel by air when any leg of the ticket is outside South Africa, is a zero-rated supply.
l Travel by air in South Africa is a standard-rated supply.
l Educational services supplied by a school, university, technikon or college, solely or mainly for
the benefit of its learners is exempt. This exemption applies to the supply of goods or services
(including domestic goods or services) for a consideration in the form of school fees, tuition fees
or payment for board and/or lodging (s 12(h)(i) and (ii)).
The exemption is not applicable to technical training provided by an employer to his employees
or to the employees of an employer who is a connected person in relation to that employer
(proviso to section 12(h)).
l Membership contributions to employee organisations, such as trade unions, are exempt (s 12(i )).
l The supply of childcare services by a crèche or an after-school care centre is also exempt (s 12(j )).
Remember
The zero-rating of financial services and transport services takes priority over exempt supplies. You
will thus always first determine whether these supplies qualify as zero-rated supplies. This may, for
example, be the case if it relates to exports. Only if it is not zero-rated will it qualify as an exempt
supply.
31.12 Output tax: Deemed supplies (ss 8 and 18(3))

In order to avoid any confusion about whether a transaction is a supply or not, and whether certain
transactions are deemed to either be a supply of goods or a supply of services or not, deemed
provisions are contained in the VAT Act (ss 8 and 18(3)).
1095
31.12.1 Deemed supply: Ceasing to be a vendor

31.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor (s 8(2))
Although no actual supply of goods and services is made, the ceasing to be a vendor triggers a
deemed supply for VAT purposes. Output tax will become payable on all goods and rights still owned
by a person on the day he ceases to be a vendor. This deemed supply is not applicable to goods in
respect of which input tax was denied, for example motor cars and entertainment (see 31.21).
On date of ceasing to be a vendor, output tax will also become payable on outstanding balances,
owing to suppliers, not older than 12 months.
These provisions will not apply where a person ceased to be a vendor as a consequence of his death
or sequestration and the executor or trustee of that estate carries on that enterprise.
31.12.1.2 Value of the supply: Ceasing to be a vendor (s 10(5))

Value of the supply: Goods and rights owned
In the case of deemed supplies of goods and rights owned on date of ceasing to be a vendor, the
consideration is the lesser of:
l the cost of the goods or services, and
l the open market value on date of ceasing to be a vendor.
The cost for this purpose expressly includes
l any VAT charged in respect of the supply to the vendor of the goods or services, plus
l any costs (including VAT) incurred by the vendor in respect of the transportation or delivery of the
goods or the provision of the services, plus
l if the goods or services were acquired from a connected person who is a vendor, then the open
market value on the date of acquisition to the extent that it exceeds the consideration on the date
of acquisition.
The goods and rights could only trigger output tax to the extent that it was paid for (provisos (v) and (vi)
to s 8(2)).
Value of the supply: Outstanding balances owing to suppliers

The outstanding balances owed to suppliers should be divided into the following:
l Outstanding balances not older than 12 months:
On the date of cessation of the enterprise an output tax liability arises on the outstanding bal-
ances owing to suppliers not older than 12 months. The consideration is the amount that has not
been paid immediately before the vendor ceases to be a vendor (s 22(3) proviso (ii)(BB)).
l Outstanding balances owing to suppliers older than 12 months:
The output tax liability for these outstanding balances would arise because of the non-payment
within 12 months and not because of the cessation of the enterprise. A vendor will be obliged to
account for an amount of output tax if he has not paid the full consideration for a supply within
12 months (s 22(3) – see 31.31). If the output tax liability had already been accounted for, no
additional output tax liability would arise on date of cessation of the enterprise.
Remember
The outstanding balances owing to suppliers could only trigger output tax to the extent and at
the rate that input tax was actually claimed on the supply that gave rise to the outstanding
balance (s 22(3)(a)).
1096
Example 31.16. Ceasing to be a vendor
Mr Philemon Balewa trades as a sole proprietor under the name Balewa Golf. Philemon is
registered on the invoice basis for VAT purposes and makes 100% taxable supplies. Philemon is
a category B VAT vendor. Philemon decided that he will deregister as a VAT vendor with effect
from 1 May 2022 because his taxable supplies fell permanently below the compulsory
registration threshold of R1 000 000. You may assume that SARS deregistered Philemon on
1 May 2022.
On 1 May 2022, Philemon provided you with the following list of assets and liabilities of Balewa Golf:
Cost Open market
(Including VAT) value
Assets
Delivery vehicle (note 1) ................................................................ R180 000 R118 000
Toyota Corolla – solely used for business purposes (note 1) ........ 120 000 70 000
Furniture – solely used for business purposes .............................. 16 100 35 000
Debtors (note 2) ............................................................................. 70 000 n.a.
Trading stock ................................................................................. 29 300 45 000
Liabilities
Creditors (note 3) ........................................................................... 39 100 n.a.
Notes
(1) The delivery vehicle is not a motor car as defined. The Toyota Corolla is a motor car as
defined.
(2) The following is the debtors age analysis on the local credit sales of trading stock:
30 days 60 days 90 days Total
Amount (R) 20 000 27 000 23 000 70 000
Philemon is of the opinion that the 90 days outstanding debtors amount of R23 000 will not
be recoverable and consequently wrote it off on 1 May 2022. Philemon does not charge any
interest on outstanding accounts.
(3) The following is the creditors age analysis:
60 days 370 days Total
Amount (R) 11 500 27 600 39 100
The creditors older than 370 days are already outstanding for more than 12 months, but no
VAT adjustment has yet been accounted for. The 60 days creditors of R11 500 relate to the
following goods and services purchased (cost prices including VAT and market values are
the same where applicable):
– R4 000 – trading stock, which is still on hand
– R2 000 – trading stock, which has already been sold
– R2 500 – services rendered to Balewa Golf
– R3 000 – amount still outstanding on the capital repayment of the delivery vehicle.
Calculate the VAT consequences arising from Philemon’s decision to deregister Balewa Golf.
SOLUTION
Output tax
Delivery vehicle: (R118 000 – R3 000) x 15/115 (note 1) ............................................... 15 000
Toyota Corolla (note 2) .................................................................................................. nil
Furniture: R16 100 × 15/115 .......................................................................................... 2 100
Debtors: (note 3) ............................................................................................................ nil
Trading stock: (R29 300 – R4 000) × 15/115 (note 1).................................................... 3 300
Creditors – Older than 12 months: R27 600 × 15/115 (note 4) ................................ 3 600
– Balance of creditors: R11 500 × 15/115 (note 4) .................................. 1 500
Input tax
Irrecoverable debts: 23 000 × 15/115 (note 5) .............................................................. (3 000)
VAT payable to SARS .................................................................................................... 22 500
continued
1097
Notes
(1) A deemed disposal for VAT purposes arises when a person ceases to be a VAT vendor
(s 8(2)). Output VAT is calculated by multiplying the lesser of the cost (including VAT) and
the open market value by the tax fraction. However, this shall not apply to assets where
output tax has already been accounted for (proviso (v) to s 8(2) and s 22(3)). As output tax
has already been accounted for on an amount of R3 000 (the delivery vehicle) and R4 000
(the trading stock on hand), no deemed disposal arises on these amounts.
(2) Input tax was denied with the initial purchase of the motor car (s 17(2)(c)). No deemed
supply consequently arises with deregistration.
(3) The general time of supply is the earliest of the issue of the invoice in respect of that supply
or the time any payment of consideration is received by the supplier (s 9(1)). The output tax
had therefore already been accounted for by Philemon when the invoice for the supply of the
goods was issued.
(4) Consideration for the supply was not paid within 12 months from the supply. A deemed
output tax therefore needs to be levied on creditors older than 12 months (s 22(3)). The
remaining creditor’s balance is subject to the deemed output provisions as the vendor
ceased to be a vendor within 12 months after the supply (proviso (ii)(dd) to s 22(3)).
(5) Deemed input tax available where a vendor has previously made a taxable supply for con-
sideration and the consideration subsequently becomes irrecoverable (s 22).
31.12.1.3 Time of supply: Ceasing to be a vendor (ss 8(2) and 9(5))

Where goods or rights are deemed to be supplied by a vendor who ceases to be a vendor, the time
of supply is immediately before the vendor ceases to be a vendor.
31.12.2 Deemed supply: Indemnity payments
31.12.2.1 Meaning of ‘supply’: Indemnity payments (s 8(8))

The reason for this deemed supply rule is as follows: if, for example, a vendor’s trading stock is stolen
and he receives cash from his insurance company, he is effectively in the same position as he would
have been if he had sold the trading stock. SARS wants the VAT on that disposal. Also, when a
vendor pays the insurance premiums under a short-term insurance policy, the vendor will mostly be
entitled to claim the input tax on the premium.
Therefore, when the vendor receives a claim pay-out under a short-term insurance policy, the vendor
is obliged to account for output tax on the claim received in certain circumstances. This will be the
case where a vendor under a contract of insurance
l receives an indemnity payment (insurance claim), or
l is indemnified by the payment of an amount of money to another person.
The payment will be deemed to be consideration received for the supply of a service. It is only
consideration to the extent that it relates to a loss incurred in the course of carrying on an enterprise.
This relates to all taxable supplies (both zero-rated and standard-rated). It relates only to short-term
insurance and will not apply to payments received under a life insurance contract, for example death
benefits received. Premiums for life insurance policies do not attract VAT (exempt supply of financial
service (s 2(1)(i))). Any claim received under a life insurance contract will thus also not give rise to
any output tax.
The insured must also be a vendor, as this deemed supply is not applicable to non-vendors. There
will also be no deemed supplies where the payments are
l not related to taxable supplies made by the vendor (both zero-rated and standard-rated), or
l the payments relate to the total replacement of goods for which an input tax deduction was denied
(for example motor cars or goods used for entertainment – see 31.21). Total replacement is
usually required if such goods are stolen or damaged beyond economic repair.
31.12.2.2 Value of the supply: Indemnity payments (s 8(8))

The ‘value of the supply’ will be
A × B × C, where
A = the tax fraction
B = the consideration received
C = the percentage for which the loss was incurred by the vendor in the course of making
taxable supplies.
1098
31.12.2.3 Time of supply: Indemnity payments (s 8(8))

The time of supply is the date of receipt of that payment or the date of payment to another person, as
the case may be.
Remember
l If the insurer replaces the damaged or stolen goods, there can be no output tax conse-
quences for the vendor, as there was no indemnity payment.
l If the payment is made to a third party to indemnify the vendor, the vendor also has to pay
output tax, although the vendor himself did not receive any money.
Example 31.17. Indemnity payment

Manufacturers Ltd recently suffered a robbery at its premises. The insurance company reim-
bursed them in cash, as follows:
R
l For delivery vehicle stolen 132 250
l For passenger vehicle stolen (input tax was denied upon purchase) 100 000
l For microwave oven in canteen stolen (input tax was denied upon purchase) 2 500
Calculate the output tax for the insurance payment received.
SOLUTION
R
Delivery vehicle, not motor car as defined, could claim input tax in the past
R132 250 × 15/115 = .................................................................................................. 17 250
Passenger vehicle, motor car, total reinstatement of goods where input tax originally denied –
thus no output tax liability.
Microwave oven, entertainment, total reinstatement of goods where input tax originally denied –
thus no output tax liability.
Example 31.18. Indemnity payment: Comprehensive

Ohno recently experienced flooding of the ground floor at the premises rented from Agnee CC.
Ohno’s insurance company replaced the following items:
l Computers .............................................. R48 000
l Desks and chairs .................................... R80 000
l Cupboards .............................................. R12 500
The insurance company also reimbursed Ohno in cash for other losses suffered as follows:
l Fittings ..................................................... R92 000
The insurance company also paid Agnee CC for damages suffered amounting to R36 800.
Calculate the output tax in respect of the insurance payments and replacements.
SOLUTION
Ohno is not required to account for output tax on the replacements by the insurance company,
since these replacements are not payments in money.
With regard to the fittings on which input tax could be claimed in the past, output tax of R12 000
(R92 000 × 15/115) must be accounted for.
Ohno is indemnified by the payment of an amount of money to a third party and must account for
output tax of R4 800 (R36 800 × 15/115).
Remember
Output tax is usually not apportioned, but levied on the value of the full supply, even if the supply
was previously used only partially for taxable purposes. There are two exceptions to the above
rule, namely fringe benefits (see 31.12.4) and indemnity payments. For both these types of
supply, the amount of output tax is payable only to the extent that it relates to taxable supplies
made in the course of the enterprise.
1099
Example 31.19 Indemnity payment: Taxable and exempt use

BB Bank acquired insurance cover for a computer of which 40% was used for taxable purposes
and 60% for exempt supplies. The computer was stolen and the bank received an indemnity
payment of R16 100 from its insurer.
Calculate BB Bank’s output tax liability.
SOLUTION
R16 100 × 15/115 × 40% = R840 output tax payable to SARS
BB Bank’s output tax liability is apportioned according to 40% taxable supplies made. With the
initial purchase of the computer as well as with the monthly insurance premiums paid, BB Bank
was only entitled to 40% of the input tax.
31.12.3 Deemed supply: Supplies to independent branches
31.12.3.1 Meaning of ‘supply’: Supplies to independent branches (par (ii) of the proviso to the
definition of ‘enterprise’, ss 8(9), 11(1)(i ) and 11(2)(o))
Some vendors make supplies to a foreign ‘independent branch’ or head office. Strictly speaking, the
vendor makes a supply to himself (being the same legal entity). As VAT attempts to only tax the con-
sumption of goods and services in South Africa, the supply by the vendor to a foreign ‘independent
branch’ or head office is treated as a supply of goods or services to another person.
This will apply only if the branch or head office
l is permanently situated outside South Africa
l can be separately identified, and
l has a separate accounting system.
The foreign branch or head office also makes supplies. These supplies are technically made by a
non-resident and the intended consumption of the supplies is not in South Africa. When a supply is
made by the foreign branch or head office, the supply is NOT included with the supplies of the local
South African vendor. The supplies made by the foreign branch or head office will have no VAT
consequences (par (ii) of the proviso of the definition of ‘enterprise’ in s 1(1)).
The effect is that the local South African vendor does not have to account for VAT on the supplies
made by the foreign branch or head office. The local South African vendor is regarded as a separate
person. This ensures that the normal rules relating to exports and imports will apply.
In line with the zero rate of exported goods and services, all supplies to the independent branch of
goods or services are zero-rated (ss 11(1)(i ) and 11(2)(o)). However, the zero-rating provision of
services will not apply in the following scenarios:
l If the services are supplied to any person who is in South Africa at the time the services are ren-
dered, the service is probably consumed in South Africa and the zero-rating will not be applic-
able.
l If the services are supplied directly in connection with land situated in South Africa, it is clear that
the consumption of the service is in South Africa. The services are therefore not zero-rated.
l If the services are supplied directly in connection with movable property situated inside South
Africa at the time the services are rendered, the consumption could either be inside or outside
South Africa. Where the consumption is in South Africa, the service is not zero-rated. If the con-
sumption is outside South Africa, the service is zero-rated. The following two situations qualify for
consumption outside South Africa and will be zero-rated:
– When the movable property is delivered to the non-resident at an address in an export country
after the supply of the service, the zero rate will apply.
– If the supply forms part of a supply that the non-resident makes to another registered vendor in
South Africa, the zero rate will apply. The foreign head office can, for example, have a contract
to repair the machinery of an unrelated South African business (Machine Ltd). The foreign
head office then subcontracts the work to its local branch in South Africa. If the local branch in
South Africa repairs the machinery of Machine Ltd, the local branch renders the service to the
foreign head office and the service can be zero-rated.
The interpretation of the definition of an ‘enterprise’ (s 1(1), read with s 8(9)) were centred in the mat-
ter between Wenco International Mining Systems Ltd and Another v Commissioner for the South
African Revenue Service (59922/2019) [2021] ZAGPPHC 70. In this case, Wenco International Mining
1100
Systems Ltd (‘Wenco Canada’) is incorporated and has its principal place of business in Canada.
Wenco Canada specialises in the development of software for the mining industry and supplies
mines with management systems software, maintenance, safety and machine guidance to manage
mining operations. Wenco Canada set up a local branch in SA (‘Wenco SA’). The branch is also
incorporated in Canada; however, it has its principal place of business and registered address in
South Africa.
l The contracts for the rendering of the services between Wenco Canada and its mining clients in
South Africa and the rest of Africa are concluded and signed in Canada. The mining clients pay
Wenco Canada directly for the rendering of such services.
l Wenco SA, on behalf of Wenco Canada, is responsible for rendering services such as training,
system support, site visits and installation of the software to South African and other African
clients. Wenco SA charges Wenco Canada a management fee for the rendering of these ser-
vices.
The following arguments were held:
l Wenco Canada held that Wenco SA carries on an ‘enterprise’ in South Africa. Therefore, Wenco
SA (and not Wenco Canada) should register as a VAT vendor. It was argued that Wenco SA and
Wenco Canada function separately, based on the context of the operations, and, as such, should
be recognised as separate persons for VAT purposes. Furthermore, Wenco SA should account
for VAT at the zero rate on the services it supplies to the non-resident, Wenco Canada.
l SARS, on the other hand, argued that Wenco Canada conducts a continuous and regular activity
in South Africa. Wenco Canada uses locally situated resources (Wenco SA) and provides soft-
ware and training services to clients within and outside of South Africa. Accordingly, SARS
argued that the activities of Wenco Canada could be attributed to the local branch and Wenco
Canada is required to register as a VAT vendor. Once Wenco Canada is a registered vendor,
VAT at 15% should be charged for services rendered in South Africa to its South Afican clients,
and VAT at 0% to its clients outside of South Africa.
Considering the matters outlined above, the court found it important to understand the structure of
the business and reviewed the contractual arrangements between Wenco Canada and Wenco SA. In
doing so, the court relied on the Respublica case (see 31.11.3.2) which referenced the general
principle (as recognised in other VAT jurisdictions) that allows for an interpretation of the relevant
sections in the act and the contractual arrangements ‘that is sensible and business-like to be prefer-
red over one that leads to insensible consequences or those that appear to frustrate the statutory
objective’.
The contractual arrangements indicated that Wenco Canada appointed Wenco SA as the ‘service
provider’ to ‘solely and exclusively’ provide the services on behalf of Wenco Canada. Thus, although
the activities of Wenco SA could constitute the physical act of rendering services to a non-resident
head office, from a legal viewpoint it appeared that the position of Wenco SA was merely that of an
agent acting on behalf of Wenco Canada in South Africa.
The court found that one cannot seriously contend that the second proviso to the definition of an
‘enterprise’ contemplates a situation where a branch is registered in South Africa purely for supplies
that it makes to its business permanently situated outside South Africa. Accordingly, Wenco SA was
not carrying on a separate enterprise in the sense envisaged in the second proviso to the definition of
‘enterprise’. Wenco SA is therefore not entitled to be registered as a VAT vendor. Wenco Canada
therefore had the obligation to register for VAT in South Africa. Subsequently, VAT at 15% should be
charged for services rendered in South Africa to its South African clients and VAT at 0% should be
charged to its clients outside of South Africa.
31.12.3.2 Value of the supply: Supplies to independent branches (s 10(5))

The value of a supply to a foreign branch or head office is the lesser of
l the cost to the vendor of the goods or services, or
l the open market value of the supply.
The cost for this purpose expressly includes
l any VAT charged in respect of the supply to the vendor of the goods or services, plus
l any costs (including VAT) incurred by the vendor in respect of the transportation or delivery of the
goods or the provision of the services, plus
l if the goods or services were acquired from a connected person who is a vendor, then the open
market value on the date of acquisition to the extent that it exceeds the consideration on the date
of acquisition.
1101
Remember
The open market value for a supply is per definition inclusive of VAT.
31.12.3.3 Time of supply: Supplies to independent branches (s 9(2)(e))

In the case of delivery to a foreign branch or head office outside South Africa, the time of supply is
when the goods are delivered or the service is performed.
Example 31.20. Supplies to independent branches
ABC (Pty) Ltd has its head office in Johannesburg and is a vendor for VAT purposes. ABC (Pty) Ltd
also has a branch in America, which is separately identifiable and has a separate accounting
system. ABC (Pty) Ltd purchased goods for R115 000 (VAT inclusive) and transferred the goods to
the branch in America. The branch then sold the goods to a third party in America.
Calculate the VAT consequences of the above transactions.
SOLUTION
ABC (Pty) Ltd will be entitled to claim the input tax deduction of R15 000 (R115 000 × 15/115) as
the goods were purchased for the purpose of making taxable supplies. The transfer to the
branch in America is deemed to be a direct export to a separate person and is therefore a
taxable supply at the rate of 0%. The sale by the branch of the goods to a third party in America
will not attract any VAT, as the supplies made by the branch in America will not form part of the
enterprise that ABC (Pty) Ltd carries on in South Africa.
31.12.4 Deemed supply: Fringe benefits

31.12.4.1 Meaning of ‘supply’: Fringe benefits (s 18(3))
The provision of certain fringe benefits to employees by an employer that is a vendor is a deemed
supply and is therefore subject to VAT. This applies only to fringe benefits as set out in the Seventh
Schedule to the Income Tax Act (see Chapter 8). Essentially, the output tax to be accounted for by
the employer (vendor) is intended to reverse a portion of the input tax that was previously claimed on
those goods or services by that vendor.
The following fringe benefits as set out in the Seventh Schedule to the Income Tax Act are subject to
both Income Tax for the employee and output tax (VAT) for the employer:
l Assets given to employees. (This refers only to assets given free of charge or at a price less than
market value. No VAT is, however, applicable to assets supplied that were used for entertainment
purposes, zero-rated or exempt supplies, or certain motor vehicles.)
l The right of use of an asset given to an employee (for example, the use of a company car
provided to an employee).
l Services made available by the employer to the employee for private purposes.
If the fringe benefit relates to
l an exempt supply
l a zero-rated supply, or
l the supply of entertainment (for example meals, see 31.21),
there is no deemed supply and no output tax (VAT) is payable on that fringe benefit.
Certain other employment benefits are not taxable fringe benefits in terms of the Seventh Schedule to
the Income Tax Act and no output tax (VAT) is thus calculated thereon, for example
l cash salaries
l all allowances (s 8(1) of the Income Tax Act), and
l broad-based employee share plans (ss 8B and 8C of the Income Tax Act).
The following employment benefits are therefore not subject to VAT:
l cash allowances (for example entertainment, subsistence and travel allowances) as these allow-
ances are not fringe benefits in terms of the Seventh Schedule to the Income Tax Act
l subsidies (supply of money)
l long-service awards in cash (money and thus not goods or services)
l the supply of meals and refreshments (this is the supply of entertainment)
l free or cheap holiday accommodation (‘accommodation’ is defined as part of entertainment)
l residential housing (exempt supply)
1102
l interest-free and low-interest loans (financial service – exempt supply)

l pension and medical aid fund contributions (financial service – exempt supply)
l bursary schemes (supply of money – exempt supply)
l international transport (zero-rated)
l the supply of a motor car at less than market value, if the employer was denied a deduction of
input tax on the acquisition of the motor vehicle (s 8(14)(a)), and
l any fringe benefit to the extent that it is granted in the course of making exempt supplies. For
example, if a person that makes only exempt supplies gives an asset to one of his employees
free of charge, there is no output tax on the fringe benefit as the employer did not claim any input
tax.
31.12.4.2 Value of the supply: Fringe benefits (s 10(13))

The consideration for the supply of a fringe benefit depends on the type of fringe benefit. The same
rule to determine the consideration for the supply applies to all fringe benefits other than the right of
use of a motor vehicle (see (a) below). Different rules apply to a fringe benefit where the right of use
of a motor vehicle is granted to an employee (see (b) below).
(a) Fringe benefits other than the right of use of a motor vehicle
The consideration of the supply of a fringe benefit that is not related to the use of a motor vehicle
equals:
A × B, where
A = the cash equivalent of the benefit used for income tax purposes (see chapter 8.4)
B = the tax fraction
Various rules regulate the determination of the cash equivalent of the fringe benefit for income tax
purposes (see chapter 8.4), but the determination of the cash equivalent for income tax purposes
also depends on the extent that VAT was claimed as an input tax by the employer (s 23C of the
Income Tax Act). If input tax was claimed by the employer, the amount of the relevant cost price or
market value of an asset considered in the determination of the cash equivalent for income tax will exclude
VAT. If input tax was not claimed by the employer, the amount of the relevant cost price or market value of
an asset considered in the determination of the cash equivalent for income tax will include VAT. Take note
that special rules apply where the right of use of a motor vehicle is granted to an employee (see (b)
that follows).
Remember
l The calculation of output tax on the fringe benefit does not apply to the supply of any such
benefit to the extent that it is granted by the vendor in the course of making non-taxable supplies.
This means that the output tax on the fringe benefit should be apportioned to the extent that it
relates to the making of taxable supplies. For example, where a bank making 20% taxable and
80% exempt supplies provides a fringe benefit to an employee, the bank will apportion the
output tax (that is, account for output tax on 20% of the cash equivalent of the fringe benefit).
l Although the employee is the recipient of the fringe benefit, the payment of the output tax is
the obligation of the employer and not the employee.
Example 31.21. Deemed supply: Fringe benefits
An employer purchases a watch for R1 150 (excluding VAT) to give to an employee as a fringe
benefit. The cash equivalent of the fringe benefit is the cost to the employer exclusive of VAT,
being R1 150.
Calculate output tax in respect of the fringe benefit.
SOLUTION
Output tax:
The tax fraction × the cash equivalent
15/115 × R1 150 = ............................................................................................................... R150
1103
(b) Fringe benefit where the right of use of a motor vehicle is granted to an employee
The following three steps can be followed to calculate the output tax regarding the right of use of a
motor vehicle:
Step 1: Determine the value of the motor vehicle (excluding VAT and finance charges – as
calculated according to Regulation 2835). Take any reductions in the determined value into
account.
Step 2: Determine the consideration for the use of the motor vehicle (value determined in Step 1 ×
0,3% or 0,6%). If the input tax was denied when the vehicle was purchased, use 0,3% and
if not, use 0,6%.
Step 3: Deduct the following
l If the input tax on the vehicle was claimed, all amounts paid by the employee to the
employer, excluding finance charges and fuel. (Amounts paid by the employee should
be excluded as it relates to a separate supply for value [thus not free use of motor car]
on which VAT will also be levied. No VAT will be levied on the finance charges
(consideration for an exempt supply) and fuel (zero-rated supply), and this should thus
not be deducted.)
l If the input tax on the motor car was denied, all amounts paid by the employee to the
employer, excluding finance charges, fuel and the portion of the amount that relates to
the fixed cost of the motor car. (The portion of the consideration that relates to the fixed
cost of the motor vehicle will not include any VAT as no input tax was claimed when the
vehicle was purchased (s 8(14)(a)).)
l R85 if the employee bears the full cost of repairs and maintenance.
Step 4: Multiply by the tax fraction to determine the output tax.
Step 5: Multiply by the percentage of taxable usage.
Remember
l The determined value of the vehicle for income tax purposes is inclusive of VAT. The deter-
mined value for VAT purposes, however, still excludes VAT (GN 2835 defines ‘determined
value’ as exclusive of VAT).
l The rate of 0,3% is used if the employer was not entitled to claim input tax in respect of a
motor car as defined.
l The rate of 0,6% is used in all other cases.
l The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a two-month VAT
period, the amount calculated should be multiplied by two.
l When the employee pays anything for the right of use, a portion of this amount could be
deducted in the calculation of the consideration for the right of use of a motor vehicle. This
amount paid by the employee should be split to determine the different items it relates to.
l In the case where the employee bears the full cost of maintaining the motor vehicle, a
deduction of R85 per month is allowed to establish the consideration. (This is not applicable
to fuel.)
l Where there is a reduction in the determined value, the depreciation allowance is calculated
according to the reducing-balance method at the rate of 15% for each completed period of
12 months from the date on which the vendor first obtained such vehicle, to the date when
the relevant employee was first granted the right of use thereof.
Example 31.22. Fringe benefit: Use of employer-owned vehicle
An employer grants an employee the right of use of a motor car. The employer was unable to
claim the input tax when the vehicle was purchased for R161 000 (including VAT). The employee
bears the full cost of maintaining the vehicle.
Calculate output tax for one month in respect of the fringe benefit.
1104
SOLUTION
Output tax:
Step 1: R161 000 × 100/115 = R140 000
Step 2: R140 000 × 0,3% = R420
Step 3: R420 – R85 = R335
Step 4: R335 × 15/115 = R43,70
Step 5: R43,70 × 100% = R43,70 output tax payable
If the vehicle had not been a motor car but a delivery vehicle, the employer would have been
able to claim the VAT paid on the vehicle as input tax (R161 000 × 15/115 = R21 000), and
output tax would have been calculated as follows:
Step 1: R161 000 × 100/115 = R140 000
Step 2: R140 000 × 0,6% = R840
Step 3: R840 – R85 = R755
Step 4: R755 × 15/115 = R98,48
Step 5: R98,48 × 100% = R98,48 output tax payable
Example 31.23. Fringe benefits: Consideration for use of employer vehicle
An employee is granted the use of a company-owned motor car (input tax denied) with a deter-
mined value (excluding VAT) of R160 000, that is fully used for taxable purposes. The employee
pays R600 per month that is allocated as follows:
Fuel .......................................................................................................................................... 112
Insurance ................................................................................................................................. 150
Maintenance ............................................................................................................................ 70
Interest ..................................................................................................................................... 168
Fixed costs of car .................................................................................................................... 100
Total ......................................................................................................................................... 600
Calculate the VAT consequences of the above.
SOLUTION
Employer has to account for output tax on two separate supplies:
(i) Output tax on deemed supply in respect of right of use granted to employee:
Step 1: R160 000 (determined value already excludes VAT)
Step 2: R160 000 × 0,3% = R480
Step 3: R480 – R150 (insurance) – R70 (maintenance) = R260
The fuel (zero-rated), interest (exempt), and fixed cost (input tax denied) are not deductible.
The R150 and R70 constitute a separate supply on which output tax is levied (refer (ii) below).
Step 4: R260 × 15/115 = R33,91
Step 5: R33,91 × 100% = R33,91 output tax per month payable by the employer on the fringe
benefit
(ii) Output tax on supply at value in respect of consideration received:
The employer must also account for output tax on the consideration paid by the employee to the
employer in respect of the insurance and maintenance. (The employer probably claimed the VAT
on these expenses paid by him.)
R150 + R70 = R220 × 15/115 = R28,70 output tax
Example 31.24. Fringe benefits: Taxable and exempt use of employer owned vehicle
The use of a delivery truck, with a determined value (excluding VAT) of R35 000, is granted to an
employee. The company makes 60% taxable supplies. The employee pays R80 for fuel to the
employer.
Calculate the VAT consequences of the above.
1105
SOLUTION
Step 1: R35 000 (determined value already excludes VAT)
Step 2: R35 000 × 0,6% = R210
Step 3: R210 – Rnil = R210
No deduction for fuel – zero-rated (note)
Step 4: R210 × 15/115 = R27,39
Step 5: R27,39 × 60% = R16,43
Note
The fact that the employee also pays for the fuel does not give rise to another output tax,
because it is a zero-rated supply.
Example 31.25. Supply of fringe benefits: Comprehensive
A vendor that makes both taxable (70%) and exempt (30%) supplies provides certain fringe
benefits to its managing director. The monthly cash equivalent of each benefit for employees’ tax
purposes is as follows:
Cash
Fringe benefit equivalent
Interest-free loan .............................................................................................................. R135
Residential accommodation ............................................................................................ R3 900
Free use of a company-owned motor car that cost the employer R230 000
(including VAT) ................................................................................................................ R5 000
In addition to the above benefits, the managing director was given a computer during the tax
period. The cash equivalent of this benefit is R7 000.
(a) Calculate the VAT payable by the vendor in respect of the fringe benefits granted to the
managing director for the two-month tax period.
(b) Provide the journal entry that should be passed in the accounting records of the employer.
SOLUTION
(a) VAT payable on fringe benefits Consideration
Interest-free loan – exempt supply .............................................................................. Rnil
Residential accommodation – exempt supply ............................................................ nil
Free use of the company car (R230 000 × 100/115 × 0,3% × 2 months) ................... 1 200
Asset acquired for no consideration ........................................................................... 7 000
Total ............................................................................................................................ R8 200
Extent used to make taxable supplies (R8 200 × 70%) .............................................. R5 740
VAT: R5 740 × 15/115 ................................................................................................. R749
(b) Journal entry

Dr Salaries ....................................................................................................... R749
Cr Output tax ........................................................................................................... R749
Output tax in respect of fringe benefits provided to managing director. The output tax thus results
in an additional salary cost that should now be deductible for income tax purposes.
31.12.4.3 Time of supply: Fringe benefits (s 9(7))

The time of supply is deemed to be the end of the month in which the cash equivalent of the fringe
benefit is granted to the employee (as determined under the Seventh Schedule to the Income Tax
Act). However, where the cash equivalent is not required to be included on a monthly basis, the
supply is taxable on the last day of the year of assessment of the employee.
31.12.5 Deemed supply: Payments exceeding consideration

31.12.5.1 Meaning of supply: Payments exceeding consideration (ss 8(27) and 16(3)(m))
It is possible that a vendor could receive an overpayment for a standard-rated taxable supply of
goods or services. The excess amount is deemed to be consideration for the supply of a service.
Output tax will be payable if this overpayment is not refunded within four months (s 8(27)).
In the event that the overpayment is refunded on a date after the output tax has been accounted for,
the vendor will become entitled to claim additional input tax (s 16(3)(m)).
1106
31.12.5.2 Value of supply: Payments exceeding consideration (s 10(26))

The consideration for the supply equals the excess portion of the payment received.
31.12.5.3 Time of supply: Payments exceeding consideration (s 8(27))

The time of supply is deemed to be the last day of the tax period during which the four-month period
ends. It should, however, be borne in mind that this is only the case when the excess portion has not
been refunded within four months of receipt.
Example 31.26. Payment exceeding consideration
Herron CC issues a tax invoice to George Dlamini for R115 (invoice no. 1025 dated 1 March
2022). Three weeks later, Herron CC sends him a statement reflecting the purchase made as an
outstanding amount due. Upon receiving the statement on 28 April 2022, George’s wife decides
to pay Herron CC R115. She does this as she is unaware that George already paid the amount
two days earlier.
Herron CC is a Category A VAT vendor and has a two-monthly VAT period ending on the last
day of January, March, May, etc.
Explain:
(a) the VAT treatment of the above, assuming Herron CC retains both payments and does not
refund the overpayment received from George’s wife
(b) the VAT treatment assuming that Herron CC refunds the overpayment received by George’s
wife on 25 October 2022.
SOLUTION
(a) The excess payment of R115 received by Herron CC will be treated as a deemed supply
and output tax will be payable. Herron CC will be liable to account for output tax amounting
to R15 (R115 × 15/115). The time of supply is 30 September 2022, which is the last day of
the VAT period ending four months after the excess amount was received.
(b) Upon refunding the amount of R115 to George’s wife, Herron CC will become entitled to
claim input tax amounting to R15 (R115 × 15/115). As the CC failed to refund the amount
within four months of receipt, they previously needed to account for output tax on the
deemed supply (refer to (a) above). They are now entitled to claim an additional amount of
input tax in the VAT period ending on 30 November 2022.
31.12.6 Deemed supplies: Other (ss 8(1), 8(10), 8(15), 8(21), 9(8) and 10(16))
The VAT Act also provides for other deemed supplies of which the more common provisions are
listed below:
l Sometimes a business owes debt it cannot repay. It might then happen that the creditors decide
that some of the assets of the business should be sold in order for the debt to be repaid. The
creditors will not necessarily know the VAT status of the business. They will have to treat the sale
as a taxable supply, unless the business supplies the creditors with a statement indicating that
the sale of the assets should not be a taxable supply (s 8(1)).
l When VENDOR A sells goods on credit to a customer (VENDOR B), then VENDOR A accounts for
output tax on the supply. If the customer (VENDOR B) defaults on the payments for the goods, it
may result in the repossession of the goods. In such a case the customer (VENDOR B) is
deemed to make a supply of the goods to the original supplier (VENDOR A) (s 8(10)). The
customer (VENDOR B) therefore has to account for output tax on the supply of the repossessed
goods to VENDOR A. The supply is deemed to be made for a consideration in money equal to
the balance of the outstanding cash value of the goods (s 10(16)). VENDOR A would then be
able to claim input tax on the supply of the repossessed good. If the customer was not a vendor,
or used the goods for exempt or private purposes, or where input tax was originally denied and
the subsequent supply of the goods is in terms of s 8(14), no deemed supply or VAT conse-
quences will arise for the customer on the repossession of the goods. Despite this, VENDOR A is,
however, also entitled to claim an input tax deduction at such time when the deemed supply is
made to it (par (c) of ‘input tax’ definition and ss 9(8) and 16(3)(a)(i)).
l Where a single supply of goods or services would, if separate considerations had been payable,
have been charged partly at the standard rate and partly at the zero rate, each part of the supply
is deemed to be a separate supply (s 8(15)).
In Commissioner for SARS v British Airways (67 SATC 167) the fare charged by British Airways for
its international flight included a number of elements which were separately disclosed on the
1107
passenger ticket. One such charge was the fees levied by the Airport Company Limited (a
separate independent vendor) to British Airways. This charge is levied to British Airways for the
general airport services (baggage handling facilities, waiting lounges, etc.) and was referred to
as the passenger service charge. British Airways separately reflects this charge on the pas-
senger ticket in order to recover it from its passengers. As the fare related to international travel
(see 31.10.2.1), British Airways zero-rated the total fare charged for the ticket. SARS argued that
the British Airways fare was a fare made up of different components (s 8(15)). SARS wanted to
apply the standard rate to the passenger service charge of the fare as this service is provided in
South Africa.
The Supreme Court of Appeal agreed with British Airways that the total fare for the ticket should
be zero-rate and held that
– a single supply of service is only capable of separation into its component parts, when the
same vendor supplies more than one service (at 170)
– the passenger service charge that the Airport Company Limited charges to British Airways is
no more than a cost that British Airways has to bear in order to operate its business. This is
similar to the cost it pays to land and park its aircraft (at 168). The passenger service charge
therefore relates to a service that was supplied by another vendor (not British Airways). This
cost simply formed part of the cost of British Airways’ supply of international transportation.
This is not a separate service provided by British Airways to the passenger. If British Airways
was the owner of the airport and if the general airport services were in fact supplied by British
Airways, the judgment of the court might have been totally different.
Example 31.27. Recovering of costs
Mr Karabo is an attorney practising in Johannesburg. Mr Karabo provided legal services to a

client in Pretoria and is uncertain about the VAT consequences of this supply.
The breakdown of the charge to the client is as follows:
Legal advice fee (standard-rated supply) ......................................................................... R8 000

Fuel costs incurred (zero-rated supply) ............................................................................. 50
Gautrain ticket cost incurred (exempt supply) ................................................................... 150
Value of supply (excluding VAT) R8 200
Discuss the VAT consequences of the above supply.
SOLUTION
VAT will be levied at the standard rate on the total value of the supply (R8 200 × 15% = R1 230).
The fuel and Gautrain ticket costs incurred will form part of the expenses incurred by Mr Karabo
(disbursements) to perform the legal service, rather than a service supplied by Mr Karabo to the
client.
l Any fixed property used for the purposes of an enterprise can be expropriated. Such fixed prop-
erty expropriated is deemed to be a supply made in the course or furtherance of an enterprise
(s 8(21)).
31.13 Output tax: Non-supplies (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11))
If a vendor supplies goods or services in the course or furtherance of his enterprise, he is obliged to
levy output tax on these supplies. There are, however, exceptions to this rule where supplies are
deemed not to be a supply for VAT purposes – the so-called non-supplies.
The following non-supplies are important:
l When a supply is made under a credit agreement, the buyer has the right to cancel that
agreement within a ‘cooling-off’ period of five days. If the buyer exercises such right to cancel,
that supply is deemed not to be a supply of goods or services (s 8(3)). If the buyer does not
cancel the transaction, a special time-of-supply rule applies. The time of supply is the day after
the ‘cooling-off’ period expired (s 9(2)(b)).
l In terms of a lay-by agreement, goods are reserved by deposit and only delivered to the buyer
when the full price or determined portion of the price is paid. For a lay-by agreement, where the
full price of goods to be delivered does not exceed R10 000, no supply occurs until the goods
are delivered (ss 8(4)(a) and 9(2)(c)). Where the agreement is, however, cancelled and the seller
1108
retains any amount, the seller is deemed to have supplied a service in respect of the lay-by
agreement (s 8(4)(b)). The consideration for the service is the amount retained (s 10(11)).
l If the input tax has been denied when the goods were originally acquired by the vendor, no
output tax is levied on the later sale of those goods by the vendor (s 8(14)(a)). Typical examples
will be where goods or services were acquired for entertainment purposes, or the supply of a
motor car (other than an employer granting the use of a motor car to an employee) (s 17(2) – see
31.21).
Example 31.28. Non-supplies
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the
following for these items:
Motor car: R143 000 (including VAT – input tax denied)
Coffee machine: R457 (including VAT – input tax denied)
Printer: R6 647 (including VAT)
He then sells all three items.
Explain the VAT consequences relating to the purchase and sale of the motor car, coffee machine
and the printer.
SOLUTION
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will be
able to claim an input tax deduction on the acquisition of the printer amounting to R867 (R6 647
× 15/115). No input tax will be claimable on the acquisition of the motor car and coffee machine,
as input tax deductions are specifically denied on the acquisition thereof.
Speedy will be required to levy output tax on the sale of only the printer, since the said supply
will be made in the course or the furtherance of his enterprise. Speedy will not be required to
account for any output tax on the sale of the coffee machine and motor car, since Speedy was
denied input tax deductions on the acquisition of these items (s 8(14)(a)).
l The supplying vendor and recipient vendor are in certain cases deemed to be one and the same
person in respect of certain company reorganisation transactions (s 8(25)). A reorganisation for
VAT purposes is deemed to be a non-event (no VAT is charged on the supply and no input VAT
adjustments are applicable). The transactions to which this is applicable are the following:
– going concern asset-for-share transactions: a person disposes of an asset to a company in
exchange for the company’s equity shares. These reorganisation transactions will only be a
non-event for VAT purposes if they meet the requirements of a going concern sale. These
reorganisation transactions will not be a non-event if the supplier and recipient have agreed in
writing that the transaction will be a zero-rated going concern transaction for VAT purposes
(see 31.10.3). If a single transfer of trading stock or a capital asset occurs, the normal VAT
rules will apply (s 42 of the Income Tax Act; see chapter 20)
– going concern intragroup transactions: one company disposes of an asset to another company
that forms part of the same group of companies. These reorganisation transactions will only be
a non-event for VAT purposes if they meet the requirements of a going concern sale. These
going concern intragroup transactions will not be a non-event if the supplier and recipient have
agreed in writing that the transaction will be a zero-rated going concern transaction for VAT
purposes (see 31.10.3). If a single transfer of trading stock or a capital asset occurs, the
normal VAT rules will apply (s 45 of the Income Tax Act; see chapter 20)
– amalgamation transactions: a company’s existence is terminated after it disposes of all its
assets to another company (s 44 of the Income Tax Act; see chapter 20)
– transactions relating to liquidation and deregistration: a company distributes all its assets to
another company that forms part of the same group of companies in anticipation of its
liquidation, winding up or deregistration (s 47 of the Income Tax Act; see chapter 20)
– fixed property asset-for-share transactions and intragroup transactions: a supplier (Vendor A)
disposes of fixed property to Vendor B and the parties agree in writing that the supplier
(Vendor A) will lease the fixed property from the recipient (Vendor B) immediately after the
supply happened.
1109
31.14 Output tax: No apportionment (s 8(16)(a))

If a vendor acquires goods or services partly for the purposes of making taxable supplies and subse-
quently sells these goods, the vendor will be deemed to make a taxable supply of goods or services
wholly in the course of his enterprise. The total consideration received for such supply will be subject
to VAT (s 8(16)(a)).
There are two exceptions to this rule: the first relate to fringe benefits (s 18(3)) and the second to
indemnity payments (s 8(8)). For both these types of supplies, the amount of output tax is payable
only to the extent that it relates to taxable supplies made in the course of the enterprise.
Example 31.29. No apportionment of output VAT

BBC Bank sells a computer to CNN Bank for R12 650. This computer was used 80% for the
making of taxable supplies and 20% for the making of exempt supplies.
Advise BBC Bank on the VAT consequences of the transaction.
SOLUTION
BBC Bank will be required to account for VAT at the standard rate on the full selling price of
R12 650, that is R1 650 (R12 650 × 15/115). However, BBC will be entitled to make an additional
input tax adjustment for the 20% exempt portion (s 16(3)(h) – see 31.25).
31.15 Time of supply (s 9)

The time of supply is important for VAT purposes, as it determines when (i.e., during which VAT
period) a vendor must account for VAT. The time-of-supply rules are applicable to both output and
input tax.
31.15.1 Time of supply (ss 9(1) and 9(2)(d))

The general rule of the time of supply is the earlier of
l the date of the invoice, or
l the date the payment is received by the supplier.
An ‘invoice’ is defined as ‘a document notifying an obligation to make payment’ (s 1(1)). This
definition is wide enough to embrace any document notifying the obligation to make payment, even
though it may not be called an invoice. For example, in certain circumstances a contract may
constitute an invoice as defined.
The date of delivery of the goods or of providing the services plays no role in determining the time of
supply. It will play a role only in special cases, such as if connected persons are involved.
Apart from the above general rule, there are also certain specific rules for special types of trans-
actions. Special rules also apply to vendors registered on the payments basis (see 31.3.2).
Take note that the general time of supply rule cannot be applied to supplies where the consideration
is received by the supplier through a coin-operated machine. Think, for example, of a coin-operated
machine in a hospital that sells soft drinks and chocolates. The time of supply for the supplier will be
at the time the money is taken from the machine. In the case of the person buying the soft drinks or
chocolates, the time of supply is the date the money is inserted into the machine (s 9(2)(d)).
31.15.2 Time of supply: Connected persons (s 9(2)(a))

To limit the risk of the manipulation of the cash flow relating to VAT, special time-of-supply rules are
applicable to connected persons (s 9(2)(a)).
A ‘connected person’ is
l any natural person (including his estate) and his relative or the estate of any relative
l any natural person and any trust fund of which any relative or estate of a relative may benefit
l a trust fund and any beneficiary
l any partnership or close corporation and any member thereof or any other person connected to
that member
1110
l any company
– and any other person (other than a company) where the person, his spouse, minor child or trust
fund in which they may be beneficiaries, separately or in aggregate, holds at least 10% of the
paid-up capital, equity shares or voting rights of the company (whether directly or indirectly), or
– any connected person to the person, spouse, minor child or trust fund
l any company, and
– any other company that is substantially controlled by the same shareholders, or
– any connected person to such other company
l a vendor and a separate branch, or division separately registered, or
l any employer and the pension or provident fund of which most of his employees are members.
The special time of supply rule will only apply if the application of the general time of supply rules
result in a date that is later than
l the date of removal of goods in the case of the supply of goods
l the date goods are made available to the recipient in the case of goods not to be removed, or
l the date when services are performed.
If the general time-of-supply rules are later than the dates mentioned above, the time of supply where
the supplier and recipient are connected persons is
l the time of removal of goods in the case of the supply of goods
l the time goods are made available to the recipient in the case of goods that are not to be removed,
or
l when services are performed.
If the consideration of the supply between connected persons cannot be determined, the general
time-of-supply rule is applicable (s 9(1)). This is only the case if the connected person receiving the
supply is entitled to deduct the full input tax.
31.15.3 Time of supply: Rental agreements (ss 8(11) and 9(3)(a))

A ‘rental agreement’ is any agreement for the letting of goods, excluding a finance lease. Although
the actual supply is the supply of a ‘right’ to use the goods, the right to use goods under a rental
agreement is specifically regarded as the supply of goods (s 8(11)).
The rental agreement may state that the rental is payable on the first day of each calendar month.
Invoices are not necessarily issued monthly.
When goods are supplied in terms of a rental agreement, the time of supply is the earlier of the date
on which payment is due, or the date on which payment is received (s 9(3)(a)).
31.15.4 Time of supply: Progressive supplies (s 9(3)(b))

Special time-of-supply rules are required in, for example, the construction industry where the consid-
eration payable for the supply depends on the progress made. The time of supply is the earliest of
the date when payment is due or is received, or any invoice relating to the payment is issued
(s 9(3)(b)).
Example 31.30. Progressive supplies
Ubuntu Construction is registered for VAT under the Category C tax period (monthly) and enters
into a contract to build 50 residential units for a total contract price of R6 555 000 (VAT inclusive).
The agreement provides for monthly progress payments to be made over a period of 12 months.
At the end of January 2022 and February 2022, the work certified as completed by the appointed
Project Manager was 10% and 23% respectively. Ubuntu Construction issued two tax invoices
as follows:
Invoice 1357 – 31 January 2022 R655 500 (10% of R6 555 000)
Invoice 1358 – 28 February 2022 R852 150 (23% of R6 555 000 less R655 500 already invoiced)
Explain the time of supply of the above for Ubuntu Construction.
1111
SOLUTION
As the goods are deemed to be supplied progressively, Ubuntu Construction will not account for
the full contract price at the time the agreement is entered into. Ubuntu Construction will account
for VAT of R85 500 (15 / 115 × R655 500) in the January 2022 return and R111 150 (15 / 115 ×
R852 150) in the February 2022 return.
31.15.5 Time of supply: Undetermined consideration (s 9(4))

A special time-of-supply rule exists for goods and services supplied if the consideration cannot be
determined upfront.
Typically, these supplies relate to goods in the mining, forestry, or agricultural industries. The prices
for those goods are dependent on the quality, international markets or the price is subject to
exchange rate fluctuations. For instance, in the forestry industry, the price of logs supplied to a wood
mill depends on the quality and moisture content of the logs. The quality is determined by the pur-
chaser only after risk and ownership passes.
If the consideration of goods and services supplied cannot be determined upfront, the time of supply
is the earlier of
l the date payment is due or received, or
l the date the invoice is issued (s 9(4)).
31.16 Value of the supply (s 10(2))

As pointed out, it is important to note whether a specific provision refers to the value, consideration or
open market value of a supply. If the provision refers to the value, the amount of VAT is calculated by
applying 15% to the value amount. If it refers to consideration or open market value, the amount of
VAT is calculated by applying the tax fraction (15/115) to the amount of the consideration or open
market value.
For the purposes of VAT, there is a general valuation rule with certain specific rules applying to the
value of certain supplies. Where no specific rule exists, the general rule will apply.
31.16.1 Value of the supply: General rule (s 10(3))

The value of the supply of goods or services is either:
l the amount of the money if the consideration is in money, or
l the open market value of the consideration if the consideration is not in money
less
l the amount of VAT included in the consideration.
When the vendor does not account for the VAT separately, the tax fraction is applied to determine the
VAT included in the consideration.
Remember
l The value of a supply therefore refers to the amount excluding VAT.
l The consideration and open market value of a supply refers to the amount including VAT.
Example 31.31. Value of supply
A vendor sells goods for R115 000 (including VAT). Calculate the VAT that is included in the
consideration.
SOLUTION
VAT is determined as: R115 000 × 15/115; that is....................................................... R15 000
1112
31.16.2 Value of the supply: Connected persons (s 10(4))

When a vendor supplies goods to a connected person
l for no consideration, or
l for a consideration in money that is less than the open market value, or
l the consideration cannot be determined at the time of the supply, and
l the connected person would not have been able to claim the full input tax,
the consideration of the supply is deemed to be its open market value.
Remember
This special rule relating to connected persons is not applicable to the supply of fringe benefits
and barter transactions.
Example 31.32. Value of supply: Connected persons
A and B are connected persons. A sells trading stock valued at R10 000 to B, who only paid an
amount of R4 000 for this trading stock. B is not entitled to a full input tax deduction (only 60%).
Explain the VAT consequences of the above.
SOLUTION
A has to account for VAT on the open market value of the supply: R10 000 × 15/115 = R1 304,35.
(The consideration received from B is ignored.) A’s proceeds will therefore be R4 000 less
R1 340,35 = R2 695,65.
B will only be able to claim an input tax on the actual consideration of R4 000: R4 000 × 15/115 ×
60% = R313,04. (B only has a VAT invoice showing the total consideration as R4 000 and could
therefore not claim input tax on R10 000. The definition of ‘input tax’ further specifically states
that it is the tax charged and payable. Unless the parties decide to adjust their purchase price to
R10 000, B will always only be able to claim the input tax on the actual consideration.)
Example 31.33. Value of supply to connected person
A vendor sells goods for R115 000 (including VAT) to its wholly-owned subsidiary, which is not
registered as a vendor for VAT purposes. The open market value of the goods on the date of sale
is R172 500.
Calculate the VAT that is payable by the vendor.
SOLUTION
The open market value of R172 500 must be used since the recipient, who is a connected
person, is not entitled to claim input tax.
VAT is determined as: R172 500 × 15/115; that is .......................................................... R22 500
Note
It is therefore clear from the above that the special value-of-supply rule for connected persons
(s 10(4)) will be applicable when the connected person could either claim only a portion of the
input tax or when the connected person could not claim any portion of the input tax.
Had the wholly-owned subsidiary in this example been a registered vendor that is entitled to the
full input tax, the consideration for the supply would have been R115 000 and the output tax
R15 000 (R115 000 × 15/115).
The reason for this special rule is that connected persons could try to limit the VAT cost and therefore
manipulate the prices so that the VAT cost is decreased. If the recipient is a vendor and allowed to
claim the input tax in full, no manipulation can take place. The VAT paid by the one vendor is claimed
back by the other vendor. No special value of supply rules is therefore required.
31.16.3 Value of the supply: Vouchers (s 10(18) and (19))

Vouchers can either entitle the bearer to goods or services of a specific monetary amount, or it could
entitle the bearer to specific goods and services. The VAT treatment of these two types of vouchers
differ.
1113
31.16.3.1 Voucher entitling bearer to specific monetary value (s 10(18))

Many people buy vouchers as gifts for others. The voucher entitles the bearer to the right to receive
unspecified goods or services for a specific monetary value. There is no VAT on the purchase of the
voucher as the transaction is disregarded for VAT purposes (s 10(18)). The subsequent redemption
of the voucher will attract VAT. The voucher will then form part of the consideration for the supply of
the goods or service.
31.16.3.2 Voucher entitling bearer to specific goods and services (s 10(19))

It might also be that some people buy vouchers that entitle the bearer to only specific goods or
services on the surrender of the voucher. The issue of the voucher then attracts VAT. The subsequent
surrender of the voucher attracts no further VAT (s 10(19)).
31.16.4 Value of the supply: Discount vouchers (s 10(20))

One should distinguish between discount vouchers issued and redeemed by the same suppliers and
discount vouchers issued and redeemed by two different suppliers.
31.16.4.1 Discount vouchers issued and redeemed by the same supplier

When a dealer decides to issue discount vouchers to promote the sale of his own goods, the issue of
the discount vouchers does not have any VAT consequences. When the client redeems the discount
voucher at the dealer to reduce the price he pays for his goods, the discount reduces the
consideration for the supply and VAT is only accounted for on the reduced amount. If Shoprite, for
example, has a loyalty programme and customers could earn discount vouchers, the redemption of
the discount vouchers will only reduce the price the customer pays and Shoprite will only account for
VAT on the reduced amount.
31.16.4.2 Discount vouchers issued and redeemed by two different suppliers

When the discount voucher is issued by someone who is not the supplier of the goods, the
redemption of the discount voucher does not reduce the consideration for the supply. The supplier
has to account for the VAT on the discount voucher. The discount voucher does not reduce the
consideration, but, like gift vouchers, forms part of the consideration for the supply of the goods. An
example where this will apply is where Shoprite sells OMO washing powder. OMO would like to
increase the sale of their products and they offer a discount voucher of R10 on each OMO washing
powder purchased from Shoprite. The price before the discount for the OMO washing powder was
R100. The consideration for the supply payable by the customer will be the R90 cash (R100 – R10)
and the R10 discount voucher. Shoprite has to account for VAT on the full R100. The R100 is deemed
to include VAT (s 10(20)). OMO will then pay the R10 to Shoprite.
31.16.5 Value of the supply: Entertainment (s 10(21))

The input tax on the acquisition of entertainment is usually denied (s 17(2)). When a supplier then
makes a supply of entertainment, the value of the supply is nil. This will be the case even if the supply
was made to a connected person. The value will not be nil if the supplier is in the entertainment
business (see 31.21.1).
Example 31.34. Value of supply: Entertainment
Abraham purchased coffee powder in bulk for his employees to consume at work. Abraham sold
half of the coffee powder to Magdalene (a connected person) at a discount of 30%. Magdalene
also obtained the coffee powder in order to provide it to her employees to consume whilst at
work.
Explain the VAT consequences of the above.
SOLUTION
Abraham cannot claim the input tax on the purchase of the coffee powder as this transaction is in
respect of the acquisition of goods for the purposes of entertainment (s 17(2)(a)). The value of
the supply of the coffee to his employees is Rnil, as it constitutes entertainment (s 10(21)). The
value of the supply between Abraham and Magdalene is also Rnil: (s 8(14)(a)), even though
Magdalene and Abraham are connected parties. Magdalene will therefore also not be entitled to
claim any input tax on the purchase of the coffee powder from Abraham, as she did not pay any
VAT. (Even if she had paid VAT, the input would be denied under s 17(2)(a) as the coffee will be
used for entertainment by Magdalene as well.)
1114
31.16.6 Value of the supply: Dual supplies (s 10(22))

Sometimes a single consideration is paid for more than one supply made to the recipient. If this is the
case, the supply shall be deemed to be for such part of the consideration as is properly attributable
to it. For example, A sells his private house as well as his computer from his enterprise to B. B pays
an amount of R300 000 for both. This payment should now be allocated to the different items to
determine the VAT element, since the selling of the private house will not attract VAT, whereas the
selling of the computer will be subject to VAT at the standard rate. B could also pay by means of a
motor car, valued at R300 000, and then the consideration should be apportioned to each of the
components to which it relates.
The above should not be confused with the situation where the goods supplied was previously used
partly for taxable purposes. For example, a building is sold which was partly let as residential units
(exempt supplies) and partly as office space (taxable supplies). This supply will be a taxable supply
without any apportionment. Dual supplies refer to a situation where a single consideration (not a
single supply) is received for more than one supply.
31.16.7 Value of the supply: Supply for no consideration (s 10(23))

Where a supply is made for no consideration, the value of the supply is deemed to be nil (excluding
connected persons – see 31.16.2).
Promotional supplies, such as product samples made for no consideration in a business context, are
generally regarded as taxable supplies. That is if they are made in an effort to promote other taxable
supplies which are usually made for a consideration by the enterprise. The value of these taxable
supplies, as they are made for no consideration, is still deemed to be nil (Interpretation Note No. 70).
31.17 Basics of input tax (ss 16 and 17)

Input tax is the VAT component of the payment made by the vendor for goods and services supplied
to him for the purpose of making taxable supplies. This input tax can be deducted from the output tax
in order to calculate the total VAT payable or refundable. A vendor who purchases, for example,
stationery to be used in the making of taxable supplies, can claim the VAT part of the expense as
input tax. Where goods or services are, however, used partly for purposes of making taxable
supplies, only the portion of the input tax attributable to taxable supplies may be claimed as input tax
(s 17(1)). However, if 95% or more of the purchased goods or services will be used in the making of
taxable supplies, the full input tax may be claimed and no apportionment is necessary (the so-called
de minimis rule) (first proviso to s 17(1)).
Input tax may be claimed only if the vendor has documentary proof that substantiates the vendor’s
entitlement to the input tax. Such documentary proof includes
l a tax invoice
l a debit note or a credit note
l a document acceptable to the Commissioner if the consideration for the supply is less than R50
l a document where the Commissioner is satisfied that there will be sufficient records available to
establish the particulars required on an invoice for any supply
l a release notification or other document, together with a receipt of payment of the tax in the case
of imported goods
l an agent statement issued to a principal vendor (s 54(3)(a) – see 31.32), or
l any other documentary proof as is acceptable to the Commissioner (s 16(2) and Interpretation
Note No. 92).
Input tax should usually be deducted in the VAT 201 return in the period during which the time of
supply occurs. (For imported goods: the period during which the goods are released in terms of the
Customs and Excise Act.) Input tax may be deducted in a later period if the vendor is unable to
deduct input tax in the aforementioned period (for example, because documentary evidence is not
received in time). This later period may not be more than five years after the tax period during which
the input tax deduction should originally have been made (first proviso to s 16(3)). To be able to get
this input tax deduction, the vendor should retain the necessary documents (proviso to s 16(2)).
Chapter 4 of the Tax Administration Act sets out the details of the form in which records must be kept
(including electronic form) and the period for which documents should be retained (see chapter 33).
The requirements to issue and retain documents are equally applicable to vendors that do ‘e-invoicing’.
Vendors do not need prior approval from the Commissioner to implement e-invoicing.
1115
If goods or services are purchased from a person who is not a registered vendor, no input tax can
usually be claimed, as no VAT has been paid on the goods or services. Deemed input tax can, how-
ever, sometimes be claimed (see 31.22).
31.18 Tax invoices (ss 16(2) and 20)

Tax invoices are the driving force behind the VAT system. No input tax may be claimed unless a ven-
dor is in possession of a tax invoice or other documentary proof as approved by the Commissioner.
A registered vendor is obliged to issue a tax invoice only if the total consideration of the supply
exceeds R50 (suppliers who are not registered do not issue tax invoices) (s 20(6)). A document that
is acceptable to the Commissioner should be issued for supplies not exceeding R50.
A supplier, or the agent of a supplier, must furnish a recipient with a tax invoice within 21 days of the
date of the supply (s 20(1)). Copies of tax invoices must clearly indicate that they are only copies,
since a vendor may issue only one original tax invoice (s 20(1)).
Where the supply exceeds R5 000, a tax invoice must be issued in South African currency unless the
information relates to a zero-rated supply. Where applicable, a foreign currency, together with the
daily exchange rate at the time of supply should also be on the tax invoice (see BGR 11). The
following information must appear on a tax invoice (s 20(4)):
l the words ‘tax invoice’, ‘VAT invoice’ or ‘invoice’
l the name, address (either the physical or postal address) and VAT registration number of the
supplier (see BGR 21)
l the name, address (either the physical or postal address) and VAT registration number (if the
recipient is a vendor) of the recipient (see BGR 21)
l an individual serialised number and the date on which the tax invoice is issued
l a full and proper description of the goods or services supplied (including an indication that the
goods are second-hand, if that is the case)
l the quantity or volume of the goods or services supplied
l either
– the value of the supply, the amount of VAT charged and the consideration for the supply, or
– where the amount of VAT charged is calculated by applying the tax fraction to the consider-
ation, the consideration for the supply and either the VAT charged or a statement that it
includes a charge for VAT and the rate at which the VAT was charged.
Where the consideration for the supply does not exceed R5 000, an abridged tax invoice may be
issued (s 20(5)). This abridged tax invoice should contain only the following particulars:
l the words ‘tax invoice’, ‘VAT invoice’ or ‘invoice’
l the name, address and VAT registration number of the supplier
l an individual serialised number and the date on which the tax invoice is issued
l a description of the goods or services supplied (including an indication that the goods are
second-hand, if that is the case)
l either
– the value of the supply, the amount of VAT levied and the consideration paid for the supply, or
– where the amount of VAT charged is calculated by applying the tax fraction to the consider-
ation, the consideration for the supply and the VAT charged or a statement that it includes a
charge for VAT and the rate at which the VAT was charged.
Remember
l The abridged tax invoice does not have to include the name, address or VAT registration
number of the recipient or the quantity or volume of the goods or services.
l An abridged tax invoice may not be issued for zero-rated supplies (proviso to s 20(5)).
l The requirement that the VAT amount should be reflected in South African currency is not
applicable to zero-rated supplies.
l A vendor may reflect the foreign currency of a supply on an invoice as long as the South
African currency is also reflected on it. Vendors should use the applicable daily exchange
rate as published on the website of the South African Reserve Bank, Bloomberg, or the
European Central Bank. The exchange rate to be used is the weighted average of the bank’s
daily rates at approximately 10:30 am (BGR 11).
1116
For practical reasons, a foreign supplier of electronic services is required to issue a tax invoice that
contains slightly different information. The VAT registration number of the recipient is, for example,
not required (see BGR 28).
If the Commissioner is satisfied that a vendor’s records are sufficient and that it would be impractical
to require a full tax invoice to be issued, he may direct that certain particulars may be omitted or that
no tax invoice needs to be issued (s 20(7)) (see BGR 27 and Interpretation Note No. 83). A short-term
insurer, for example, does not have to issue a tax invoice subject to the condition that the policy
documents contain prescribed information (see par 2.2 of BGR 14).
Although the supplier usually issues VAT documentation, the recipients (not suppliers) could some-
times be required to issue tax invoices, credit and debit notes. This would be the case if the recipient
l determines the consideration for the supply, and
l is in control of determining the quantity or quality of the supply (see Interpretation Note No. 56).
The Commissioner is also granted discretionary powers to prescribe (s 16(2)(f))) or accept (s 16(2)(g))
other documentary proof that a vendor must be in possession of before making any input tax
deductions (see Interpretation Note No. 92 for guidance on documentary proof for specific trans-
actions). In South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] ZAWCHC, sponsorship agreements
were accepted as sufficient proof to enable input tax to be claimed despite no tax invoices being
issued (see 31.5.1). The conditions under which the Commissioner will accept different documentary
proof have been refined.
31.19 Debit notes, credit notes and errors on tax invoices (ss 20(1B) and 21)
Changes to the VAT consequences of a supply as documented on a tax invoice could occur. The
VAT Act provides for the issuing of debit and credit notes if a tax invoice was issued in relation to the
original supply (s 21(1)). This is required
l if a supply is cancelled
l the nature of the supply has changed fundamentally
l the consideration has changed
l goods or services have been returned, or
l if a correction needs to be made regarding the amount of consideration agreed upon on an
issued tax invoice.
If there was an error on the originally issued tax invoice that is not listed above, a new corrected tax
invoice should be issued. A new corrected tax invoice will, for example, be issued if the name,
address or VAT registration number of the recipient was incorrect on the original tax invoice
(s 20(1B)). The rules to correct an original tax invoice are as follows:
l A recipient informs the supplier that information on the original tax invoice is incorrect and
requests the original tax invoice to be corrected.
l The supplier must correct the original tax invoice with the correct particulars within 21 days from
the date of the request. The supplier will then issue a new corrected tax invoice.
l The original tax invoice is invalid from the date the recipient requests the supplier to correct an error.
l The time of supply will continue to be the time of supply as indicated on the original tax invoice.
l The supplier must retain sufficient information to identify the transaction to which the original tax
invoice refers.
A new corrected tax invoice will not be issued if the error related to an amount of VAT or the value of
the consideration. In such an instance, a debit note (see 31.19.1) or credit note (see 31.19.2) should
be issued.
31.19.1 Debit notes

If the amount of VAT indicated on the tax invoice is incorrectly shown as an amount that is less than
the actual VAT charged in respect of the supply, a debit note must be issued. A debit note therefore
increases the VAT output of a transaction.
The following information must appear on the debit note (s 21(3)(b)):
l the words ‘debit note’
l the name, address and VAT registration number of the recipient (if the recipient is a vendor)
(unless an abridged tax invoice was issued)
l the date on which the debit note was issued
1117
l either
– the amount by which the value of the supply shown on the tax invoice has been increased, and
the amount of the additional VAT, or
– where the VAT charged is calculated by applying the tax fraction to the consideration: the
amount by which the consideration has been increased. Together with this either the amount of
the additional VAT or a statement that the increase includes VAT and the rate of the VAT
included
l a brief explanation of the circumstances giving rise to the debit note
l sufficient information to identify the transaction to which the debit note refers.
31.19.2 Credit notes

If the amount of VAT indicated on the tax invoice is incorrectly shown as an amount that is more than
the actual VAT charged in respect of the supply, a credit note must be issued. A credit note therefore
reduces the output VAT of a transaction.
The following information must appear on the credit note (s 21(3)(a)):
l the words ‘credit note’
l the name, address and VAT registration number of the recipient (if the recipient is a vendor)
(unless an abridged tax invoice was issued)
l the date on which the credit note was issued
l either
– the amount by which the value of the supply shown on the tax invoice has been reduced, and
the amount of the reduced VAT, or
– where the VAT charged is calculated by applying the tax fraction to the consideration: the
amount by which the consideration has been reduced. Together with this the amount of the
excess (reduced) VAT or a statement that the reduction includes VAT and the rate of the VAT
included
l a brief explanation of the circumstances giving rise to the credit note
l sufficient information to identify the transaction to which the credit note refers.
A binding general ruling (BGR 6) clarifies the VAT treatment of discounts, rebates and incentives in
the production, distribution as well as marketing of the packaged consumer goods industry. The
discounts, rebates and incentives could be divided into two categories, namely variable allowances
and fixed allowances.
Variable allowances are usually granted to retailers subject to the retailer satisfying certain conditions
stipulated in the terms of a trade agreement. Variable allowances include, for example, early settle-
ment allowances and growth rebates. An early settlement allowance is granted on the prompt pay-
ment for a supply. Growth rebates are allowances linked to a volume target where a percentage dis-
count will be provided when a certain growth percentage has been achieved. Variable allowances
are regarded as a reduction in the original purchase prices and a credit note should be issued
unless otherwise directed. If Vendor X supplies goods to Vendor Z, Vendor X should issue a credit
note for the variable allowance to Vendor Z to facilitate the reduction of the consideration payable by
Vendor Z.
Fixed allowances are granted based on the condition that an actual supply is performed. Fixed allow-
ances include, for example, new store allowances and major refurbishment allowances. A new store
allowance is an allowance granted by the supplier for the promotion of its products with the opening
of a new store by the recipient. Major refurbishment allowances are payments to revamp a retailer’s
store to meet the required standard. The binding general ruling (BGR 6) determines that fixed
allowances are regarded as consideration for the supply of a service and a tax invoice must be
issued. If Vendor X supplies goods or services to Vendor Z, Vendor Z should issue a tax invoice to
Vendor X for the supply of the fixed allowance.
Example 31.35. Variable allowance

OCS Wholesalers purchases trading stock from Kleentex (Pty) Ltd for R115 000. As OCS Whole-
salers exceeded the R75 000 purchase target for the month, they were entitled to a growth
rebate (variable allowance) of R20 000 and only paid the difference of R95 000 (R115 000 less
R20 000).
Discuss the VAT implications of the growth rebate.
1118
SOLUTION
With the original purchase transaction, Kleentex (Pty) Ltd would have issued a tax invoice to OCS
Wholesalers stating a consideration due of R115 000 (R100 000 plus R15 000 VAT). Kleen-
tex (Pty) Ltd would now also have to issue a credit note for the R20 000 growth rebate. The credit
note should indicate the reduction in the consideration of the supply of R20 000 (R17 391,30 plus
VAT of R2 608,70). As Kleentex (Pty) Ltd has previously accounted for an excess amount of
output tax, it must either increase its input tax by R2 608,70 or reduce its output tax attributable
to the tax period by R2 608,70 (s 21(2)(b)). As OCS Wholesalers has previously deducted input
tax in relation to a supply and receives a credit note, it must make the necessary adjustment in
its VAT return (s 21(6)). The excess tax (R2 608,70) must be accounted for by OCS Wholesalers
by either increasing its output tax or reducing its input tax for the tax period in which the credit
note is issued.
Example 31.36. Fixed allowance
Let us assume that OCS Wholesalers again purchases trading stock from Kleentex (Pty) Ltd for
R115 000. As OCS Wholesalers has just opened its store, it is entitled to a promotion of new store
allowance (fixed allowance) of R20 000. OCS Wholesalers again only paid the net amount of
R95 000 (R115 000 less R20 000).
Discuss the VAT implications of the promotion of new store allowance.
SOLUTION
With the original purchase transaction, Kleentex (Pty) Ltd would again issue a tax invoice to
OCS Wholesalers with a consideration due of R115 000 (R100 000 plus R15 000 VAT). For fixed
allowances, OCS Wholesalers is regarded to supply a service to Kleentex (Pty) Ltd (in this case
an advertising service of the product of Kleentex (Pty) Ltd with the opening of its store). To cor-
rectly account for the fixed allowance, OCS Wholesalers should now issue a tax invoice to
Kleentex (Pty) Ltd for R20 000 (R17 391,30 plus VAT of R2 608,70). This deemed supply for
which the tax invoice is issued by OCS Wholesalers will result in it having an additional output tax
liability of R2 608,70 with Kleentex (Pty) Ltd having a corresponding increase in its input tax
deduction of R2 608,70.
31.20 The determination of input tax (s 17)

‘Input tax’ is defined in s 1(1) as to include the tax payable by a vendor
l to a supplier for the supply of goods or services by the supplier to the vendor, or
l on the importation of goods by the vendor.
The ‘input tax’, as mentioned above, relates to VAT that was paid by the vendor when acquiring
goods or services and imported goods. When goods or services are acquired from a vendor, VAT will
be paid and a tax invoice will be supplied. When goods are imported, VAT is levied, and this amount
can sometimes be claimed, as input tax, by a vendor.
VAT can be claimed as an input tax deduction only if VAT was paid by the vendor at the standard
rate or, in certain circumstances, also on the purchase of second-hand goods when no VAT was
levied (that is, a notional or deemed input tax deduction). No VAT may be claimed if the vendor does
not have a valid tax invoice or the required documentation to claim a notional input tax deduction
(see 31.22).
To determine whether a VAT amount may be claimed as an input tax deduction, it is important to
determine the purpose for which the goods or services acquired will be used.
If a vendor uses the goods or services wholly in the course of making taxable supplies, then the
vendor would be entitled to claim the full input tax.
If a vendor uses the goods or services only partly in the course of making taxable supplies, either of
the following input tax deductions may be made
l the full input tax deduction (so-called de minimis rule) if the taxable use is 95% or more of the
total intended use, or
l the portion that relates to the taxable supplies if the taxable use is less than 95% (the input tax
being apportioned by the vendor).
1119
Remember
Apportionment of input tax is thus compulsory where goods and services are acquired for both
taxable and exempt supplies, but output tax is not apportioned (except for fringe benefits and
indemnity payments).
The methods used to calculate the apportionment rate of input tax are discussed below.
31.20.1 Turnover-based method

For most vendors, only one standard method of apportionment, that is the turnover-based method, is
approved by SARS (BGR 16). Essentially, the turnover-based method entails the total taxable
supplies being expressed as a percentage of total supplies. The working thereof is illustrated in the
following formula:
Y= A/(A+B+C) where
Y = the percentage of taxable use of input tax deductible
A = the value of all taxable supplies (including deemed taxable supplies) made during the period
B = the value of all exempt supplies made during the period, and
C = the value of any other amount that was received or which accrued during the period, whether in
respect of a supply or not (for example dividend income and statutory fines).
The amounts used in the above calculation should exclude VAT (‘value’ referring to an amount that
excludes VAT) and the percentage of taxable use should be rounded off to two decimal places.
SARS states that the following amounts must also be excluded from the calculation:
l supply of any capital goods or services (unless supplied under a rental agreement)
l supply of goods or services for which an input tax credit was denied (see 31.21).
The percentage of taxable usage (Y in the above formula) is calculated only once a year, and the
same percentage is used for all the inputs of that specific year if the supply is not wholly applied for
taxable or non-taxable purposes.
Example 31.37. Apportionment of input tax
At the beginning of its current financial year, Ramaphosa CC registered as a VAT vendor. It did
so as it realised that its taxable supplies in the coming year would exceed the registration
threshold.
The CC owns several residential properties which it leases to tenants as residential accommo-
dation. Additionally, it manufactures and promotes ‘Flangals’, a new type of square potato chip.
During the last year, the CC earned R175 000 (excluding VAT) from its letting activities and
R200 000 (excluding VAT) from manufacturing and promoting ‘Flangals’.
Immediately after registering for VAT purposes, the managing director authorised the purchase
of the following assets:
l a new computer, costing R23 000 (including VAT), to be used for administering the residen-
tial letting activities and the chip manufacturing process
l a new mixer, costing R16 100 (including VAT), to be used solely in the chip manufacturing
process.
The managing director now wishes to determine what input tax the CC can claim, bearing in
mind that it is registered for VAT purposes.
Calculate the apportionment ratio of input tax using the turnover-based method and apply this
ratio to determine the amount of input tax that Ramaphosa CC can claim in its first VAT period.
1120
SOLUTION
The computer is going to be used in making both taxable supplies (the selling of potato chips)
and non-taxable supplies (the leasing of residential accommodation). Therefore, the input tax
deduction must be apportioned.
The turnover-based method entails the total taxable supplies being expressed as a percentage
of total supplies and is an acceptable means of determining an input tax ratio. The following
formula is applied:
Y = A/(A+B+C), where
Y = the percentage deductible input tax
A = the value of taxable supplies (R200 000)
B = the value of exempt supplies (R175 000), and
C = Rnil.
Thus:
Y = R200 000/R375 000 × 100 = 53,33%
Total amount of input tax (R23 000 × 15/115) = R3 000
Ramaphosa CC will be entitled to claim R1 600 (R3 000 × 53,33%) as an input tax deduction on
the computer.
The CC will be entitled to claim the full input tax deduction on the mixer as this machine is used
wholly for the making of taxable supplies. Ramaphosa CC will therefore be entitled to claim a
further R2 100 (R16 100 × 15/115) as an input tax deduction.
31.20.2 Special apportionment method

A vendor may use an alternative apportionment method only when prior approval is granted by
SARS. Approval should be sought if the turnover-based method does not yield a fair approximation of
the extent of taxable supplies. Other methods are, for example, the varied input-based method, the
floor-space method, the transaction-based method and the employee-time method.
SARS’s refusal to approve an alternative apportionment method is subject to objection and appeal
(s 32(1)(a)(iv)).
31.21 Input tax: Denial of input tax (s 17(2))

Input tax may not be claimed by a vendor for certain goods or services (s 17(2)). The input tax is
denied even if the vendor paid VAT when the goods or services were acquired and is going to use
the goods or services for the making of taxable supplies.
31.21.1 Denial of input tax: Entertainment

The input tax is denied on goods or services acquired to the extent that such goods or services are
acquired for the purposes of entertainment (s 17(2)(a)).
Entertainment as defined (s 1(1)), includes the provision of food, beverages, accommodation,
amusement, recreation or hospitality of any kind.
In respect of entertainment expenses, there are cases where the input tax will not be denied, these
being:
l Vendors in the business of supplying entertainment can claim input tax related to their entertain-
ment. They can only claim input tax as long as a charge is made by the vendor for the enter-
tainment and
– the charge covers all direct and indirect costs, or
– the charge is equal to the open market value of the entertainment supplied.
l Vendors in the business of supplying entertainment can claim the input tax on entertainment if the
entertainment is supplied for bona fide promotional purposes. They can only claim it back if the
supply for bona fide promotional purposes is to customers in the ordinary course of the enterprise
or any excess food, not consumed by the customers during a taxable supply, is subsequently
given to
– any employee of the vendor, or
– any welfare organisation.
l A vendor supplying entertainment to an employee or connected person and a charge is made to
such person that covers all direct and indirect costs of such entertainment.
1121
l Any meal, refreshment or accommodation of a vendor, his employee or any self-employed natural
person who is required to be away from his usual place of residence and usual place of business
for at least one night. A self-employed person is a person who is not an employee of the vendor
but who invoices the vendor for services rendered. A vendor may only claim the input tax on the
personal subsistence of a self-employed natural person where the self-employed natural person is
– by reason of his contractual obligations with the vendor
– obliged to spend any night away from his usual place of residence and usual place of business.
l Vendors operating taxable (not exempt) passenger transport services.
l Vendors organising seminars or similar events for reward.
31.21.2 Denial of input tax: Club membership fees and subscriptions

The input tax deduction is denied for any fees or subscriptions paid by the vendor for the member-
ship of any club of a sporting, social or recreational nature, for example golf membership (s 17(2)(b)).
The input tax is not denied if the payment is for the professional membership of an employee, for
example membership of the CA(SA) accounting profession in South Africa.
31.21.3 Denial of input tax: Motor car

The input tax on the supply of a motor car through an acquisition or rental transaction is also denied
(s 17(2)(c)). A ‘motor car’ includes the following five categories (definition in s 1 and Interpretation
Note No. 82):
l motor car
l station wagon
l minibus
l double-cab light delivery vehicle, and
l any other motor vehicle that
– is normally used on public roads
– has three or more wheels and
– is constructed or converted wholly or mainly for the carriage of passengers.
Once it is established that a vehicle does not fall within one of the first four categories, a determina-
tion must be made in order to confirm whether the vehicle falls within the fifth category. In this regard,
the judgment in ITC 1596 stated that the term ‘mainly for the carriage of passengers’ implies an
objective test with a quantitative measurement of more than 50%. The objective test requires a one-
dimensional measurement of the length of the area designed for the carriage of passengers in
relation to the dedicated loading space in the vehicle. This objective test was approved in the sub-
sequent case of ITC 1693. The importance of an objective test was again confirmed in the case of
RTCC v CSARS (VAT Case 1345 (28 July 2016)). The subjective use by the vendor of the vehicle
would therefore not be decisive but rather the objective facts including the purpose for which the
vehicle is constructed or converted.
A ‘motor car’ specifically excludes the following (definition in s 1(1) and Interpretation Note No. 82):
l vehicles capable of transporting only one person or suitable for carrying more than sixteen persons
l vehicles with an unladen mass of 3 500 kg or more
l caravans
l ambulances
l vehicles constructed for a purpose other than the transport of persons that do not have the ability
to transport passengers other than such as is incidental to that purpose
l game viewing vehicles constructed or permanently converted for the carriage of seven or more
passengers for game viewing. The game viewing vehicle should be used in national parks, game
reserves, sanctuaries or safari areas and exclusively for the purpose of game viewing, other than
use that is merely incidental and subordinate to that use (see Interpretation Note No. 42), and
l vehicles constructed as, or permanently converted into hearses for the transport of deceased
persons and used exclusively for that purpose.
The denial of input tax does not apply in the case of a vendor who
l is a car dealer
l runs a car hire business at an economic rental, or
1122
l regularly or continuously supplies motor cars as prizes to clients or customers (other than employees,
office-holders or any connected person in relation to that employee, office-holder or vendor).
A vendor that acquires a ‘motor car’ for which an input tax deduction is denied upon acquisition, and
subsequently utilises such vehicle for purposes for which an input tax deduction would have been
allowed on acquisition, may deduct input tax after the subsequent change of use of the motor vehicle
(s 18(4) – see 31.26). There are also special rules for the conversion of vehicles into game viewing
vehicles and hearses (s 18(9) – see 31.28).
Example 31.38. Denial of input tax on motor car
Mr Silindile purchased a new motor car valued at R228 000 from Van Oordt & Hills Motors Inc. in
terms of a cash sale with monthly payments of R4 500. As an additional option, Mr Silindile took
out a maintenance plan and insurance on the motor car resulting in an additional monthly
payment of R500 and R400 respectively. All amounts include VAT.
Determine the input tax deduction claimable (if any) by Mr Silindile.
SOLUTION
Mr Silindile would not be able to claim an input tax deduction on the cost of the motor car, as this
deduction is denied (s 17(2)(c)). Mr Silindile will, however, be allowed to claim an input tax
deduction in respect of the maintenance plan and insurance on the motor car as the input tax
deduction on these supplies is not denied (s 17(2)(c)).
Note that if the maintenance plan and insurance payment were not separately indicated on the
VAT invoice, but formed part of the supply of the motor car, the input tax deduction on these
expenses would have been denied (s 17(2)(c)).
31.22 Input tax: Deemed input tax on second-hand goods (ss 1(1), 18(8) and 20(8))
The VAT Act provides that a deemed input tax on second-hand goods may be claimed. This deemed
input tax can be claimed when second-hand goods are acquired from a resident of South Africa and
the goods are situated in South Africa.
‘Second-hand goods’ are defined as
l goods that were previously owned and used.
Second-hand goods do not include
l animals
l gold coins issued by the Reserve Bank (s 11(1)(k))
l goods consisting solely of gold unless acquired for the sole purpose of supplying such goods in
the same state without any further processing (99,5% purity is required, and 24 carat gold is
accepted as consisting solely of gold (BGR 43))
l any other goods containing gold unless those goods are acquired for the sole purpose of
supplying those goods in the same or substantially the same state to another person, or
l certain prospecting and mining rights.
Fixed property usually also qualifies as second-hand goods if it was previously owned and used. All
supplies of fixed property as part of the land reform regime are, however, excluded from the defini-
tion of ‘second-hand goods’. The reason for the exclusion is to prevent claims for notional input tax on
such land. The supply of land as part of the land reform programme is usually either zero-rated or
exempt from transfer duty. No tax-related cost is therefore associated with the acquisition of the land
and the recipient of the supply is not entitled to any notional input VAT.
The input tax is calculated by the application of the tax fraction to the lesser of
l the purchase price (consideration in money), or
l open market value
even though no VAT has been paid.
‘Open market value’ is the consideration in money that the supply of goods and services will fetch if
freely offered and made between non-connected persons. Open market value includes VAT, where
applicable, in respect of taxable supplies.
It should, however, be noted that when a vendor acquires second-hand fixed property for the pur-
poses of making taxable supplies, the purchase price (consideration in money) does not include any
transfer duty. As a result, the amount of transfer duty paid or payable by a vendor to acquire the
second-hand fixed property should not be included in the calculation of any notional input tax deduc-
tion (see BGR 57).
1123
This deemed VAT may be claimed as input tax to the extent that payment has been made for the
second-hand goods (s 16(3)(a)(ii)(aa)). If only a portion of the purchase price for the second-hand
goods has been paid, only the same relative portion of the deemed input tax may be claimed.
Remember
l This deemed input tax rule relates only to goods previously owned and used. The acquisition
of trading stock from a non-vendor (except for antiques) would usually not qualify as
second-hand goods, as the trading stock was not previously used.
l The rule that the lesser of purchase price or open market value should be used in
calculating the deemed input tax, does not apply to the motor industry on the trade in of
second-hand vehicles. It is not the intention of the VAT Act to deny an input tax credit on an
arm’s length transaction between parties that are not connected persons. A binding general
ruling (BGR 12) allows motor dealers to deduct the deemed input tax on the full con-
sideration (including any over-allowance amount) paid or credited to the supplier for a
second-hand vehicle traded-in under a non-taxable supply.
Example 31.39. Input tax on second-hand goods
Simuyne (Pty) Ltd, a vendor for VAT purposes, acquired a second-hand delivery bicycle from a
non-vendor for use in its business. The purchase price of the delivery bicycle was R630 and the
open market value was R780. The purchase price was paid in full.
Determine whether any input tax may be claimed in respect of the purchase.
SOLUTION
Because the vendor has purchased a second-hand bicycle from a person not registered for VAT
purposes, a deemed input tax credit can be claimed in respect of the second-hand bicycle. The
deemed input tax is based on the lower of the consideration paid (R630) or open market value
(R780).
The deemed input tax is calculated as follows:
Tax fraction × consideration paid
15/115 × R630 = .................................................................................................................. R82
If, after a deduction of input tax on second-hand goods, the sale is cancelled, the consideration is
reduced, or the second-hand goods are returned, and the input tax actually deducted exceeds the
input tax properly deductible, the difference should be accounted for as an output tax (s 18(8)).
The recipient of second-hand goods must obtain and maintain a declaration by the supplier stating
whether the supply is a taxable supply or not, and must further maintain sufficient records to enable
the following particulars to be ascertained (s 20(8)):
l the name of the supplier, and
– where the supplier is a natural person, his identity number
– where the supplier is not a natural person, the name of the supplier and the name and identity
number of the natural person representing the supplier in respect of the supply, and any
legally allocated registration number.
• The recipient should verify the name and identity number of a natural person with reference
to the person’s identity card and the recipient should also retain a photocopy of such
identity card.
• The recipient should verify the name and registration number of any supplier, other than a
natural person, with reference to its business letterhead and should retain a photocopy of
such name and registration number appearing on such letterhead.
l the address of the supplier
l the date upon which such second-hand goods were acquired
l a description of the goods
l the quantity or volume of the goods
l the consideration for the supply
l proof and date of payment.
No documentary proof is required if the total consideration for the supply of the second-hand goods
is in money and does not exceed R50.
1124
31.22.1 Zero-rating of movable second-hand goods exported (proviso to s 11(1) and

s 10(12))
When second-hand goods are exported the zero-rating is in certain cases not applicable and the
standard rate will apply. This will be the case where a deemed input tax has been claimed by that
vendor or any other connected person of that vendor. The reason for then levying VAT at the stand-
ard rate is to cancel out the deemed input tax previously claimed.
When such second-hand goods are exported, the value of the supply shall be deemed to be equal to
the original purchase price of the goods. However, if the supplier purchased the goods from a con-
nected person who was also entitled to claim a deemed input tax on the second-hand goods, the
value of the supply will be the greater of
l the purchase price of those goods to the supplier when purchased from the connected person,
and
l the purchase price of those goods to the connected person when the goods were originally
acquired.
Effectively, the zero rate applies only to the mark-up.
Example 31.40. Second-hand goods exported
ABC CC buys scrap metal from a non-vendor for R6 900 and claims a deemed input tax deduc-
tion of R900 (R6 900 × 15/115).
Explain the VAT consequences if:
(a) ABC CC exports the goods for R7 500, and
(b) ABC CC exports the goods for R4 000.
SOLUTION
(a) ABC CC will be required to account for output tax equal to the notional input tax claimed of
R900. The output tax is based on the purchase price of R6 900, irrespective of the selling
price of R7 500.
However, if ABC CC accounted for VAT at the standard rate of 15% in respect of the total
amount charged (R7 500 × 15/115 = R978), the purchaser, if a qualifying purchaser, may
claim the difference between the VAT paid to ABC CC and the notional input tax deduction
claimed by ABC CC (namely R978 – R900 = R78) from the VAT Refund Administrator (see
Regulation R.316).
(b) ABC CC will again be required to account for output tax equal to R900, although the selling
price of the goods is less than the purchase price. The output tax is based on the original
purchase price, irrespective of the selling price.
Example 31.41. Second-hand goods exported if purchased from connected person
A buys second-hand goods for R2 300 and claims a notional input tax deduction of R300
(R2 300 × 15/115), then sells them to B, a connected person, for R1 702. B claims an input tax
deduction of R222 (R1 702 × 15/115) based on the tax invoice provided by A. B exports the
goods for R1 980.
Explain the VAT consequences in respect of the export.
SOLUTION
B will be required to account for output tax of R300 (R2 300 × 15/115) which is based on the
greater of the price paid by the connected person (A) – R2 300; or the price paid by B – R1 702.
1125
31.23 Special rules: Instalment credit agreements

31.23.1 Meaning of ‘supply’: Instalment credit agreements
An instalment credit agreement encompasses suspensive sales and, finance leases. The definitions
of a suspensive sale and finance lease can be summarised as follows:
Suspensive sale Finance lease

The goods are sold by a seller to a purchaser for The rent consists of a stated or determinable sum of
payment of a stated or determinable sum of money, money payable at a stated or determinable future
at a stated or determinable future date or in instal- date or in instalments over a period in the future
ments over a period in the future
Such sum of money includes finance charges stipu- Such sum of money includes finance charges and
lated in the agreement of sale mark-ups based on time-value of money principles
as stipulated in the lease
The aggregate of the amounts payable by the pur- The aggregate of the amounts payable under such
chaser to the seller under such agreement exceeds lease by the lessee to the lessor for the period of
the cash value of the supply, meaning that the goods such lease and any residual value of the leased
may not be supplied at a loss by the seller goods on termination of the lease, as stipulated in the
lease, exceeds the cash value of the supply, mean-
ing that the goods may not be supplied at a loss by
the lessor
The purchaser does not become the owner of those The lessee is entitled to the possession, use or
goods merely by virtue of the delivery to or the use, enjoyment of those goods for a period of at least
possession or enjoyment by him thereof 12 months
Or
The seller is entitled to the return of those goods if
the purchaser fails to comply with any term of that
agreement
The definition of a finance lease also includes the
situation where
l the lessor accepts the full risk of destruction or
loss of, or other disadvantage to those goods and
assumes all obligations of whatever nature arising
in connection with the insurance of those goods,
and
l the lessee accepts the full risk of maintenance
and repair of those goods and reimburses the
lessor for the insurance of those goods
It should be noted that all the requirements listed above should be met for a supply to be in terms of
a suspensive sale or in terms of a finance lease.
Although the definitions summarised above are similar to a large extent, it seems that the major differ-
ence between a suspensive sale and finance lease lies in the person carrying the risk of ownership of
the goods supplied. In terms of a suspensive sale, the risk of ownership will pass to the purchaser at
the beginning of the agreement, where, in terms of a finance lease, the risk of ownership will pass to
the lessee at the end of the lease term.
31.23.2 Value of the supply: Instalment credit agreements (s 10(6))

In the case of instalment credit agreements, the consideration in money for the supply is deemed to
be its cash value. The cash value excludes interest, as interest is an exempt supply for VAT purposes
(being consideration for the supply of a financial service).
31.23.3 Time of supply: Instalment credit agreements (s 9(3)(c))

In the case of instalment credit agreements, the time of supply is the earlier of the time of delivery of
the goods or the time any payment is received.
This rule does not apply when the supply is made under a credit agreement in terms of which the
buyer has a right to return the goods within a certain time. Thus, for a suspensive sale agreement, the
time of supply is when the ‘cooling-off’ period of five days has expired (s 9(2)(b)).
1126
Example 31.42. Instalment credit agreement (finance lease)
A bank enters into a finance lease on 15 May of the current tax year for the lease of a ‘motor car’
to a clothing manufacturer, as follows:
Cost of motor car ......................................................................................................... R97 391

VAT .............................................................................................................................. 14 609
112 000
Finance charges .......................................................................................................... 39 200
R151 200
The agreement states that 36 monthly instalments of R4 200 (including VAT) are payable as from
1 July. The motor car was delivered on 1 June. The motor car is a ‘motor car’ (see 31.21.3) as
defined for VAT purposes.
Discuss the VAT implications of the above transaction if both parties have a one-month tax
period.
SOLUTION
The bank has to account for output tax of R14 608,70 (R112 000 × 15/115) on 1 June.
The manufacturer is not able to claim any input tax deduction since the vehicle is a ‘motor car’ as
defined (see 31.21).
Should the clothing manufacturer purchase the car at the end of the lease, VAT is also payable
on any consideration paid at that stage for the vehicle. Again, the manufacturer would not be
able to claim any input tax deduction as it would be denied.
Example 31.43. Instalment credit agreement (suspensive sale agreement)
Assume the same information as in the above example, except that it is now a delivery vehicle
acquired in terms of a suspensive sale agreement, which provides for a deposit of R14 000
payable on 15 May of the current tax year.
The monthly instalments are R3 675, and finance charges totalling R34 300 will be paid over the
36-month period.
Discuss the VAT implications of the above transaction.
SOLUTION
The only difference is that the bank now has to account for output tax of R14 608,70 (R112 000
(see note) × 15/115) on 15 May. This is also the date on which the manufacturer can claim the
input tax of R14 608,70, assuming that the delivery vehicle will be used exclusively to make tax-
able supplies. With regard to a suspensive sale agreement, when a deposit is paid, it is imme-
diately applied in reducing the total consideration due.
Note
The cash value is calculated as follows: R3 675 × 36 payments + R14 000 (deposit) – R34 300
(finance charges) = R112 000.
Remember
Where any consideration payable in terms of a finance lease agreement has become irre-
coverable, the supplier can adjust the output tax previously paid by way of an additional amount
of input tax. The input tax is restricted to the VAT content of the irrecoverable portion of the
outstanding amount of the cash value (first proviso (i) to s 22(1)). No repossession or surrender
of the goods is necessary as ownership only passes at the end of the agreement.
1127
31.24 Special rules: Fixed property
31.24.1 Meaning of ‘supply’: Fixed property

The term ‘goods’, includes fixed property and real rights in fixed property. ‘Fixed property’, in turn, is
also defined and includes
l land and improvements to land
l sectional title units
l certain shares in a share block company
l time-sharing interests, and
l real rights in any of the above items.
Since all these forms of fixed property constitute ‘goods’ as defined, a vendor who supplies, or is
deemed to supply, fixed property in the course or furtherance of his enterprise is required to account
for VAT at the standard rate unless the supply is zero-rated or exempt from VAT.
SARS is of the opinion that transactions involving fractional ownership interests in fixed property
would mostly constitute the supply of fixed property and not the supply of shares. ‘Real rights’ include
rights such as servitudes or usufructs.
31.24.2 Value of the supply: Fixed property

The rules pertaining to the general value of the supply (s 10(3)) will also apply to fixed property. If the
supply of fixed property is a taxable supply for VAT purposes, no transfer duty is payable in respect
of the acquisition of any property. This exemption applies whether the supply is a taxable supply
subject to the standard rate of 15% or is zero-rated (s 9(15) of the Transfer Duty Act 40 of 1949). The
supply of fixed property will be zero-rated, for example, where it is disposed of as part of a going
concern (s 11(1)(e)). Thus, a supply of fixed property that is subject to VAT at any rate is exempt from
transfer duty.
If a supply of fixed property does not attract VAT, therefore not a taxable supply, the supply will be
subject to transfer duty. The transfer duty is payable by the purchaser and is levied at a sliding scale
for all persons (see chapter 28). No distinction is made between natural persons and legal persons.
The current transfer duty rates are as follows (s 2(1)(b) of the Transfer Duty Act):
Value of property (Rand) Transfer duty rate

0–1 000 000 0%
1 000 001–1 375 000 3% of the value above R1 000 000
2 475 001–11 000 000 R88 250 +11% of the value above R2 475 000
11 000 001 and above R1 026 000 + 13% of the value above R11 000 000
Remember
There could never be both transfer duty and VAT on a single transaction. If a sale of property
attracts VAT, no transfer duty will be payable. If it does not attract VAT, transfer duty will be
payable. In all cases, the VAT provisions take precedence. One must first identify whether or not
the sale is subject to VAT (at either standard or zero rate); if so, transfer duty is not payable.
31.24.3 Time of supply: Fixed property

Where fixed property or any real right in fixed property is supplied by a vendor, the time of supply is
the earlier of
l the date of registration (where registration of transfer is effected in a deeds registry), or
l the date on which any payment is made in respect of the consideration for such supply.
(Section 9(3)(d).)
With the supply of fixed property between connected persons, the above time-of-supply rule is only
applicable where the supply was deemed to take place at open market value (thus s 10(4) was
applied – see 31.16.2). If this is the case, the input and output tax should be claimed and paid in full
on the actual date of the supply as determined by the above rule (s 16(3)(a)(iiA)).
1128
Different rules should be applied where the supply was not deemed to take place at the open market
value (where s 10(4) was not applied). One has to distinguish between fixed property that is supplied
in the course or furtherance of an enterprise (see 31.24.3.1) and fixed property that is not supplied in
the course or furtherance of an enterprise (see 31.24.3.2).
31.24.3.1 Time of supply: Fixed property that is supplied in the course or furtherance of an
enterprise
For fixed property transactions in the course of an enterprise
l between parties that are not connected persons, or
l where the parties are connected persons, but the supply was not deemed to take place at the
open market value (thus s 10(4) was not applied),
the special time-of-supply rule does not necessarily correlate with the actual entitlement to claim an
input tax or the liability to pay output tax.
The input tax may then only be claimed in proportion to the amount paid, irrespective of the date of
transfer. The output tax is also only accounted for to the extent that payment is received (ss 16(3)(a)(iiA)
and 16(4)(a)(ii)). For these transactions, the special time-of-supply rule is actually ignored. We only
have to focus on the payments, as this would trigger an output tax obligation or an input tax entitlement.
It also does not matter whether the applicable vendor is registered on the invoice basis or payments
basis. All input tax and output tax cash flows will arise only to the extent that payment has been made
or has been received.
Remember
l The payment of transfer duty is not a payment for a consideration, but payment of an addi-
tional tax on the transaction.
l The payment of a deposit is not regarded as a payment until the deposit is applied as
part-payment or forfeited.
l Payment does not include seller financing or promissory notes.
There are, however, different rules pertaining to fixed property that is not supplied in the course or
furtherance of an enterprise (see 31.24.3.2).
31.24.3.2 Time of supply: Fixed property not supplied in the course or furtherance of an
enterprise
Fixed property that is not supplied in the course or furtherance of an enterprise could include fixed
property that is supplied by a vendor, but where the fixed property, for example, related to exempt
residential accommodation. The fixed property, although supplied by a vendor, would thus be
regarded not to be supplied in the course or furtherance of an enterprise, as exempt supplies are
specifically excluded from the definition of an enterprise (see 31.7.4). Fixed property not supplied in
the course or furtherance of an enterprise would also include second-hand fixed property that is
supplied by a non-vendor.
In both these cases the vendor buying the fixed property would be entitled to a deemed input tax on
the ‘second-hand’ fixed property purchased from a South African resident to the extent that such a
vendor is going to use the fixed property in the course or furtherance of making taxable supplies. In
this case one, however, has to distinguish between vendors on the invoice basis and vendors on the
payments basis.
Payments basis (s 16(3)(b)(i))
When a vendor is registered on the payments basis (see 31.3.2), the deemed input tax is always
claimable only to the extent that the payment of the purchase price has been made.
Invoice basis (s 16(3)(a)(ii)(aa) & (bb)(A))
The deemed input tax for vendors registered on the invoice basis (see 31.3.1) can only be claimed
once the fixed property is registered in the name of the vendor. After registration in the name of the
vendor, the deemed input tax can further only be claimed to the extent that payment was made for the
supply.
1129
Example 31.44. Supply of fixed property as second-hand goods

Venter and Naidoo CC purchased a house from a non-vendor (South African resident) for a con-
sideration equal to the open market value of R349 600. Venter and Naidoo CC will use the house
to make taxable supplies. As the value of the fixed property is below R1 000 000, no transfer duty
is payable on the transfer of the fixed property. The registration of the property in the name of
Venter and Naidoo CC occurred on 15 April 2022. Venter and Naidoo CC borrowed money from
ABC Bank and paid the full R349 600 to the non-vendor on 20 March 2022.
Determine when and to what extent input tax may be claimed for the purchase of the house.
Take note that the CC is registered on the invoice basis (see 31.3.1).
SOLUTION
Because the vendor has purchased second-hand fixed property from a South African resident,
deemed input tax may be claimed for the house.
The deemed input tax credit is calculated as follows:
Tax fraction × lesser of consideration paid or open market value
= 15/115 × R349 600 .......................................................................................................... 45 600
Although the full consideration for the supply was paid on 20 March 2022, the actual registration
of the house in the name of Venter and Naidoo CC only occurred on 15 April 2022 and the full
deemed input tax may be claimed only after registration – in the tax period covering April 2022.
If it is assumed that only 80% of the house will be used by Venter and Naidoo CC for taxable
purposes, the calculation for the allowable input VAT will be as follows:
R349 600 × 15/115 × 80% = R36 480
Whether Venter and Naidoo CC paid cash or used third-party financing (such as a bond from
ABC Bank) to effect payment, makes no difference to the timing of the deemed input VAT. If
Venter and Naidoo CC, however, used financing that it obtained from the seller, the deemed
input tax is claimable to the extent that Venter and Naidoo CC settles their debt to the seller.
If the house was purchased by a natural person who is registered on the payments basis, the
deemed input tax will be claimable to the extent that payment has been made for the con-
sideration. Let us assume that the natural person is going to use 80% of the house for taxable
purposes, and that only R300 000 of the consideration has been paid on 20 March 2022. The
input tax will then be as follows:
15/115 × R349 600 × 80% × R300 000/R349 600
= R31 304,35
Thus, R31 304,35 may be claimed as a notional input tax deduction (note).
Note
The deemed input tax could be claimed to the extent that payment was made and to the extent
that the property will be used for taxable purposes. This deemed input tax could be claimed to
the extent of payment in the tax period covering March 2022. Date of registration is not
considered for vendors registered on the payments basis.
31.25 Adjustments: 100% non-taxable use (ss 9(6), 10(7), 16(3)(h) and 18(1))
In the case of goods or services acquired wholly or partly for making taxable supplies that are sub-
sequently applied wholly for non-taxable purposes (such as private use or exempt supplies) or for
purposes where input tax would have been denied, a taxable supply will arise for which output tax
must be levied (s 18(1)).
100% taxable use Î 0% taxable use
The output tax is equal to the tax fraction multiplied by the open market value (s 10(7)), as deter-
mined in the following formula:
A×B
where A = the tax fraction and
B = the open market value.
The time of supply is the date on which the goods are applied for non-taxable or input-denied pur-
poses (when the change in use occurred) (s 9(6)).
1130
The output tax adjustment under s 18(1) is never apportioned. Where any vendor has made an
adjustment to output tax in circumstances where partial input tax was originally claimed, an additional
input tax adjustment is provided for. The purpose of this adjustment is to allow a deduction of the
unclaimed portion of

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SILKE - South African Income Tax 2022

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Silke: South African Income Tax

Professor Madeleine Stiglingh (volume editor)

Professor Linda van Heerden

Editor: Mandy Jonck

Outcomes of this chapter

Definition Rate structure Tax liability

1.2 Tax base

1.3 Tax rate structure and incidence

Example 1.2. Tax rate structure analysis

Using this information, determine the following:

1.4 Principles of taxation

1.4.1 The Equity Principle

Example 1.3. The Equity Principle

1.4.2 The Certainty Principle

1.4.3 The Convenience Principle

1.4.4 The Economic Efficiency Principle

Example 1.4. Economic efficiency

1.4.5 The Administrative Efficiency Principle

1.4.6 The Flexibility Principle

1.4.7 The Simplicity Principle

Example 1.5. Comprehensive example

Outcomes of this chapter

2.2 Taxation in South Africa

2.2.1 Brief history of taxation in South Africa

2.2.2 The legislative process

l the date determined in accordance with the Act, or

Draft Money Bill

2.2.3 Current tax legislation

2.2.3.1 Normal tax

(c) Taxes withheld on payments to non-residents

2.2.3.3 Turnover tax (ss 48–48C)

2.2.3.4 Dividends tax (ss 64D–64N)

2.2.3.5 Donations tax (s 54)

2.2.3.6 Value-added tax

2.2.3.7 Transfer duty

2.2.3.8 Estate duty

2.2.3.9 Securities transfer tax

2.2.3.10 Customs and excise duties and levies

2.2.3.11 Unemployment insurance contributions

2.2.3.12 Skills development levies

2.3 Administration of tax legislation

2.4 Interpretation of tax law

2.4.1 Tax legislation

The Interpretation Act

Interpretation Notes and Binding General Rulings

2.4.2 Judicial decisions

When will a tax case be heard in a court of law?

The legal precedence principle

What part of the decision creates legal precedence?

Can income tax decisions of foreign countries create legal precedence?

2.4.3 Rules of interpretation

The strict literal approach

The purposive approach

The contra fiscum rule

The substance over form rule

2.5.1 The incidence of normal tax

2.5.2 The rate structure of normal tax

Taxable income of a natural person

Note 1: Gross income

Taxable income of a company

Outcomes of this chapter

3.1 Overview (the definition of ‘gross income’ (s 1))

3.2 Resident and non-resident