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A Students Approach To Taxation in South Africa 2021 PDF
A Students Approach To Taxation in South Africa 2021 PDF
A Student’s Approach to
Taxation in South Africa
(First edition)
2021
A Student’s Approach to
Taxation in South Africa
(First edition)
2021
L BRUWER
MCom (UP) CA(SA)
Senior Lecturer: School of Accountancy, UFS
SC CASS
MCom (UP)
Senior Lecturer: Department of Taxation, UNISA
K COETZEE
DCom (UNISA) CA(SA)
Professor: School of Accounting Sciences, NWU
D CUCCIOLILLO
MCom (Tax) (UFS) Professional Accountant (SA)
BDO
AD KOEKEMOER
DCom (Taxation)(UP) CA(SA)
Associate Professor: Centre for Accounting, UFS
A OOSTHUIZEN
MCom (UP) CA(SA)
Senior Lecturer: Centre for Accounting, UFS
C STEDALL
MCom (NWU)CA(SA)
Senior Lecturer: Department of Taxation, UNISA
© 2020
ISBN 978 0 639 01206 3
eBook ISBN 978 0 639 01207 0
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means
without the publisher’s written permission. Any unauthorised reproduction of this work will constitute a
copyright infringement and render the doer liable under both civil and criminal law.
Whilst every effort has been made to ensure that the information published in this work is accurate, the
editors, publishers and printers take no responsibility for any loss or damage suffered by any person as a
result of the reliance upon the information contained therein.
Preface
This book was written with the specific purpose of combining in one volume the pro-
visions of the Income Tax Act 58 of 1962, as it applies to individuals and businesses
for the year of assessment ending 28 February 2021, for undergraduate students.
Simple language is used and the relevant sections of the Act are provided and ex-
plained in simple terms.
A further characteristic of this volume is the steps used to explain certain topics. This
is especially handy for students who are making use of distance education. At the
end of each chapter are exam preparation questions, with solutions, that can be used
to revise the various principles of the chapter.
This work is directed at undergraduate students. It is not written specifically for tax
practitioners but may in fact be used by general accountants for addressing basic tax
problems.
This book contains various examples and practical case studies. All examples and
case studies relate to the year of assessment from 1 March 2020 to 28 February 2021
(the 2021 year of assessment). Unless otherwise indicated, all dates will fall within the
2021 year of assessment. A date of 3 August will thus refer to the August of this year
of assessment, 3 August 2020, and 2 February will refer to 2 February 2021.
This book integrates some basic technology into taxation students’ studies. Some
examples have so-called e-mails inserted. You can electronically download the re-
sponses to these e-mails either on your computer or on your smartphone. The e-mail
questions are based on errors students traditionally make in exams or on aspects
students are sometimes uncertain about. The responses to these e-mails do not pro-
vide any new content but seek to embed concepts. Students who don’t have access to
the electronic answers are not disadvantaged, as these answers do not contain any
new information. Each chapter also contains one or more additional questions that
are available electronically.
This work is updated to include all relevant legislative amendments to the middle of
November 2020.
We would like to thank all the people who offered us their invaluable advice.
Although extreme care was taken to update, review and edit the content of this book,
some errors or anomalies may still occur. To help us and your fellow students, please
send any errors or anomalies you find to dhartkl@unisa.ac.za.
Assumptions and
abbreviations
Unless expressly stated to the contrary, the following assumptions must be made
when interpreting the examples and examination preparation questions in this vol-
ume:
• References to ‘the Act’ bear reference to the Income Tax Act 58 of 1962 (as amended).
• The use of the concept ‘South Africa’ or ‘Republic’ refers to the Republic of South
Africa and vice versa.
• All individuals are residents of the Republic.
• No double tax agreements between South Africa and overseas countries are in
force.
• Enterprises are registered as vendors for value-added tax (VAT).
• The cost price of all purchases made by vendors registered for VAT purposes is net
after any input tax credit to which they are entitled.
• All married persons are married out of community of property.
• Taxpayers, their spouses and their children are not persons with a disability as
defined.
• Medical costs fulfil the requirements of section 18 of the Act.
• The ages given are the ages of the persons on the last day of the year of assessment.
• In the case of an individual, the current year of assessment ends on 28 Febru-
ary 2021.
• All calculations are in Rands only.
vii
viii
Contents
Page
Preface ......................................................................................................... v
Assumptions and abbreviations ........................................................................... vii
Chapter 1 Value-Added Tax (VAT) ........................................................................ 1
Lizelle Bruwer
Chapter 2 Gross income ........................................................................................... 135
Karina Coetzee
Chapter 3 Special inclusions .................................................................................... 179
Annelize Oosthuizen
Chapter 4 The taxation of non-residents ................................................................ 191
Karina Coetzee
Chapter 5 Income exempt from tax ........................................................................ 209
Kerry de Hart
Chapter 6 General deduction formula ................................................................... 233
Annelize Oosthuizen
Chapter 7 Specific deductions and allowances ..................................................... 275
Carien Cass
Chapter 8 Expenditure and allowances relating to capital assets ...................... 335
Carien Cass
Chapter 9 Capital gains tax...................................................................................... 375
Alta Koekemoer
Chapter 10 Taxation of companies and company distributions ........................... 449
Doria Cucciolillo
Chapter 11 Prepaid taxes ........................................................................................... 491
Kerry de Hart
Chapter 12 Individuals ............................................................................................... 529
Kerry de Hart
Chapter 13 Fringe benefits ......................................................................................... 581
Karina Coetzee
ix
Page
Chapter 14 Retirement benefits ................................................................................. 643
Kerry de Hart
Chapter 15 Taxation of trusts .................................................................................... 669
Doria Cucciolillo
Chapter 16 Donations tax........................................................................................... 725
Karina Coetzee
Chapter 17 Estate duty ............................................................................................... 747
Cinzia Stedall
Appendices ................................................................................................................... 787
Value-Added Tax
1 (VAT)
Page
1.1 Introduction............................................................................................................ 5
1.2 VAT in perspective ................................................................................................ 7
1.3 Calculation of VAT ................................................................................................ 8
1.3.1 The accounting basis (section 15) ........................................................... 9
1.3.1.1 Invoice basis .............................................................................. 9
1.3.1.2 Payments basis.......................................................................... 10
1.3.2 Tax periods (section 27) ........................................................................... 13
1.3.3 Tax returns and payments (sections 28 and 25 of the
Tax Administration Act) ......................................................................... 14
1.3.4 Penalties and interest (section 39 and Chapter 15
of the Tax Administration Act) .............................................................. 15
1.3.5 Refunds (section 44 and Chapter 13 of the Tax
Administration Act) ................................................................................. 16
1.4 The basics of output VAT ..................................................................................... 17
1.5 The levying of output VAT (section 7(1)) ........................................................... 19
1.6 Output VAT: Supply of goods or services (section 7(1)(a)) ............................. 20
1.6.1 Supply ........................................................................................................ 20
1.6.2 Goods or services ..................................................................................... 20
1.6.2.1 Goods ......................................................................................... 20
1.6.2.2 Services ...................................................................................... 21
1.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22
and 23 of the Tax Administration Act).................................................. 22
1.6.3.1 Registration as a vendor: Compulsory registration
(sections 23(1), (2), (3) and (6), 50 and 50A) .......................... 23
1.6.3.2 Registration as a vendor: Voluntary registration
(section 23(3)) ............................................................................ 25
Page
1.7 Output VAT: In the course or furtherance of an enterprise
(section 7(1)(a)) ....................................................................................................... 26
1.7.1 Enterprise or activity carried on continuously or regularly............... 26
1.7.2 Goods or services are supplied for a consideration ............................ 27
1.7.3 Specifically included in the definition of an ‘enterprise’ .................... 27
1.7.4 Specifically excluded from the definition of an ‘enterprise’ .............. 28
1.8 VAT levied: Importation of goods (sections 7(1)(b) and 13) ............................ 29
1.8.1 Importation of goods from BLNS countries ......................................... 29
1.8.1.1 Time of importation (section 13(1)(iii)) ............................... 29
1.8.1.2 Calculation of VAT on importation (section 13(2)(b)) ....... 30
1.8.2 Importation of goods from other countries .......................................... 30
1.8.2.1 Time of importation (section 13(1)(i)).................................. 30
1.8.2.2 Calculation of VAT on importation (section 13(2)(a)) ....... 30
1.9 VAT levied: Imported services (sections 7(1)(c) and 14) .................................. 32
1.9.1 Imported services: Meaning of ‘supply’ ............................................... 32
1.9.2 Imported services: Time of supply (section 14(2)) ............................... 36
1.9.3 Imported services: Value of the supply (section 14(3)) ....................... 36
1.10 Output VAT: Zero-rated supplies (section 11) .................................................. 36
1.10.1 Zero-rated supply: Exported goods (section 11(1)(a)(i) and (ii)) ....... 36
1.10.2 Zero-rated supply: Exported services (section 11(2)) .......................... 39
1.10.2.1 Exported services: Transportation (section 11(2)(a),
(b) and (d)) ................................................................................. 39
1.10.2.2 Exported services: Ancillary services to exported
goods (section 11(2)(e)) ............................................................ 39
1.10.2.3 Exported services: Services rendered outside
South Africa (section 11(2)(k))................................................. 39
1.10.2.4 Exported services: Services to non-residents
(section 11(2)(l)) ........................................................................ 39
1.10.3 Zero-rated supply: The sale of a going concern
(sections 11(1)(e) and 18A) ...................................................................... 42
1.10.3.1 General ....................................................................................... 42
1.10.3.2 Specific examples relating to going-concern sales ............... 43
1.10.3.3 Calculations relating to going-concern sales ........................ 44
1.10.4 Zero-rated supplies: Other...................................................................... 45
1.11 Output VAT: Exempt supplies (section 12) ....................................................... 49
1.11.1 Exempt supply: Financial services (sections 2 and 12(a)) ................... 49
1.11.2 Exempt supply: Donated goods and services (section 12(b)) ............. 52
1.11.3 Exempt supply: Accommodation (section 12(c)) ................................. 52
1.11.3.1 Exempt supply: Residential accommodation
(section 12(c)) ............................................................................ 52
1.11.3.2 Taxable supply: Commercial accommodation ..................... 53
1.11.4 Exempt supplies: Other ........................................................................... 56
Page
1.12 Output VAT: Deemed supplies (sections 8, 8A and 18(3)) .............................. 58
1.12.1 Deemed supply: Ceasing to be a vendor .............................................. 58
1.12.1.1 Meaning of ‘supply’: Ceasing to be a vendor
(section 8(2)) .............................................................................. 58
1.12.1.2 Value of the supply: Ceasing to be a vendor
(section 10(5)) ............................................................................ 58
1.12.1.3 Time of supply: Ceasing to be a vendor
(sections 8(2) and 9(5)) ............................................................. 61
1.12.2 Deemed supply: Indemnity payments .................................................. 62
1.12.2.1 Meaning of ‘supply’: Indemnity payments
(section 8(8)) .............................................................................. 62
1.12.2.2 Value of the supply: Indemnity payments
(section 8(8)) .............................................................................. 62
1.12.2.3 Time of supply: Indemnity payments (section 8(8))............ 62
1.12.3 Deemed supply: Supplies to independent branches ........................... 64
1.12.3.1 Meaning of ‘supply’: Supplies to independent branches
(paragraph (ii) of the proviso to the definition
of ‘enterprise’, sections 8(9), 11(1)(i) and 11(2)(o)) ............... 64
1.12.3.2 Value of the supply: Supplies to independent
branches (section 10(5)) ........................................................... 65
1.12.3.3 Time of supply: Supplies to independent branches
(section 9(2)(e)) .......................................................................... 66
1.12.4 Deemed supply: Fringe benefits ............................................................ 66
1.12.4.1 Meaning of ‘supply’: Fringe benefits (section 18(3)) ........... 66
1.12.4.2 Value of the supply: Fringe benefits (section 10(13)) .......... 68
1.12.4.3 Time of supply: Fringe benefits (section 9(7)) ...................... 73
1.12.5 Deemed supply: Payments exceeding consideration.......................... 74
1.12.5.1 Meaning of supply: Payments exceeding
consideration (sections 8(27) and 16(3)(m)) .......................... 74
1.12.5.2 Value of supply: Payments exceeding consideration
(section 10(26)) .......................................................................... 74
1.12.5.3 Time of supply: Payments exceeding consideration
(section 8(27)) ............................................................................ 74
1.12.6 Deemed supplies: Other (section 8(3), (7), (13), (15), (25)
and (29))..................................................................................................... 75
1.13 Output VAT: Non-supplies (section 8(14)) ........................................................ 78
1.14 Output VAT: No apportionment (section 8(16)) ............................................... 79
1.15 Time of supply (section 9) .................................................................................... 79
1.15.1 Time of supply: General rule (section 9(1)) ........................................ 79
1.15.2 Time of supply: Connected persons (section 9(2)(a)) ........................ 80
1.15.3 Time of supply: Rental agreements (section 9(3)(a)) ......................... 80
Page
1.16 Value of the supply (section 10) .......................................................................... 81
1.16.1 Value of the supply: General rule (section 10(3)) .............................. 81
1.16.2 Value of the supply: Connected persons (section 10(4))................... 82
1.16.3 Value of the supply: Entertainment (section 10(21)) ......................... 83
1.16.4 Value of the supply: Dual supplies (section 10(22)) .......................... 84
1.16.5 Value of the supply: Supply for no consideration (section 10(23)) .... 84
1.17 Basics of input VAT ............................................................................................ 84
1.18 Tax invoices (sections 16(2) and 20) .................................................................. 87
1.19 Debit notes and credit notes (section 21).......................................................... 89
1.19.1 Debit notes .............................................................................................. 89
1.19.2 Credit notes............................................................................................. 89
1.20 The determination of input VAT (section 17) .................................................. 91
1.20.1 Turnover-based method ....................................................................... 92
1.20.2 Special apportionment method............................................................ 94
1.21 Input VAT: Denial of input VAT (section 17(2)) ............................................. 94
1.21.1 Denial of input VAT: Entertainment ................................................... 94
1.21.2 Denial of input VAT: Club membership fees and subscriptions .... 96
1.21.3 Denial of input VAT: Motor car ........................................................... 96
1.22 Input VAT: Deemed input tax on second-hand goods
(sections 1, 18(8) and 20(8)) ................................................................................ 97
1.22.1 Zero rating of movable second-hand goods exported
(proviso sections 11(1) and 10(12)) ...................................................... 100
1.23 Special rules: Instalment credit agreements .................................................... 101
1.23.1 Meaning of ‘supply’: Instalment credit agreements ......................... 101
1.23.2 Value of the supply: Instalment credit agreements (section 10(6))....... 102
1.23.3 Time of supply: Instalment credit agreements (section 9(3)(c)) ...... 102
1.24 Special rules: Fixed property ............................................................................. 104
1.24.1 Meaning of ‘supply’: Fixed property .................................................. 104
1.24.2 Value of the supply: Fixed property ................................................... 104
1.24.3 Time of supply: Fixed property ........................................................... 105
1.24.3.1 Time of supply: Fixed property supplied in
the course or furtherance of an enterprise........................ 105
1.24.3.2 Time of supply: Fixed property not supplied
in the course or furtherance of an enterprise .................... 106
1.25 Special rules: Foreign supplies of electronic services
(sections 1 (definition of ‘enterprise’), 23 and 20) ........................................... 108
1.26 Adjustments: 100% non-taxable use
(sections 18(1), 18B, 9(6), 16(3)(h) and 10(7)) .................................................... 109
1.1 Introduction
Almost every time a consumer purchases goods or services from a vendor in South
Africa, he has to pay a price that includes Value-Added Tax (VAT). VAT is a type of
indirect tax and a direct cost to the final consumer, as he cannot claim the amount
back from the South African Revenue Service (SARS).
However, in certain instances an enterprise registered as a vendor may claim the
VAT it has paid back from SARS. It is therefore critical to understand the mechanisms
of VAT in an enterprise, as it has a direct cash-flow effect on the enterprise.
VAT
Adjustments
(refer to 1.26–1.32)
Time of Value
supply of supply
(refer to 1.15) (refer to 1.16)
Tax statistics
According to the 2019 tax statistics there were 802 957 registered VAT vendors in South
Africa. SARS received the following VAT payments per sector:
Financial intermediation, insurance,
R158,9bn
real-estate and business services
Manufacturing R53,8bn
Wholesale and retail trade, catering
R55,8bn
and accommodation
Construction R22,4bn
Transport, storage and communication R22,3bn
Community, social and personal services R24,0bn
Mining and quarrying R14,0bn
All other sectors R26,6bn
Step 3: Determine whether there are any VAT adjustments that must be
considered (refer to 1.26 to 1.32).
Step 4: If the input tax claimable exceeds the output tax payable, the credit is
refundable to the vendor. If the output tax payable exceeds the input
tax claimable, the debit is payable by the vendor to SARS.
Tax statistics
According to the 2019 tax statistics the following output tax was paid and input tax
claimed during the fiscal year:
R million
OUTPUT TAX
Standard rate (excl. capital goods and services
and accommodation) 1 459 836
Standard rate (only capital goods and/or services) 37 543
Supply of accommodation 3 281
Adjustments 36 029
Total output tax 1 536 689
INPUT TAX
Claimed on capital goods and/or services 118 961
Claimed on capital goods imported 4 833
Claimed on other goods and/or services 1 072 425
Claimed on other goods imported 144 217
Claimed on adjustments 36 948
Total input tax 1 377 384
REMEMBER
• Output VAT and output tax has the same meaning and refers to the VAT that a vendor
has to levy on a supply and pay over to SARS.
• Similarly, input VAT and input tax has the same meaning and refers to the VAT that a
vendor can claim on goods or services supplied to the vendor that will be used for the
making of taxable supplies.
Example 1.1
A vendor registered on the invoice basis supplied the following goods:
(a) On 2 February goods were delivered at a client’s premises and the invoice for the
goods was issued on the same date. The payment for the goods was received on
31 March.
(b) On 29 April a client paid R100 000 for goods delivered on the same date. The invoice
was issued on 14 May.
You are required to determine the time of the above supplies for VAT purposes.
Solution 1.1
(a) As the invoice for the goods was issued before payment was made, the time of the
supply is the date the invoice was issued, which is 2 February. The date of payment
(31 March) is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of
supply is 29 April, when payment was made. The date of delivery of the goods is
irrelevant.
When a vendor changes from the invoice basis to the payments basis, he should
calculate the amount payable or refundable, which is the amount of input tax payable
on his creditors’ balances less the amount of output tax receivable on his debtors’
balances (refer to 1.15 for the other time-of-supply rules).
Example 1.2
A vendor registered on the payments basis supplied the following goods:
(a) On 2 February goods are delivered at a client’s premises and the invoice for R15 000
for the goods was issued on the same date. The payment for the goods was received
on 31 March.
(b) On 29 April a client paid R50 000 for goods delivered on the same date. The invoice
for the goods was issued on 14 May.
(c) On 19 July trading stock is delivered at a client’s premises and the invoice for
R180 000 was issued on the same date. Payment for the goods was only received on
31 August.
You are required to determine the time of the above supplies for VAT purposes.
Solution 1.2
(a) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 31 March.
(b) The consideration of the supply is lower than R100 000 and the time of supply is the
date the payment is received – 29 April.
continued
10
(c) As the consideration of the supply exceeds R100 000, the time of supply is deter-
mined by applying the time-of-supply rules for the invoice basis and that is the ear-
lier of payment or the date the invoice is issued. The invoice is issued before
payment is made and the time of supply is therefore on the date the invoice is issued
– that is to say 19 July.
A vendor may account for VAT on the payments basis only if the vendor applied to
the Commissioner in writing (that is registration on the payments basis is not auto-
matic) and the vendor is:
– a public authority;
– a municipality;
– a municipal entity that supplies electricity, gas, water, drainage, or services
relating to the removal or disposal of garbage or sewage;
– an association not for gain;
– a water board or any other institution which has similar powers to a water
board;
– a regional electricity distributor, for example City Power in Johannesburg;
– a foreign supplier or intermediary of electronic services (refer to 1.25 for further
information regarding foreign suppliers of electronic services);
– the South African Broadcasting Corporation; or
– a natural person or an unincorporated body of persons of which all the mem-
bers are natural persons, and the total value of the taxable supplies in a
12-month period has not exceeded R2,5 million (excluding VAT).
Any vendor that is voluntarily registered for VAT purposes with the value of its
taxable supplies not exceeding R50 000, must register on the payments basis (refer to
1.6.3.2). Such vendor should continue to be registered on the payments basis until the
value of its taxable supplies exceeds R50 000. Unless such a vendor otherwise quali-
fies for the payments basis as listed above, such vendor must convert to the invoice
basis from the commencement of the tax period immediately following the tax period
when the total value of taxable supplies has exceeded R50 000.
When the taxable supplies of a vendor (individual and unincorporated body of
persons) who accounts for VAT on the payments basis exceed R2,5 million, he must
inform the Commissioner in writing, as he will now have to account for VAT on the
invoice basis. The reverse situation also applies but is not compulsory.
The following can be disregarded when determining whether a vendor’s taxable
supplies exceed R2,5 million:
• a cessation of or a substantial and permanent reduction in the size or scale of an
enterprise carried on by the vendor;
• the replacement of a plant or other capital asset used in an enterprise carried on by
the vendor; or
• an abnormal circumstances of a temporary nature.
If a vendor’s tax basis changes, he must provide particulars to the Commissioner on
the prescribed form. This allows for the calculation of the tax payable or refundable
as a result of the change in the tax basis.
11
If the vendor changes from the payments basis to the invoice basis, he should prepare
a list of his enterprise’s debtors and creditors, showing the amounts owing at the end
of the tax period immediately preceding the change-over period. The amount payable
or refundable will be the output tax due on his outstanding debtors’ balances less the
input tax receivable on his creditors’ balances.
REMEMBER
• The payment basis is not available to vendors that are not natural persons (except for
those entities listed above).
Example 1.3
Paul is a natural person carrying on a sole proprietorship and is currently registered for
VAT on the payments basis. As a result of his flourishing business, his taxable supplies
(excluding VAT) for the previous 12 months have increased to R2,5 million. He now has to
make the required adjustment in respect of debtors and creditors and will change over to
the invoice basis as from 1 August of the current year of assessment. On 31 July of the cur-
rent year of assessment, Paul’s records reflected debtors (including VAT) of R350 000
(Note 1) and creditors (including VAT) of R315 000 (Note 2).
Notes
1. Included in his debtors is an amount of R10 000 for zero-rated sales made to export
debtors. Also included in debtors is an amount of R12 000 for interest on long out-
standing debtors’ balances. Interest is an exempt financial service and no VAT should be
levied on this.
2. Included in creditors is an amount of R80 000 for the purchase of a motor car in respect
of which the input tax is denied.
You are required to calculate the VAT adjustment which Paul needs to make as a result of
the change from the payments to the invoice basis.
Solution 1.3
Output tax not yet paid in respect of debtors:
R
Export debtors: Zero-rated nil
Interest: Financial service, thus exempt nil
Other debtors: (R350 000 – R10 000 – R12 000) × 15 / 115 42 783
Less: Input tax not yet claimed in respect of creditors:
On motor vehicle: Input denied nil
Other creditors: (R315 000 – R80 000) × 15 / 115 (30 652)
Net output tax adjustment 12 131
12
13
In determining the value of taxable supplies for a 12-month period, the following
must be excluded:
• supplies arising from the cessation of an enterprise or a substantial and permanent
reduction in the size or scale of an enterprise;
• supplies resulting from the replacement of capital assets; and
• supplies resulting from temporary abnormal circumstances.
The Commissioner may permit a vendor’s tax period to end within either ten days
before or after the last day of the month during which the period was originally
supposed to end. The future tax period, as approved by the Commissioner, must be
used by the vendor for a minimum period of 12 months commencing from the tax
period the change is made (section 27(6)(ii)). A binding general ruling (Interpretation
Note No. 52) stipulates that a vendor could use the 10-day rule if the cut-off date is:
• a fixed of the week;
• a fixed date in a calendar month; or
• a fixed day in accordance with ‘commercial accounting periods’ applied by the
vendor. (The vendor should supply the necessary proof for this option (for exam-
ple minutes of a board meeting).)
During the 2020 calendar year South Africa, along with the rest of the world, was
confronted with the Covid-19 pandemic which resulted in a state of lockdown for a
large part of the year. To assist VAT vendors who were experiencing negative cash-
flows during this period, the South African government introduced temporary VAT
relief in the form of the ‘COVID VAT Refund Relief for Vendors’. This special relief
allowed vendors who were registered on a bi-monthly basis (that is to say Category A
and Category B vendors) to file and submit their VAT returns on a monthly basis,
similar to Category C vendors. This, according to SARS’s website (www.sars.gov.za)
would assist vendors by getting access to VAT refunds due to them earlier than they
originally would have been able to. For Category A vendors the relief period was the
two-month tax period ended May 2020 and the two-month tax period ended July
2020. For Category B vendors, the relief period was for the two-month tax period
ended 30 June 2020 and the two-month tax period ended 31 August 2020. These
vendors did not have to apply to change their VAT category status to make use of
this relief.
14
payment made through e-filing on or before the last business day of the month, the
submission and payment is deemed to have been made on the 25th day of the
month). Where a return is submitted via e-filing, but payment is made by electronic
transfer (as opposed to via e-filing), the submission and payment must be made
before the 25th day of the month. The following table summarises the different pay-
ment methods and prescribed dates:
REMEMBER
The Commissioner may alter the normal rules as presented above and prescribe the
following:
• the form and manner (including any specifications relating to any means of electronic
communication) in which returns must be submitted and payments be made;
• the date for the submission of returns and the making of payments (section 28(4)).
15
Interest may be waived if the late payment was beyond the control of the vendor
(section 39(7)(a) and Interpretation Note No. 61). A vendor is allowed to object and
appeal against the decision by SARS not to waive penalties and interest (sec-
tions 32(1)(a)(vi) and 220 of the Tax Administration Act).
REMEMBER
• The Commissioner has the right to fix the specific time of the day on which any VAT
payment must be made.
• Any payment received after such time, is treated as a late payment for VAT purposes.
16
Example 1.4
A vendor carries on an enterprise and supplied goods and services for R1 150 000 (includ-
ing VAT of R150 000) during a tax period.
You are required to calculate the VAT payable by or refundable to the vendor if he paid
the following amount of input tax on goods and services supplied to him during the tax
period:
(a) R60 000
(b) R160 000.
Solution 1.4
R
(a) Output tax 150 000
Less: Input tax (60 000)
VAT payable 90 000
(b) Output tax 150 000
Less: Input tax (160 000)
VAT refundable (10 000)
REMEMBER
The VAT calculation is therefore the amount of output tax less the amount of input tax.
Section 17(2) of the VAT Act provides that input tax may not be claimed in respect of cer-
tain goods or services. The input tax is denied although VAT was charged to the vendor
when the goods or services were acquired and even though it is going to use the goods or
services wholly for the making of taxable supplies. The input tax is denied to the extent
that such goods or services are acquired for the purposes of entertainment or relate to the
supply of a motor car (refer to 1.21).
17
No VAT
@ 15% @ 0%
applicable
Supplies charged at the zero rate are taxable supplies charged with VAT at 0%.
Exempt supplies are supplies that are not charged with VAT at all.
Supplies or transactions are all taxable at the rate of 15% unless they are taxed at 0%
or are specifically exempt. It is thus important to know exactly which supplies are
taxed at 0% (refer to 1.10) and which are exempt (refer to 1.11), as all the other sup-
plies are taxable at the standard rate of 15%.
In order to be able to calculate the VAT component of taxable supplies at the standard
rate, it is necessary to apply the tax fraction to the consideration of such supplies.
The tax fraction is the fraction calculated in terms of the formula:
r where:
100 + r
r is the rate of tax, thus 15%.
15
100 + 15
15
=
115
18
Example 1.5
Vendor Ltd’s sales (all standard-rated taxable supplies) for a specific tax period amounted
to R46 000 (including VAT).
You are required to calculate output tax in respect of the supplies.
Solution 1.5
R
Tax fraction × taxable supplies
= (15 / 115) × R46 000 6 000
This output tax must be paid over to SARS.
If the zero rate was applied to Vendor Ltd’s supplies, the output tax would be:
Tax fraction × taxable supplies
= (0 / 100) × R46 000 nil
Rnil output tax has been levied, and Rnil is payable to SARS.
19
1.6.1 Supply
The first requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply for VAT purposes. According to the English
Usage Dictionary, ‘to supply’ means to provide or to make available.
According to the definition of ‘supply’ in section 1 of the VAT Act, the term ‘supply’
includes a sale, rental agreement, an instalment credit agreement, as well as all other
forms of supply, whether voluntary, compulsory or by operation of law, irrespective
of where the supply is affected.
It is clear from the definition of ‘supply’ that a supply also includes supplies under
barter exchange transactions and expropriation of property. A barter exchange trans-
action occurs when goods are supplied for a consideration that is not money, for
example, when John supplies his farm to Janet in exchange for Janet’s holiday home
in Knysna. Expropriation occurs when someone’s possession is taken in order to use
it for a public purpose.
However, for a supply to occur, it appears that there must be at least two persons
involved, namely the supplier and the recipient of the goods or services. The recipi-
ent is the person to whom the supply is made.
In order to avoid any confusion about whether a transaction is a supply or not, and
whether certain transactions are deemed to be either a supply of goods or a supply
of services or not, deemed provisions are contained in sections 8 and 18(3) of the
VAT Act. Section 8 also deems certain transactions to be a supply for VAT purposes,
although they do not meet the requirements of the applicable definitions (refer to 1.12).
1.6.2.1 Goods
‘Goods’ is defined as:
• corporeal movable things;
• fixed property;
• any real right in such thing or fixed property; and
• electricity.
20
1.6.2.2 Services
The term ‘services’ is also defined very widely and includes the granting, cession or
surrender of any right or the making available of any facility or advantage.
If a supply is not a supply of goods and not specifically excluded in the definition of
‘goods’, the supply constitutes a service.
For example: A buys a business from B. He pays R100 000 for the fixed assets and
R50 000 for the goodwill in the business. The fixed assets are clearly property and are
therefore ‘goods’. The goodwill is not included in the definition of ‘goods’ and there-
fore constitutes the supply of services. The supply of services includes, for example,
trademarks, goodwill, patents and know-how.
Advancements and developments in technology over the past couple of years have
introduced certain concepts that require clarification in terms of the tax treatment
21
1.6.3 Vendor (sections 23, 50, 50A and 51(2) and sections 22 and 23
of the Tax Administration Act)
The third requirement for a transaction in South Africa to attract VAT is that the
transaction should constitute a supply of goods or services by a vendor.
If a person is a vendor, he has to levy VAT on his taxable supplies (selling price), and
input tax credits may be claimed on certain purchases and expenses. If, on the other
hand, a person is not a vendor, VAT is not levied on his supplies (the selling price of
goods and services does not include VAT) and no input tax credit can be claimed on
the purchases or expenses.
A ‘vendor’ is a person who is, or is required to be, registered under the VAT Act.
The definition of a ‘person’ includes a public authority, a municipality, a company, a
close corporation, a body of persons (whether vested with a legal persona or not, for
example, a partnership), a deceased or insolvent estate, a trust fund and a foreign
donor funded project. The definition of ‘person’ was amended to remove ‘foreign
donor funded projects’ as a ‘person’ for VAT purposes as from 1 April 2020.
Although a partnership is not a separate person for income tax purposes, it is a sepa-
rate person for VAT purposes, and the partnership, not the individual partners,
should register as a VAT vendor. When one 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 (section 51(2)).
While it is the partnership that is registered as the vendor for VAT purposes, every
member of that partnership is liable (jointly and severally with the other members of
the partnership) to perform the duties of the partnership. In addition, each member is
also liable for paying any amount of VAT on supplies made by the partnership while
that person was a member of the partnership.
For VAT purposes, SARS regards spouses married in community of property as an
unincorporated body of persons just like a partnership.
It is clear from the above that not only registered persons are vendors, but also every
person that should be registered. It is thus important to know the registration
requirements.
22
23
Example 1.6
Zulu (Pty) Ltd has three branches enterprises that only make taxable supplies. None of
the three branches are independent branches.
R
Branch 1: Turnover of 360 000 for 12 months (excluding VAT)
Branch 2: Turnover of 320 000 for 12 months (excluding VAT)
Branch 3: Turnover of 340 000 for 12 months (excluding VAT)
1 020 000
You are required to determine whether Zulu (Pty) Ltd is obliged to register for VAT pur-
poses if the above information applies to the 12 months ending 31 December of the cur-
rent year.
Solution 1.6
Zulu (Pty) Ltd must register as a vendor since the three branches together make taxable
supplies of R1 020 000, which is above the R1 million threshold. It is the person, Zulu
(Pty) Ltd, that must register, and therefore all its taxable supplies must be taken into ac-
count to determine whether the company meets the registration threshold.
However, where business activities are split between two different persons to avoid
the registration threshold of R1 million, the Commissioner may make a decision in
terms of which such separate persons (for example, a natural person and a legal
entity of which he is a member) are deemed to be a single person carrying on one
enterprise. The Commissioner will issue such decisions only if he is satisfied that
there is a split of an activity into more than one entity to avoid the registration
requirements of VAT. If such a decision is issued, the single person is required to
register (section 50A).
Example 1.7
Paul is a plumber and carries on business as a sole trader. His turnover (excluding VAT)
for the past 12 months ending 31 December amounted to R550 000. He is also the sole
shareholder of a private company called ‘Paul’s Plumbing Services’ with a turnover
(excluding VAT) of R580 000 for the past 12 months.
You are required to determine whether Paul is obliged to register for VAT purposes.
Solution 1.7
If the Commissioner makes a decision in this regard, Paul will have to register as a ven-
dor under section 50A, since the combined value of taxable supplies is R1 130 000, which
exceeds R1 million.
24
25
supplies only after a period of time. Regulation 446 provides a list of what can be seen
as ‘ongoing and regular activities’ in the following sectors: Agriculture, farming,
forestry and fisheries, mining, ship and aircraft building, manufacturing or assembly,
property development, infrastructure development and beneficiation (Section 23(3)(b)
and (d)).
The fourth instance where a person can voluntarily register for VAT is in the case of a
qualifying welfare organisation, foreign donor funded project, share-block com-
pany or municipality that may register voluntarily, without any minimum taxable
supply or the conducting of an enterprise requirement.
Persons supplying commercial accommodation with a value not exceeding R120 000
in any 12-month period are not carrying on enterprises. Therefore, such persons
are eligible for voluntary registration only once the supplies exceed R120 000 for a
12-month period.
The Commissioner may cancel a vendor’s registration if the Commissioner is satisfied
that the vendor no longer meets the registration requirements, as set out above
(section 24(5)). If the vendor does not meet the administrative or recordkeeping
requirements (under section 23(7)), the Commissioner can also cancel the vendor’s
registration (section 24(6)). The Commissioner must inform the vendor in writing of
such deregistration and the date from which the deregistration will be applicable
(section 24(7)).
26
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.
Municipalities are included in the general definition of an ‘enterprise’ and will conse-
quently levy VAT at the standard rate on all supplies that are not otherwise zero
rated or exempt. However, it must be clear whether the supply of goods or services is
being made by the municipality itself, or in terms of the authority of the province (a
public authority), as a supply of goods or services by a public authority does not
necessarily attract VAT.
REMEMBER
• Where a municipality imposes a fine or penalty, such as a traffic fine, in respect of an
unlawful activity, that charge will not have VAT-consequences as it is not in respect of
any supply of goods or services by the municipality. Fines are generally levied in terms
of the national or provincial laws.
• The collection of licence fees in terms of the Road Traffic Act will not be in the course or
furtherance of the municipality’s enterprise, as the actual levying of licence fees is in
respect of the supply of goods or services made in terms of the authority of the province
(public authority). However, where the municipality is paid a certain percentage of the
licence fees collected, the municipality is liable to account for VAT at the standard rate
on that amount as it is in respect of the collection service rendered to the province.
A donation to an association not for gain is specifically excluded from the definition
of consideration.
27
28
– the SA resident will not be reimbursed by the foreign owner for the output VAT
paid on the importation of the ships, aircraft or rolling stock.
29
REMEMBER
• While the levying of VAT on the importation of goods is determined in terms of sec-
tion 7 of the VAT Act, the importer of the goods is not the one that levies the output
VAT.
• A Customs and Excise SARS official levies and collects the amount of output VAT on
behalf of SARS at the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
at the border, as input tax, subject to the normal conditions pertaining to input tax
deductions (refer to 1.17 and 1.20 to 1.22).
Example 1.8
Gert Smit Construction (Pty) Ltd imported marble, that has a cost price and customs
value of R120 000, from Zimbabwe. Import surcharges of R5 600 were levied.
You are required to determine the amount of the VAT levied on importation.
30
Solution 1.8
R
Customs duty value 120 000
Add: 10% of customs duty value 12 000
Add: Importation surcharges 5 600
137 600
× 15%
VAT levied on importation (R137 600 × 15%) (Note) 20 640
Note
The output VAT of R20 640 is levied by a SARS Customs and Excise official at the border
when the goods enter the Republic. This output VAT is an additional charge to the
importer. The treatment of this additional charge after acquisition depends on whether
the importer is a registered VAT vendor that will be utilising the imported goods for the
purposes of making taxable supplies. To distinguish between the subsequent use of the
imported item to make taxable or non-taxable supplies, consider the following:
(a) Gert Smit imported the marble for use in his own home. This is not a taxable supply,
so he cannot claim the R20 640 VAT, levied by the Customs and Excise official, and
paid at the border post as an input tax deduction.
The journal entries for the purchase of the marble is as follows:
Transaction 1 Dr Cr
R R
Improvement to home 120 000
Bank 120 000
Marble purchased to affect improvements to private residence
Transaction 2
Improvements to home 20 640
Bank 20 640
Input tax paid on the importation of marble
continued
31
According to the proviso to section 13(2), the Minister of Finance may in certain
circumstances lay down a value for the goods by regulation.
REMEMBER
• VAT is usually levied on the supply of goods and services of an enterprise (thus the
turnover) and is usually received by the vendor on behalf of SARS. The VAT relating to
the importation of goods is a calculated amount of additional VAT that was not re-
ceived on behalf of SARS, but that is paid in addition to the purchase price, in terms of
the VAT Act.
• A Customs and Excise SARS official collects the amount of VAT on behalf of SARS at
the border post.
• Where vendors paid VAT on goods imported, they are permitted to claim the VAT paid
as input tax, subject to the normal conditions pertaining to input tax deductions (refer
to 1.17 and 1.20 to 1.22).
32
CASE:
CSARS v De Beers Consolidated Mines LTD
74 SATC 330
Facts: The taxpayer was in the business of Africa otherwise than for the making of
mining for and the international sale of taxable supplies. In order to determine if the
diamonds. The taxpayer was approached services rendered by the English advisory
by a consortium of companies that pro- company were utilised or consumed by the
posed a complex transaction, the result of taxpayer for the purposes of making taxable
which would be the formation of a new supplies, the court looked at whether these
company and this new company becoming services were utilised to make taxable sup-
the holding company of the taxpayer. This plies in the course or furtherance of the
arrangement was done in terms of the taxpayer’s enterprise of buying and selling
provisions of section 311 of the old Com- diamonds. The court held that the foreign
panies Act. The taxpayer appointed an advisory services were not related to the
English advisory services company (this taxpayer’s primary activities, which was the
advisory company was based in London in mining and sale of diamonds, but that it
the UK) to assist the taxpayer with regards rather related to the interest of the taxpay-
to the finalisation of the proposed transac- er’s shareholders. The services rendered by
tion. This advisory company then invoiced the English advisory company therefore
the taxpayer nearly R161 million for the constituted ‘imported services’ as they were
services that it rendered. The taxpayer did not utilised for the making of taxable sup-
not levy output VAT on this R161 million plies. The output VAT raised by SARS on
invoice. On assessment, the Commissioner the invoice of R161 million was thus paya-
of SARS determined that the English advi- ble by the taxpayer in terms of sec-
sory company’s services constituted ‘im- tion 7(1)(c) of the VAT Act.
ported services’ as defined. Consequently, Principle: In order to determine whether
SARS assessed the taxpayer on an amount services constitute ‘imported services’, one
of output VAT on these imported services needs consider the purpose for which the
in terms of section 7(1)(c) of the VAT Act. services were acquired. If the purpose (that
The taxpayer lodged an objection to is to say the purpose of the acquirer of the
SARS’s decision. service) of the services was not to utilise or
consume it in South Africa for the purpose
Judgment: For a service to be classified as of making taxable supplies (which relates
an ‘imported service’, it is the supply of to a taxpayer’s core enterprise/activities),
services by a non-resident to a South Afri- then those services will constitute ‘import-
can resident to the extent that such services ed services’ as defined, and output VAT
are utilised or consumed in South will be payable thereon.
33
If the recipient of the imported services is not a vendor, the recipient is required to
pay the VAT within 30 days from the time of supply (section 14(1)). The non-vendoris
required to also obtain, complete and retain a VAT 215 form.
If the recipient of the imported services is a vendor, the vendor is required to include
the VAT in the VAT 201 return corresponding to the tax period in which the supply
was made (proviso to section 14(1)).
REMEMBER
• VAT is usually levied on the supply of goods and services (thus the turnover) of an
enterprise and is usually received by the vendor on behalf of SARS. The reversed
charge VAT relating to the imported services is an amount of VAT that was not re-
ceived on behalf of SARS, but an amount that is paid in addition to the charge for the
service. Although thus referred to as VAT, this is a reversed charge VAT that is paid by
the vendor to SARS, although he never received this amount as an agent on behalf of
SARS.
• Where vendors have paid VAT on imported services, such vendors are NOT permitted
to claim the VAT paid as input tax, as it relates to only non-taxable supplies.
• The VAT paid on imported services is a non-refundable cost for the South African
taxpayer and could be deducted for income tax purposes if the expense it relates to is
deductible for income tax purposes.
Example 1.9
A bank in South Africa received professional advice relating to their total business from a
company outside South Africa. The bank’s business entails the making of both taxable
and exempt supplies in a ratio of 80:20. The non-resident company charges the bank
R60 000 for such services.
You are required to determine the amount of the VAT that should be levied.
Solution 1.9
Since the bank acquired the services partly for the purposes of making exempt supplies
(20%), the bank will be required to account for VAT on 20% of the value of the services
(that is to say R60 000 × 20% × 15% = R1 800).
The journal entries for the transaction would be as follows:
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Professional services paid that is rendered to the Bank.
Journal entry 2
Professional services 1 800
Bank 1 800
continued
34
The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: exempt supplies (R60 000 × 20% × 15% = R1 800).
However, a private individual who does not make taxable supplies and who seeks pro-
fessional advice overseas to be utilised in South Africa will have to account for VAT on
the total value of that advice, since it will not be used in South Africa for the purpose of
making taxable supplies.
The journal entries for the transaction would be as follows
Journal entry 1 Dr Cr
R R
Professional services 60 000
Bank 60 000
Payment for professional services rendered to the
private individual.
Journal entry 2
Professional services 9 000
Bank 9 000
The reversed charge VAT on the professional services that constitute imported ser-
vices, to the extent that the service is not applied in the course of making taxable sup-
plies – in this case: private purposes (R60 000 × 100% × 15% = R9 000).
The individual is then legally obliged to pay the reversed charge VAT to SARS, but this is
not very practical and very difficult for SARS to administer.
The rationale behind the levying of VAT on imported services is to prevent unfair
competition. Private individuals or businesses making exempt supplies might be
tempted, if imported services are not subject to VAT, to acquire them from non-
resident suppliers rather than buy them locally and pay irrecoverable VAT on the
purchase price. The levying of VAT on the imported services would thus partly
prevent such persons from paying a lower price to non-residents.
VAT is also payable on imported services, even if the same person renders the ser-
vices. Where a person carries on activities outside South Africa (for example, a head
office) that does not form part of the activities of an enterprise (for example, a branch)
carried on by him in South Africa, the supply of services from such head office to the
branch also constitutes imported services (section 14(4)). This appears to be aimed at
preventing non-vendors from setting up an operation across the border (for example,
a branch, thus the same person) and then rendering services to themselves free of
VAT.
The following imported services do not attract VAT (section 14(5)):
• A supply of services that was already subject to VAT at 15%.
• A supply that, if made in South Africa, would be subject to VAT at 0% (refer to
1.10) or would have been an exempt supply (refer to 1.11).
• The supply of educational services rendered by foreign educational institutions to
South African students.
35
36
The word ‘exported’ is defined in the VAT Act as the supply of movable goods under
either an instalment credit agreement or a sale (a transaction whereby ownership
passes or is to pass from one person to another) where such movable goods are
supplied in any one of the following ways:
• direct exports (paragraph (a) of the definition of exported); or
• indirect exports (paragraph (d) of the definition of exported); or
• goods delivered by the vendor to a foreign-going ship or aircraft for use in such
ship or aircraft (paragraphs (b) and (c) of the definition of exported); or
• goods supplied under rental agreements for use in an export country or customs-
controlled area (section 11(1)(c) and (d)).
The items listed above are discussed in more detail in the paragraphs that follow.
Direct exports (goods consigned or delivered to an export country (defini-
tion of ‘exported’ – paragraph (a)))
Goods exported are, under the following circumstances, regarded as direct exports
and would therefore qualify for the zero rate. The supply of:
• moveable goods under a sale or instalment credit agreement;
• provided the goods are consigned and delivered to the recipient or the recipient’s
duly appointed agent or customer at an address in an export country;
• through a designated commercial port within the prescribed time period as set out
in Interpretation Note No. 30; and
• the supplier obtained and retained all documentary proof as set out in Interpreta-
tion Note No. 30.
The above refers to a situation where the supplying vendor exports the movable
goods:
• in the supplying vendor’s baggage (luggage); or
• by means of the supplying vendor’s own transport.
The zero rate also applies in circumstances where:
• the South African vendor uses a supplier’s cartage contractor to deliver the goods
on the vendor’s behalf to the recipient at an address in an export country;
• the cartage 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 (Interpretation 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 (section 11(3)).
Interpretation Note No. 30 stipulates the documentary proof required by the Com-
missioner. This includes:
• official documentation – the export or removal documentation prescribed under
the Customs and Excise Act; and
• commercial documentation – that is to say the documentation issued by a freight
hauler or freight forward businesses and other organisations, that provides proof
of the transaction and the transportation of the movable goods, example, a tax in-
voice, airway bill, bill of lading, recipient’s order or contract.
37
The supplying vendor must obtain the required documentary proof within 90 days
calculated from the date that the movable goods are required to be exported, gener-
ally 90 days from the earlier of:
• the time an invoice is issued; or
• the time payment is received.
When the supplying vendor does not obtain the required documentation within 90
days calculated from the date the movable goods are required to be exported, the
supply may, subject to the exceptions provided in Interpretation Note No. 30, be
deemed to be at the standard rate in the tax period within which the period of 90
days ends. Should the documentation be obtained at a later stage (within five years
from the end of the tax period that the invoice was or should have been issued),
an output tax adjustment may be deducted, provided that the necessary proof is
provided to the Commissioner (refer to Interpretation Note No. 30).
The zero rate also applies:
• if the customer is a South African resident who requests delivery to himself at
another address in an export country;
• where the movable goods are situated, temporarily or permanently, outside of
South Africa;
• where the movable goods are subject to a process of repair, improvement, manu-
facture, assembly or alteration by a third party in South Africa, where after the
goods are delivered to the vendor by the third party who then consigns and deliv-
ers the goods at an address in an export country; or
• in certain instances where movable goods are supplied to a vendor and delivered
to that vendor’s costumer at an address in an export country (an indirect supply).
It should be noted that the zero rate is not applicable to supplies of second-hand
goods (that is to say previously owned and used goods) where a notional input tax
deduction was claimed by the South African vendor or any other person who is a
connected person in relation to the vendor when the goods were originally acquired.
In such circumstances, VAT is chargeable to the recipient equal to the notional input
tax deduction claimed by the South African vendor (proviso to sections 11(1) and
10(2)) (refer to 1.22.1).
As already pointed out, only movable goods can be exported. The supply of vouchers
entitling the purchaser to a service, for example, a phone recharge voucher, a prepaid
38
39
For example:
• 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 (refer to Interpretation Note No. 42
that also deals with VAT implications for travel agents, tour operators and travel
brokers).
• Accounting services rendered to a local branch of a non-resident company are not
zero rated as the non-resident has a presence (the branch) in South Africa while the
services are rendered.
• The supply of a tax opinion by a South African resident to a foreign company is
zero rated if the services were rendered while the foreign company did not have
any presence in South Africa.
The zero rating is not applicable if the service is directly in connection with:
• land, or improvements thereto, situated in South Africa; or
• movable property situated inside South Africa at the time the services are ren-
dered:
– except when the movable property is exported to the non-resident subsequent to
the supply of such service; or
– forms part of a supply that the non-resident makes to a registered vendor.
Example 1.11
ABC (Pty) Ltd (a South African vendor) is instructed to replace the screen of a laptop
computer belonging to a visiting tourist. The supply by ABC (Pty) Ltd may not be zero
rated because the laptop is within the borders of South Africa. If, however, the laptop is
again exported directly after the supply, the zero rating may be applied.
Example 1.12
A local newspaper, run by a VAT vendor, inserts an advertisement for a foreign advertis-
er. This will be zero rated even though local readers of the newspaper may also inci-
dentally benefit from the advertisement.
40
Two important court cases have dealt with the issue relating to the zero rating of
supplies made to non-residents: Master Currency v CSARS and Stellenbosch Farmers’
Winery Ltd v CSARS.
CASE:
Master Currency (Pty) Ltd v CSARS
[2013] 3 All SA 135 (SCA)
Facts: The taxpayer operated foreign ruling was a special arrangement which
exchange services (bureaux de change) in intended to relieve a non-resident of the
the duty-free area of a South African air- burden of having to apply for a refund of
port. These foreign exchange services were the VAT which would otherwise have
rendered to non-resident passengers. The been paid on goods purchased in the duty-
taxpayer sought to rely on a ruling issued free area and subsequently refunded by
by the Commissioner of SARS (under sec- the VAT Refund Administrator. The non-
tion 72) which indicates that supplies of resident would be able to qualify for the
goods in duty free areas were subject to refund as the goods are to be exported. The
VAT at the zero rate and subsequently non-resident does not qualify for any
levied output VAT at zero per cent on the refund in relation to the services and the
commission and transaction fee that it ruling would thus not apply to services.
charged departing passengers in respect of
the foreign exchange services. SARS, how-
Principle: Foreign exchange services sup-
ever, raised an assessment where VAT was plied in the duty-free area of an interna-
charged at the standard rate on the com- tional airport are subject to VAT at the
mission and transaction fees charged by standard rate. The duty-free area of an
the taxpayer. international airport is therefore not
Judgment: The court concluded that Mas- regarded to be outside the Republic. This
ter Currency could not rely on the ruling judgment confirms a basic VAT principle
because the ruling was limited in its appli- that goods or services consumed within
cation to goods supplied by duty free the borders of the Republic are subject to
shops in duty free areas and therefore did VAT at the standard rate unless the VAT
not apply to services. In addition, the Act specifically provides for an exemption
or zero rating.
41
CASE:
Stellenbosch Farmers’ Winery Ltd v CSARS
74 SATC 235
Facts: The taxpayer was a producer and Judgment: The taxpayer, in terms of the
importer of liquor products. It had entered termination agreement, surrendered the
into a distribution agreement with a com- remaining portion of its right to the exclu-
pany in the UK, whereby the taxpayer sive distribution right and this surrender
acquired the exclusive right to distribute constituted the supply of services in the
Bells whiskey in South Africa. The period course of an enterprise. The exclusive dis-
of the distribution agreement was ten tribution right did not constitute movable
years. The UK company terminated the property as envisaged in section 11(2)(l).
distribution agreement with the taxpayer The supply was subject to VAT at the rate
three years earlier than agreed upon. of zero per cent.
As compensation for the early termination, Principle: Distribution rights constitute an
the taxpayer received an amount of incorporeal right (not goods as defined)
R67 million. SARS contended that the and the incorporeal right is situated in the
compensation amount of R67 million relat- place where the debtor resides. If the debt-
ed to the supply of ‘services’ as defined in or is a non-resident, the incorporeal right
section 1 of the VAT Act, but that the sup- will be located in the non-resident’s coun-
ply should not be zero rated and assessed try of residence.
VAT thereon at the standard rate.
42
• Both the parties (supplier and recipient) must be registered vendors for VAT pur-
poses. The supplier must obtain and retain a copy of the recipient’s Notice of Regis-
tration (form VAT 103) as proof. Section 23(3)(c) provides for a purchaser to regis-
ter voluntarily based on the supplier’s history, in order for both parties to meet the
VAT registration requirements.
Section 11(1)(p) also allows for the zero rating of the disposal of an enterprise or parts
of an enterprise that are separately registered for VAT purposes but fall within the
same legal entity. The zero rating is only allowed if:
• that enterprise or part is capable of separate operation;
• that enterprise is an income-earning activity on the date of transfer thereof; and
• a tax invoice in relation to the supply is inclusive of VAT at the rate of 0%.
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, cropping etc., will be
transferred.
Leasing activities
Where the seller of fixed property conducts a leasing activity, the contract must
provide for the leasing activity to be disposed of together with the fixed property in
order to constitute an income-earning activity. If the agreement does not provide for a
tenanted property to be transferred, an asset is merely sold.
43
bequeathed cannot, on transfer, proceed with the activities of the enterprise, the
supply of the bare dominium cannot be zero rated.
More than 50% taxable usage for the purposes of the going concern
If the assets of the going concern were applied by the seller mainly for taxable sup-
plies in the going concern (that is to say more than 50%), but also partly for other
purposes, all the assets are deemed to form part of the going concern disposed of and
the full selling price is zero rated (refer to 1.30 for adjustments by both the seller and
purchaser).
Less than 50% of the selling price relates to the going concern
If the goods or services of the enterprise were applied by the seller partially for pur-
poses of the going concern, but not mainly (thus less than 50%), only the portion of
the selling price that relates to the going concern may be zero rated. Section 8(15)
determines that the seller must make an apportionment:
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
44
• The seller must charge VAT at the zero rate in respect of the going-concern por-
tion that was applied for taxable purposes.
(Refer to 1.30 for adjustments by both the seller and purchaser.)
Example 1.13
A vendor sells tenanted fixed property for R1 700 000. The building is partly let as resi-
dential flats (exempt supplies) and partly as commercial offices (taxable supplies).
Assume that all requirements are met and that the sale qualifies as the sale of a going
concern.
You are required to determine how much of the selling price will be subject to the zero
rating, if the building is used:
(a) 4% for residential flats and 96% for commercial offices.
(b) 60% for residential flats and 40% for commercial offices.
(c) 40% for residential flats and 60% for commercial offices.
Solution 1.13
(a) Residential flats 4% versus commercial offices 96%: As at least 95% of the assets of the
enterprise were used for the making of taxable supplies, the de minimis rule applies
and the entire (100%) R1 700 000 will be subject to VAT at 0%.
(b) Residential flats 60% versus commercial offices 40%: Only R680 000 (R1,7m × 40%) will
be subject to the zero rating.
R1 020 000 (R1,7m × 60%) will be subject to VAT at 15%.
(c) Residential flats 40% versus commercial offices 60%: The full selling price of R1,7m
will be zero rated as the assets are mainly (more than 50%) applied for taxable
supplies.
45
fruit and nuts or basic foodstuffs cooked (or processed) and sold in a restaurant do
not qualify for the zero rating. Additional items that were added to the list of basic
foodstuffs, effective 1 April 2019, are cake wheat flour, white bread wheat flour
and sanitary towels (pads). These items were added to alleviate the effect of the
increased VAT rate on the poor of South Africa. Meat, including red meat and
chicken, is not considered to be basic food-stuffs.
• The supply of fuel levy goods (for example, petrol and diesel, including biofuels)
and certain crude oil products used in the production of such goods (sec-
tion 11(1)(h) and (hA)).
• Illuminating kerosene (paraffin) marked as intended for use as fuel for illuminat-
ing or heating, and not mixed or blended with another substance (section 11(1)(l)).
• Certain goods supplied to a customs-controlled area enterprise (section 11(1)(m)
and (mA)).
• Goods supplied by a vendor to a foreign company:
– but delivered to a registered vendor (the recipient) in South Africa; and
– used by the recipient wholly for the purposes of making taxable supplies (sec-
tion 11(1)(q)).
Example 1.14
A foreign company, ABC Plc, is contracted to supply goods to Recipient Ltd, a client in
South Africa. ABC Plc in turn contracts with Supplier Ltd, a local supplier, to supply cer-
tain goods that are to be delivered to Recipient Ltd in South Africa. Recipient Ltd is going
to use the goods wholly for taxable supplies.
You are required to discuss the VAT implications of the above.
Solution 1.14
The supply of the goods from Supplier Ltd (South African vendor) to ABC Plc is a zero-
rated supply. The supply of the goods from ABC Plc (non-resident and non-vendor) to
Recipient Ltd (South African vendor) does not carry any VAT, as ABC Plc is not a vendor.
The goods are also not imported goods. Recipient Ltd will not be entitled to input VAT, as
no VAT has been paid on this transaction.
Since the goods were supplied by Supplier Ltd, they will have to obtain a declaration
from Recipient Ltd that states that the goods will be used wholly for the purposes of mak-
ing taxable supplies. Only then can Supplier Ltd make the supply at the zero rate. If at a
later stage it is discovered that a false declaration was made by Recipient Ltd, the VAT
that should have been charged at the standard rate on the supply by Supplier Ltd on
behalf of ABC Plc will be recovered from Recipient Ltd in terms of section 61 of the VAT
Act.
46
47
REMEMBER
Following the principle of the British Airways case (refer to 1.12.8), when zero-rated
municipal rates are charged by the owner of the property to a tenant using the property
for commercial purposes, the owner (if VAT registered) should levy VAT at the standard
rate on the recovery of the rates and taxes. The owner incurs the municipal rates as princi-
pal and not as the tenant’s agent. The municipal rates charged to the tenant as a disburse-
ment is just a method to calculate the total rental consideration which is subject to VAT.
The vendor has to obtain and retain the documentary proof listed in Interpretation Note
No. 31 in order to substantiate a zero-rate (section 11(3)).
REMEMBER
A zero-rated supply is a taxable supply and a vendor could claim back all input VAT (lev-
ied at 15%) in connection with such supply.
Example 1.15
Mark Model (a VAT vendor) carries on the business of a dairy, and for the VAT period
under review he received R300 000 (VAT inclusive) for the sale of milk. During the same
period he incurred the following expenses (all amounts are VAT inclusive, where appli-
cable):
R
Purchase of cows from vendors – standard-rated supply 115 000
Fuel from vendors – zero-rated supply 18 000
Purchase of packing materials from vendors – standard-rated supply 57 500
You are required to calculate the VAT payable or refundable for the applicable VAT period.
Solution 1.15
R
Output VAT
Sale of milk (zero rated) nil
Less: Input VAT
Purchase of cows (R115 000 × 15 / 115) (15 000)
Fuel (zero rated) nil
Purchase of packing materials (R57 500 × 15 / 115) (7 500)
Amount refundable by SARS (Rnil – R22 500) (22 500)
Can Mark claim back VAT if he doesn’t have to pay any VAT?
48
49
a separate supply at its market value and is not deemed to be a financial service.
The premium paid on an option contract does thus also not attract any VAT.
• The issue, acquisition, collection, buying, selling or transfer of ownership of any
cryptocurrency, such as bitcoin. While cryptocurrency is an internet-based digital
currency, it is not recognised as an official South African currency by SARS. They are
assets of an intangible nature. As the supply of cryptocurrencies is considered to be
financial services, it is exempt for VAT purposes (refer to 1.6.2.2).
In South Africa, banks and insurance companies are the biggest financial services
providers.
Financial services do not include:
• Fee-based financial services. The financial service is still be exempt, but the fee,
commission or similar charge attract VAT. Similarly, where any fee is charged for
the giving of advice on any of the services, this fee is taxable. For example: The
bank charges on the overdraft account attracts VAT at the standard rate, whereas
the interest, that is to say the consideration for providing the overdraft facility, is
exempt.
• Underwriting of the issue of a share or member’s interest.
• A consideration payable for renewal or variation of financial arrangements relating to
a debt security. This is a fee or commission and therefore it attracts VAT.
• Rental agreement payments. Rental agreement payments to a vendor usually do
not constitute an exempt supply for VAT purposes. If, for example, Vendor X rents
a building to Tenant Y, the rental payments paid by Tenant Y to Vendor X do not
constitute consideration for a supply that constitutes a financial service. The trans-
fer of a right to receive money (that is to say a debt security) in terms of a rental
agreement however constitutes the supply of a financial service and therefore be
exempt from VAT. If Vendor X in the above example decides to transfer his rights
in terms of the rental agreement for a consideration to Bank B, the transaction be-
tween Vendor X and Bank B constitutes an exempt financial service.
• A merchant’s discount (being the charge made to merchants for accepting a credit
or debit card as payment). Although merchant’s discounts are taxable for VAT
purposes, discounting costs form part of financial services and are exempt supply.
• The supply of a cheque book.
50
REMEMBER
• Dividends paid by a company to a shareholder is not exempt for VAT purposes because
it does not fall within the definition of ‘financial services’ in section 2. Dividends paid in
cash constitute the supply of money, that is to say currency and is therefore excluded
from the definition of good and services and will therefore not attract any VAT. In the
case of dividends in specie, there could be output VAT consequences in terms of the ad-
justment provisions contained in section 18(1) (refer to 1.26)
• Although the provision of financial services is an exempt supply, it will be zero rated if
physically rendered outside South Africa.
• The zero rating of a supply will always take preference over either being an exempt
supply or a standard-rated supply.
• Other services supplied to a non-resident (even if physically rendered in South Africa)
may be zero rated only if the services are supplied directly to that non-resident or any
other person, and both the non-resident and the other person are not in South Africa at
the time the services are supplied. For example: B Bank (a resident of South Africa) pro-
vides 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 in terms of section 11(2)(l) of the
VAT Act, and the interest will be regarded as the consideration for such supply.
• The zero rating of financial services therefore takes precedence over exemption. 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 with
the input tax credit if the supply of the services was an exempt supply (refer to 1.20).
Example 1.16
The following items appeared on Ragdoll Boutique’s bank statements for September:
R
Internet banking fee 73,92
Service fee (bank charges) 162,35
Transaction costs 83,90
Administration costs 14,00
Interest charged on overdraft 116,40
Interest received on positive bank balance 83,20
You are required to indicate which of the above amounts include VAT and, if any, how
much VAT is included.
Solution 1.16
R
Internet banking fee (R73,92 × 15 / 115) – fee-based financial service 9,64
Service fee (bank charges) (R162,35 × 15 / 115) – fee-based financial service 21,18
Transaction costs (R83,90 × 15 / 115) – fee-based financial service 10,94
Administration costs (R15,00 × 15 / 115) – fee-based financial service 1,96
Interest charged on overdraft – exempt financial service nil
Interest received on positive bank balance – exempt financial service nil
51
Example 1.17
The Needy Association, an association not for gain, received second-hand clothes and
glasses as donations from members of the public. The Needy Association sells the clothes
to the public for R10 a piece and engraved the Association’s name on the glasses prior to
selling them to the public for R5 a glass.
You are required to determine the output VAT consequences of the above.
Solution 1.17
The supply of the clothes as well as the glasses will be exempt from VAT, since at least
80% of the value of these goods consisted of donated goods.
52
dwelling, no VAT is levied. If a vendor sells a dwelling, it does not attract VAT if it
was previously used to earn exempt rental income. This is so because any activity
involving the making of exempt supplies is specifically excluded from the definition
of an ‘enterprise’ and, therefore, the dwelling was not used in the course of an enter-
prise.
It is, however, different for a property developer – if he only temporarily rents out a
property before the sale thereof, he should still levy VAT on the sale.
REMEMBER
• There could never be both transfer duty and VAT on a single transaction. If a sale of
property attracts VAT, no transfer duty will be payable. If it does not attract VAT, trans-
fer duty will be payable.
• In all cases, the VAT provisions take precedence. One must first identify whether or
not the sale is subject to VAT (at either standard or zero rate); if so, transfer duty is not
payable.
REMEMBER
• The VAT Act is not clear whether student accommodation in student houses will be
exempt from VAT or subject to VAT at the standard rate. It is submitted that that the
letting of residential accommodation to students in student houses fall within the ambit
of ‘residential accommodation’ and will therefore be exempt for VAT purposes.
53
REMEMBER
• Despite the fact that an occupant may be taxed only on a portion of the value of the
accommodation provided to him, the enterprise itself may deduct input tax as if the
occupant is taxed on the full value.
• The enterprise still bills the occupant for the full 100% of the value of the accommoda-
tion and not for only 60%. If the supply of commercial accommodation is for a period
exceeding 28 days, it is only the VAT that is calculated on 60% of the value.
54
Example 1.18
Hein is the owner of Rest-a-While, a bed-and-breakfast establishment situated in the Na-
tal Midlands. His total annual receipts from the bed-and-breakfast business amount to
R175 000. Most of the guests do not stay longer than three nights at a time. It does some-
times happen that a guest stays a month at a time. Hein charges R920 per night (exclud-
ing VAT) for bed and breakfast.
You are required to explain to Hein the VAT consequences of running his bed-and-
breakfast business.
Solution 1.18
The bed-and-breakfast business constitutes the provision of commercial accommodation. As
the annual receipts of the business exceed R120 000, Hein can register voluntarily for VAT
(still below the mandatory registration threshold of R1 million).
Should Hein decide to register, he must levy output tax on the supply of the domestic
goods and services (being a taxable supply) as follows:
• guests staying 28 days and less: 100% of the charge is subject to VAT at 15% (for exam-
ple, three nights at R920 × 100% × 15% = R414 output tax); and
• guests staying more than 28 days at a time: Only 60% of the charge is subject to VAT at
15% (for example, 30 nights at R920 × 60% × 15% = R2 484 output tax).
Hein will be entitled to an input tax deduction for VAT paid on the acquisition of goods
and services for the purposes of the bed-and-breakfast business because he is making
taxable supplies.
Should Hein decide not to register for VAT purposes, he does not have to account for
output tax, but then he will not be entitled to any input tax deductions.
Example 1.19
Jo Ndlovu is a property magnate and a vendor. During the current tax period Jo earned
the following amounts:
R
• letting of townhouses (purely for residential purposes) 242 000
• short-term stay (less than 28 days) in bed and breakfast hotels
(including VAT) 150 000
• board and lodging in boarding houses (all periods longer than
28 days – excluding VAT) 30 000
You are required to calculate the output tax in respect of the income earned.
55
Solution 1.19
R
Letting of townhouse, hiring of a dwelling, which is an exempt residential
supply nil
Bed and breakfast, commercial accommodation
• R150 000 × 15 / 115 = 19 565
Board and lodging, long-term commercial accommodation
• (R30 000 × 15% × 60%) 2 700
Where separate prices are charged for accommodation in a room and any other ser-
vices (for example meals, cleaning services, maintenance etc.) and the occupant stays
for an unbroken period exceeding 28 days, the charge must be apportioned between
the room (accommodation) provided and the other services. (VAT is levied at 100%
on the other services and only at 60% on the fee for the room). The only exception is
where the services are supplied together with the room (accommodation) at an all-
inclusive price.
Example 1.20
Assume the all-inclusive daily rate at a hotel is R2 500 per day (excluding VAT). Included
in the R2 500 daily rate is the use of a post-box.
You are required to calculate the VAT if:
(a) the person stays in the hotel for four days; and
(b) the person stays in the hotel for 35 days.
Solution 1.20
R
(a) Full supply at standard rate (R2 500 × 4 × 15%) – output VAT 1 500
(b) Supply of the post box that is included in the all-inclusive
daily rate – output tax nil
Supply of commercial accommodation together with domestic goods and
services (R2 500 × 35 × 60% × 15%) – output tax 7 875
56
where the costs of supplying such services are met out of the levies charged by
them are also exempt supplies (section 12(f )). Although provision is made for these
supplies to be exempt these persons can, however, apply to SARS for the levies to
be taxable or partly taxable. This exemption is not applicable to the supply of ser-
vices in connection with the management of a property time-sharing scheme.
• The transport of fare-paying passengers (in a bus or taxi, but not a game-viewing
vehicle or hearse) and their personal effects by road or railway, unless the service
is subject to VAT at the zero rate (section 12(g)), provided that the transport is:
– only by road and railway, but excluding a funicular railway (thus, it is not
applicable to air tickets);
– not for the purpose of courier services, since the exemption applies to the trans-
port of passengers and their personal effects, and not to goods; or
– for fare-paying passengers (thus, a supply of transport services by a hotel to and
from the airport is not an exempt supply if the residents of the hotel are not
charged separately for such service).
REMEMBER
• The supply of qualifying educational services by the State, a school, a public higher
education institution or certain institutions that meet the definition of a public
benefit organisation in section 30(1) of the Income Tax Act is an exempt supply
(section 12(h)(i)). The exemption is not applicable to technical training provided by
an employer to his employees or employees of an employer who are connected
persons in relation to that employer.
• The supply by a school, university, technikon or college, solely or mainly for the
benefit of its learners, of goods or services (including domestic goods or services)
for a consideration in the form of school fees, tuition fees or payment for lodging or
board and lodging, is exempt (section 12(h)(ii)).
• Membership contributions to employee organisations, such as trade unions, are
exempt (section 12(i)).
• The supply of childcare services by a crèche or an after-school care centre are also
exempt (section 12(j)).
• All supplies of goods or services as by a bargaining council to any of its members
(section 12(l)).
57
• All supplies of goods or services by a political party to any of its members to the
extent that the consideration for such supply consists of membership contributions
(section 12(m)).
REMEMBER
• The zero rating of financial services and transport services takes precedence over
exempt supplies. You will thus always first determine whether these supplies qualify as
zero-rated supplies. This may, for example, be the case if it relates to transport services.
Only if it is not zero rated will it qualify as an exempt supply.
58
REMEMBER
• The goods and rights could only trigger output tax to the extent that they were paid for
(provisos (v) and (vi) to section 8(2)).
• The outstanding balances owing to suppliers could only trigger output tax to the
extent that input VAT was actually claimed on the supply that gave rise to the out-
standing balance (section 22(3)(a)).
59
Example 1.21
Mr Phillip de Vos trades as a sole proprietor under the name DeVos Golf. Phillip is regis-
tered on the invoice basis for VAT purposes and makes 100% taxable supplies. Phillip is a
category B VAT vendor. Phillip decided that he will deregister as a VAT vendor with
effect from 1 May of the current year because his taxable supplies permanently dropped
below the compulsory registration threshold of R1 000 000. You may assume that SARS
deregistered Phillip on 1 May of the current year.
On 1 May of the current year, Phillip provided you with the following list of assets and
liabilities of DeVos Golf:
Cost Open
Assets (Including market
VAT) value
R R
Delivery vehicle (Note 1) 180 000 110 000
Toyota Corolla – solely used for business purposes (Note 1) 320 000 270 000
Furniture – solely used for business purposes 115 000 135 000
Debtors (Note 2) 70 000 n/a
Trading stock 30 000 45 000
Liabilities
Creditors (Note 3) 40 000 n/a
Notes
1. The delivery vehicle not a ‘motor car’ as defined. The Toyota Corolla is a ‘motor car’
as defined.
2. The following is the debtors age analysis on the local credit sales of trading stock:
30 days 60 days 90 days Total
Amount (R) 20 000 27 000 23 000 70 000
Phillip is of the opinion that the 90 days outstanding debtors’ amount of R23 000 will
not be recoverable and consequently wrote it off on 1 May of the current year. Phillip
does not charge any interest on outstanding accounts.
3. The following is the creditors age analysis:
60 days 370 days Total
Amount (R) 15 000 25 000 40 000
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 R15 000
relates 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
– R6 000 – services rendered to DeVos Golf
– R3 000 – amount still outstanding on the capital repayment of the delivery
vehicle.
You are required to calculate the VAT consequences arising out of Phillip’s decision to
deregister DeVos Golf.
60
Solution 1.21
Output tax R
Delivery vehicle: (R110 000 – R3 000) × 15 / 115 (Note 1) 13 957
Motor car (Note 2) nil
Furniture: R115 000 × 15 / 115 15 000
Debtors: (Note 3) nil
Trading stock: (R30 000 – R4 000) × 15 / 115 (Note 1) 3 391
Creditors: – Older than 12 months: R25 000 × 15 / 115
(Note 4) 3 261
– Balance of creditors: R15 000 × 15 / 115
(Note 4) 1 957
Input tax
Irrecoverable debts: 23 000 × 15 / 115 (Note 5) (3 000)
VAT payable to SARS 34 566
Notes
1. A deemed disposal for VAT purposes arises when a person ceases to be a VAT ven-
dor (section 8(2)). Output VAT is calculated by multiplying the lesser of the cost
(including VAT) and the open market value by the tax fraction. However, sec-
tion 8(2)(v) provides that this shall not apply to assets where output tax has already
been accounted for in terms of section 22(3). As output tax has already been account-
ed for on an amount of R3 000 (the amount outstanding in respect of the delivery
vehicle) and R4 000 (the amount outstanding in respect of the trading stock on hand)
in terms of section 22(3), no deemed supply arises on these amounts.
2. Input tax was denied with the initial purchase of the motor car (section 17(2)). No
deemed supply consequently arises with deregistration.
3. The general time of supply is the earliest of the issue of the invoice in respect of that
supply or the time a payment of consideration is received by the supplier (sec-
tion 9(1)). The output tax was therefore already accounted for by Phillip when the
invoice for the supply of the goods was issued.
4. Consideration for the supply was not paid within 12 months from the supply. A
deemed output tax therefore needs to be levied on creditors older than 12 months in
terms of section 22(3). The remaining creditor’s balance is subject to the deemed out-
put provisions in section 22(3) proviso (ii)(dd) as the vendor ceased to be a vendor
within 12 months after the supply.
5. Deemed input tax available in terms of section 22 where a vendor has made a taxable
supply for consideration, the output of which has been properly accounted for and
the consideration subsequently becomes irrecoverable.
Where a vendor deregisters solely because the total value of taxable supplies in the
preceding 12 months did not exceed the voluntary registration threshold of R50 000
or the compulsory registration threshold of R1 000 000. The Minister determined by
regulation (GNR.211 of 19 March 2010) that the output VAT payable in respect of the
deregistration should be paid within six months (section 8(2E)).
61
62
REMEMBER
• If the insurer replaces the damaged or stolen goods, there can be no output VAT conse-
quences for the vendor, as there was no indemnity payment.
• If the payment is made to a third party to indemnify the vendor, the vendor also has to
pay output tax, although the vendor himself did not receive any money.
Example 1.22
Manufacturers Ltd recently suffered a robbery at its premises. Their insurance company
reimbursed them in cash, as follows:
R
• for delivery vehicle stolen 132 000
• for passenger vehicle stolen (input tax was denied with purchase) 300 000
• for microwave oven in canteen stolen (input tax was denied with purchase) 2 500
You are required to calculate the output tax in respect of the insurance payment received.
Solution 1.22
R
Delivery vehicle, not motor car as defined, could claim input tax in the past
R132 000 × 15 / 115 = 17 217
Passenger vehicle, motor car as defined, total reinstatement of goods where input tax was
originally denied – thus no output tax liability.
Microwave oven, entertainment, total reinstatement of goods where input tax was origi-
nally denied – thus no output tax liability.
Example 1.23
Ohno (Pty) Ltd recently experienced flooding of the ground floor at the premises rented
from Agnee (Pty) Ltd. Ohno’s insurance company replaced the following items:
• computers R48 000
• desks and chairs R80 000
• cupboards R12 500
Their insurance company also reimbursed Ohno in cash for other losses suffered as fol-
lows:
• fittings R93 600
The insurance company also paid Agnee for damages suffered amounting to R36 000.
You are required to calculate the output tax in respect of the insurance payments and
replacements.
63
Solution 1.23
Ohno is not required to account for output tax on the replacements by the insurance
company, since these replacements are not payments in money.
Regarding the fittings on which input tax could be claimed in the past, output VAT of
R12 209 (R93 600 × 15 / 115) must be accounted for.
Ohno is indemnified by the payment of an amount of money to a third party and must
account for output VAT of R4 696 (R36 000 × 15 / 115).
REMEMBER
• Output tax is usually not apportioned, but levied on the value of the full supply, even if
the supply was previously used only partially for taxable purposes. There are two
exceptions to the above rule, namely, fringe benefits and indemnity payments. For both
these types of supply, the amount of output tax is payable only to the extent that it
relates to taxable supplies made in the course of the enterprise.
Example 1.24
BB Bank acquired insurance cover for a computer of which 40% was used for taxable
purposes and 60% for exempt supplies. The computer was stolen, and the bank received
an indemnity payment of R14 230 from its insurer.
You are required to calculate BB Bank’s output tax liability.
Solution 1.24
R14 230 × 15 / 115 × 40% = R742 output tax payable to SARS.
BB Bank’s output tax liability is apportioned according to 40% taxable supplies made.
With the initial purchase of the computer as well as with the monthly insurance premi-
ums paid, BB Bank was only entitled to 40% of the input VAT.
64
65
REMEMBER
• The value of a supply that occurs in terms of section 8(9) is usually determined with
reference to the lesser of the cost of acquisition (including VAT) or the open market
value of the goods or services supplied.
• However, where the supplying vendor initially acquired the goods or services, which
will be supplied in terms of section 8(9), from a connected person (a vendor) and the
open market value on the date of acquisition of such goods or services is higher than
the cost of acquisition, the actual cost of acquisition must be ignored and the open-
market value on the date of acquisition is effectively taken to be the deemed cost of
acquisition.
• The open market value for a supply is inclusive of VAT.
Example 1.25
Africa (Pty) Ltd has its head office in Johannesburg and is a vendor for VAT purposes.
Africa (Pty) Ltd also has a branch in America, which is separately identifiable and has a
separate accounting system. Africa (Pty) Ltd purchased goods for R115 000 (VAT inclu-
sive) and then sold them to the branch in America. The branch then sold the goods to a
third party in America.
You are required to calculate the VAT consequences of the above transactions.
Solution 1.25
Africa (Pty) Ltd will be entitled to claim the input tax deduction of R15 000 (R115 000 ×
15 / 115) as the goods were purchased for the purpose of making taxable supplies. The
sale to the branch in America is a taxable supply at the rate of 0%. The sale by the branch
of the goods to a third party in America will not attract any VAT, as the supplies made by
the branch in America will not form part of the enterprise that Africa (Pty) Ltd carries on
in South Africa.
66
Certain other employment benefits are not fringe benefits in terms of the Seventh
Schedule to the Income Tax Act and no output VAT is thus payable thereon, for
example:
• cash salaries;
• section 8(1) of the Income Tax Act – all allowances;
• section 8B of the Income Tax Act – broad-based employee share plans; and
• section 8C of the Income Tax Act – other share plans.
If the fringe benefit relates to:
• an exempt supply;
• a zero-rated supply; or
• the supply of entertainment (for example, meals; refer to 1.21),
there is also no deemed supply and thus no output tax is payable on that fringe
benefit.
The following fringe benefits are subject to VAT:
• Assets given to employees. (This refers only to assets given free of charge or at a low
rate. There is, however, no VAT applicable to assets supplied for entertainment
purposes, zero-rated or exempt supplies, or motor vehicles.)
• The right of use of an asset given to an employee (for example, the use of a com-
pany car provided to an employee).
• Services made available by the employer to the employee for private purposes.
The following employment benefits are not subject to VAT:
• Cash allowances (for example, entertainment, subsistence and travel allowances)
as these allowances are not fringe benefits in terms of the Seventh Schedule to the
Income Tax Act.
• Subsidies (supply of money).
• Long-service awards in cash (money and thus not goods or services).
• The supply of meals and refreshments (this is the supply of entertainment).
• Free or cheap holiday accommodation (‘accommodation’ is defined as part of
entertainment).
• Residential housing (exempt supply).
• Interest-free and low-interest loans (financial service – exempt supply).
• Paying a debt on behalf of an employee (not supply of goods or service).
• Share incentives or plans (financial service – exempt supply, section 8B and 8C of
the Income Tax Act are also not fringe benefits in terms of the Seventh Schedule).
• Pension and medical aid fund contributions (superannuation scheme, financial
service – exempt supply).
• Payment of home telephone expenses (payment of debt, financial service – exempt
supply).
• Bursary schemes (supply of money or educational services – exempt supply).
• International transport (zero rated).
67
• 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 (section 8(14)).
• 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, such person would not be entitled to any
input tax on that asset and there is therefore no output tax on the fringe benefit).
REMEMBER
• The calculation of output tax on the fringe benefit does not apply to the supply of any
such benefit to the extent that it is granted by the vendor in the course of making non-
taxable supplies. This means that the output tax on the fringe benefit should be appor-
tioned to the extent that it relates to the making of taxable supplies. For example: Where a
bank making 20% taxable and 80% exempt supplies provides a fringe benefit to an
employee, the bank will apportion the output VAT (account for output tax on 20% of the
cash equivalent of the fringe benefit).
• Although the employee is the recipient of the fringe benefit, the payment of the output
tax is the obligation of the employer and not the employee.
• The output tax paid by the employer forms part of the employer’s salary costs.
Example 1.26
An employer purchases a watch at a cost of R1 150 (including VAT) to give to an employ-
ee as a fringe benefit. The value (cash equivalent) of the fringe benefit is the cost to the
employer exclusive of VAT, being R1 000.
You are required to calculate output tax in respect of the fringe benefit.
Solution 1.26
R
Output tax:
The tax fraction × the cash equivalent 15 / 115 × R1 000 = 130
68
Where an employee is granted the right of use of a motor vehicle, the consideration is
calculated differently. It is calculated monthly as follows:
• 0,3% of the determined value (as calculated according to Regulation 2835), in the
case of a motor car as defined; and
• 0,6% of the determined value in the case of any other vehicle.
REMEMBER
• The determined value of the vehicle excludes VAT. The determined value for income
tax purposes is the retail market value inclusive of VAT. The determined value for VAT
purposes, however, still excludes VAT (Government Notice (GN) 2835 defines ‘deter-
mined value’ as exclusive of VAT).
• The rate of 0,3% is used if the employer was not entitled to claim an input tax credit in
respect of a motor car as defined.
• The rate of 0,6% is used in all other cases.
• The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a two-month VAT
period, the amount calculated should be multiplied by two.
• When the employee pays anything for the right of use, a portion of this amount could be
deducted in the calculation of the consideration for the right of use of a motor vehicle.
Split this amount paid by the employee to determine the different items it relates to.
• In the case where the employee bears the full cost of maintaining the motor vehicle, a
deduction of R85 per month is allowed to establish the consideration. (This is not appli-
cable to fuel.)
• Where there is a reduction in the determined value, the depreciation allowance is
calculated according to the reducing-balance method at the rate of 15% for each com-
pleted period of 12 months from the date on which the vendor first obtained such vehi-
cle, to the date when the relevant employee was first granted the right of use thereof.
69
Step 1: Determine the value of the motor vehicle (excluding VAT and finance
charges). Take any reductions in the determined value into account.
Step 2: Determine the consideration for the use of the motor vehicle (value
determined in step 1 × 0,3% or 0,6%). If the input tax was denied, use
0,3% and if not, use 0,6%.
Example 1.27
An employer grants an employee the right of use of a motor car. The employer was
unable to claim the input VAT when the vehicle was purchased for R161 000 (including
VAT). The employee bears the full cost of maintaining the vehicle.
You are required to calculate output tax for one month in respect of the fringe benefit.
70
Solution 1.27
Output tax:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,3% = R420
Less deductions: R420 – R85 = R335
Multiply by the tax fraction: R335 × 15 / 115 = R44
Multiply by the percentage of taxable usage: R44 × 100% = R44 output tax payable
If the vehicle had not been a motor car but a delivery vehicle, the employer would have
been able to claim the VAT paid on the vehicle as an input tax credit (R161 000 × 15 / 115
= R21 000), and output tax would have been calculated as follows:
Value of the motor vehicle: R161 000 × 100 / 115 = R140 000
Consideration for the use of the motor vehicle: R140 000 × 0,6% = R840
Less deductions: R840 – R85 = R755
Multiply by the tax fraction: R755 × 15 / 115 = R98
Multiply by the percentage of taxable usage: R98 × 100% = R98 output tax payable.
Example 1.28
An employee is granted the use of a company-owned motor car (input tax denied) with a
determined value of R320 000, that is fully used for taxable purposes. The employee pays
R1 200 per month, allocated as follows:
R
Fuel 224
Insurance 300
Repairs 140
Interest 326
Fixed costs of car 200
Total 1 200
You are required to calculate the VAT consequences of the above.
71
Solution 1.28
Output tax:
Value of the motor vehicle: R320 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R320 000 × 0,3% = R960
Less deductions: R960 – R300 (insurance) – R140 (repairs) = R520
The fuel (zero rated), interest (exempt), and fixed cost (input tax denied) are not
deductible.
Multiply by the tax fraction: R520 × 15 / 115 = R68
Multiply by the percentage of taxable usage: R68 × 100% = R68 output VAT per month
payable by the employer on the fringe benefit
Additional output VAT on consideration received:
The employer must also account for output VAT on the consideration paid by the
employee to the employer in respect of the insurance and maintenance. (The employer
probably claimed the VAT on these expenses paid by him.)
R300 + R140 = R440 × 15 / 115 = R57 output tax
Example 1.29
The use of a delivery truck, with a determined value of R350 000, of which 60% was used
for taxable supplies and 40% for non-taxable supplies, is granted to an employee. The
employee pays R800 for fuel to the employer.
You are required to calculate the VAT consequences of the above.
Solution 1.29
Value of the motor vehicle: R350 000 (determined value already excludes VAT)
Consideration for the use of the motor vehicle: R350 000 × 0,6% = R2 100
Less deductions: R2 100 – Rnil = R2 100
No deduction for fuel – zero rated (Note)
Multiply by the tax fraction: R2 100 × 15 / 115 = R274
Multiply by the percentage of taxable usage: R274 × 60% = R164
Note
The fact that the employee also pays for the fuel does not give rise to another output tax,
because it is a zero-rated supply.
72
Example 1.30
A vendor who makes both taxable (70%) and exempt (30%) supplies provides certain
fringe benefits to its managing director. The monthly cash equivalent of each benefit for
employees’ tax purposes is as follows:
Fringe benefit Cash
equivalent
R
Interest-free loan 135
Residential accommodation 3 900
Free use of a company-owned motor car that cost the employer R230 000
(including VAT) 5 000
In addition to the above benefits, the managing director was given a computer during the
tax period. The cash equivalent of this benefit is R7 000.
You are required to:
(a) calculate the VAT payable by the vendor in respect of the fringe benefits granted to
the managing director for the two-month tax period;
(b) provide the journal entry that should be passed in the accounting records of the
employer.
Solution 1.30
Consideration
(a) Fringe benefit R
Interest-free loan – exempt supply nil
Residential accommodation – exempt supply nil
Free use of the company car
(R230 000 × 100 / 115 × 0,3% × 2 months) 1 200
Asset acquired for no consideration 7 000
Total 8 200
Extent used to make taxable supplies (R8 200 × 70%) 5 740
Total output VAT payable: R5 740 × 15 / 115 779
73
Example 1.31
STP (Pty) Ltd issues a tax invoice to George Thompson for R115 (invoice no. 1025 dated
1 March of the current year of assessment). Three weeks later, STP sends him a statement
reflecting the purchase made as an outstanding amount due. Upon receiving the state-
ment on 28 April of the current year of assessment, George’s wife decides to pay STP
R115. She does this as she is unaware that George already paid the amount two days
earlier.
STP (Pty) Ltd has a two-monthly VAT period ending on the last day of January, March,
May etc.
You are required to explain the VAT treatment of the payment:
(a) assuming STP (Pty) Ltd retains both payments and does not refund the overpayment
received from George’s wife;
(b) assuming STP (Pty) Ltd refunds the overpayment received by George’s wife on
25 October of the current year of assessment.
74
Solution 1.31
(a) The excess payment of R115 received by STP (Pty) Ltd will be treated as a deemed
supply and output tax will be payable. STP will be liable to account for output tax
amounting to R15 (R115 × 15 / 115). The time of supply is 30 September of the cur-
rent year of assessment, which is the last day of the VAT period ending four months
after the excess amount was received.
(b) Upon refunding the amount of R115 to George’s wife, STP (Pty) Ltd will become
entitled to claim input tax amounting to R15 (R115 × 15 / 115). As the company
failed to refund the amount within four months of receipt, they previously needed to
account for output tax on the deemed supply. In terms of section 16(3)(m) they are
now entitled to claim an additional amount of input tax in the VAT period ending
30 November of the current year.
1.12.6 Deemed supplies: Other (section 8(3), (7), (13), (15), (25) and
(29))
Section 8 also provides for the following deeming provisions (this list is not exhaus-
tive and therefore other deeming provisions exist):
• When a supply is made under a credit agreement and the buyer has exercised his
right to rescind that agreement within a certain period of time (‘cooling-off’ period
of five days (section 9(2)(b))), that supply is deemed not to be a supply of goods or
services (section 8(3)).
• The sale of an enterprise as a going concern or part thereof, which is capable of
separate operation, is deemed to be a taxable supply of goods (that is to say the
whole business including any services (for example, goodwill) is deemed to be
goods (section 8(7)).
• Where a person bets an amount on the outcome of a race or any other event or
occurrence (for example, at a casino), the person with whom the bet is placed (for
example, the casino) is deemed to supply a service to the first-mentioned person
(for example, the punter) (section 8(13) and section 8(13A)). In the event that the
person with whom the bet is placed (for example, a casino) pays any prize or win-
nings, such person, if a registered vendor, is entitled to claim an input tax deduc-
tion. This input tax deduction is however limited to the input tax on the initial cost
of acquiring goods or services for this purpose (section 16(3)(d)) (refer to Interpre-
tation Note No. 41 that deals with the application of VAT to the gambling indus-
try).
• Where a single supply of goods or services would, if separate considerations had
been payable, have been charged partly at the standard rate and partly at the zero
rate, each part of the supply is deemed to be a separate supply (section 8(15)). This
principle was expanded upon in the CSARS v British Airways court case.
75
CASE:
CSARS v British Airways
67 SATC 167
Facts: The fare charged by the taxpayer in Judgment: The court agreed with the tax-
respect of its international flights included a payer that the total fare for the ticket
number of elements which were separately should be zero rated and held that a single
disclosed on the passenger ticket. One such supply of service is only capable of notion-
charge was the fees levied by the Airport al separation into its component parts, as
Company Limited (a separate independent contemplated by section 8(15), when the
vendor) to the taxpayer. This charge is lev- same vendor supplies more than one ser-
ied to the taxpayer for the general airport vice, each of which, had it been supplied
services (baggage handling facilities, wait- separately, would have attracted a differ-
ing lounges etc.) that are made available ent tax rate. The passenger service charge
to its passengers at the airport and was that the Airport Company Limited charges
referred to as the passenger service charge. to taxpayer is no more than a cost that the
The taxpayer separately reflects this charge taxpayer has to bear in order to operate its
on the passenger ticket in order to recover it carrier service. This is similar to the cost it
from its passengers. As the fare related to pays to land and park its aircraft. The pas-
international travel, the taxpayer zero rated senger service charge therefore relates to a
the total fare charged for the ticket. SARS service that was supplied by another ven-
relied on section 8(15), arguing that the dor (not the taxpayer) and simply formed
British Airways fare was a composite fare part of the cost of the taxpayer’s supply of
given for a single supply of a number of international transportation.
services and wanted to apply the standard Principle: The recovery of costs is not a
rate to the passenger service charge of the supply for VAT purposes.
fare as this service is provided in South
Africa.
Example 1.32
Mr Du Toit is an attorney practising in Johannesburg. Mr Du Toit provided legal services
to a client in Pretoria and is uncertain about the VAT consequences of this supply.
The breakdown of the charge to the client is as follows:
R
Legal advice fee (standard-rated supply) 80 000
Fuel costs incurred (zero-rated supply) 500
Gautrain tickets cost incurred (exempt supply) 1 200
Value of supply (excluding VAT) 81 700
You are required to discuss the VAT consequences of the above supply.
76
Solution 1.32
VAT will be levied at the standard rate on the total value of the supply (R81 700 × 15% =
R12 255). The provision of sections 8(15) and 10(22) (refer to 1.16.4) will not be applicable
in respect of the fuel and Gautrain ticket costs incurred as these will form part of the
expenses incurred by Mr Du Toit to perform the legal service, rather than a service sup-
plied by Mr Du Toit to the client.
• The supplying vendor (registered vendor) and recipient (registered vendor) are in
certain cases deemed to be one and the same persons in respect of certain company
re-organisation transactions that occurred in terms of section 42, 44, 45 or 47 of the
Income Tax Act (section 8(25)). The transactions to which this is applicable are
transactions whereby:
– A person disposes of an asset to a company in exchange for the company’s
equity shares (asset-for-share transaction; section 42 of the Income Tax Act).
– A company’s existence is terminated after it disposes of all its assets to another
company (amalgamation transaction; section 44 of the Income Tax Act).
– One company disposes of an asset to another company that forms part of the same
group of companies (intra-group transactions; section 45 of the Income Tax Act).
– A company distributes all its assets to another company that forms part of the
same group of companies in anticipation of its liquidation, winding up or dereg-
istration (transactions relating to liquidation and deregistration; section 47 of the
Income Tax Act).
– A person supplies fixed property to a company (either as part of an asset-for-
share transaction in terms of section 42 of the Income Tax Act, or as part of an
intra-group transaction in terms of section 45 of the Income Tax Act) and the
person and the company agree in writing that immediately after the supply, the
company will lease the fixed property from the person that supplied it.
The effect of section 8(25) is that a re-organisation for VAT purposes is deemed to be
a non-event (no VAT is charged on the supply and no adjustments in terms of sec-
tions 16(3)(h) and 18A are applicable). The VAT re-organisation provisions only
apply to a supply contemplated in section 42 or 45 if that supply is a going concern. If
a single transfer of trading stock or a capital asset occurs under a section 42 or 45
transaction, the normal VAT rules apply.
However, parties in a section 42 or 45 transaction can agree in writing that the provi-
sions of section 8(25) must not apply (that the transaction is not treated as a non-VAT
event), but that the going concern provision in section 11(1)(e) should apply to the
corporate transaction.
• Where a lessee (the supplying vendor) effects leasehold improvements to the
property of a lessor, the lessee is deemed to have made a taxable supply of goods
to the lessor to the extent that these leasehold improvements are made for no con-
sideration. There is no deemed supply if the lessee uses the leasehold improve-
ments wholly (100%) for the making of exempt supplies (section 8(29)). Refer also
to 1.31 for further VAT effects regarding leasehold improvements.
77
Example 1.33
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the
following for these items:
Motor car: R343 000 (including VAT – input VAT denied)
Coffee machine: R6 457 (including VAT – input VAT denied)
Printer: R6 900 (including VAT)
He then sells all three items.
You are required to explain the VAT consequences relating to the purchase and sale of
the motor car, coffee machine and the printer.
Solution 1.33
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will
be able to claim an input tax deduction on the acquisition of the printer amounting to
R900 (R6 900 × 15 / 115). No input tax will be claimable on the acquisition of the motor
car and coffee machine, as input tax deductions are specifically denied on the acquisition
thereof, even if the goods will be utilised for the making of taxable supplies.
Speedy will be required to levy output tax on the sale of the printer only, since the said
supply will be made in the course or the furtherance of his enterprise. Speedy will not be
required to account for any output tax on the sale of the coffee machine and motor car,
since Speedy was denied input tax deductions on the acquisition of these items.
Where goods or services were acquired by a vendor wholly (that is to say 100%) to
make exempt supplies, the subsequent sale thereof is not subject to VAT, as the
supply is not made in the course or furtherance of the vendor’s enterprise.
REMEMBER
Where the initial input VAT was denied on a motor vehicle, but the vehicle was subsequent-
ly converted into a game-viewing vehicle or a hearse on which input tax is allowed (sec-
tion 18(9)), the ultimate sale of the vehicle will be deemed to be a supply in the course of the
enterprise, and VAT should thus be levied on this transaction (section 8(14)(b); refer to 1.28).
78
Example 1.34
BBC Bank sells a computer to CNN Bank for R12 000. This computer was used 80% for
the making of taxable supplies and 20% for the making of exempt supplies.
You are required to advise BBC Bank on the VAT consequences of the transaction.
Solution 1.34
BBC Bank will be required to account for VAT at the standard rate on the full selling price
of R12 000 (R1 565 (R12 000 × 15 / 115)). However, BBC will be entitled to make an input
tax adjustment for the 20% exempt portion in terms of section 16(3)(h) (refer to 1.25).
79
80
When goods are supplied in terms of a rental agreement, the time of supply is the
earlier of the date on which payment is due, or the date on which payment is received.
If goods are delivered periodically, the time of supply is the earliest of payment
received or invoice issued.
REMEMBER
Example 1.35
A vendor sells goods for R115 000 (including VAT).
You are required to calculate the VAT that is included in the consideration.
Solution 1.35
VAT is determined as: R115 000 × 15 / 115 = R15 000
81
REMEMBER
• The value is usually determined with reference to the consideration, but for qualifying
transactions between connected persons, the actual consideration must be ignored and
the open-market value of the supply is taken to be the deemed consideration.
• This special rule relating to connected persons is not applicable to the supply of fringe
benefits.
• Instances where a person is not able to claim a full input tax credit includes where
the person is a non-vendor for VAT purposes or where the person does not make 100%
taxable supplies.
Example 1.36
Arnold and Bob are connected persons. Arnold, a registered vendor, sells trading stock
valued at R10 000 to Bob, who only paid an amount of R4 000 for this trading stock. B is
also a registered vendor, but he is not entitled to a full input tax deduction (only 60%).
You are required to explain the VAT consequences of the above.
Solution 1.36
Arnold must account for VAT on the open-market value of the supply: R10 000 × 15 /
115 = R1 304. (The actual consideration received from Bob is ignored for VAT purposes.)
Bob will only be able to claim an input tax on the actual consideration of R4 000: R4 000 ×
15 / 115 × 60% = R313.
Bob has a VAT invoice showing the total consideration as only R4 000 and could there-
fore not claim input tax on R10 000. The definition of ‘input tax’ further specifically states
that it is the tax charged and payable. Unless the parties decide to adjust their purchase
price to R10 000, Bob will always be able to claim only the input tax on the actual consid-
eration.
Example 1.37
A vendor sells goods for R115 000 (including VAT) to its wholly owned subsidiary,
which is not registered as a vendor for VAT purposes. The open-market value of the
goods on the date of sale is R172 500 (including VAT).
You are required to calculate the VAT that is payable by the vendor.
82
Solution 1.37
The open-market value of R171 000 must be used, since the recipient is a connected person
to the vendor, is not entitled to an input tax credit and the supply was for a consideration
less than market value.
VAT is determined as: R172 500 × 15 / 115 = R22 500
Note
It is therefore clear from the above that section 10(4) will be applicable when the con-
nected person could either claim only a portion of the input tax or when the connected
person could not claim any portion of the input tax.
What would the effect be, if the wholly owned subsidiary in this
example had been a registered vendor?
The reason for this special rule is that connected persons could try to limit the VAT
cost and therefore manipulate the prices so that the VAT cost is decreased. If the
recipient is a vendor and allowed to claim the input tax in full, no manipulation can
take place. The VAT paid by the one vendor is claimed back by the other vendor. No
special value of supply rules is therefore required.
Example 1.38
Abraham bought coffee powder in bulk for his employees to consume at work. Abraham sold
half of the coffee powder to Beryl (a connected person) at a discount of 30%. Beryl also
obtained the coffee powder to provide it to her employees to consume while at work.
You are required to explain the VAT consequences of the above.
Solution 1.38
Abraham cannot claim the input VAT on the purchase of the coffee powder as this trans-
action is in respect of the acquisition of goods for the purposes of entertainment. The
value of the supply between Abraham and Beryl is Rnil: (section 10(21)), even though
Beryl and Abraham are connected parties. Beryl will therefore also not be entitled to claim
any input VAT on the purchase of the coffee powder from Abraham.
83
Example 1.39
Teboho, a registered vendor, sells his private house (worth R790 000) as well as his com-
puter from his enterprise (worth R10 000) to Bernadette. Bernadette pays an amount of
R800 000 for both items.
What are the VAT consequences of the above transaction?
Solution 1.39
The payment of R800 000 should be allocated to the different items to determine the VAT
consequences, since the selling of the private house (R790 000) will not attract VAT,
whereas the selling of the computer (R10 000) will be subject to standard rate VAT of 15%.
The above should not be confused with the situation where a single supply was
previously partially used for taxable purposes (refer to 1.14). That supply is a taxable
supply without an apportionment. The above example refers to a situation where a
single consideration (not supply) is received for more than one supply.
84
Example 1.40
Purchaser Ltd, a vendor who only makes taxable supplies, acquired the following goods
from vendors during the tax period:
• computer: R13 800 (including VAT); and
• stationery: R4 600 (including VAT).
You are required to calculate input tax in respect of the goods acquired.
Solution 1.40
Tax fraction × goods acquired R
Computer = 15 / 115 × R13 800 1 800
Stationery = 15 / 115 × R4 600 600
The total amount of input tax for the period 2 400
Section 17(1) of the VAT Act provides that where goods or services are used partially
for the purpose of making taxable supplies, only the portion of the input tax attribut-
able to taxable supplies may be claimed as an input tax credit. However, if 95% or
more of the purchased goods or services will be used in the making of taxable sup-
plies, the full input tax credit may be claimed, and no apportionment is necessary (the
so-called de minimis rule) (first proviso to section 17(1)). De minimus is a Latin phrase
that means ‘something that’s too small or insignificant to be of importance’.
The claiming of an input-tax deduction is not automatic as there are four aspects that
need to be considered:
• the goods or services must be acquired wholly or partly for the making of taxable
supplies (refer to 1.20) ; and
• all documentary requirements must be met (refer to 1.18 and 1.19); and
• VAT at the rate of 15% must actually have been paid by the vendor who wants to
claim the input tax deduction. If goods or services are purchased from a person
who is not a registered vendor, no input tax can be claimed, as no VAT has been
paid on the goods or services. The only exception is the purchase of second-hand
goods from non-vendors (refer to 1.22); and
• the claiming of an input-tax deduction must not specifically be prohibited in terms
of section 17(2) (refer to 1.21)
As mentioned above, input tax may be claimed only if the vendor is in possession of
documentary proof that substantiates the vendor’s entitlement to the input tax. Such
documentary proof include:
• a tax invoice;
• a debit note or a credit note;
• a document acceptable to the Commissioner if the consideration for the supply is
less than R50;
85
• a document where the Commissioner is satisfied that there are sufficient records
available to establish the particulars required on an invoice for a supply;
• records as required to be maintained in section 20(8) for the supply of second-hand
goods (refer to 1.22);
• a bill of entry or other document, together with a receipt of payment of the tax in
the case of imported goods;
• a section 54(3)(a) statement received from the agent of the vendor who received an
invoice, debit note or credit note on behalf of the vendor; and
• any other documentary proof as is acceptable to the Commissioner (sec-
tion 16(2)(f)).
The issue regarding what documentary proof is acceptable to the Commissioner came
under review in the recent court case of South Atlantic Jazz Festival (Pty) Ltd v CSARS.
CASE:
South Atlantic Jazz Festival (Pty) Ltd v CSARS
Facts: The taxpayer organised an interna- tax invoices from the sponsors but had not
tional jazz festival (which it had done for a been provided with the tax invoices as re-
number of years). It entered into sponsor- quested.
ship agreements with various large busi-
nesses. In exchange for their sponsorship Judgment: The court determined that this
(cash, goods or services to an agreed value), specific transaction was a barter transaction
the businesses were given preferential between persons dealing at arm’s length. In
advertising and marketing rights. SARS the absence of any contrary indication, the
regarded the granting of these rights by the value that the parties attributed to the
taxpayer to the large businesses as a taxable goods or services that were exchanged, was
service. SARS consequently raised output a reliable indicator of their market value.
VAT on the value of the goods and services The value of these goods and services were
that were supplied by the businesses, as determinable from the sponsorship agree-
specified in the applicable sponsorship ments. As SARS had used these sponsor-
agreements. The taxpayer agreed with the ship agreements to determine the value of
levying of the output VAT but contended the output VAT in respect of these goods
that as it had purchased goods and services and services, the sponsorship agreements
from the sponsors to an agreed value, SARS were acceptable documentary proof for the
should allow the taxpayer an input tax claiming of input tax.
deduction in respect of the VAT on those
supplies. SARS denied the taxpayer’s input Principle: Where a vendor is entitled to an
VAT claim by a deduction in respect of input tax deduction but is not in possession
input tax that may not be claimed unless the of a valid tax invoice, the vendor may use
vendor is in possession of a valid tax in- any other document that has sufficient
voice from the supplier. The taxpayer only information to substantiate his claim. The
had the sponsorship agreements to base its document must, however, be acceptable to
claim on. The taxpayer had requested the Commissioner.
Input tax is usually deducted in the VAT return in the period during which time of
supply occurs, or for imported goods, the period during which the VAT on importa-
tion is paid. The vendor must, however, be in possession of the relevant documentary
proof to qualify for the deduction. In some cases, the vendor may claim input-tax
without the relevant documentary proof, if he has documents that prove that he is
86
entitled to the deduction but is waiting for the required document. Input tax may be
deducted in a later period if the vendor is unable to deduct input tax in the aforemen-
tioned period (for example because evidence is not received in time). This later period
may not be more than five years after the tax period when the input-tax deduction
should have been made (first proviso to section 16(3)).
87
REMEMBER
• The abridged tax invoice does not have to include the name, address or VAT regis-
tration number of the recipient or the quantity or volume of the goods or services.
• An abridged tax invoice may not be issued for zero-rated supplies.
• The requirement that the VAT amount should be reflected in South African currency is
not applicable to zero-rated supplies.
• A vendor may reflect the foreign currency of a supply on an invoice as long as the
South African currency is also reflected on it. Vendors should use the applicable daily
exchange rate as published on the South African Reserve Bank website. This rate is the
weighted average of the bank’s daily rates at approximately 10:30 (Binding General
Ruling No. 11). These rates are published on http://www.resbank.co.za.
If a tax invoice contains an error, for example the VAT registration number of the
recipient is incorrect, the supplying vendor can cancel the incorrect tax invoice and
re-issue the tax invoice with the correct information within 21 days from the date of
the request to correct it. The supplying vendor is not guilty of an offence by issuing a
corrected tax invoice but must ensure that there is a proper audit trail between the
initial invoice, the manner and/or reason for the cancellation and the re-issued tax
invoice.
If the Commissioner is satisfied that a vendor’s records are sufficient and that
it would be impractical to require a full tax invoice to be issued, he may direct
that certain particulars may be omitted or that no tax invoice needs to be issued
(section 20(7)). Interpretation note No. 56 grants approval to recipients (not suppliers)
to issue tax invoices, credit and debit notes if the recipient:
• determines the consideration for the supply;
• is in control of determining the quantity or quality of the supply; and
• obtained written authorisation from the Commissioner.
In the case where no formal documentary proof is required, the Commissioner is
granted discretionary powers in order to prescribe acceptable documentary proof
that a vendor must be in possession of before making any input tax deductions (sec-
tion 16(2)(f)) (refer to Interpretation Note No. 49 for guidance on documentary proof
for specific transactions).
There are also special rules regarding documentary proof for second-hand goods
(refer to 1.22) and foreign suppliers of electronic services (refer to 1.25).
88
89
amount of the excess (reduced) VAT or a statement that the reduction includes
VAT and the rate of the VAT included;
• a brief explanation of the circumstances giving rise to the credit note; and
• sufficient information to identify the transaction to which the credit note refers.
REMEMBER
• No credit note is required if a customer pays his account and receives a prompt pay-
ment discount, if the terms of the prompt payment discount offer are clearly stated on
the face of the tax invoice (proviso (C) of section 21(3)).
• It is not lawful to issue more than one credit or debit note. A copy credit or debit note
may, however, be provided where the original debit or credit note is lost, but it should
be clearly marked as a ‘copy’ (provisos (A) and (B) of section 21(3)).
Where an enterprise is sold as a going concern (refer to 1.10.3), VAT is levied on the
sale of the assets of the going concern at 0%. A recent amendment to section 21
determines that when the purchaser returns goods that were acquired in terms of the
going concern sale to the seller, the purchaser of the enterprise is allowed to issue a
credit note to the seller.
A Binding General Ruling (BGR No. 6) clarifies the VAT treatment of discounts,
rebates and incentives in the production, distribution and marketing of the packaged
consumer goods industry. The discounts, rebates and incentives can be divided into
two categories, namely variable allowances and fixed allowances. Early settlement
allowances and growth rebates (allowances linked to a volume target where a per-
centage discount is provided when a certain growth percentage has been achieved)
are categorised as variable allowances. The binding general ruling determines that
variable allowances are regarded as a reduction in the original purchase prices and a
credit note should be issued unless otherwise directed. If Vendor X supplies goods to
Vendor Z, Vendor X should issue a credit note to Vendor Z to facilitate the reduction
of the consideration payable by Vendor Z.
New store allowance (an allowance for the promotion of products with the opening
of a new store) and major refurbishment allowances (a payment to revamp a retailer’s
store to meet the required standard) are some of the fixed allowances as per the
binding general ruling. The binding general ruling determines that fixed allowances
are regarded as consideration for the supply of a service and a tax invoice must be
issued. If Vendor X supplies goods to Vendor Z, Vendor Z should issue a tax invoice
to Vendor X for the supply of the fixed allowance.
Example 1.41
OCS Wholesalers purchases trading stock from Kleentex (Pty) Ltd for R115 000. As OCS
Wholesalers exceeded the R75 000 purchase target for the month, they are entitled to a
growth rebate (variable allowance) of R20 000 and only paid the difference of R95 000
(R115 000 less R20 000).
You are required to discuss the VAT implications of the growth rebate.
90
Solution 1.41
With the original purchase transaction, Kleentex (Pty) Ltd issued a tax invoice to OCT
Wholesalers stating a consideration due of R115 000 (R100 000 plus R15 000 VAT). Kleen-
tex (Pty) Ltd must now also issue a credit note for the R20 000 growth rebate.
The credit note should indicate the reduction in the consideration of the supply of R20 000
(R17 391 plus VAT of R2 609). As Kleentex (Pty) Ltd has previously accounted for an
excess amount of output tax, they must either increase their input tax by R2 609 or reduce
their output tax attributable to the tax period by R2 609 (section 21(2)(b)). As OCS Whole-
salers has previously deducted input tax in relation to a supply and receives a credit note,
they must make the necessary adjustment in their VAT return (section 21(6)). The excess
tax (R2 609) must be accounted for by OCS Wholesalers by either increasing their output
tax or reducing their input tax for the tax period in which the credit note is issued.
Example 1.42
Assume that OCS Wholesalers again purchases trading stock from Kleentex (Pty) Ltd for
R115 000. As OCS Wholesalers just opened their store, they are entitled to a promotion of
new products allowance (fixed allowance) of R20 000. OCS Wholesalers again only paid
the net amount of R95 000 (R115 000 less R20 000).
You are required to discuss the VAT implications of the promotion of new products al-
lowance.
Solution 1.42
With the original purchase transaction, Kleentex (Pty) Ltd will again issue a tax invoice to
OCT Wholesalers with a consideration due of R115 000 (R100 000 plus R15 000 VAT). For
fixed allowances OCS Wholesalers is regarded to supply a service to Kleentex (Pty) Ltd
(in this case an advertising service of the product of Kleentex (Pty) Ltd with the opening
of their store). To correctly account for the fixed allowance, OCS Wholesalers must now
issue a tax invoice to Kleentex (Pty) Ltd for R20 000 (R17 391 plus VAT of R2 609). This
deemed supply for which the tax invoice is issued by OCS Wholesalers will result in them
having an additional output tax liability of R2 609 with Kleentex (Pty) Ltd having a corre-
sponding increase in their input tax deduction of R2 609.
91
REMEMBER
Apportionment of input tax is thus compulsory where goods and services are acquired for
both taxable and exempt supplies, but output tax is never apportioned (except for fringe
benefits and indemnity payments).
The methods used to calculate the apportionment rate of input tax are discussed
below.
92
Example 1.43
At the beginning of their current financial year, Kagiso (Pty) Ltd registered as a VAT
vendor. They did so as they realised that their taxable supplies in the coming year would
exceed the registration threshold.
The company owns several residential properties which it hires out to tenants. Addition-
ally, they manufacture and promote, ‘Flangals’, a new type of square potato chip. During
the last year, the company earned R175 000 (excluding VAT) from its letting activities and
R200 000 (excluding VAT) from manufacturing and promoting Flangals.
Immediately after registering for VAT purposes, the managing director authorised the
purchase of the following assets:
• A new computer, costing R23 000 (including VAT), to be used for administering the
residential letting activities and the chip manufacturing process.
• A new mixer, costing R16 100 (including VAT), to be used solely in the chip manufac-
turing process.
The managing director now wishes to determine what input tax the company can claim,
as they are registered for VAT purposes.
You are required to calculate the apportionment ratio of input tax using the turnover-
based method and apply this ratio to determine the amount of input tax that Kagiso (Pty)
Ltd can claim in its first VAT period.
93
Solution 1.43
The computer is going to be used in making both taxable supplies (the selling of potato
chips) and non-taxable supplies (the hiring out of residential accommodation). Therefore,
the input tax deduction that can be claimed must be apportioned.
The turnover-based method entails the total taxable supplies expressed as a percentage of
total supplies and is an acceptable means of determining an input tax ratio. The following
formula is applied: B × C / D, where:
C = the value of taxable supplies (R200 000), and
D = the value of all supplies (R375 000 = R200 000 (manufacturing income) + R175 000
(income from letting activities)).
Thus:
The input tax ratio for Kagiso (Pty) Ltd is calculated as R200 000 / R375 000 = 53,33%.
Input tax deduction on the computer:
As the computer is used for the making of both taxable supplies and exempt supplies, the
input tax deduction is determined using the input tax ratio of 53,33%. Kagiso (Pty) Ltd is
entitled to claim R1 600 (rounded) as an input tax deduction on the computer, calculated as
follows: R23 000 x 15 / 115 = R3 000 x 53,33%
Input tax deduction on the mixer:
The company is entitled to claim the full input tax deduction on the mixer as this machine
is used wholly for the making of taxable supplies.
Kagiso (Pty) Ltd will therefore be entitled to claim a further R2 100 (R16 100 × 15 / 115) as
an input tax deduction.
94
95
96
The denial of input tax also does not apply in respect of the related expenses that are
incurred as part of vehicle ownership, for example insurance premiums, maintenance
and repair costs etc.
Example 1.44
Mr Silindile is a vendor that bought a new motor car valued at R230 000 from Van Oordt
& Hills Motors Inc. in terms of a credit sale with monthly payments of R4 500. As an addi-
tional option Mr Silindile took out a maintenance plan and insurance on the motor car
resulting in an additional monthly payment of R500 and R400 respectively. All amounts
are inclusive of VAT. The motor car is used 100% for the making of taxable supplies.
You are required to determine the input tax deduction claimable (if any) by Mr Silindile.
Solution 1.44
Mr Silindile cannot claim an input tax deduction on the cost of the motor car, because it
relates to the acquisition of a motor car and this deduction is denied in terms of sec-
tion 17(2). Mr Silindile can, however, claim an input tax deduction in respect of the
maintenance plan and insurance on the motor car as section 17(2) does not deny the input
tax deduction on these services supplied.
Note that if the maintenance plan and insurance payment were not separately indicated
on the VAT invoice but formed part of the supply of the motor car, the input tax deduc-
tion on these expenses would have been denied in terms of section 17(2) as it would have
related to the acquisition of a motor car as defined.
97
REMEMBER
• This deemed input tax rule relates only to goods previously owned and used. The pur-
chase of trading stock from a non-vendor (except for antiques) would usually not quali-
fy as second-hand goods, as the trading stock was not previously used.
• The rule that the lesser of purchase price or open market value should be used in calcu-
lating the deemed input VAT does not apply to the motor industry on the trade in of
second-hand vehicles. It is not the intention of the VAT Act to deny an input tax credit
on an arm’s-length transaction between parties that are not connected persons. A bind-
ing general ruling (BGR No. 12) allows motor dealers to deduct the deemed input tax
on the full consideration (including any over-allowance amount) paid or credited to the
supplier for a second-hand vehicle traded-in under a non-taxable supply.
98
Example 1.45
Simunye (Pty) Ltd, a vendor for VAT purposes, acquired a second-hand machine from a
non-vendor for use in its business. The purchase price of the machine was R6 300 and the
market value was R7 800. The purchase price was paid in full.
You are required to determine whether any input tax may be claimed in respect of the
purchase.
Solution 1.45
Because the vendor has purchased a second-hand machine from a person not registered
for VAT purposes, a deemed input tax credit can be claimed on the second-hand machine.
The deemed input tax credit is based on the lower of the consideration paid (R6 300) or
open-market value (R7 800).
The deemed input tax is calculated as follows:
Tax fraction × consideration paid (15 / 115 × R6 300) = R822.
If, after a deduction of input tax on second-hand goods, the sale is cancelled, the
consideration is reduced, or the second-hand goods are returned, and the input tax
actually deducted exceeds the input tax properly deductible, the difference should be
accounted for as an output tax (section 18(8)).
The recipient of second-hand goods must obtain and maintain a declaration by the
supplier stating whether the supply is a taxable supply or not, and must further
maintain sufficient records to enable the following particulars to be ascertained
(section 20(8)):
• The name of the supplier; and
– where the supplier is a natural person, his identity number;
– where the supplier is not a natural person, the name of the supplier and the
name and identity number of the natural person representing the supplier in
respect of the supply, and any legally allocated registration number.
* The recipient should verify the name and identity number of natural person
with reference to the person’s identity card and, the recipient should also re-
tain a photocopy of such identity card.
* The recipient should verify the name and registration number of any suppli-
er, other than a natural person, with reference to its business letterhead and
should retain a photocopy of such name and registration number appearing
on such letterhead.
• The date upon which such second-hand goods were acquired.
• A description of the goods.
• The quantity or volume of the goods.
• The consideration for the supply.
• Proof and date of payment.
No documentary proof is required if the total consideration for the supply of the
second-hand goods is in money and does not exceed R50.
99
Example 1.46
Aron (Pty) Ltd buys scrap metal from a non-vendor for R6 000 and claims a deemed input
tax deduction of R783 (R6 000 × 15 / 115).
You are required to explain the VAT consequences if:
(a) Aron (Pty) Ltd exports the goods for R7 000, and
(b) Aron (Pty) Ltd exports the goods for R4 000.
Solution 1.46
(a) Aron (Pty) Ltd will be required to account for output tax equal to the notional input
tax claimed (R783). The output VAT is based on the purchase price, irrespective of
the selling price. However, where Aron (Pty) Ltd accounted for VAT at the standard
rate of 15% in respect of the total amount charged, the purchaser, if a qualifying pur-
chaser, may claim the difference between the VAT paid and the notional input tax
deduction from the VAT Refund Administrator.
(b) Aron (Pty) Ltd will again be required to account for output tax equal to R783,
although the selling price of the goods is less than the purchase price. The output
VAT is based on the original purchase price, irrespective of the selling price.
Example 1.47
Adam buys second-hand goods for R2 000 and claims a notional input tax deduction of
R261, then sells them to Bart, a connected person, for R1 800. Bart claims an input tax
deduction of R235 based on the tax invoice provided by Adam. Bart exports the goods for
R1 980.
You are required to explain the VAT consequences in respect of the export.
100
Solution 1.47
Bart will be required to account for output tax of R261 (R2 000 × 15 / 115) which is based
on the greater of the price paid by the connected person (Adam) – R2 000; or the price
paid by (Bart) – R1 800.
101
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 difference between a suspensive sale and finance lease lies in the person
carrying the risk of ownership of the goods supplied. In terms of a suspensive sale
the risk of ownership passes to the purchaser on the date that the suspensive sale
condition is complied with, where in terms of a finance lease the risk of ownership
passes to the lessee and the date that the lease agreement is concluded.
Example 1.48
A bank enters a finance lease on 15 May of the current tax year for the lease of a motor car
to a clothing manufacturer, as follows:
R
Cost of motor car 292 174
VAT 43 826
336 000
Finance charges 117 600
453 600
The agreement states that 36 monthly instalments of R12 600 (including VAT) are payable
starting on 30 June of the current year. The motor car was delivered on 1 June. The motor
car is a motor car (refer to 1.21) as defined for VAT purposes.
You are required to discuss the VAT implications of the above transaction if both parties
have a one-month tax period.
102
Solution 1.48
The bank must account for output tax of R43 826 (R336 000 × 15 / 115) on 1 June on the
cash value of the motor car. The bank does not have to account for output VAT on the
finance charges as they constitute an exempt supply.
The clothing manufacturer is not able to claim any input tax deduction, since the vehicle
is a ‘motor car’ as defined (refer to 1.21).
Should the clothing manufacturer purchase the car at the end of the lease, VAT is also
payable on any consideration paid for the vehicle at that stage. Again the manufacturer
would not be able to claim any input tax deduction, as it relates to the acquisition of a
motor car as defined.
Example 1.49
Assume the same information as in the above example, except that it is now a delivery
vehicle acquired in terms of a suspensive sale agreement, which provides for a deposit of
R42 000 payable on 15 May of the current tax year.
The monthly instalments are R11 025, and finance charges totalling R102 900 will be paid
over the 36-month period.
You are required to discuss the VAT implications of the above transaction.
Solution 1.49
The only difference is that the bank now must account for output tax of R43 826 (R336 000
× 15 / 115) on 15 May. This is also the date on which the manufacturer can claim the input
tax of R43 826, assuming that the delivery vehicle will be used exclusively to make taxable
supplies. Regarding a suspensive sale agreement, when a deposit is paid, it is immediate-
ly applied in reducing the total consideration due. Neither the bank nor the manufacturer
needs to account for VAT on the finance charges as it constitutes an exempt supply.
REMEMBER
continued
103
104
REMEMBER
• Transfer duty is a separate tax levied by SARS on the value of any property acquired by
any person. Property includes land, fixtures and rights to land, rights to minerals,
shares or interest in residential property companies and shares in share-block compa-
nies.
• Fixed property transactions in South Africa are either subject to VAT or to transfer
duty.
If a supply of fixed property does not attract VAT at any rate, the supply is subject to
transfer duty. Transfer duty is levied at a sliding scale for all persons. No distinction
is made between natural persons and legal persons. The current transfer duty rates
are:
105
applied), the above time of supply rule does not necessarily correlate with the actual
entitlement to claim an input tax or the liability to pay output tax. The input tax may
then only be claimed in proportion to the amount paid, irrespective of the date of
transfer. The output VAT is also only accounted for to the extent that payment is
received (sections 16(3)(a)(iiA) and (4)(a)(ii)). For these transactions, the special time
of supply rule is ignored, and we only have to focus on the payments as this would
trigger an output tax obligation or an input tax entitlement.
It does also not matter whether the applicable vendor is registered on the invoice
basis or payments basis as all input tax and output tax cash-flows arise only to the
extent payment has been made or has been received (section 16(3)(a)(iiA) and
(4)(a)(ii)).
REMEMBER
• The payment of transfer duty is not payment for a consideration, but payment of an
additional tax on the transaction.
• The payment of a deposit is not regarded as a payment until the deposit is applied as
part-payment or forfeited.
• Payment does not include seller financing or promissory notes.
There are, however, different rules pertaining to fixed property that is not supplied in
the course or furtherance of an enterprise (refer to 1.24.3.2).
106
the fixed property is registered in the name of the vendor. After registration in the
name of the vendor, the deemed input tax can further only be claimed to the extent
that payment was made for the supply.
Example 1.50
Venter and Naidoo (Pty) Ltd purchased a house from a non-vendor South African resi-
dent for a consideration equal to R800 000. The open-market value of the house is
R750 000. Venter and Naidoo (Pty) Ltd will use the house for the purposes of making
taxable supplies. As the value of the fixed property is below R900 000, no transfer duty is
payable on the transfer of the fixed property. The registration of the property in the name
of Venter and Naidoo (Pty) Ltd occurred on 15 April of the current year. Venter and
Naidoo (Pty) Ltd borrowed money from ABC Bank and paid the full R800 000 to the non-
vendor on 20 March of the current year.
You are required to determine when and to what extent input tax may be claimed in
respect of the purchase of the house. Take note that the company is registered on the
invoice basis (refer to 1.3.1.1).
Solution 1.50
Because the vendor has purchased second-hand fixed property from a South African
resident, deemed input tax may be claimed for the house.
The deemed input tax credit is calculated as follows:
Tax fraction × (lesser of) consideration paid (R800 000) or open market value (R750 000)
= 15 / 115 × R750 000 = R97 826
Although the full consideration for the supply was paid on 20 March, the actual registra-
tion of the house in the name of Venter and Naidoo (Pty) Ltd only occurred on
15 April of the current year. The full deemed input tax may be claimed only after registra-
tion í in the tax period covering April of the current year – as the company is registered
on the invoice basis.
If it is assumed that only 80% of the house will be used by Venter and Naidoo (Pty) Ltd
for taxable purposes, the calculation for the allowable input VAT would have been as
follows:
R750 000 × 15 / 115 × 80% = R78 261
Whether Venter and Naidoo (Pty) Ltd paid cash or used third party financing to effect
payment makes no difference as to the timing of the deemed input VAT. If Venter and
Naidoo (Pty) Ltd, however, used financing that it obtained from the seller, the deemed
input tax is claimable to the extent that Venter and Naidoo (Pty) Ltd settles their debt to
the seller (that is to say to the extent that payment is made).
If the house was purchased by a natural person who is registered on the payments basis,
the input VAT will be claimable to the extent that payment has been made for the consid-
eration. Let us assume that the natural person is going to use 80% of the house for taxable
purposes, and that only R300 000 of the consideration has been paid on 20 March of the
current year. The input tax will then be as follows:
15 / 115 × R750 000 × 80% × R300 000 / R800 000 = R29 348
Thus, R29 348 may be claimed as a notional input tax deduction (refer to Note).
continued
107
Note
The deemed input tax could be claimed to the extent payment was made and to the extent
the property will be used for taxable purposes. This deemed input tax could be claimed in
the tax period covering March of the current year – to the extent of payment and we do
not need to wait for registration if the vendor is registered on the payments basis.
108
value of the taxable supplies made by foreign supplier has exceeded R1 000 000 in
any consecutive 12-month period.
Foreign suppliers of electronic services (and their intermediaries) are allowed to
account for VAT on the payments basis, provided that the foreign supplier (and/or
the intermediary) applied to the Commissioner in writing to do so.
The supplies made by foreign suppliers of electronic services are subject to VAT at
the standard rate of 15% and do not qualify for zero rating in terms of section 11(2).
A foreign supplier of electronic services is required to issue a tax invoice that contain
particulars prescribed by SARS in Binding General Ruling No. 28. Additional infor-
mation on the tax invoices of foreign suppliers of electronic services include, for
example, the exchange rate used.
The output tax is equal to the tax fraction multiplied by the open-market value (sec-
tion 10(7)), as determined in the following formula:
A×B
where:
A = the tax fraction, and
B = the open-market value.
The time of supply is the date on which the goods are applied for non-taxable pur-
poses (section 9(6)).
Where a vendor has made an adjustment to output tax as contemplated in sec-
tion 18(1) in circumstances where partial input tax was originally claimed, an addi-
tional input tax adjustment is provided for. The purpose of this adjustment is to allow
a deduction of the unclaimed portion of the input tax. The adjustment is required to
be made on the date on which the goods are supplied. For this purpose, the following
formula is to be used (section 16(3)(h)):
A×B×C
where:
A = the tax fraction;
B = the lesser of:
– adjusted cost (including VAT) of the goods or services (an exception
being that the cost for connected persons is the open-market value on the
date of the original transaction),
– B in formula A × B × C × D in section 18(4) (refer to 1.27),
– the open-market value on the date that a previous increase or decrease was
calculated if the open-market value was lower than the adjusted cost, or
109
– the open-market value of the goods or services at the time the change-of-
use adjustment is required;
C = the percentage use for non-taxable purposes for the period before the
adjustment.
REMEMBER
• The adjusted cost of an asset differs from the cost price of the asset. The ‘adjusted cost
of an asset’ refers to that part of the cost price of the asset where VAT has been charged
or would have been charged if VAT was applicable when the goods or services were
supplied to the vendor.
• Wages and finance charges are sometimes included in the cost price of an asset. These
costs would, however, not be included in the adjusted cost of the asset as no VAT is lev-
ied on either the wages or the finance charges.
Example 1.51
Dube Mahlangu purchased ten lawnmowers to be sold in his nursery. Each lawnmower
cost him R10 000 (including VAT). At the time of purchase, he intended to sell the
lawnmowers in the course of his business and claimed input tax of R1 304 (R10 000 ×
15 / 115) per lawnmower. Dube decided to take one of the lawnmowers for his own pri-
vate use in his garden at home. Dube usually sells the lawnmowers for R18 000 each (in-
cluding VAT).
You are required to calculate the output tax.
Solution 1.51
R
Output tax adjustment is equal to the tax fraction multiplied by
open-market value = 15 / 115 × R18 000 2 348
If Dube originally acquired the lawnmower for making only 55% taxable
supplies, the VAT consequences would have been as follows:
Output tax
= 15 / 115 × R18 000 (section 18(1)) 2 348
Input tax
= 15 / 115 × R10 000 × 45% (non-taxable use) (section 16(3)(h)) 587
110
REMEMBER
• Section 18(1) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 1.21).
• The open-market value is used in cases where the use for taxable purposes decreases to
0%, but if the goods are still used in the course of making taxable supplies and the ex-
tent merely decreases, section 18(2) will be applicable (refer to 1.28).
• A section 18(1) adjustment is made on the date of the change of use.
111
Example 1.52
Mr Chill is a residential property developer. Mr Chill recently completed a development
in Mooikloof, Pretoria. Due to the current market conditions Mr Chill is unable to sell the
residential units.
You are required to discuss the VAT consequences of the following scenarios:
(a) Mr Chill decides to temporarily rent out the property with the intention to sell the
property. After 18 months, a buyer is found, and the property is sold.
(b) Mr Chill decides to temporarily rent out the property with the intention to sell the
property. After 36 months Mr Chill is still unable to sell the property.
(c) Mr Chill decides to temporarily rent out the property with the intention to sell the
property. After 12 months Mr Chill’s intention changed, and he decided to take the
property of the market and rent it out permanently.
Solution 1.52
(a) No output VAT adjustment needs to be made on the date that the property is rented
out. As the property is sold within the 36-month relief period, output VAT will be
levied on the date of supply of the property in terms of section 7(1)(a).
(b) No output VAT adjustment needs to be made on the date that the property is rented
out. As Mr Chill was unable to sell the property within the 36-month relief period,
an output VAT adjustment will have to be made on the expiry of the 36 months in
terms of section 18B. The value of the section 18B change of use adjustment is the
open market value of the residential property at the end of the 36-month period.
(c) No output VAT adjustment needs to be made on the date that the property is rented
out. On the date that Mr Chill changed his intention in respect of the property, the
relief provided in terms of section 18B will no longer apply and Mr Chill will have to
make a section 18B output VAT adjustment. The value of the section 18B change of
use adjustment is the open market value at the end of the 12-month period.
112
where:
A = the tax fraction;
B = the lesser of:
– adjusted cost (including VAT) of the goods or services, or
– open-market value of the goods or services at the time the change-of-
use adjustment is required;
C = the percentage by which the taxable use of goods or services has in-
creased (an increase to 95% or more is deemed to be 100%); and
D = if the goods are second-hand goods (refer to 1.22), the percentage of the
consideration that has been paid.
This adjustment is required to be made in the tax period when the goods are applied
for taxable purposes.
REMEMBER
• Section 18(4) is not applicable if the input has been denied in terms of the VAT Act (for
example, motor vehicles or entertainment assets) (refer to 1.21). For example: A vendor
took a fridge from the flat he rented for residential purposes to the kitchen of his enter-
prise. Although the fridge is now utilised for taxable purposes, it relates to the supply of
entertainment, and no input tax deduction could be made in terms of this section.
• Section 18(4) is also applicable (for example, if a motor car or entertainment asset was
acquired and, on purchase date, the input tax was denied, but subsequently the use of
the asset changed). For example, a warehouse purchased a fridge for the canteen. Orig-
inally input tax was denied. Then the fridge was moved to the warehouse to be used for
taxable purposes and not the supply of entertainment. A section 18(4) adjustment is
permitted.
• The section 18(4) adjustment is applicable if there is an increase of taxable use, but only
if the taxable use before the increase was 0%. (For other increases of taxable use, refer to
1.28.)
Example 1.53
Mr Knowhow, a VAT vendor on the invoice basis, did the following in March of the cur-
rent tax period:
• He started to use his personal motor vehicle 100% for business purposes. His business
entails only taxable supplies, and he is not a car dealer. The motor vehicle cost him
R66 000 (VAT inclusive) and on the date on which he started to use it for business pur-
poses, it had a market value of R37 500.
• He started to use his private computer 100% for business purposes. The computer cost
him R11 355 (VAT inclusive) and had a market value of R7 300 when he started to use
it for business purposes.
• He started to use his private printer 97% for business purposes. The printer was
bought from a non-vendor for R2 500 and had a market value of R1 500 on the date on
which he started to use it for business purposes. The full purchase price had been paid.
continued
113
• He converted 80% of his private residence into offices. He bought his residence for
R500 000. He bought the residence on credit from the seller and has paid only R300 000
up to date. At the date on which he started to use 80% of the residence as offices, it had
a market value of R750 000.
You are required to calculate the VAT consequences of the above.
Solution 1.53
Motor vehicle
• Cannot claim input tax in terms of section 18(4), as input tax is denied in terms of
section 17(2) as it is a motor car as defined.
Computer
A×B×C
15 / 115 × R7 300 × 100% = R952 input VAT can be claimed in terms of section 18(4) in
the applicable tax period when he started to use it for the making of taxable supplies.
Printer
A×B×C×D
15 / 115 × R1 500 × 100% (Note 1) × 100% = R196 input VAT can be claimed
Offices
A×B×C×D
15 / 115 × R500 000 (Note 2) × 80% × R300 000 / R500 000 = R31 304 input tax can be
claimed
Notes
1. Taxable use of 97% is deemed to be 100% (as it is more than 95% – de minimus rule).
2. The lesser of the original cost R500 000 and the market value on the date of the change
of use – R750 000 – should be used.
3. The section 18(4) output VAT adjustment is made in the tax period when Mr
Knowhow starts using the goods for taxable purposes, that is to say March of the cur-
rent tax period.
114
Section 18(2)
100% taxable use Î lower % of taxable use (but not 0%)
Section 18(5)
< 100% taxable use Î higher % of taxable use
115
Example 1.54
Jo Soap purchased a computer for his business for R48 000 (including VAT). 60% of the
business relates to taxable supplies. Input tax claimed was therefore R48 000 × 15 / 115 ×
60% = R3 757. At the end of Jo’s Year 1, Jo determined that 45% of his business would
now relate to taxable supplies. The market value of the computer on that date was
R45 000. At the end of Year 2, Jo determined that 80% of the business would now relate to
taxable supplies and the market value of the computer on that date amounted to R49 500.
You are required to calculate the VAT consequences of the above.
Solution 1.54
R
Year 1 – reduction in the percentage taxable use
(section 18(2) output VAT adjustment)
15 / 115 × R45 000 × 15% (60% – 45%) 880
= Output tax payable by Jo
In terms of section 18(6), any output VAT adjustment in terms of section 18(2) is
deemed to take place at the end of the vendor’s year of assessment.
Year 2 – increase in the percentage taxable use
(section 18(5) input VAT adjustment)
15 / 115 × R45 000 (Note) × 35% (80% – 45%) 2 054
= Input tax claimable by Jo
In terms of section 18(6), any input VAT adjustment in terms of section 18(5) is
deemed to take place at the end of the vendor’s year of assessment.
Note
Although the market value was R49 500, the lower of the cost, current market value or the
value of the previous adjustment should be used.
REMEMBER
• Decrease in taxable use to 0%: Section 18(1) and an additional input tax credit in terms
of section 16(3)(h) (refer to 1.26).
• Increase in taxable use from 0%: Section 18(4) (refer to 1.27).
• Any other increases or decreases: Section 18(2) (decrease) and 18(5) (increase). Only for
capital goods or services.
• These section 18(2) and section 18(5) adjustments are only made at year end. The
market value at year end (and not at any other date) is relevant as the B value in the
formula.
116
Example 1.55
A vendor acquires capital goods or services partially (65%) for the purposes of making tax-
able supplies for R86 700 (including VAT). The vendor claimed R7 351 as input tax (R86 700
× 15 / 115 × 65%). The open-market value in all cases is R102 600.
Year 1: The taxable percentage increases to 80%;
Year 2: The taxable percentage reduces to 58%; and
Year 3: The taxable percentage is 0%.
You are required to calculate the adjustments to be made by the vendor.
Solution 1.55
Year 1: A×B×C
= 15 / 115 × 86 700 × 15% (80% – 65%)
= R1 696 (input tax adjustment)
Year 2: A×B×C
= 15 / 115 × 86 700 × 22% (80% – 58%)
= R2 488 (output tax adjustment)
Year 3: A×B
= 15 / 115 × R102 600 (market value for section 18(1))
= R13 383 (output tax adjustment)
Section 16(3)(h) – additional input
= A×B×C
= 15 / 115 × 86 700 × 42% (100% – 58%)
= R4 750 (input tax adjustment)
REMEMBER
When an input tax deduction has been denied in terms of section 17(2) in respect of
the acquisition of a motor vehicle, section 18(9) could subsequently grant the input
tax deduction if the motor vehicle were converted into a game-viewing vehicle or
hearse.
This converted game-viewing vehicle or hearse is deemed to be supplied to that
vendor in that tax period. The vendor can claim an input tax equal to the tax fraction
of the lesser of:
• the adjusted cost; or
• the open-market value,
117
of that vehicle on the day before the conversion. However, the deduction should
exclude any amount of input tax that qualified for a deduction under another provi-
sion of the VAT Act.
Should this be the situation, and, upon conversion of a vehicle, a vendor managed to
claim an input tax deduction, the vendor would be liable to declare output tax on the
subsequent supply of the vehicle. This is the case as it would be deemed to be a
supply in the course or furtherance of the vendor’s enterprise (section 8(14)(b)). The
value of the supply would be deemed to be the open-market value of that vehicle
(section 10(24)).
Should a game-viewing vehicle or hearse subsequently be applied for a purpose other
than the purpose for which the input tax deduction was initially allowed, a supply at
the standard rate for these assets is deemed to take place (section 8(14A)). The value
of the supply is deemed to be the open-market value of that vehicle (section 10(24)).
The time of supply is deemed to be the time that the game-viewing vehicle or hearse
is supplied as contemplated in section 8(14)(b) and (14A) (section 9(10)).
Example 1.56
A station-wagon is purchased for R115 000 (VAT included). An input tax deduction is
denied in terms of section 17(2)(c), as the station-wagon falls within the ambit of the defi-
nition of ‘motor car’. The station-wagon is subsequently converted into a hearse for
R23 000 (VAT included). The market value on the date of the conversion was R116 000.
You are required to calculate the input tax claimable as a result of the conversion of the
motor vehicle.
Solution 1.56
Input tax of R3 000 (R23 000 × 15 / 115) is allowed on the conversion costs. An adjustment
will be allowed in terms of section 18(9), which will result in an input tax claim of R15 000
(R115 000 × 15 / 115) in relation to the acquisition of the station-wagon. The input tax
adjustment is based on the lower of adjusted cost (R115 000) and the open market value at
the date of the conversion (R116 000).
Where the hearse is subsequently sold to another undertaker, the supply will be subject to
VAT at the standard rate in terms of section 8(14)(b). Alternatively, where the hearse is
converted back into a station-wagon or it is no longer used to transport deceased persons,
a supply of the hearse is deemed to be made in terms of section 8(14A) and output VAT
will be payable by the vendor.
118
• the seller levies output tax at the rate of 0% on the full transaction; and
• the purchaser pays Rnil input tax and may not claim any input tax on the transaction.
119
Step 2: Reduce such value by the value of assets that specifically relate to
100% taxable supplies.
Step 3: Reduce the value by all items for which input tax would have been
denied.
Example 1.57
Financinki (Pty) Ltd, a vendor, acquires a business as a going concern from Itsover (Pty)
Ltd at the zero rate for R500 000. Financinki determines that three office desks, six chairs
and two laptops will be used 100% to make taxable supplies. The value of these assets
amounts to R70 000. Included in the R500 000 purchase price is a motor car to the value
of R95 000 and a coffee machine to the value of R10 000. Except for the assets specifically
mentioned, Financinki estimates that for the rest of the assets 65% will be used for the
making of taxable supplies.
Itsover (Pty) Ltd used the chairs, desks and laptops 70% for the purposes of making non-
taxable supplies. The value of the above-mentioned items constitutes R70 000 of the
R500 000 purchase price. The original cost of these items for Itsover (Pty) Ltd amounted
to R114 000 (VAT inclusive). All the other items relating to the acquired concern were
used 100% by Itsover (Pty) Ltd for the purposes of making taxable supplies.
You are required to calculate all the VAT implications of the above transaction for both
parties.
Solution 1.57
Itsover (Pty) Ltd R
Output VAT
Selling of the enterprise as a going concern:
((R500 000 – R95 000 – R10 000) × 0%) nil
Additional input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R70 000 (lesser of cost or market value) × 70% (non-taxable use)
= R6 391 input VAT
continued
120
1.30.3 Less than 50% of the selling price relates to the going
concern
If the goods or services of the enterprise were applied by the seller partially for the
purposes of the going concern, but not mainly (thus less than 50%), only the portion
of the selling price that relates to the going concern may be zero rated.
• The seller should charge VAT at the zero rate on the going concern portion of the
supply.
• The seller must charge VAT at the standard rate in respect of the non-going-
concern portion.
• The seller can claim an input tax adjustment in respect of the assets used for non-
taxable purposes (section 16(3)(h) of the VAT Act).
• The purchaser may claim input tax credits where the assets acquired at the stand-
ard rate is applied for purposes of making taxable supplies. However, the purchas-
er cannot claim an input tax deduction in connection with the portion he is going
to utilise for non-taxable purposes.
• The purchaser is required to make a section 18A adjustment where he does not
apply the going-concern portion only for taxable purposes.
121
Example 1.58
Barry sells a farm, together with crops and assets, that was used for taxable purposes
(farming), exempt purposes (provision of accommodation to labourers) and private pur-
poses (the farm house and game farm) is sold as a going concern to Zander for
R2 million (excluding VAT). Only 40% of the selling price relates to the taxable supply of
farming (going concern). The R2 million does not include any assets in respect of which
an input has been denied. Zander estimates that he will also use only 40% of the farm for
taxable purposes (going concern). The cost price of the concern for Barry amounted to
R900 000 when he originally bought it from a vendor.
You are required to explain and calculate the VAT consequences of the above.
Solution 1.58
VAT consequences for Barry (seller) R
Output VAT
Two supplies are deemed to occur for VAT purposes. The supply relating to the going
concern is zero rated and the second supply is a supply at the standard rate.
Zero-rated portion: R2 000 000 × 40% = R800 000
R800 000 × 0% = nil
Standard-rated portion: R2 000 000 × 60% × 15% = 180 000
Input VAT
Section 16(3)(h) relief
A×B×C
15 / 115 × R900 000 (lesser of cost or market value) × 60% = 70 435
VAT consequences for Zander (purchaser)
Input VAT
Although he paid input VAT of R180 000, he cannot claim it as a deduction, as it is not
incurred for the making of taxable supplies.
No input VAT can be claimed on the portion relating to the going concern as 0% VAT
was levied by Barry.
Output VAT
The full supply of the going concern (40%) will be utilised for taxable purposes, thus, no
additional section 18A adjustment is required.
122
123
Example 1.59
Jane Brand enters into a lease agreement with Khaya Dube for a vacant piece of land on
1 April. The lease agreement stipulates that Jane must erect a building on the piece of
land for R3 000 000. The ground floor of the building (60%) will be used by Jane for mak-
ing taxable supplies, while the top floor (40%) will be let to residential tenants (exempt
supply). The erection of the building was completed on 1 August. Khaya did not pay any
consideration to Jane for the erection of the building. Both Jane and Khaya are VAT ven-
dors.
You are required to determine the VAT implications of the above for both Jane Brand
and Khaya Dube.
Solution 1.59
VAT implications for Jane Brand (lessee)
Jane Brand will be deemed to have supplied the building (the leasehold improvements)
on 1 August (date of completion of the improvements) for Rnil. As she will be using the
building for the making of both taxable supplies as well as exempt supplies, she will need
to apportion her input VAT deduction in respect of the costs that she incurs.
VAT implications for Khaya Dube (lessor)
Khaya needs to make an output VAT adjustment in terms of section 18C as the building
(the leasehold improvements) will not be used solely for the making of taxable supplies
(40% of the building will be used for residential purposes, that is to say an exempt
supply).
The output VAT that Khaya needs to account for on 1 August (the date of completion of
the leasehold improvements) is calculated using the formula A × B × C:
15 / 115 × R3 000 000 (amount stipulated in agreement) × 40% (% non-taxable use)
= 156 522.
124
Example 1.60
For accounting purposes, Talita (Pty) Ltd wrote off R4 658 as bad debts. This amount com-
prises an amount of R2 875 owed by a local debtor and an amount of R1 783 owed by an
export sale debtor.
You are required to provide the journal entry for the above in the books of Talita (Pty)
Ltd.
Solution 1.60
R R
Dr Bad debts (SCI) 4 283 (R4 658 – R375)
Dr VAT Control Account: Input tax (SFP)
(Note) 375 (R2 875 × 15 / 115)
Cr Local debtor (SFP) 2 875
Cr Export debtor (SFP) 1 783
(Bad debts written off and corresponding VAT adjustment.)
Notes
1. The sale to the export debtor was a zero-rated supply. No adjustment to the VAT is
therefore allowed when the debt is subsequently written off.
2. One of the requirements to be able to deduct a bad debt for income tax purposes is
that the amount of the debt must have been included in the taxpayer’s income in ei-
ther the current or a previous year of assessment. As the output tax was never in-
cluded in Talita (Pty) Ltd’s income, only R4 658 (therefore excluding VAT) would
quality as a bad debt deduction (section 11(i); refer to chapter 7).
If the debt is wholly or partially recovered, the tax attributable to the amount recov-
ered by the vendor is deemed to be tax charged by him in relation to a taxable supply
made during the tax period in which the debt is recovered and must be accounted for
as output tax (section 22(2)).
Creditors: claw-back of input tax deduction
When a debt is irrecoverable, the vendor (seller) is entitled to an amount of input
VAT. However, if a vendor does not pay his creditors, he is obliged to account for an
additional amount of output VAT. This is so because he claimed the input VAT initially,
when he incurred the expense. This additional output VAT arises when a vendor on
the invoice basis has:
• deducted input tax in respect of a taxable supply of goods or services made to him;
and
• not paid the full consideration for the supply within 12 months from the end of the
tax period in which the deduction was claimed.
The tax fraction (as determined at the time of deduction) of the unpaid portion of the
consideration must be accounted for as output tax (section 22(3)).
If a written agreement provides for payment to be made after the tax period in which
the deduction of the input tax was made, the period of 12 months is determined from
125
the end of the month in which the consideration is payable (proviso (i) to sec-
tion 22(3)). For example, A and B may agree in writing that A will pay B only three
months after the date of the supply. If this is the case, the adjustment of the output tax
will arise only if A pays B after a period of 15 months (the original three months as
per the contract plus the additional period of 12 months).
This payment of additional output VAT is also applicable to a vendor who:
• has either voluntarily or compulsorily been sequestrated;
• has been declared insolvent;
• has entered into an arrangement;
• has entered a compromise with creditors (proviso (ii) to section 22(3)); or
• has ceased to be a vendor as contemplated in section 8(2) (refer to 1.12.1) (proviso
(ii) to section 22(3)).
The input tax may again be deducted if the vendor subsequently pays the considera-
tion in respect of the supply (section 22(4)).
REMEMBER
Intra-group debt
Group companies often do not have written agreements with one another for each
VAT transaction processed via loan account. Group companies also often operate
internal loan accounts for commercial reasons without clearing these accounts for
many years. Therefore, the 12-month unpaid creditor adjustment is unrealistic in a
group context. Debts between inter-group companies would not be subject to the 12-
month unpaid creditor adjustment (section 22(3A)). The creditor providing the sup-
ply to the indebted group company can also not claim an input deduction for a bad
debt written of (section 22(6)(a)). For applying this relief a group of company is
defined as in section 1 with the exception that the 70% shareholding should be
replaced with a 100% shareholding (section 22(6)(b)).
126
Example 1.61
Slow-Mo (Pty) Ltd owns 100% of the shares in Retro (Pty) Ltd. Retro (Pty) Ltd supplied
goods to the value of R750 000 to Slow-Mo (Pty) on a loan account. After 15 months the
amount in respect of the loan is still unpaid.
You are required to discuss the VAT consequences of the following scenarios:
(a) Because Slow-Mo (Pty) Ltd had cash flow problems, Retro (Pty) Ltd decided to
write-off the debt owed as bad debt.
(b) 14 months after the date of the initial transaction Slow-Mo (Pty) Ltd sold 40% of its
shares in Retro (Pty) Ltd to an unconnected third party.
Solution 1.61
(a) As Slow-Mo (Pty) Ltd and Retro (Pty) Ltd are a group of companies for the purposes
of section 22(6) the 12-month unpaid creditor adjustment will not apply to Slow-Mo
(Pty) Ltd. Consequently Retro (Pty) Ltd will not be entitled to an input tax deduction
on the bad debt write-off.
(b) As the two companies are no longer a group of companies for the purposes of sec-
tion 22(6) the 12-month unpaid creditor adjustment will apply and Slow-Mo (Pty)
Ltd would have to account for output VAT for the supply of goods made to them. If
Retro (Pty) Ltd were to write-off the loan as bad debt, Retro (Pty) Ltd would be enti-
tled to an input tax deduction as the provisions of section 22(6) will no longer apply.
1.33.2 Section 41B of the VAT Act: VAT rulings and VAT class
rulings
Section 41B of the VAT Act provides for the Commissioner to continue to issue bind-
ing VAT rulings in addition to rulings under the Advance Ruling system. VAT rul-
ings are issued under the provisions of ‘binding private rulings’ whereas ‘VAT class
127
rulings are issued under the provisions of ‘binding class rulings’. It should also be
noted that some of the information required for tax rulings are not applicable to VAT
rulings and VAT class ruling (section 79(4)(f) and (k) of the Tax Administration Act.
The VAT rulings and VAT class rulings are also not subject to the application fees but
are still subject to the cost recovery fees (sections 79(6) and 81 of the Tax Administra-
tion Act).
The Commissioner has also published a list of aspects that would result in an applica-
tion for these types of rulings to be automatically rejected (GG 36119 read together
with section 80(2) of the Tax Administration Act.)
1.34 Tax avoidance (section 73 of the VAT Act and section 102
of the Tax Administration Act)
The Commissioner may determine a VAT liability in respect of certain schemes. This
is the case if a scheme has been entered or carried out and has resulted in a tax benefit
being granted to a person, and the scheme was entered into or carried out in a manner
that would not normally be employed for bona fide business purposes.
A scheme includes any transaction, operation, scheme or understanding, including all
steps and transactions by which it is carried into effect.
A tax benefit includes:
• any reduction of tax;
• an increase in an entitlement of a vendor;
• a reduction in the consideration payable by a person in respect of any supply of
goods or services; or
• any other avoidance or postponement of liability for the payment of any tax, duty
or levy imposed by the VAT Act or by any other law administered by the Commis-
sioner.
128
1.37 Summary
VAT is levied by vendors on all taxable supplies. Vendors who pay input tax may
claim the input tax against output tax on taxable supplies. The scope of the rules in
the VAT Act is, however, much more complicated. The VAT Act is indeed a compli-
cated rule-based document with many exceptions.
In respect of supplies made, great care must be taken to distinguish between stand-
ard-rated supplies, zero-rated supplies and exempt supplies.
In respect of input tax, VAT may only be claimed if VAT was levied on the supply,
except in the case of second-hand goods acquired from non-vendors.
In addition to these basic principles, cognisance must be taken of special rules in
respect of the change of use, exports, accommodation, financial services, sale of going
concerns, fringe benefits, indemnity payments, instalment credit agreements etc.
The next section contains several questions that may be completed in order to evalu-
ate your knowledge on VAT.
129
Question 1.1
Violet (Pty) Ltd (Violet), a manufacturer of chalk paints (paint that gives a chalky finish), is a
category C VAT vendor whose head office is located in Durban in KwaZulu-Natal. The
company makes 70% taxable supplies.
The MD (managing director) of the company arranged that the business purchase an expen-
sive road bicycle for employees’ use. The cost of the bike was R92 500 on 15 April of the cur-
rent year and it was purchased from a registered vendor. The marketing manager of Violet
has had the right of use of the bicycle since 15 April of the current year. The open market
value of the bicycle on the date of purchase was R95 000.
Answer 1.1
VAT consequences for Violet (Pty) Ltd
Fringe benefit (deemed supply)
Output VAT for May R134
Question 1.2
On 1 March, Mr Green Fingers commenced a garden service business. He is trading
through the means of a private company named Tidy Gardens (Pty) Ltd. Mr Green is the
sole shareholder of Tidy Gardens (Pty) Ltd and is its sole director.
Tidy Gardens (Pty) Ltd is a registered vendor for VAT purposes. The first tax period is
from 1 March to 30 April.
Mr Fingers’ wife, Sue, is the bookkeeper employed by Tidy Gardens (Pty) Ltd and is re-
sponsible for all its accounting records. Sue is also required to complete the two-monthly
VAT returns.
Sue has requested your help in processing the following four transactions through the
accounting records of Tidy Gardens (Pty) Ltd. She has not recorded any entries in the ac-
counting records for the following transactions, as she is unsure of the VAT implications.
All four transactions relate to its first tax period (1 March to 30 April).
Transaction One
On 1 March, Tidy Gardens (Pty) Ltd purchased a second-hand truck from a used-car dealer
(a registered VAT vendor) for R621 000 (R540 000 plus VAT of R81 000). The used-car deal-
er agreed to allow Tidy Gardens (Pty) Ltd to settle the purchase price in three equal
instalments of R207 000 payable on 1 April, 1 May and 1 June. By 30 April, Tidy Gardens
(Pty) Ltd had settled one of the three instalments in compliance with the agreement
entered with the used-car dealer.
continued
130
Transaction Two
Tidy Gardens (Pty) Ltd purchased a second-hand computer from Mr Green Fingers’
brother (a non-vendor) for R8 500 cash. The market value of the computer was R6 500, but
because Mr Green Fingers owed his brother R2 000 for a gambling debt, the purchase price
was agreed upon as being R8 500. (This was done so that Sue would not find out about her
husband’s gambling debts.) Unfortunately for Mr Green Fingers, Sue queried his brother
about the amount Tidy Gardens (Pty) Ltd had paid him for the computer. He then
revealed the details of the purchase price to her.
Transaction Three
Instead of giving its employees cash to cover their transport expenses to and from work,
Tidy Gardens (Pty) Ltd purchased bus coupons that it distributes to them on a weekly
basis. During the period under review, Tidy Gardens (Pty) Ltd incurred R1 026 per month
on purchasing bus coupons.
Transaction Four
On 1 March, Tidy Gardens (Pty) Ltd employed a landscape gardener (a person who plans
the layout of gardens) to provide a landscape gardening service to its clients. To enable the
landscape gardener to visit existing and potential clients, Tidy Gardens (Pty) Ltd pur-
chased a new double-cab light-delivery vehicle for R276 000 (R240 000 plus VAT of
R36 000). The landscape gardener has the sole use of this double-cab light-delivery vehicle
but is required to pay for all its petrol and maintenance expenses. He may also use the
vehicle for private purposes.
Answer 1.2
R R
Transaction One
Motor vehicles Dr 540 000
VAT Control Account: Input VAT Dr 81 000
Creditor (used-car dealer) Cr 621 000
Purchase of a second-hand truck from a used-car
dealer on 1 March.
Creditor Dr 207 000
Bank Cr 207 000
Settlement of the first instalment on 1 April.
Note
Because Tidy Gardens (Pty) Ltd has purchased a ‘truck’, not being a ‘motor car’ as
defined, an input tax credit is available. The full input tax credit is claimable on 1 March
(provided Tidy Gardens (Pty) Ltd obtains a valid tax invoice) as this is a suspensive sales
agreement (an instalment credit agreement as defined). The settlement of the purchase
price by means of instalments does not affect the timing of the input tax credit as the truck
was not purchased from a non-registered vendor, and therefore it is not a ‘notional’ input
tax that is being claimed.
continued
131
R R
Transaction Two
Computer (R6 500 – R848) Dr 5 652
Loan account – Mr Green Dr 2 000
VAT Control Account: Notional input VAT Dr 848
Bank Cr 8 500
Payment for a second-hand computer purchased for R6 500 from Mr Green Fingers’
brother (a non-vendor) for use in the business.
Note
A notional input tax deduction of R848 (R6 500 × 15 / 115) is available. The gambling debt
of R2 000 is a private transaction and no input tax or notional input tax is claimable on it.
R R
Transaction Three
Salaries and wages Dr 2 052
Bank Cr 2 052
Bus coupons purchased and supplied to employees to cover their transport expenses.
Note
Transport is an exempt supply (section 12(g)), thus no VAT arises. The supply of a non-
cash amount to an employee constitutes a fringe benefit. A deemed supply arises in terms
of section 18(3) on certain fringe benefits but because transport is an exempt supply no
deemed supply on this fringe benefit arises (the first proviso to section 18(3)).
R R
Transaction Four
Motor vehicles Dr 276 000
VAT Control Account: Input VAT Dr nil
Bank Cr 276 000
Purchase of a new double-cab light-delivery vehicle
Salaries and wages Dr 166
VAT Control Account: Output VAT Cr 166
Output tax on the deemed supply arising from the use of a ‘company car’ by the employee.
Note
Because the double-cab light-delivery vehicle is a ‘motor car’ as defined, an input VAT
deduction may not be claimed.
The use of the double-cab light-delivery vehicle by the employee is a Seventh Schedule fringe
benefit, giving rise to a deemed supply (section 18(3)). The output tax on the deemed supply is
calculated as follows: ((R276 000 × 100 / 115 × 0,3%) – R85) × 15 / 115 × 2 months = R166.
132
Question 1.3
Invoices (Pty) Ltd, a vendor registered for VAT purposes on the invoice basis, provides the
following information for the period May and June (all amounts include VAT at 15%
where applicable, and tax invoices have been issued for all supplies and, where applicable,
received from all suppliers):
Extracts from the cashbook:
R
Cash receipts
Cash sales in the Republic 68 400
Sales in Lesotho (delivery was made outside the Republic) 89 000
Sales in Namibia (delivery was made outside the Republic) 56 200
Receipts from debtors – South Africa (Note 1) 22 800
– Lesotho (Note 1) 14 000
– Namibia (Note 1) 20 520
Cash payments
Bank charges 2 280
Interest on bank overdraft 2 300
Fuel 5 400
Entertainment expenses 1 140
Stock purchases (Note 1) 28 500
Payments to creditors for stock purchases 31 920
Rent paid 9 120
Motor vehicle purchased (Note 2) 57 000
Delivery vehicle purchased (Note 3) 115 000
Short-term insurance premiums – fire and theft of stock 1 710
Notes
1. Debtors, creditors and stock
1 May 30 June
R R
Debtors – South Africa 45 600 74 100
– Lesotho 34 200 39 900
– Namibia 28 500 36 480
Creditors – purchase of stock 57 000 62 700
Stock on hand at cost (excluding VAT) 35 000 45 000
2. A motor car for use in the business was purchased from a vendor, and a second-hand
delivery vehicle was purchased from a person not registered for VAT, for use in the
business. The person confirmed in writing that the sale of the vehicle was not a taxable
supply. Invoices (Pty) Ltd is not a car dealer.
3. A new delivery vehicle was purchased and delivered on 1 June in terms of an instal-
ment credit agreement. The purchase price was R91 200 (including VAT at 15%). The
first instalment of R9 800 was payable on 1 July and includes interest amounting to
R500.
133
Answer 1.3
Calculation of VAT payable or refundable R R
Output tax
Republic cash sales 68 400
Republic credit sales 51 300
Debtor receipts 22 800
Debtors outstanding 30 June 74 100
96 900
Less: Debtors outstanding 1 May (45 600)
Total Republic sales 119 700
Output VAT (R119 700 × 15 / 115) 15 613
Exports – zero rated (Note 1) nil
15 613
Less: Input tax
Bank charges (R2 280 × 15 / 115) 297
Interest on bank overdraft – exempt supply, financial service nil
Fuel – zero-rated supply (section 11(1)(h)) nil
Entertainment – not deductible (section 17(2)(a)) nil
Stock purchases R
Cash purchases 28 500
Credit purchases 37 620
Creditors – 30 June 62 700
Payments to creditors 31 920
94 620
Less: Creditors – 1 May (57 000)
Total stock purchases 66 120
Input VAT (R66 120 × 15 / 115) 8 624
Rent paid (R9 120 × 15 / 115) 1 190
Motor car – input tax denied (section 17(2)(c)) (Note 2) nil
Short-term insurance premiums (R1 710 × 15 / 115) 223
Delivery vehicle –
(R115 000 × 15 / 115) (Note 3) 15 000
Interest on credit agreement – exempt supply, financial services nil (25 334)
VAT refundable by the Commissioner (Note 4) (9 721)
Notes
1. The sales to Lesotho and Namibia are zero rated.
2. Even though the motor car is a second-hand vehicle and it was purchased from a non-
vendor, no notional (deemed) input tax credit may be claimed as it is a motor car (as
defined).
3. The delivery vehicle is not a motor car as defined and the input tax can be claimed
upfront as it was purchased in terms of an instalment credit agreement.
4. As the input tax exceeds the output tax, the difference represents the VAT refundable
by the Commissioner.
134
2 Gross income
General Specific
definition inclusions
Page
2.1 Introduction............................................................................................................ 135
2.2 Definition of ‘gross income’ (section 1) .............................................................. 136
2.3 Resident of the Republic ....................................................................................... 137
2.3.1 Ordinarily resident .................................................................................. 138
2.3.2 ‘Physical presence’ test ............................................................................ 140
2.4 Total amount in cash or otherwise ...................................................................... 143
2.5 Received by or accrued to or in favour of .......................................................... 145
2.6 Year or period of assessment ............................................................................... 155
2.7 Receipts or accruals of a capital nature .............................................................. 155
2.7.1 Subjective tests.......................................................................................... 157
2.7.2 Objective factors ....................................................................................... 164
2.7.3 Specific types of transactions.................................................................. 169
2.8 Summary................................................................................................................. 175
2.9 Examination preparation ...................................................................................... 175
2.1 Introduction
Gross income is one of the main building blocks of taxation. If you are given a pile of
documents relating to a taxpayer’s income, you will have to understand the concept
of ‘gross income’ to be able to decide which of the amounts constitute gross income
and are therefore subject to tax. An amount must be included in gross income before
135
it can be subject to tax. The determination of gross income is the starting point of the
taxpayer’s tax calculation.
An amount can be included in gross income either by complying with the general
definition thereof in the Act or by being included in gross income by means of one of
the specific inclusions listed at the end of the definition.
This chapter discusses the different components of the gross income definition as well
as the special inclusions listed as part of the gross income definition.
Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, . . .;
The definition is divided into two sections, namely one applicable to residents and
the other to non-residents (refer to 4.2).
The components of the definition are as follows:
• resident (refer to 2.3);
• total amount (refer to 2.4);
• received by or accrued to or in favour of (refer to 2.5);
• year or period of assessment (refer to 2.6); and
• receipts or accruals of a capital nature (refer to 2.7).
Section 1 of the Act defines certain terms used in the gross income definition (refer to
bullets above), but not all the terms are defined and therefore the courts have been
called on to provide clarity on the meaning of some of these terms. In the paragraphs
that follow reference is made to court cases. In this book, reference is made in the
following way:
Natal Estates LTD v SIR 37 SATC 193. The name of the case is ‘Natal Estates LTD v SIR’.
The reference to ‘SATC’ depicts a publication of all the reported tax cases namely
‘South African Tax Cases’. In this example, the ‘37’ refers to the volume and the’193’ to
the page at which the court’s decision commences.
References are also made to income tax cases and these are indicated as follows:
ITC 1545 45 SATC 464. The ‘ITC’ means ‘Income Tax Case’.
When considering different tax case law it is important to know the hierarchy of the
different courts. The higher up in the hierarchy a court is, the more important its
decision is.
• Constitutional Court (the highest court)
136
REMEMBER
• All the components of gross income must be present for an amount to constitute gross
income.
Step 3: Determine whether the person complies with the ‘physical presence’
test as described in the Act (refer to 2.3.2).
Yes: He is a resident.
No: He is not a resident of the Republic (refer to 4.2).
137
CASE:
Cohen v Commissioner for Inland Revenue
13 SATC 362
Facts: The taxpayer, who was domiciled in derived taxable South African dividends.
the Union of South Africa (now the Re- He claimed to be exempt from supertax as
public), was one of two directors of a com- the Act exempted individuals ‘not ordin-
pany carrying on business in South Africa. arily resident nor carrying on business in
He was requested by his company to go the Union’ from the tax.
overseas to act as the company’s buyer in Judgment: The question whether an indi-
view of the difficulty of obtaining merchan- vidual was in any one year of assessment
dise, caused by war conditions. He left South ordinarily resident in South Africa or else-
Africa in June 1940, accompanied by his where was not to be determined solely by
family. The permit authorising his depart- his actions during that year of assessment;
ure contained the words ‘duration 9 his conditions of ordinary residence during
months’. In October 1940, he arrived in the that year could be determined by evidence
USA and he and his family lived in an as to his mode of life outside the year of
apartment in New York, from where he assessment. Mere physical absence during
carried on the business operations which the whole of the year of assessment was
were the purpose of his visit. In 1941, the not decisive of the question of ‘ordinarily
taxpayer was granted an extension of resident’. On the facts, the taxpayer was
12 months in respect of his permit to found to be still ‘ordinarily resident’ in
remain in the USA. From that date and up South Africa. The judge stated that a per-
to 30 June 1942, neither the taxpayer nor son’s ordinary residence was the country
his family had returned to South Africa. In to which he would naturally and as a mat-
1939, the taxpayer had leased a flat in ter of course return from his wanderings,
Johannesburg for a period of five years his usual or principal residence and could
and had furnished it. This flat had been be described as his real home.
sub-let, with the furniture, during the Principle: ‘Ordinarily resident’ refers to
period he was in the USA. During the year the place where a person will return to
ended 30 June 1942, the taxpayer had after his ‘wanderings’.
138
CASE:
Commissioner for Inland Revenue v Kuttel
54 SATC 298
Facts: The taxpayer was taxed on interest wife were the sole shareholders. At no
and dividends he earned from a source in time was it let and consequently it was
the Republic in the 1984, 1985 and 1986 available whenever the taxpayer wanted to
years of assessments. He contended that he live in it. During 1985 he effected substan-
was not ordinarily resident in South Africa tial renovations and extensions to the
as required by the Act. In 1983, he and his house. He did so, according to his unchal-
wife emigrated to the USA where he had lenged testimony, because he wished por-
obtained a permanent resident’s permit to tion of his South African capital to be
open a business on behalf of a South Afri- invested in fixed property as a hedge
can company in which he held shares. He against the falling value of the rand in rela-
sold a large number of his South African tion to the United States dollar. The tax-
assets and invested the proceeds in Eskom payer also stated that had he not been
stock in order to secure the maximum per- prohibited by the South African exchange
sonal income transmissible to him in the control regulations from taking all his
USA. He decided to buy a home in Florida, assets out of the country, he would certain-
USA. He established church membership, ly have done so.
opened banking accounts, acquired an Judgment: A person is ordinarily resident
office, bought a car and registered with where his ordinary or main residence is,
social security. He also obtained a settling- that is, what can be described as his real
in allowance from the South African ex- home. By applying this test, the taxpayer
change control authorities. was not ordinarily resident in the Republic
Since then, apart from visits to South Africa during the period under consideration. His
and other countries, the taxpayer had lived normal or main residence, his real home,
and worked in the USA. During the period was in the USA. The fact that the taxpayer
September 1983 to November 1985 the tax- retained his home in Cape Town, was not
payer made nine visits to South Africa, stay- at all contrary to his usual home in the
ing for up to two months at a time. The USA. The Commissioner agreed that the
visits were to attend to the continuing liquid- taxpayer was not trading in South Africa
ation of his interests, to participate in yacht- because he was only earning dividends
ing and personal boat-building activities and interest income.
and to attend to family matters. Of the Principle: A person was ordinarily resident
31-month period under review, the tax- where he had his usual or principal resi-
payer spent, on average, just over one third dence, that which may be described as his
of the time in South Africa, the duration of real home. A person may also have a sec-
his visits becoming shorter towards the ond home in, for example, South Africa
end of the period. During his visits to Cape but the South African home must not be
Town the taxpayer lived in a house owned seen to be the home to which he will return
by the company in which he and his to after his wanderings.
The principles developed over time by the courts to establish whether a person is an
ordinary resident in the Republic can be summarised as follows:
• If it is part of a person’s ordinary regular course of life to live in a particular place
with a degree of permanence, the person must be regarded as being ordinarily resi-
dent (Levene v IRC1928 AC).
139
• A person is ordinarily resident in the country to which they would naturally and
as a matter of course return from their wanderings and would, in contrast to other
countries, call home (Cohen v CIR 13 SATC 362).
• A person can be ordinarily resident even if they are physically absent throughout
the year of assessment in question. In determining residence, the person’s mode of
life outside that year of assessment must be considered (Cohen v CIR 13 SATC 362).
• The place of residence must be settled and certain, not temporary and casual
(Soldier v COT 1943 SR).
• A person is ordinarily resident where their permanent place of abode is situated,
where their belongings are stored which they left behind during temporary
absences and to which they regularly returns after these absences (H v COT 1960
SR).
• The term ordinarily resident is narrower than the term resident. A person is ordi-
narily resident where they normally reside, apart from temporary and occasional
absences (CIR v Kuttel 1992 AR).
The taxpayer will be resident in the Republic from the date they became ordinarily
resident, therefore not necessarily for the full year of assessment. Before this event
occurs, they will be treated as a non-resident.
If during a year of assessment a taxpayer stops being ordinarily resident in the
Republic, they will be non-residents from the following day. The ‘physical presence’
test cannot be applied if a person was ordinarily resident in the Republic at any time
during the year of assessment.
140
Where a person who is resident in terms of these rules is physically absent from the
Republic for a continuous period of at least 330 full days immediately after the day
the person ceases to be physically present in the Republic, the person is deemed not
to have been resident from the day the person ceased to be physically present in the
Republic.
A person who becomes resident by virtue of the physical presence test will become a
resident from the first day of the year of assessment during which all the require-
ments of the test are met and will be taxed on their worldwide income for the full
year of assessment.
REMEMBER
The burden of proof in terms of section 102 of the Tax Administration Act, 2011 lies
with the taxpayer; therefore it is important that a person who could become resident
as a result of the physical presence test keep a detailed record of days present in and
outside of the Republic (as they will have to prove that they are not residents).
Example 2.1
Mr Sam Ntembo is a South African citizen who lives in the Republic. Sam was on holiday
in Spain for the last 92 days of the year of assessment.
You are required to determine whether Sam is a resident of the Republic.
Solution 2.1
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Now determine whether the person is ordinarily resident in the Republic: Yes, Sam was
on holiday and his intention was to return to the Republic. Therefore he is a resident of
the Republic and ordinarily resident.
Why did we not count the days that he was in the Republic?
141
Example 2.2
Jay Kolapen is not a resident of the Republic. His employer in England sent him over to
South Africa to work here and gain experience in his field. The days he spent in South
Africa during the years of assessment were as follows:
2015: He spent 95 days in South Africa
2016: He spent 100 days in South Africa
2017: He spent 200 days in South Africa
2018: He spent 200 days in South Africa
2019: He spent 321 days in South Africa
2020: He spent 300 days in South Africa
2021: He spent 100 days in South Africa
He returned to England during 2021 and did not return to South Africa again. Ignore any
effect of a double-tax agreement between the two countries.
You are required to determine whether Jay will be classified as a resident for South
African income tax purposes for each of the years of assessment.
Solution 2.2
Firstly determine whether the person is exclusively a resident of another country as a
result of a double-tax agreement: No.
Next determine whether the person is ordinarily resident in the Republic: He is not ordin-
arily resident.
Now consider the physical presence rules:
2015: Jay is present for more than 91 days in this year, but not in each of the five
prior years of assessment. He is not a resident.
2016: Jay is present for more than 91 days in this year, and for the 2015 year, but
not for the four prior years. He is not a resident.
2017: Jay is present for more than 91 days in this year as well as for 2015 and
2016 years, but not for the three years prior to that (2012, 2013 and 2014).
He is not a resident.
2018: Jay is present for more than 91 days in this year, and for the 2015, 2016 and
2017 years, but not for the two prior years (2013 and 2014). He is not a res-
ident.
2019: Jay is present for more than 91 days in this year, and for the 2015, 2016,
2017 and 2018 years, but not for the prior year (2014). He is not a resident.
2020: Jay is present for more than 91 days in this year as well as for each of the
five preceding years, and in aggregate, he is present for more than 915
(321 + 200 + 200 + 100 + 95 = 916) days in the five prior years. He is a resi-
dent of South Africa from 1 March 2019.
2021: As in 2020 (he meets the requirements). He ceases to be a resident the day
he leaves South Africa, provided that he remains outside South Africa for
a continuous period of 330 days immediately thereafter.
142
CASE:
Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd
13 SATC 21
Facts: The taxpayer owned land that was the year of assessment in which the build-
leased to a cinema company for a period of ing was completed. (It should be noted
50 years with a further option for another that paragraph (h) of the definition of ‘gross
period of 49 years. In terms of the contract, income’ now includes the value of improve-
the lessee was obliged to erect a cinema ments to leasehold properties in gross
building at its own expense. At the end of income.)
the contract the building would become
Principle: The onus is firstly on the Com-
the property of the lessors at no cost.
missioner to establish a method to be used
Judgment: The rights that accrued to the to value an asset received other than in
lessor could not be regarded as consti- cash. It is only after the Commissioner has
tuting an amount accrued to the lessor in established the amount that the burden
the year the building was completed, as it shifts onto the taxpayer, in terms of sec-
did not have an ascertainable money value tion 102 of the Tax Administration Act,
that the Commissioner could include in 2011, to show that the amount is incorrect.
The inclusion of ‘amounts received in cash or otherwise’ means that the value of
assets received in lieu of cash must also be included in gross income. A car dealer
may accept a trade-in of a customer’s old car as part of the selling price of a new car.
Both the cash received and the value of the car traded in will be included in the
dealer’s gross income.
In Lategan v CIR 2 SATC 16 the court held that the term ‘amount’ included not only
money, but also the value of every form of property the taxpayer earned.
When an asset other than money is received, it will have to be valued. The principle
has been established in several court decisions, for example ITC 932 24 SATC 341 and
Lace Proprietary Mines Ltd v CIR 9 SATC 349, that this value will normally be the
market value of the asset on the date the asset was received. A farmer may exchange
produce they have grown on their farms for an implement such as a plough at their
local co-operative. The value of the plough will be included in their gross income and
this value will be the selling price (market value) of the plough on the date they
received the plough. The value of the new item (exchanged item, in this case the
plough) and not the value of the ‘old’ item (in this case the produce) will be the
amount received.
In CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, Judge Hefer accepted as
correct the statement of Judge Watermeyer in Lategan v CIR 2 SATC 16 that the word
‘amount’ should be given a wider meaning and ‘include not only money, but the
value of every form of property earned by the taxpayer, whether corporeal or incor-
poreal, which has a money value’.
143
One of the problems associated with the valuation of receipts in a form other than
cash is the question whether the value so ascribed should be a subjective or objective
value (refer to Ochberg v CIR 5 SATC 93 and the Butcher Bros case).
Example 2.3
In return for services rendered, Mr Jayce Naidoo is granted the right to occupy his client’s
holiday flat in Cape Town free of charge for two weeks. The holiday flat is normally let to
the public at a rate of R5 000 a week. Jayce cannot make use of the benefit at the time it is
made available and does not have the right to grant the benefit to a third party in return
for cash.
You are required to determine the amount in terms of the gross income definition.
Solution 2.3
The objective valuation of this non-cash receipt would be R10 000.
The subjective value of this benefit to Jayce would be Rnil.
Burden of proof (in terms of section 102 of the Tax Administration Act, 2011) of the tax-
payer will be important in this instance regarding the value placed on the benefit.
The effect of the ‘cash or otherwise’ element of gross income is also that notional
amounts are not included in gross income. For example, if a person could have
earned R1 000 in interest on funds they had at their disposal had they invested these
funds, this ‘notional’ interest cannot be included in their gross income if they did not
in fact so invest it. However, in Brummeria, the court found that where something is
received that is connected to a transaction, this ‘notional amount’ can be included in
gross income.
CASE:
Commissioner for South African Revenue Services v
Brummeria Renaissance
69 SATC 205
Facts: The taxpayers (developers) obtained the definition of ‘gross income’. The right
interest-free loans from future occupants to to obtain the loan capital without paying
finance the construction units in a retire- interest is linked to the taxpayer providing
ment village. Interest-free loans were made the lender with a ‘life right’. Therefore a
by occupants of the retirement villages. monetary value can be determined for this
The lenders (occupiers of units) made the right that accrued to the taxpayer. As these
interest-free loans and were granted a rights are of a non-capital nature and can
lifelong right to occupy a unit (called ‘life be valued in money they are included in
rights’). The developers retained owner- gross income.
ship of the units. When the lender died or
the agreement was cancelled, the devel- Principle: The court stated that where an
oper had to repay the loan. The developer interest-free loan is given to a person in
received the use of the interest-free loan in return for something (a quid pro quo), in
exchange for life rights. this instance ‘life rights’, then the notional
Judgment: The actual receipt of the loan interest on interest-free loans represents
did not result in a receipt for purposes of the total amount in cash or otherwise.
144
The general rule for establishing an amount in relation to assets received in a form
other than cash is set out above. Specific types of assets such as shares or insurance
policies have special rules relating to their valuation, and certain sections of the Act
provide for the valuation methods to be used in certain circumstances.
REMEMBER
• There must be an actual amount received or accrued before there can be any question of
gross income.
• Amount has a wide meaning which includes the value of any form of property earned
by the taxpayer and which has monetary value.
Receipts
The question of when an amount is deemed to have been received by a taxpayer was
determined in Geldenhuys v CIR.
145
CASE:
Geldenhuys v CIR
14 SATC 419
Facts: The taxpayer enjoyed a usufructuary Judgment: As the number of sheep on date
interest in a flock of sheep (that is to say she of the sale was smaller than the number
had the right to enjoy the fruits and income when the usufruct commenced, there was
of the asset (sheep)). Her children were the no surplus to which she was entitled; there-
owners of the bare dominium (actual sheep). fore the amount belonged to the children.
The taxpayer and her children decided Principle: The mere receipt of an amount
to give up farming and sell the sheep. The does not result in an inclusion in gross in-
proceeds were deposited in the taxpayer’s come. Although a taxpayer might receive
banking account. The question is: how an amount, it will only be included in
should she be taxed on the amount gross income if it is received on his or her
received? own behalf and for his or her own benefit.
Example 2.4
Jakes Attorney received R250 000 rental per month on behalf of his client Billy Rental.
Billy owns two warehouses that he leases to businesses. Jakes receives these rentals on a
monthly basis and pays it over to Billy.
You are required to determine in whose hands the R250 000 will be taxable.
Solution 2.4
The R250 000 rent received will form part of Billy’s gross income, since Jakes Attorney
had not received it on his own behalf and for his own benefit.
If a taxpayer receives an amount as an agent of someone else, the amount does not accrue
to the agent (C: SARS v Cape Consumers (Pty) Ltd 61 SATC 91).
Illegal receipts
In ITC 1624 59 SATC 373 the judge ruled that where an amount is received due to an
overcharge to a customer, it constitutes an amount received. This is due to the fact
that the amount is received and it is received by virtue of a contract between the two
parties.
In ITC 1545 54 SATC 464, the taxpayer was a dealer in stolen diamonds, knowing
them to be stolen. The court, without arguing the matter, stated that it was common
cause that the proceeds of the sales of the diamonds amounted to a ‘receipt or accrual’
for the purposes of the definition of gross income. The taxpayer receives an amount
on their own behalf and for their own benefit irrespective of the fact that the person is
engaged in illegal activities.
As can be seen in ITC 1545 and ITC 1624, the South African Court taxed the theft of
money as income. This principle was confirmed and extended in two other cases: CIR
v Delagoa Bay Cigarette Company and MP Finance Group CC (in liquidation) v C: SARS.
146
CASE:
Commissioner for Inland Revenue v
Delagoa Bay Cigarette Co, Ltd
32 SATC 47
Facts: The taxpayer company had adver- Judgment: The prizes were paid in terms
tised a scheme under which it sold packets of a contract of purchase and sale and the
of cigarettes at a discount, each such packet cost had been incurred in earning the
containing a numbered coupon. The then income. Accordingly it had not been a
company undertook to set aside two thirds distribution of profit. The court ruled that
of the amount received from such sales as the legality or otherwise of the business
a prize fund from which a monthly distri- was irrelevant and that income earned was
bution would be made to such purchasers taxable.
of the packets ‘as the directors of the com-
pany should in their discretion determine’.
Two monthly distributions to winners Principle: To decide if an amount is
were made. However, before the third dis- ‘income’ or not, no account must be taken
tribution took place, the scheme was stop- of the fact that the activity involved was
ped as it was considered to be a lottery and illegal, immoral or ultra vires. Expenditure
therefore illegal. The taxpayer argued that incurred in producing such income may
the prizes paid were incurred in the pro- qualify as a deductible expense, except
duction of the income, and that if the where the expenses are prohibited by sec-
scheme was illegal the Commissioner could tion 23(o), which prohibits the deduction of
not tax the profits. bribes, fines and penalties.
CASE:
MP Finance Group CC (In Liquidation) v Commissioner for
South African Revenue Service
69 SATC 141
Facts: During the 2000, 2001 and 2002 immediately refund the deposits, there
years of assessment, Prinsloo operated a was no basis on which it could be said that
pyramid scheme (an illegal and fraudulent the deposits were ‘received’ and that they
investment enterprise). In terms of the were therefore not subject to tax.
scheme agents solicited and transmitted
investors’ deposits in return for commis- Judgment: The relationship between inves-
sion. Prinsloo controlled several entities tor and scheme and the relationship be-
which printed a range of convincing- tween scheme and fiscus (the Commis-
looking documentation issued to investors sioner), was different. An illegal contract
when they made deposits. In schemes of can have some legal and fiscal (taxation)
this nature, investors are promised irresist- consequences. For tax purposes the only
ible (but unsustainable) returns on their question is if the amounts paid to the
investments and the scheme paid such scheme complied with the requirements of
returns before finally collapsing, owing the Income Tax Act and unquestionably it
many millions to investors. During the did. The amounts paid to the scheme were
years of assessment under review the oper- accepted by the operators of the scheme
ators of the scheme knew that it was insolv- with the intention of using it for their own
ent, fraudulent and would not be able to benefit and notwithstanding that in law
pay investors. The taxpayer contended that they were immediately repayable, they
because the scheme was in law liable to constituted receipts and were taxable.
continued
147
The tax consequences flow from the rela- Principle: There is a distinction to be drawn
tionship with the fiscus rather than from the in the relationship between contracting par-
commercial relationship. Therefore illegal ties (commercial relationship) and the rela-
receipts and ill-gotten gains are taxable. tionship that a taxpayer has with the fiscus.
Example 2.5
Jack Smith uses street vendors to sell pirated versions of well-known DVDs to the general
public. His income from these activities amounted to R150 000 for the current year of
assessment.
You are required to determine whether Jack Smith will be taxable on the income
received.
Solution 2.5
Jack will include the R150 000 in his gross income as this amount was received by him on
his own behalf and for his own benefit, irrespective of the fact that the sale of pirated
DVDs constitutes illegal activities. SARS does not distinguish between income from legal
activities and income from illegal activities.
Accrued to
In terms of the definition of gross income, amounts which accrue to a taxpayer which
they have not yet received will be included in their gross income. The first case deal-
ing with the meaning of the term ‘accrue’, namely Lategan v CIR, was heard in 1926.
CASE:
WH Lategan v Commissioner for Inland Revenue
2 SATC 16
Facts: The taxpayer, a wine farmer, entered the year of assessment in respect of the
into an agreement to sell his wine to a co- wine produced during the year of assess-
operative company. A portion of the selling ment formed part of the ‘gross income’ for
price was paid prior to the end of his year of that year. The court also held that the
assessment and the balance was to be paid future payments must be included at their
after the end of the year of assessment. discounted future value.
Judgment: ‘Accrued to’ means ‘become Principle: ‘Accrued to’ is the amount to
entitled to’ thus the instalments payable after which the taxpayer has become entitled.
The Lategan decision was followed by CIR v Delfos 6 SATC 92, where two of the
judges interpreted accrue to mean ‘due and payable’. This interpretation may result
in income being taxed in different years of assessment. An amount may be ‘due’ to a
taxpayer during the year of assessment, but only ‘payable’ during the following year
of assessment. In 1990 the appeal court gave its first ruling on the term accrual in CIR v
People’s Stores (Walvis Bay) (Pty) Ltd, thus effectively overruling the previous
decisions.
148
CASE:
Commissioner for Inland Revenue v People’s Stores
(Walvis Bay) (Pty) Ltd
52 SATC 9
Facts: The taxpayer was a retailer of cloth- during the year of assessment and to
ing, footwear etc., for cash and on credit. which a monetary value can be attached,
Most of the credit sales were made under forms part of the ‘gross income’, irrespec-
its so-called ‘6-months-to-pay’ revolving tive of whether it is immediately payable
credit scheme. In terms of this scheme (due and enforceable) or not. The value of
customers’ accounts were payable in six the instalments not yet payable had to be
equal monthly instalments. The instalment their market value.
reflected on the statement had to be paid After this decision an amendment was
before the next statement date. The enacted that subsequently included the
Commissioner taxed the full amount of ‘present value’ of any unpaid amounts.
the sale of the goods in the year of
Principle: The court confirmed the mean-
assessment in which they were sold, but
ing of ‘accrued to’ as applied in Lategan,
allowed a section 11(j) deduction (pro-
has become ‘entitled’. Please note that
vision for bad debt).
granting credit is not a condition. A con-
Judgment: An amount accrues to a taxpayer dition in a contract normally delays the
when he becomes entitled to the ‘amount’. transfer of ownership until the occurrence
Therefore any right that a taxpayer acquired of a specific event.
Example 2.6
Ms Norah Eyssel rendered services to Invest (Pty) Ltd on 15 January. Invest (Pty) Ltd
agrees to pay her R5 000 for the services rendered but the amount is only payable in five
years’ time. Assume that the present value of R5 000 in five years’ time is R1 500.
You are required to determine the amount that will be included in Norah’s gross income.
149
Solution 2.6
The total value of the accrual is R5 000 and she will include the R5 000 in her gross
income for the current year of assessment.
Will she be taxed on the amount when she receives it after five years?
CASE:
Mooi v Secretary For Inland Revenue
34 SATC 1
Facts: The taxpayer received an option to Judgment: The true and real benefit con-
subscribe for (buy) shares in the company templated in the option offer was the right,
he was employed by but subject to the upon the due fulfilment of all the con-
following conditions: he must still be ditions, to obtain the shares at a set price.
employed by the company at the time the The relevant accrual of that benefit occurred
mine (at which he worked) came into when the option became exercisable upon
operation. Three years later the mine came those conditions being fulfilled some three
into operation and he exercised the option. years later; until the taxpayer had per-
The option price paid was far below the formed those services he did not become
market price of the shares. The Commis- ‘entitled to’ any right of option, nor was
sioner included the difference between the anything ‘due and payable’ to him. There-
option price paid and the market value of fore there was no accrual to the taxpayer
the shares at the time of exercising the until the conditions were fulfilled. The
option, in the taxpayer’s gross income. The court also found that when the taxpayer
inclusion was made on the basis that the was in the service of the company, there
amount had accrued to him in respect of existed the necessary causal relationship
services rendered. The taxpayer argued between the benefit acquired by the tax-
that the only amount, if any, which payer and his services to the company.
accrued to him in respect of services, was (Note that section 8C now allows for these
the right he had acquired three years earlier amounts to be taxed.)
(namely the right to exercise an option in
future when certain conditions had been Principle: An amount can only accrue if
met). Therefore the amount accrued when the person has ‘become unconditionally
the options were exercised was as a result entitled to’ it. Conditional entitlement
of the amount paid by the taxpayer for the would therefore not constitute an accrual
shares and not in respect of services ren- until the condition had been satisfied.
dered.
In practice, the date of accrual will depend on the terms of the contract giving rise to the
income. A rental agreement may provide for monthly, quarterly or annual rent pay-
ments. The amount accrues on the date it is due.
150
Example 2.7
A taxpayer carries on business as a furniture dealer. He sells an item of furniture for cash
during the year of assessment. He also sells and delivers furniture on 25 February 2021
but only receives payment on 25 March 2021.
You are required to determine the date of accrual.
Solution 2.7
The selling price of the item sold for cash which he has received during the current year
of assessment is included in his gross income on the date of sale.
The selling price of the second sale accrues to him on 25 February 2021, even though
payment is only received after the current year of assessment and will be included in his
gross income for the current year of assessment.
Example 2.8
Frederikus has an investment in a foreign country. During the current year of assessment,
interest amounting to R32 300 was credited to the account. According to the laws of the
foreign country, the interest earned on these types of accounts may only be remitted to
foreign residents after two years.
You are required to show the effect of the R32 300 interest earned on Frederikus’ taxable
income for the current and next two years, assuming that he earned no other investment
income.
Solution 2.8
Current year of assessment R
Gross income – Foreign interest earned 32 300
Section 9A deduction (32 300)
Effect on taxable income nil
2022 year of assessment
Gross income – section 9A inclusion 32 300
Section 9A deduction (32 300)
Effect on taxable income nil
As the amount has been included in income and once again it has not been
remitted to the Republic, it can be deducted in terms of section 9A.
continued
151
If you don’t take the money that you have earned out of a country within
that same year, and in the next year the country imposes a limitation on the
removal of the money, will you still be able to qualify for this deduction?
REMEMBER
Deposits received
Advance payments received for work still to be performed, such as advance pay-
ments on building contracts, will be included in the taxpayer’s gross income although
the payment accrues to them only when the work has been performed. The principle
relating to deposits was set out in Pyott Ltd v CIR.
CASE:
Pyott Ltd v Commissioner for Inland Revenue
13 SATC 121
Facts: The taxpayer (Pyott) manufactured tin containers returnable, an amount rep-
biscuits. The biscuits were packaged and resenting their liability for refunds, effec-
sold in tin containers. A refundable deposit tively resulting in the deposits received not
was charged for the tin container which being taxed. The Commissioner refused to
was repaid when the tin was returned in allow the provision for refunds.
good condition. Before the Second World Judgment: The amount received for the
War between 25% and 30% of the tins were containers was cash (not subject to any
so returned to the company. Due to a reduction or discounting) and must be
shortage of tinplate in the war years, the included in the gross income of the tax-
deposit on the tins was tripled in an attempt payer at its full value. The provision made
to have more tins returned. This resulted in to meet future claims for refunds is a re-
90% of the tins being returned for a refund. serve for a contingent liability, which was
The company provided for an allowance on expressly forbidden (section 23(e)). The
continued
152
court stated that if the moneys received as Principle: Deposited moneys are included
deposits had been banked in a separate in ‘gross income’ unless they are deposited
trust account set up specifically for the de- into a separate trust account set up speci-
posits received, then such amounts deposited fically for the deposits received.
would not constitute ‘gross income’.
There have also been several other decisions relating to deposits received by a tax-
payer (Brookes-Lemos Ltd v CIR 14 SATC 295 and Greases SA Ltd v CIR 17 SATC 358)
that have indicated that once a taxpayer has received an amount as their own during
a year of assessment to be dealt with as they wish, it is included in their gross income
despite the fact that in terms of the contract they may have to repay the amount later
in certain circumstances.
Example 2.9
Grace Nkomo operates a bed and breakfast establishment in Soweto. She received a de-
posit of R10 000 on 1 April 2020 to reserve accommodation for a group of German tourists
who will visit Soweto during April 2021.
You are required to determine whether Grace will include the R10 000 in her gross in-
come for the current year of assessment.
Solution 2.9
Grace will include the deposit of R10 000 in the year of receipt (2021 year of assessment).
Even though the services will only be rendered in the 2022 year of assessment, she has
received the amount for her own benefit. It will not be included in gross income again in
the 2022 year of assessment.
Or in favour of
The words ‘or in favour of’, which are included in the definition, mean that income
received by another person on behalf of the taxpayer will be included in the tax-
payer’s gross income. A letting agent may collect rent from the tenants in a block of
flats on behalf of the owner. The owner, not the agent, will include this rental income
in their gross income, because it was received or accrued in their favour.
An amount will be included in their gross income irrespective of how the taxpayer
applies it after it has accrued. Section 7(1) of the Act provides:
Income shall be deemed to have accrued to a person notwithstanding that such
income has been invested, accumulated or otherwise capitalised by him or that such
income has not been actually paid over to him but remains due and payable to him or
has been credited in account or reinvested or accumulated or capitalised or otherwise
dealt with in his name or on his behalf, and a complete statement of all such income
shall be included by any person in the returns rendered by him under this Act.
For example, where interest has been credited to the taxpayer’s savings account, it
will have accrued, even though it has not been paid out to them. The leading case
dealing with in favour of is CIR v Witwatersrand Association of Racing Clubs.
153
CASE:
Commissioner for Inland Revenue v Witwatersrand
Association of Racing Clubs
23 SATC 380
Facts: The taxpayer (a non-registered asso- it to distribute the proceeds to the charities
ciation of racing clubs) organised a race in accordance with its declared intention.
meeting on the Johannesburg Turf Club’s The Association acted as the principal in
race course, the proceeds of which were to holding the race meeting rather than as an
be divided between two non-profit char- agent.
ities. The proceeds of the meeting were
divided between the two charitable bodies Principle: Once an amount has been bene-
for whose benefit the meeting was stated to ficially received by or accrued to a taxpayer,
be held. The Commissioner included the he is taxed on such amount even though
amount received in the taxpayer’s ‘gross he may have an obligation to pay it over to
income’. some other person. If there is a principal
Judgment: The Association had, in holding agent relationship, the amount would be
the race meeting, embarked upon a scheme taxed in the principal’s name. In this case
of profit-making and was liable for tax the two non-profit charities could have
upon the proceeds of the meeting, not- acted as principals in which event they
withstanding the moral obligation upon would have been taxed.
Example 2.10
Sarah Msimang signs a stop order authorising the deduction of her car payment of R5 000
directly from her salary. She earns a gross salary of R18 000 a month.
You are required to determine the amount that will be included in gross income.
Solution 2.10
She will include her full salary of R18 000 in her gross income, irrespective of the fact that
she has not received the full amount.
A taxpayer may, however, divest themselves of the right to income which may accrue
to them in the future, prior to its accrual. The question whether taxpayers have
divested themselves from receiving income prior to its accrual is a difficult one. In
Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), it was ruled that interest on
investments that had been ceded in exchange for dividend income had accrued when
the investments were made and that this accrual was not affected by subsequent
cessions.
When a right to future income is disposed of, the future income will be taxable in the
hands of the recipient of that right. However, it must be noted that there are also
certain provisions in the Act, for example section 7, which prevent certain donations
of income and the right to income in order to limit the ability of taxpayers to divest
themselves of the right to future income.
154
Example 2.11
Dave Right has legally ceded the income from a rent-producing property that he owns to
a friend for this year and the next four years. Dave’s friend lost his job and has no income.
During the current year of assessment, R50 000 rent was received on the property.
You are required to determine whether Dave or his friend will include the R50 000 in
their gross income.
Solution 2.11
As Dave disposed of his right to future income, he will not include the income in his
gross income. Dave’s friend, who is the recipient of the rent, will have to include the
R50 000 in his gross income. Note, however, that section 7(7) of the Act (an anti-avoidance
section) states that if an amount is transferred to another person for a specific period of
time with a donation, settlement or other disposition, the donor (Dave) (and not the per-
son receiving it) will be taxed on the income. So even though this was ceded Dave will
still be taxed on the rental.
REMEMBER
• ‘Received’ means that a taxpayer receives the amount for their own benefit and for
themselves.
• ‘Accrued’ means that the taxpayer has become unconditionally entitled to the amount.
• The time value of money is ignored.
• Income received by another person on behalf of a taxpayer will be included in the
taxpayer’s gross income.
• An amount is included in gross income either on the date of receipt or accrual, which-
ever event occurred first. You cannot be taxed twice on an amount received.
• Sections 7A and 7B have specific accrual times in respect of antedated and variable
remuneration, while sections 7C to 7E deal with accrual of certain interest and loans or
credits advanced to a trust by a connected person.
155
Example 2.12
Sam Olivier sold his personal house, which he owned for 12 years, for R700 000 due to
personal circumstances.
You are required to determine whether Sam will include the R700 000 in his gross income
for the current year of assessment.
Solution 2.12
Sam will not include the R700 000 in gross income, as this transaction constitutes a sale of
an asset which is capital in nature.
It does not normally happen that one amount is partly capital and partly revenue.
However, in Tuck v CIR 50 SATC 98 it was held that the amount was received for two
reasons and therefore the amount was apportioned between capital and revenue
income. It is also impossible to have an amount which is neither capital nor revenue.
The basic test to determine whether an amount is of a capital or a revenue nature,
was set out in CIR v Visser.
CASE:
Commissioner for Inland Revenue v Visser
8 SATC 271
Facts: The taxpayer (an influential business- Judgment: The amount in dispute had
man) acquired mining options for a period accrued to the taxpayer as the product of his
of two years over certain properties which wits, energy and influence and as such was
were not renewed and had expired. Later, not a receipt of a capital nature, but income
a third party negotiated with and offered in nature. The court used the tree and fruit
the taxpayer an interest in a company to analogy as a useful guide but cautioned
be formed if he would refrain from taking that what is the principal or tree in the
up options in competition with him and hands of one man may be interest or fruit
assist him to acquire the previously lapsed in the hands of another. For example, law
options. The taxpayer agreed to the pro- books in the hands of a lawyer are a capital
posal. The arrangement was confirmed in asset, while for a bookshop it is stock-in-
a letter which stated that the taxpayer had trade (revenue). Adopting a profession is
been promised shares ‘in consideration likened to a tree while the earnings from the
of the services you have already rendered profession is likened to the fruit of the tree.
and will be rendering to me and my Principle: The ‘tree and fruit’ principle,
associates in the venture that we are namely that the tree is capital in nature
undertaking’. and the fruit is revenue in nature.
Not all capital or revenue decisions are as clear as in the above. Over the years the
courts have identified a number of factors that can be used to determine if a receipt is
of a capital or revenue nature. The most important factors that can be considered will
be dealt with briefly.
156
The test the courts developed to determine the difference between capital and reve-
nue receipts is the intention test. The test determines what the taxpayer's intention
was. If the intention was to receive a capital amount, it will not be taxable. This test,
however, is a subjective test and courts look at various objective factors to determine
whether the subjective test gives the correct answer.
Change of intention
The intention at the time of acquisition of the property is not conclusive because an
intention to hold as an investment may change during the time the property is held
into an intention to engage in a profit-making scheme – refer to CIR v Richmond
Estates (Pty) Ltd.
CASE:
Commissioner for Inland Revenue v
Richmond Estates (Pty) Ltd
20 SATC 355
Facts: The taxpayer company was formed on business as a land speculator and re-
for the purpose of controlling the invest- ceived rent from properties it let. A large
ments and savings of the sole beneficial part of the business of the company con-
owner of the shares issued (who was also sisted of buying and selling plots in a black
the director). The memorandum of associ- township but after 1945 it was no longer
ation of the company empowered it to pur- possible except with approval of the ap-
chase land, deal in land, turn land to account, propriate Minister. In 1948, the sharehold-
develop land and lay out and prepare land er decided that the company should cease
for building purposes. The company carried selling its plots in the township and for the
continued
157
future develop its holding of eighteen plots Judgment: The company had a change in
in the township as rent-producing pro- its intention as regards the properties sold,
perties. No formal resolution recording in that it was converted to a capital asset.
this decision appeared in the company’s The sale at a profit as the result of a change
records. By 1950, the Group Areas Act had- in conditions outside the company’s con-
been passed and the intention of the gov- trol did not per se make the resulting profit
ernment was to remove the black subject to tax. The fact that the change of
inhabitants from the township in which intention had taken place was not recorded
the company had its holding. As this would in a formal resolution of the company’s
make it impossible for the company to only director (who was also the sole bene-
dispose of its plots to blacks, the share- ficial shareholder) but was evidenced from
holder decided that it would be better for the statements of the sole director and was
the company to dispose of all its holdings, regarded as sufficient evidence for the
both improved and unimproved, in the amount not to be taxed.
township. The company thereafter dis- Principle: The intention of a company is
posed of 15 of its 18 plots in the township derived from both its formal acts (resolutions
at a substantial profit. of directors) and its informal acts.
It should be noted that the mere fact that the taxpayer decides to realise an asset is not
proof of a change of intention, nor the fact that they do so in such a way that they
realise it to the best advantage (refer to CIR v Stott).
CASE:
Commissioner for Inland Revenue v Stott
3 SATC 253
Facts: Over the thirty years prior to the sale His father had been a missionary and he felt
of the properties in question, the taxpayer it his duty to assist these people. Part of the
(an architect and surveyor) had purchased farm, after the purchase, was subdivided
various properties, some of which he held and sold to the tenants at a small profit.
for a period of time to let or for private The third property in question was a small
purposes (seaside cottage) and later sold fruit farm which he purchased subject to a
them, sometimes having subdivided the long lease. The tenant failed to pay his rent
property before selling. One of the pro- and the subsequent tenant caused trouble.
perties in question was a property which The farm was then put up for sale and was
the taxpayer purchased for residential pur- sold at a profit.
poses. This property acquired was larger Judgment: Although the taxpayer’s pro-
than the taxpayer required for residential fession was one of a surveyor and archi-
purposes, but the property was only for tect, this aspect, on the facts, did not affect
sale in one block. The taxpayer built a cot- him adversely. The fact that he had dealt in
tage on the site and thereafter cut up about property previously was not taken into
half the property (property which he re- account because the court regarded them
garded as excess to his needs) into small lots, as having taken place too long ago and too
which he proceeded to sell and from which lacking in information. However, the
he derived substantial profits. A further motives in relation to the properties in
property was purchased for the purpose question were looked at closely to establish
of assisting tenants who were living there whether there was a scheme of profit-making
and who feared that they would be ejected. or not. The court found that there was no
continued
158
scheme of profit-making in regard to the Principle: A person may realise his capital
property purchased to protect the rights of asset to best advantage and the mere sub-
the tenants and later sold to them. His division of land does not constitute a trade.
father had been a missionary and the pur- The decision also lays down the principle
chase of the property was for philanthropic that the taxpayer’s intention at the time the
purposes, which by its very nature exclud- asset is purchased is decisive unless there
ed a scheme of profit-making. The is a subsequent change in intention and the
amounts realised constituted accruals of a taxpayer ‘crosses the Rubicon’ by being
capital nature. involved in a scheme of profit-making.
In Natal Estates Ltd v SIR and similarly in Berea West Estates (Pty) Ltd v SIR the courts
gave guidance as to when an asset is deemed to have been realised to its best
advantage as opposed to when it was being disposed of in a business venture.
CASE:
Natal Estates Ltd v Secretary for Inland Revenue
37 SATC 193
Facts: The taxpayer company (formed in La Lucia. During 1968 a company, known
1920) acquired as a going concern the as La Lucia Property Investment Ltd, was
whole of the assets of a company which formed in which 45% of the equity was
had for some 25 years been carrying on held by Huletts Investments Ltd and 55%
business in Natal as a grower and miller of by the Anglo American Corporation Ltd.
sugar. The assets acquired were mainly This company purchased from the tax-
planted sugar cane and included areas payer the La Lucia beachfront and
north of Durban (now known as La Lucia Umhlanga Lagoon areas en bloc for
and Umhlanga Rocks). The taxpayer con- R1,4 million. Although the taxpayer con-
tinued the sugar cane business uninter- tinued for some time to effect sales directly
rupted until the years 1965–70, when the to members of the public, by the latter half
taxpayer sold substantial areas of its land of 1968 this had largely given way to bulk
at considerable profit but still retained sales. These bulk sales were all to com-
large portions of land. The Durban City panies associated with the taxpayer, one a
Council pressurised the taxpayer to sell the subsidiary of the taxpayer and three others
land as Durban was expanding towards La wherein the taxpayer’s parent company
Lucia and Umhlanga Rocks. If the land held a 45% interest.
was not sold voluntarily, it was likely to be Judgment: The original intention of the
expropriated. In 1963, consulting engineers taxpayer to hold an asset as an investment
and architects were appointed for the de- is always an important factor but such
velopment. After the taxpayer became a intention is not necessarily decisive. There
wholly owned subsidiary of a parent com- was a change of intention considering the
pany (Huletts Corporation Ltd), the pro- manner or method of realisation which
cess of selling the land picked up speed. By indicates that a scheme for profit-making
April 1964, about 188 lots of the 2 350 was taking place and therefore the profits
comprising the La Lucia township layout derived from the sale of the asset were
had been sold. In 1965 the taxpayer formed subject to tax. The court also ruled that the
a company, La Lucia Homes (Pty) Ltd, for change of intention in regard to land in
the purpose of constructing houses in Umhlanga Rocks and La Lucia also included
continued
159
the areas sold in bulk as these transactions and selling the land; the objects of the
also benefited (and were intended to bene- owner, if a company; the owner’s activities
fit) from the intensive business activities in relation to the land prior to his decision
primarily associated with the preparation to sell, and the light thereby thrown upon the
for, and promotion of the sale of lots in owner’s statements of intention; the nature
township development, and all the trans- and extent of his marketing operations and
actions formed part of the same scheme of the like; and the incidence of the burden
profitable dealing in land. imposed by section 102 of the Tax Admin-
istration Act, 2011.
To determine whether a taxpayer is real-
ising a capital asset at best or is carrying on Principle: The court looked at the intention
a business scheme of selling land for profit, of the taxpayer and whether it had
the facts of the case must be considered in changed its intention from holding onto
their relation to the ordinary commercial the land as a capital asset or to embark on
concept of carrying on a business scheme a scheme of profit-making. The court ruled
for profit. In any such enquiry important that if a person ‘had crossed the Rubicon’
considerations will include, inter alia, the and started a ‘scheme of profit-making’ the
intention of the owner both when acquiring profits were of a revenue nature.
CASE:
Berea West Estates (Pty) Ltd v Secretary for
Inland Revenue
38 SATC 43 (A)
Facts: Mr K donated an undivided half- sale of the property. The taxpayer’s acti-
share in a property to his 13 children. The vities related to the development of one
other half was bequeathed to them in his area, selling the plots in that area, and then
will. After his death the property was sold to use the money to develop a further area.
piecemeal to cover costs in the estate. As a Some 40 years after the death of Mr K all
result of the financial and administration the land had been sold and the proceeds
problems, it was agreed to create a com- distributed.
pany that would acquire the remainder of
the property. The company will then sell Judgment: The taxpayer (company) was
the property to the best advantage and any the method used to realise the benefi-
balance left paying creditors, would be ciaries’ interests in the property. The total-
distributed to the beneficiaries according ity of the facts showed the taxpayer was a
to Mr K’s will and the company wound realisation company and that they had not
up. The shares in the company were allo- deviated from this purpose. The proceeds
cated to the heirs and beneficiaries in pro- on the sales were therefore of a capital
portion to their entitlement. The property nature.
was subsequently proclaimed as a town-
ship provided that the company arranged Principle: The use of a realisation com-
for the infrastructure (roads, water supplies, pany does not relax the rules related to a
and surveys) to be installed. Except for taxpayer ‘crossing the Rubicon’. The for-
periodic investment of temporarily surplus mation of a realisation company can assist
funds, the taxpayer did not enter into any a taxpayer to discharge the burden of proof
trading activities that were not related to the that an amount is capital in nature.
160
In 2011 the Supreme Court of Appeal expanded the principles related to realisation
companies in the Founders Hill (Pty) Ltd case. The court found that the principles can
only be applied in limited cases.
CASE:
CSARS v Founders Hill (Pty) Ltd
(509/10) [2011] ZASCA 66
Facts: AECI Ltd erected an explosives fac- from AECI. The question was if the company
tory in 1896, which was extended in 1937. had ‘crossed the Rubicon’ to change the
Much of the land on which the factory was property into stock-in-trade.
built was required as a buffer between the
factory and urban areas. AECI owned land Judgment: The court found that Founders
in Modderfontein, Johannesburg, for many Hill was not merely AECI’s alter ego; it was
decades. However as technology improved, established with the sole aim of acquiring
the extent of the buffer was reduced. Eco- the property, developing it and then sell-
nomic and social developments in Johannes- ing it at a profit. The property was there-
burg led to more land being required for fore stock-in-trade. The judge pointed out
housing and industry. AECI took steps to that the taxpayer’s intention in acquiring
subdivide and applied for it to be rezoned. the property was different from that which
AECI wanted to develop the land for the AECI had had, namely surplus land held
purpose of selling it as land for residential, as a capital investment. Founders Hill’s
business and light industrial purposes. profits were gains ‘made by an operation
of business in carrying out a scheme for
Acting on legal advice, in 1993 AECI formed profit-making’ and therefore taxable.
Founders Hill as a ‘realisation company’
with the express purpose of realising the Principle: Once a taxpayer acquires assets
land which AECI sold to it to ‘best ad- for the purpose of selling them, it is trading
vantage’. It commenced doing so and en- in those assets. There are exceptional cases
gaged the services of another AECI sub- where a realisation company or trust is re-
sidiary, Heartland Properties, to further quired in order to facilitate the sale of assets
develop and market the land. Both the (for example, where different people owned
Commissioner and Founders Hill agreed them, but to sell to best advantage the inter-
that the taxpayer acquired a capital asset position of another entity is required).
It has been held that the onus of establishing a change in intention from revenue to
capital is a heavy burden (Yates Investments v CIR 20 SATC 355). The mere fact that the
taxpayer decides to wait before selling a capital asset does not represent a change in
intention; something more is required (John Bell & Co (Pty) Ltd v Secretary for Inland
Revenue 38 SATC 87).
CASE:
John Bell & Co (Pty) Ltd v Secretary for Inland Revenue
38 SATC 87
Facts: In 1916 the taxpayer purchased, as purchased the property in which it conducted
a going concern, the businesses of fruit its business. In 1956, the taxpayer’s control-
merchants, exporters, importers and distri- ling shares were passed to new shareholders.
butors. The businesses were established The purpose of the new shareholders was
in Johannesburg and Cape Town. In 1924, it to secure the property as premises for a new
continued
161
business they proposed to establish, but one profit from the subsequent sale income in
of the shareholders appreciated the possi- nature. Something more is required in or-
bility of being able to sell the property at a der to metamorphose the character of the
price well in excess of its book value at asset and so render its proceeds gross in-
some point in the future. In 1957 and 1959, come. The court said it could not reason-
both the old and the new businesses were ably be found that the taxpayer had in 1957
discontinued. The property, which, at that embarked upon a new trade or profit-
point, was admittedly held by the taxpayer making business of dealing in land. That
as a capital asset, was no longer required for the taxpayer’s decision in 1957 to wait for a
its original purposes and from 1957 the period of time with the object of selling the
taxpayer intended to retain the property for property at a high profit when the market
the purpose of selling it at a good profit for property in the area had risen sufficiently,
when the market for property in the area by itself did not affect its character as a
had risen sufficiently. To this end, the capital asset.
property was leased to a third party for a
Principle: Once a decision is made to sell a
period of ten years and thereafter sold.
capital asset, it does not matter that the
The taxpayer had at no time offered the pro- taxpayer waits for a period of time until the
perty for sale í it was approached to sell it. value of the asset rises before he sells it.
Judgment: That a mere decision to sell the However, this is subject to the provision
asset (previously kept as a capital asset) that he does not in the interim embark on a
rather than keep it does not per se make the scheme of profit-making.
Mixed intentions
A taxpayer may even acquire an asset with mixed motives. In COT v Levy 18 SATC
127 the court ruled that the main purpose must be found and given effect to.
CASE:
Commissioner of Taxes Southern Rhodesia v Levy
18 SATC 127
Facts: The taxpayer disposed of his shares the property should not affect the issue, if
in a property-holding company at a profit. the dominant purpose of the acquisition
He had two purposes for originally pur- was clearly established.
chasing the shares, namely to acquire the Principle: Where there are two possible
shares as an income-earning investment motives at the time an asset is purchased,
while at the same time not excluding the
the dominant motive (if there is one)
possibility of a profitable resale of the shares.
prevails especially where an individual
Judgment: The fact that the taxpayer at the taxpayer is involved. If there is no domi-
time of purchasing the shares had in mind nant motive the revenue motive normally
possible alternative methods of dealing with prevails.
Where neither purpose can be said to dominate, the court held in COT v Glass
24 SATC 499 that there had been a dual purpose. This case concerned a company, but
there is no reason why it should not apply to individuals as well. The taxpayer
bought a property, planned to let it while it was more profitable, and sell it when
circumstances changed making it even more profitable. The taxpayer will be taxed on
the proceeds of the sale since they acquired the property with a dual purpose of
profit-making. In Commissioner for Inland Revenue v Nussbaum the court looked at the
dual intention of a natural person.
162
CASE:
Commissioner for Inland Revenue v Nussbaum
58 SATC 283
Facts: The taxpayer (a retired school- dividend yield. Given the close watch that
teacher) inherited certain shares quoted on the taxpayer kept on his portfolio and on
the Johannesburg Stock Exchange some every shareholding within it, and bearing
35 years previously and, on that founda- in mind his meticulous attention to detail,
tion, with active and careful investment, it was most likely that he was aware of the
had built up a substantial portfolio of profit implications in selling when the
quoted shares over the ensuing years. He dividend yield had fallen. In the present
said in evidence that his investment deci- case not only was a profit inherent in the
sions were always based on a ‘pattern of sale of shares of which the dividend yield
expectations’ that a share would pay ‘ade- had dropped, but the taxpayer manifestly
quate’ dividends in the short term or ‘more worked for it; he ‘farmed’ his portfolio
than adequate’ dividends later on and when assiduously and the number, frequency
he bought shares he did so with the inten- and profitability of sales, especially of
tion to produce a sound and increasing short-term shares, bear clear enough testi-
dividend income and to protect the capital mony to that. Although the taxpayer was
thus invested from erosion by inflation. primarily an investor and it had been
He also said that he had never bought a wholly consistent with his investment mo-
share merely for profitable resale. After his tive not to sell certain holdings entirely
retirement, he began changing his share and that 82%of the shares held at the be-
portfolio. Many of the shares sold had ginning of the three-year period were still
held at the end of that period, this share
been held for much longer than five years
retention factor detracted in no measure
and therefore profits were ‘inevitable’ but
from the force of all those circumstances
some of the shares had been held for five
that point to a subsidiary profit-making
years or less. He added that in the prevail-
purpose. Although an investor buys shares
ing inflationary economic climate it was
‘for keeps’ and generally adds to his port-
‘almost impossible to make losses’. For the
folio by employing surplus existing in-
three years in question, he made over come, the taxpayer’s share transactions
R1 million in profits and the Com- enlarged the value of his portfolio and, at
missioner sought to tax him on these pro- the same time, generated very con-
fits as being a scheme of profit-making. siderable, annually increasing, funds, over
The Commissioner accepted that prior and above his existing income. The
to this three-year period, the holding of the employment of his capital in this way con-
shares by the taxpayer was on capital stituted an additional method of earning
account but contended that he thereafter income. The court found that the taxpayer
changed his intention or at the very least had a secondary, profit-making purpose
had a dual or secondary intention. resulting in the income being taxable.
Judgment: The frequency of the taxpayer’s Principle: The court extended the prin-
share transactions, viewed in isolation, pro- ciple, previously only applied to com-
vided evidence of continuity required for panies, that if an individual has a domin-
the carrying on of a business. The taxpayer’s ant purpose, which is capital in nature,
sales were almost without exception pro- and a secondary purpose, which is reve-
fitable – the taxpayer’s annual profits sub- nue in nature, the secondary purpose
stantially exceeded his annual dividend could result in profits being treated as
income and the profits increased every revenue in nature because the two pur-
year, which, in turn, resulted in a decrease in poses are pursued simultaneously.
163
164
In ITC 862 22 SATC 301, the property had been held for more than 50 years but,
taking all the other circumstances into account, the proceeds of the sale were held to
be taxable (thus income in nature).
Continuity
The number of similar transactions undertaken by a taxpayer will be a factor to be
taken into account (CIR v Stott 3 SATC 253). A taxpayer who repeatedly buys and
sells homes, making a profit on each transaction, runs the risk of being taxed on the
proceeds of the sales because their actions indicate a business intention. This does not
mean that an isolated transaction will never be taxed. In Stephan v CIR 1919 WLD 1, it
was held that the profits from an isolated transaction of salvaging a wreck were of a
revenue nature because there was an intention to make a profit.
CASE:
Commissioner for Inland Revenue v George Forest Timber
Company Limited
1 SATC 20
Facts: The taxpayer company carried on a stock-in-trade. The balance of stock was
business as timber merchants and sawyers. acquired by purchase from other sources.
It acquired about 600 morgen of natural Judgment: The total amount received for
forest for the purposes of its business. The the sale of the stock-in-trade was in the
nature of the trees in the forest was such course of the company’s business and
that they did not renew themselves, and formed part of gross income.
for practical purposes the value of the land
without the timber was negligible. In the Principle: The sale of fixed capital assets is
course of its business the company felled a of a capital nature and the sale of floating
quantity of timber each year, which was capital is of a revenue nature. However,
sawn up in the mill and sold as part of its income from wasting assets is taxable.
165
CASE:
Commissioner for Inland Revenue v Pick ’n Pay Employee
Share Purchase Trust
54 SATC 271
Facts: The taxpayer was the Pick ’n Pay Any profit or loss was, therefore, purely
Employee Share Purchase Trust that had fortuitous. This was evidenced by the
been established to administer a share pur- profits and losses made on the purchase of
chase scheme for the benefit of employees forfeited and other shares. The Trust had
of the group. The Trust contended that it never ‘stocked up’, that is to say buying
was created and maintained to enable when the price was low or had bought
employees to purchase shares in Pick ’n stock in the hope that the price would rise
Pay, their employer company. It did not in order to make a profit.
acquire shares with the intention of resel- Judgment: Whether the taxpayer was car-
ling them in a scheme of profit-making. It rying on a business by trading in shares
purchased shares in order to make them must be determined by applying ordinary
available to employees entitled to them in common sense and business standards.
terms of its rules and in terms of its consti- The court ruled that there was no intention
tution was compelled to repurchase shares to conduct a business in shares; it was to
from employees who were required to for- operate as a conduit for the acquisition of
feit their holdings. Whether a profit or loss shares by employees entitled to them in
resulted, was completely immaterial. More- terms of the scheme’s rules. While a profit
over, the Trust had no control over the motive is not essential for the carrying on
time at which it may have to repurchase a of a business, it may well indicate whether
share, particularly when such shares are a business is being conducted.
forfeited. It also had no control over the The constraints placed upon the trustees
market price of the share at that time. in dealing with the shares in question were
continued
166
Other factors
• The age of the taxpayer: The age of the taxpayer may be indicative of their inten-
tion (Goodrick v CIR 23 SATC 1).
• The nature of the asset: A long lease period, entered into by the taxpayer, may be
indicative of the taxpayer’s intention (CIR v Stott). The fact that land may be ‘excess’
to a taxpayer’s needs or the fact that the land may be useless for the taxpayer’s pur-
poses may also give an indication of their intention (ITC 379 9 SATC 339).
• The taxpayer’s activities: The taxpayer’s activities prior to the acquisition of an
asset may be indicative of their intention (ITC 595 14 SATC 252). However, their
activities after disposing of the asset in question may also provide further evidence
of their intention. For example: Did they frequently transact similar deals after the
deal in question (ITC 1436 50 SATC 122)? How were the proceeds of the realisation
dealt with? Were the proceeds reinvested in a capital asset?
• Accounting treatment of the transaction: The way the transaction is disclosed for
accounting purposes may also provide some evidence of intention (T v COT 40
SATC 179).
• The purpose of a legal person: The courts will usually consider documents, such
as minutes of directors’ meetings and financial statements, to determine the inten-
tion of a company. The company as independent taxpayer’s intention should be
established separately from that of its shareholders. The courts view the action of
the directors as an indication of the intention of the company because they are in
control of the company's assets. In some cases, the courts will however also look at
the intention of the shareholders to determine the company’s true intention
(Elandsheuwel Farming (Edms) Bpk v Sekretaris van Binnelandse Inkomste 39 SATC 163).
CASE:
Elandsheuwel Farming (Edms) Bpk v Sekretaris van
Binnelandse Inkomste
39 SATC 163
Facts: The control of the company (the tax- Judgment: The taxpayer did originally
payer) was acquired by a group of indi- acquire the land as a capital asset and con-
vidual land speculators who also became tinued to hold and use it as such while the
directors of the taxpayer. The taxpayer owned original shareholders were in control of
farm land for several years which it leased the company The new shareholders were
out for farming purposes. After the change either land speculators or prospective land
in shareholding, it was decided by the new speculators who appreciated the poten-
shareholders that the land be sold to a mu- tialities of the land for township deve-
nicipality at a profit. lopment. The new shareholders devised a
continued
167
scheme to derive a substantial profit from property as trading stock, therefore the
that potential. The scheme consisted of income is taxable.
buying the taxpayer’s shares at a price Principle: If a transaction might be con-
based upon the land’s value as agricultural sidered to be part of a scheme of tax evasion
land, and selling the land to the municipal- and avoidance, then the courts can pierce
ity for township development. The new the ‘corporate veil’ to determine the true
shareholders had the intention to use the intention of the taxpayer.
Example 2.13
Miss Angie Baker is a very dynamic estate agent. She makes her living by selling 20 or
more houses per month. Angie has also owned her own beach cottage for over 20 years.
She decided to sell the cottage after hearing from a client that he was looking for a similar
cottage in the same area where her beach cottage was located. The sales agreement was
concluded on 30 January 2020 and the contract price of R570 000 was paid into Angie’s
bank account on 15 March 2020.
You are required to determine whether the R570 000 accrued is revenue or capital in
nature.
Solution 2.13
It must be determined whether the receipt is of a capital or revenue nature. The following
factors will be taken into account when considering the subjective tests:
• intention of the taxpayer;
• change of intention; and
• mixed intentions.
Angie’s intention would have to be determined. It should be determined what Angie’s
intentions were when she purchased the cottage. Did she decide to sell the cottage be-
cause she did not need it any more or because she could make a large profit on the sale?
Did she embark on a profit-making scheme? From the above information it appears that
Angie had no intention of selling the cottage prior to meeting this specific client and it
does not appear that she embarked on a scheme of profit-making. There may be mixed
intentions at the time of sale. Angie may have recognised the possibility of a good selling
price and profit even though she had not intended to sell the cottage. A taxpayer is
allowed to try to obtain the best price without undertaking a scheme of profit-making. A
scheme of profit-making may have occurred if Angie had auctioned the property or made
major improvements and then advertised the cottage in several newspapers and on the
Internet.
As Angie stated that her intention was capital in nature, the objective factors must be con-
sidered.
When considering the objective factors to determine whether the sale of the beach cot-
tage is of a capital or revenue nature, the following factors are considered:
• the manner of acquisition or disposal;
• the period for which the asset is held;
• continuity;
continued
168
1. When I advise a client should I only discuss the factors that indicate
that the amount will be capital in nature?
2. If an amount received is capital in nature would you pay tax on that
amount?
REMEMBER
• The nature of the receipt is determined by objective considerations, in other words the
taxpayer’s state of mind is not taken into consideration. The facts surrounding the
receipts are taken into account (refer to 2.7.2).
• The nature of the receipt is determined by subjective considerations, in other words the
intention of the taxpayer is taken into account (refer to 2.7.1).
• If a receipt is capital in nature, it is subject to capital gains tax.
169
in ITC 1547 55 SATC 19 where the following question was asked: Was the com-
pensation received from the sale of the property intended to fill a hole in the re-
cipient’s pocket or was it aimed at filling a hole in the recipient’s assets? Refer to
WJ Fourie Beleggings v Commissioner for South African Revenue Service (71 SATC 125)
and Stellenbosch Farmers’ Winery Ltd v Commissioner for South African Revenue Service
(74 SATC 235).
CASE:
WJ Fourie Beleggings v Commissioner for
South African Revenue Service
71 SATC 125
Facts: The taxpayer (an hotelier) entered Judgment: Unlike previous cases where the
into a long-term contract to provide ac- contract enabled the taxpayer to do busi-
commodation and meals for overseas ness, the taxpayer could operate the hotel
guests. Immediately after the 9/11 attacks without the contract. Therefore it was not
the guests left the hotel without any notice. part of the income producing structure of
This resulted in a breach of the accom- the business. The contract was part of the
modation agreement. The taxpayer lost a taxpayer’s business of providing accommo-
major source of income for the remainder dation, that is its income-earning activities.
of the contract period and the state of the The compensation received was thus for
rooms was so bad that considerable repairs the loss of income and must be included in
had to be effected to return the rooms to a gross income.
condition in which they could be hired out Principle: The compensation received was
again. The taxpayer and the company man- to fill a hole in the taxpayer’s income and
aged to settle the matter out of court with not to compensate for the loss of a capital
the taxpayer receiving R1 292 760 in full asset. The taxpayer’s capital asset was the
and final settlement of all claims it might hotel and the contract was to provide
have. The taxpayer claimed that the com- rooms in the hotel and was thus the fruits
pensation so received was capital in nature. of the tree.
CASE:
Stellenbosch Farmers’ Winery Ltd v Commissioner for
South African Revenue Service
74 SATC 235
Facts: The taxpayer is a producer and im- As a result of corporate takeovers in Europe,
porter of liquor products, as well as a whole- the UK entity sought to terminate the distri-
saler of a range of spirits, wine and other bution agreement three years prematurely.
liquor products, mainly to retailers. It entered A termination agreement was concluded
into a distribution agreement with an entity and the taxpayer received the sum of
in the United Kingdom. In terms of the agree- R67 million as compensation for the early
ment the taxpayer acquired the exclusive termination of the exclusive distribution
right to distribute Bells’ whisky throughout agreement.
South Africa for a period of 10 years. Here- Judgment: Although the value of the asset
after the agreement can be terminated with for accounting purposes was determined by
12 months’ notice (thus effectively a mini- considering the future inflow from the
mum period of 11 years). contract, accounting treatment is not the
continued
170
171
CASE:
Commissioner for Inland Revenue v NEL
59 SATC 349
Facts: The taxpayer, over a period of three fact that he did not require the additional
years, purchased 250 Kruger Rands with funds at that time.
surplus cash that he had available from Judgment: The taxpayer was unwilling to
time to time, at an average price of R280 sell his Kruger Rands but was obliged to
per coin. His intention, when he purchased do so because he had no other available
the coins, was to hold them as a long-term means and a motor car was urgently and
investment as a hedge against inflation. He unexpectedly required by his wife and
did not plan to sell the Kruger Rands and therefore the evidence showed clearly that
thought that they would be inherited by the taxpayer’s purpose in selling the Kruger
his children. He did not purchase any fur- Rands was not to make a profit but to realise
ther Kruger Rands thereafter. The Kruger a capital asset in order to acquire another
Rands steadily escalated in value over the capital asset. In the transaction under review
years and although he had many oppor- the Kruger Rands were purchased for
tunities to sell them, he never did so and it ‘‘keeps’’ and the disposal of some of them
never entered his mind to do so. However, was due to ‘some unusual, unexpected, or
11 years later he urgently needed to buy a special circumstances’ which supervened.
car for his wife and he was advised by his It is not correct to say that an investor
auditor to exchange 80 of his Kruger Rands could only invest in Kruger Rands with a
for a car since he had no cash available to view to reselling them at a profit and in
do so. The 80 Kruger Rands were then sold several cases the taxpayers had sold Kruger
for cash, the taxpayer making a profit of Rands that had been bought originally as an
R67 000. The Commissioner, in assessing investment in order to pay for a pressing
the profit to tax, contended that the nature and unexpected debt which had arisen
of Kruger Rands was unique in the sense and in each case the court had held that
that they are not income-producing assets the proceeds of the sale were of a capital
other than that they can be worked into nature. Thus, the disposal of the Kruger
jewellery. They do not have any economic Rands constituted the realisation of a capital
utility save for being sold when cash is asset.
required. He also submitted that when a
taxpayer invests in Kruger Rands, he must Principle: For investments in Kruger
inevitably envisage a sale of this asset in Rands and the selling thereof, the same
due course and his failure to realise the principles and guidelines must be applied
investment over many years was due to the as with other assets when they are sold.
• Goodwill: In ITC 1542 54 SATC 417, the proceeds of the sale were considered to be
of goodwill and the court held that the sale of goodwill and payment for ‘know-
how’ are two different things. The former gives rise to a receipt or accrual of a capi-
tal nature and the latter, due to the passing of knowledge, skill or ingenuity
requires effort on the part of the seller, as it is of a revenue nature. It is important
that the contract provides for the sale of goodwill and not for the share of future
profits. In Deary v Deputy Commissioner of Inland Revenue 32 SATC 92, the contract
provided for a payment of goodwill to be partly settled as an annuity out of future
profits. The amounts so received were held to be of a revenue nature.
172
Example 2.14
Jim Jacobs is a resident of the Republic who earns his income as a consulting geologist.
The following revenue transactions relate to his current year of assessment:
• He earned consultation fees of R800 000 for surveys carried out in the Republic during
the year of assessment.
• He was instructed by the chairman of a mining company in Johannesburg to carry out
a survey in Botswana at the site of a new coal mine. He carried out all the work in Bo-
tswana, returning to Johannesburg to type his final report. He was paid a fee of
R80 000.
• While he was in Botswana, he was approached by a farmer to carry out a survey of a new
borehole for water. In lieu of a fee, Jim, who also restores antique furniture as a part-
time occupation, accepted an antique yellow-wood suite which the farmer trans-
ported to Jim’s home in Johannesburg. Jim had the suite valued by a dealer in
Johannesburg, who set its value at R320 000.
• Jim also purchased debentures issued by a Namibian company. He telephoned his
bank manager in Johannesburg, instructing him to make the funds available to the
company at a bank in Windhoek in Namibia. He purchased 100 debentures of R100
each, paying interest quarterly at 18%. He received interest on 31 October and
31 January of the current year of assessment (R900 each quarter).
• Jim operates from a small factory in the garden of his home just outside Johannesburg.
The following sales of antique furniture were made by Jim during the year:
Sales to clients in the Republic R500 000
Sales to clients in Zimbabwe
(At the end of the current year of assessment, he had not yet
received this amount) R250 000
He received a deposit from a client in Pretoria for restoration work
to be done in May of the next year of assessment R50 000
He sold certain furniture that he had acquired many years ago and
used in his home as part of his personal assets R300 000
• He sold a house in Johannesburg, which he had originally acquired
with the intention of letting R1 980 000
Assume that no double-tax agreements are in force with Botswana or Namibia.
You are required to calculate Jim’s gross income.
173
Solution 2.14
R
Consultation fees earned in the Republic 800 000
Consultation fees earned in Botswana (Note 1) 80 000
Consultation fees earned from the Botswana farmer (Note 1) 320 000
Interest on the debentures in the Namibian company (Note 2) 1 800
Sales of antique furniture (Note 3)
• Clients in the Republic 500 000
• Clients in Zimbabwe 250 000
• Deposit from a client in Pretoria 50 000
• Furniture forming part of his personal assets nil
Sale of a house (Note 4) nil
Gross income 2 001 800
Notes
1. The amount of the fee to be included in Jim’s gross income will be determined by the
cash payment received, as well as the market value (R320 000) of the asset received in
lieu of the fee. This is as a result of the definition of gross income that includes the
total amount ‘in cash or otherwise’. Residents are taxed on their worldwide income.
2. The interest on the debentures issued by the Namibian company will be included in
Jim’s gross income, as he is taxed on his worldwide income, both active and passive.
In terms of section 24J, which provides detailed rules relating to the accrual (and
incurring) of interest, the calculation of the actual amount accruing to Jim could differ
from the interest received. This calculation has been ignored for the purposes of this
example.
3. Although the clients in Zimbabwe had not yet paid the amounts owing, they had
accrued during the year of assessment and are therefore included in his gross income.
In the case of the deposit received from his client in Pretoria, this amount had clearly
not yet accrued because the work would only start in May of the next year of assess-
ment. However, the amount was actually received during the year of assessment and
would be included in his gross income, which includes amounts received or accrued.
The sale of his personal furniture will give rise to a receipt of a capital nature because Jim
did not purchase the asset with the intention of selling it. His intention may have
changed, however, in which case his intention at the time of sale would determine the
capital or revenue nature of the proceeds. If, for example, he only sold this furniture
because he was replacing it with furniture that was more suitable or that he liked
more, the proceeds would be of a capital nature. The fact that he owned the furniture
for many years would support the contention that this was a receipt of a capital
nature, but the fact that he carries on the trade of restoring and selling antique furni-
ture, would go against this contention. On the balance of probabilities, the receipt
would probably be of a capital nature.
4. The sale of property purchased with the intention of holding it as a revenue pro-
ducing asset would give rise to a receipt of a capital nature, unless Jim had changed
his intention. If the asset was held for many years, it would support the capital nature of
the receipt and the fact that he does not carry on business as a property dealer would
also support it. However, if he had carried out several such transactions in the past
(the continuity test), SARS may consider the receipt to be of a revenue nature. The
continued
174
mere fact that the taxpayer has decided to realise an asset and to realise it at the best
possible price would not be enough to categorise the proceeds as revenue. The way in
which the taxpayer goes about selling their property may also have a bearing on the
matter. Repeated attempts to sell, together with an extensive advertising campaign,
may support an intention of selling at a profit, whereas selling as a result of a fortuit-
ous offer would not. The sale of the house may have capital gains tax implications.
2.8 Summary
The first building block of taxation is discussed in this chapter and this forms the
basis of the tax calculation. Before the different components of the definition are
applied, the residency of a person must be determined. A natural person can be a
resident of the Republic either by being ordinarily resident or by means of the physi-
cal presence test.
All the components of the gross income definition must be present before an amount
forms part of the gross income. As seen in this chapter, many of these concepts are
not defined in the Act and the principles and guidelines from court cases are used to
understand the components of the definition of gross income and to apply them to
the amount in question.
The gross income definition also lists items that are specifically included in the tax-
payer’s gross income, even though they would not have formed part of gross income
due to their capital nature (these are discussed in chapter 3).
In the questions to follow, the different components of the gross income definition
will be applied to real-life situations to determine whether amounts comply with the
requirements of the gross income definition and form part of the gross income of the
taxpayer.
Question 2.1
Felix sells computer equipment and is objecting to an assessment received from SARS.
During the current year of assessment (28 February 2021), Felix donated second-hand
office equipment to a local radio station. In return, the radio station agreed to broadcast ‘spe-
cials’ that Felix had on certain computer products for the week.
SARS taxed the value of the office equipment donated to the radio station and stated that
the donation fell within the definition of gross income. Felix believes otherwise.
175
Answer 2.1
Discussion of the gross income requirements
• An amount: A value must be placed on the free airtime. The value would be the
normal advertising fees charged by the radio station to its clients at the time of the
donation. Barter transactions would give rise to gross income as long as the ‘asset’
received (in this case the free airtime) is capable of being valued in monetary terms.
• In cash or otherwise: Felix did not receive cash since it was a donation to the radio
station but he did receive free airtime, which is an intangible consideration received. If
Felix did not receive something in return, this requirement would not be met, but it would
have to be proved that nothing was received in return, not even increased goodwill.
• Received by or accrued to: Felix became entitled to the airtime when the agreement
was made. The agreement need not have been in writing. Felix must include the
amount received at time of receipt or accrual, whichever occurs first. This would
depend on how the agreement was worded between the two represented parties. If
the agreement stated that from a specific date the radio station would start broadcasting
the specials, then that specific date would be the date of accrual. If the agreement did
not give a specific time, then the date that the broadcast actually occurred would be the
date of receipt.
• Year or period of assessment: Felix will be taxed in the year that the amount was
received or accrued to him, whichever occurs first. It must be noted that if the accrual
and receipt fall into different years of assessment, then it will only be included in one of
the years of assessment and not both. In this case it will be included in the current year
of assessment.
• Receipts of a capital or revenue nature: Felix’s intention will have to be considered.
Why did he donate the second-hand office equipment? Did he intend to enter into an
agreement for ‘free airtime’, or was it just a gesture of goodwill? Did he change his
intentions when the offer of free airtime was given to him? Felix most probably knew
how the broadcasting business worked. If you donate products, prizes or assets which
the radio station can use, normally some type of ‘free advertising’ is then made avail-
able to you. This free advertising would be part of a ‘scheme of profit-making’, since the
advertising would most definitely help profits increase in general.
• Note that Felix most probably purchased the office equipment to be used in the busi-
ness. The intention of the business appears to have been met as long as the equipment
was used for a period of time. If the equipment was donated because it was no longer of
use to the business, then the original intention would not have changed.
• Felix will find it very difficult to convince SARS that the equipment was not of a rev-
enue nature due to the intentions discussed above. Also, the time that the equipment
was held, the frequency of disposing of this type of equipment and how the equipment
was financed will also have to be considered.
• All the elements of the gross income definition appear to be met and therefore the value
of the free airtime received in lieu of the donation of the second-hand equipment will be
included in Felix’s gross income.
176
Question 2.2
Your friends have found out that you are studying tax, and each of them have a few que-
ries regarding the filling in of their tax return.
1. Shelley does crossword competitions every now and then. On 1 February 2021, Shelley
won a big crossword competition, with prize money of R500 000.
2. Manette won the Lotto on 13 September 2020. She won R13 000 000 but she was scared to
invest so much money, so instead she chose to receive R1 000 000 each year on 30 Sep-
tember for the next 13 years. She received her first payment on 30 September 2020.
3. Jessica, an old school friend who now lives in Italy and is not a resident of the Repub-
lic, contacted all her old South African school friends from Italy and sold some of them
timeshare that is situated in Italy. She made sales of R750 000 during the 2021 year of
assessment to South African residents.
4. Koos owns a jewellery shop in the Drakensberg. During September 2020 a good friend
of his wanted to get engaged but could not afford an engagement ring. Koos agreed to
accept three oxen in exchange for the ring. The ring had a market value of R7 500 and
the three oxen together had a market value of R10 000.
5. Nomsamo is a nurse but she does not like to work night shift, so she works for a labour
broker (Nurses on Call), who outsources her services on a temporary basis to insti-
tutions who require daytime nurses. During December 2020, Nomsamo worked for
Unitas Hospital. Nurses on Call paid Nomsamo for her outsourced services on
3 March 2021, after Unitas Hospital had paid them.
Answer 2.2
Discussion regarding the inclusion of the receipts in gross income
1. Shelley, winnings are normally seen as capital in nature, unless you make it your pro-
fession to enter crossword competitions and all your revenue is made from winnings.
The R500 000 will not be included in your gross income.
2. Manette, you will be receiving an annual amount from 30 September. Even though the
amount that you won was a fortuitous gain and of a capital nature, because you have
chosen to have it paid in the form of an annuity, it will be included in gross income.
R1 000 000 will have to be included in gross income in the current year of assessment.
However, if you can show that the annual amounts are for paying off a fixed amount,
these payments would not be considered an annuity.
3. Jessica, you are no longer a resident of South Africa and even though your sales were
made to South Africans, they will be taxed in Italy.
4. Koos, even though you did not receive cash in return for the ring you sold, you will
have to include the value of the oxen that you received in your gross income. R10 000
will therefore be included in your gross income for the current year of assessment.
5. Nomsamo, the amount you received from Nurses on Call will be included in your
gross income for the current year of assessment. Even though you only received the
amount in the 2022 year of assessment, you rendered the services during Decem-
ber 2020 and therefore the amount accrued to you in the 2021 year of assessment. The
amount must be included in your gross income at the earliest of accrual or receipt.
177
Question 2.3
You are contacted by a local teacher who inherited a block of flats from her father 20 years
ago. She rented out all the flats during this time, but as she is contemplating retirement she
is considering selling the flats. A friend of hers suggested she first upgrade the flats by
painting and restoring them and then changing them into sectional titles and selling each
flat on its own. This way she would make more money than when she sells the entire
block to one purchaser.
Answer 2.3
The flats could be considered either income or capital – it would depend on her intention.
178
3 Special inclusions
General Specific
definition inclusions
Page
3.1 Introduction............................................................................................................ 180
3.2 Special inclusions (definition of ‘gross income’ (secion 1)) ............................. 180
3.2.1 Annuities (paragraph (a)) ....................................................................... 180
3.2.2 Alimony, allowances or maintenance (paragraph (b)) ........................ 182
3.2.3 Amounts received in respect of services rendered
(paragraph (c)) .......................................................................................... 182
3.2.4 Restraint of trade payment (paragraphs (cA) and (cB)) ...................... 184
3.2.5 Amounts received from termination of employment
(paragraph (d)).......................................................................................... 184
3.2.6 Retirement fund lump sum benefits or retirement fund
lump sum withdrawal benefits (paragraphs (e) and (eA)) ................. 184
3.2.7 Commutation of amounts due (paragraph (f)) .................................... 185
3.2.8 Lease premiums (paragraph (g)) ............................................................ 185
3.2.9 ‘Know-how’ payments (paragraph (gA)) ............................................. 186
3.2.10 Leasehold improvements (paragraph (h)) ............................................ 186
3.2.11 Fringe benefits (paragraph (i)) ............................................................... 187
3.2.12 Proceeds from the disposal of certain assets (paragraph (jA)) .......... 188
3.2.13 Dividends (paragraph (k)) ...................................................................... 188
3.2.14 Other amounts included in gross income ............................................ 188
3.3 Summary................................................................................................................. 189
3.4 Examination preparation ...................................................................................... 189
179
3.1 Introduction
The definition of gross income was discussed in the previous chapter. However, the
definition of gross income also contains a list of income that is specifically included in
gross income. This chapter discusses the special inclusions listed as part of the gross
income definition.
Legislation:
Section 1: Interpretation
‘Gross income’, in relation to any year or period of assessment means –
(i) in the case of any resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within the
Republic, or
during such year or period of assessment, excluding receipts or accruals of a capital
nature, but including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described
hereunder, namely …)
Paragraphs (a) to (n) of the definition of gross income include certain types of
income that would not necessarily be included if the general principles applying to
gross income were to be applied. The reason for the non-inclusion of these types of
income may be that they possess the characteristics of being capital in nature. Income
listed under paragraphs (a) to (n) should therefore be included in gross income, even if
they are of a capital nature.
REMEMBER
• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
• If the taxpayer is a non-resident, the special inclusion amounts should be included in
the gross income of that taxpayer only if they are from a South African source.
180
CASE:
Kommissaris van Binnelandse Inkomste en ’n Ander v Hogan
55 SATC 329
Facts: The taxpayer had been seriously obligation to compensate the taxpayer for
injured in a motor vehicle collision and his future loss of earnings was extinguish-
after settling with the Motor Vehicle Assu- ed and replaced by a contractual under-
rance Fund, had been compensated for loss taking to pay the monthly instalments
of future earnings, to be paid in monthly while the taxpayer was alive, without cre-
instalments. The taxpayer contended that ating a liquid or determinable debt capable
the payments were capital in nature and of being reduced by such instalments. In
not an annuity. the light of the above, read with the essen-
tial characteristics of an annuity, the
Judgment: Paragraph (a) of the definition monthly instalments could be regarded as
of ‘gross income’ includes ‘any amount annuities and were not capital in nature.
received or accrued by way of annuity’. It
does not matter whether the annuity is of a Principle: If a person gives up a right to be
capital nature or not. That although ‘annuity’ paid a capital amount that would not
is not defined in the Act, it appeared that an under normal circumstances be subject to
annuity had two essential characteristics ordinary tax in return for the payment of
(which are, however, in no way exhaust- an annuity, the capital status of the amount
ive); it was an annual (or periodical) pay- payable will be lost and the annuity will
ment and the beneficiary had the right become revenue in nature in terms of para-
to receive more than one such payment. It graph (a) of the definition of ‘gross
was significant that the payments expired income’.
on the death of the taxpayer and that the
181
Note that the payment of a capital debt in instalments, however, is not an annuity. It
is often difficult to distinguish between the two but it has been said that periodic
payments in liquidation of a debt, even if the instalments may vary depending on the
circumstances, do not constitute an annuity. For example, an incoming partner in a
partnership may purchase goodwill from a retiring partner, the instalments being
dependent on the profits of the partnership. Provided the amount payable for
goodwill is a fixed amount, these payments do not constitute an annuity. If the
consideration payable for the goodwill is expressed as an annuity for a certain period,
or for life, it is included in the gross income of the recipient.
Example 3.1
Ben Majoli (a resident of South Africa) sold his share in the goodwill of a partnership on
31 August. In return, he will receive a monthly amount for the next ten years, amounting
to the greater of R10 000 or 1% of the monthly turnover of the business. His actual income
amounted to R10 000 a month during the current year of assessment.
You are required to determine which amounts will be included in Ben’s gross income for
the current year of assessment.
Solution 3.1
The monthly amount of R10 000 (R60 000 for the current year of assessment) is included
in Ben’s gross income in terms of paragraph (a) of the definition. An amount received for
the sale of goodwill (a capital asset) by a partner in a partnership would normally be of a
capital nature. Due to the payment being expressed as a monthly amount over a period of
ten years, each monthly payment will constitute an annuity (being a fixed annual
payment divided into instalments, repetitive and chargeable against the purchaser of the
goodwill) and it will be included in Arthur’s gross income in terms of paragraph (a) of the
definition.
182
CASE:
Stevens v Commissioner for South African Revenue Service
32 SATC 54
Facts: The taxpayer, as part of his com- Judgment: The recipients of the ex gratia
pany’s share incentive scheme had payments were employees or ex-employees
acquired an option to buy its shares but who had enjoyed a benefit directly linked
before the option could be exercised, the to their employment, and who had lost
company announced that it would be vol- that benefit but were deserving in the par-
untarily liquidated rendering such options ticular circumstances of a substitute ex gratia
valueless. The company resolved to pay payment. Accordingly, the receipt fell with-
the taxpayer, as option holder, 75 cents per in the terms of paragraph (c) of the defini-
share ex gratia. The purpose of the incentive tion of ‘gross income’.
scheme had been to promote the retention of Principle: The ex gratia (voluntary)
employees of ability and expertise who payment was received as a direct result of
were primarily responsible for the profit- the incentive scheme entered into
ability and continued growth of the com- (paragraph (c) includes within its ambit
pany. The taxpayer contended that such ex voluntary payments). The share incentive
gratia payment was not aimed at compen- scheme was only offered to employees. It
sating the option holders as employees or therefore follows that the ex gratia
ex-employees, but because their option payment was received ‘by virtue of
price was below the market value when the services rendered or by virtue of any
special dividend was declared and it was employment or the holding of any office’
they who were deprived of a contemplated as required by para-
profit. graph (c) of the definition of ‘gross
income’.
The words ‘in respect of’ used in these paragraphs require a causal connection
between the amount received and the employment or office (De Villiers v CIR
4 SATC 86). Payments by an employer such as charitable donations, which are not
connected with services, do not necessarily fall within the ambit of these paragraphs.
Payments made to one person in respect of services rendered by another are also, in
terms of paragraph (c), included in the taxable income of the person rendering the
services. Amounts deducted from an employee’s salary and paid over to the third
person are therefore included in the employee’s gross income. In other words, the
employee’s gross salary is included in their gross income.
In C: SARS v Kotze 64 SATC 447, the respondent received a police reward for pro-
viding information regarding the illegal purchase of diamonds. The issue was
whether the amount had been received for services rendered. The court held that he
was rewarded for having provided information that led to the arrest and conviction
of persons. If he had not provided the information, he would not have received the
reward. The court held the amount was received in respect of services rendered.
Example 3.2
Ms Jane Nell renders a service to Crax CC and in recognition of the services she rendered
to the CC, her brother receives R5 000 from Crax CC.
You are required to determine whether Jane will be taxed on this amount.
183
Solution 3.2
In terms of paragraph (c) (ii) Jane will be taxed on the R5 000 as she was the person who
rendered the services.
Example 3.3
Arthur McArthur is a resident of South Africa. He only worked for one private sector
employer throughout his entire working life of 40 years. The following information
relates to his receipts and accruals for the current year of assessment:
• Arthur received a lump sum of R800 000 from his employer’s pension fund when he
retired on 30 June. This amount relates to all his years of service. The business’s
accountant has ascertained from SARS that, in terms of the Second Schedule of the Act,
the tax-free portion of this lump sum amounts to R300 000.
• When he retired, his employer paid him a gratuity, amounting to R100 000, in
gratitude for his years of loyal service.
• At his retirement party, Arthur’s fellow workers presented him with a Persian carpet,
which cost R6 000.
You are required to determine which amounts will be included in Arthur’s gross income
for the current year of assessment.
184
Solution 3.3
• The taxable portion of a pension fund lump sum amounting to R500 000 (R800 000 –
R300 000) would be included in Arthur’s gross income in terms of paragraph (e) of the
definition.
• The gratuity, being a voluntary award received in respect of the termination of his
employment, is included in Arthur’s gross income in terms of paragraph (d) of the
definition.
• The value of the Persian carpet presented to Arthur by his fellow workers on his
retirement will not be included in his gross income. It was not received in respect of
services rendered from the employer but from fellow employees and represents a gra-
tuitous capital receipt.
185
186
– the excess above the stipulated amount is voluntary expenditure which is not
part of the right to have improvements effected that accrued to the lessor under
paragraph (h);
– if the lessee spends less than the amount stipulated in the agreement, the
stipulated amount in the agreement must still be included in the lessor’s gross
income under paragraph (h); and
– 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 since it is
submitted that the lessor will probably sue the lessee for non-performance
under the agreement.
• If the value of the improvements or the amount to be expended on the
improvements is not stipulated in the agreement but the obligation is on the lessee
to effect specific improvements (even if that requires the lessee to incur costs which
exceed the stipulated minimum amount):
– the stipulated minimum amount is not considered to be an amount which has
been stipulated in an agreement and the fair and reasonable value of the
specific improvements to be effected under the agreement must be included in
the lessor’s gross income. The fair and reasonable value is the actual cost
incurred.
Leasehold improvements must be included in the lessor’s gross income on the date of
accrual. The right to have improvements effected generally accrues when the lessor
acquires the right to have the improvements effected.
• If the amount of the improvement is stipulated in the lease agreement, the
amount is generally included in the lessor’s gross income in the year of assessment
when the lease agreement is signed by all the parties.
• If the amount of the improvements is not stipulated in the lease agreement, the
date of completion of the improvement is generally regarded as the date of accrual
because the amount can only be determined at this point in time.
When a lessor has to include the value of leasehold improvements in his gross
income by virtue of paragraph (h) of the gross income definition, he is taxed on an
amount of which he won't get the benefit until the end of the lease agreement. This is
so because, for the duration of the lease agreement, the lessee and not the lessor has
the right to use the leased assets. In order to provide relief for lessors, section 11(h) of
the Act makes provision for the deduction of an allowance in respect of leasehold
improvements (refer to chapter 5). Such allowance must be an amount which seems
fair and reasonable to the Commissioner, taking into account circumstances such as
the duration of the lease agreement and the nature of the building or improvements
erected on the property. This allowance ensures that a person is not taxed on the value
of leasehold improvements at the date of the agreement which, by the date that the
lease agreement terminates, may have little or no value.
187
Example 3.4
BMY Ltd manufactures vehicles. During the previous year of assessment, one of the manu-
factured vehicles (with a cost of R150 000) was used as a demonstration model. BMY Ltd
disposed of the vehicle in the current year of assessment for an amount of R220 000.
You are required to determine the effect of the above on the gross income of BMY Ltd for
the current year of assessment.
Solution 3.4
In terms of paragraph (jA) of the gross income definition, the vehicle will remain part of
the trading stock of BMY Ltd even though it was used as a capital asset. he full R220 000
will be included in gross income in the current year of assessment (similar to when trad-
ing stock was sold).
REMEMBER
• The special inclusions listed in the definition of gross income are included in gross
income, even though they are of a capital nature.
188
3.3 Summary
The special inclusions listed in the gross income definition are discussed in this
chapter. Both amount included in gross income in terms of the definition and the
specific inclusions forms the basis of the tax calculation.
Special inclusions are listed in the gross income definition and these are specifically
included in the taxpayer’s gross income, even though they would not have formed
part of gross income due to their capital nature.
Question 3.1
Ignore VAT for purposes of this question.
Bantami (Pty) Ltd, a South African resident, has the following income for the 2020 year of
assessment:
R
Gross foreign dividends (foreign tax paid R600) 6 000
Gross foreign interest (foreign tax paid R3 800) 8 000
Local interest 9 000
Other foreign income (foreign tax paid R6 000) 20 000
Bantami (Pty) Ltd entered into a lease agreement with Promac Ltd (a non-connected third
party that is also a South African resident). The following are extracts from the agreement:
Commencement of the lease: 1 March 2020
Lease term 60 months
Asset leased to Promac Office building
Lease premium payable on 1 March 2020 R60 000
Monthly rental payment from 1 March 2020 R40 000
Value of improvements to be incurred by the lessee (Promac Ltd): R190 000
The improvements were completed on 30 June 2020 at a cost of R170 000. The lease
premium was paid on 1 March 2020. The building was used from 1 July 2020 by Promac
Ltd.
No exemptions have been taken into account and the company paid non-refundable
foreign tax on all the foreign income that it received.
189
Answer 3.1
Calculating Bantami (Pty) Ltd’s tax liability for the current year of assessment
R
Foreign dividend 6 000
Foreign interest 8 000
Local interest 9 000
Other foreign income 20 000
190
The taxation of
4 non-residents
Adjustments
Non-
for tax
residents
avoidance
Page
4.1 Introduction............................................................................................................ 192
4.2 Non-residents (section 1) ...................................................................................... 193
4.3 From a source in the Republic ............................................................................ 194
4.3.1 True source of income ............................................................................. 194
4.3.2 Deemed source of income (section 9) .................................................... 196
4.4 Specific types of receipts of non-residents ......................................................... 196
4.4.1 Interest ....................................................................................................... 197
4.4.2 Dividends .................................................................................................. 199
4.4.3 Rental ......................................................................................................... 199
4.4.4 Pensions, lump sum benefits and annuities ......................................... 200
4.4.5 Sale of trading stock................................................................................. 201
4.5 Other provisions .................................................................................................... 201
4.5.1 Capital profits and losses (section 9) ..................................................... 201
4.5.2 Disposal of immovable property by a non-resident person
(section 35A) ............................................................................................. 201
4.5.2.1 Calculation of amount to be withheld ................................... 201
4.5.2.2 Payment of the amount withheld to SARS ........................... 202
4.6 Summary................................................................................................................. 203
4.7 Examination preparation ...................................................................................... 203
191
4.1 Introduction
Because of globalisation, the world has become a small place and people trade and
invest their money all over the world. Just as South Africans invest offshore, people
from other countries will invest in South Africa. This chapter discusses whether the
amount received by or accrued to the non-resident is taxable in the Republic.
It is obviously important to be able to differentiate between ‘residents’ and ‘non-
residents’. Residents are taxed on their worldwide income, and non-residents are
taxed in accordance with the source of the income and the source rules contained in
the Act.
The most common types of income earned by non-residents are
• interest;
• dividends;
• royalties;
• rental income (both movable and immovable property);
• services rendered;
• sale of trading stock; and
• sale of immovable property.
If one needs to determine whether a receipt is taxable or not, it is important to take
the source rules as well as any exemptions that apply to the receipts into account. To
determine the source of income, the rules contained in section 9 as well as the guide-
lines provided in case law have to be considered. For purposes of the discussion, the
section 9 rules will sometimes be referred to as the deemed source of income.
Certain types of income earned by non-residents are subject to a withholding tax.
Withholding tax is a tax that the person who pays the non-resident deducts (collects
on behalf of SARS) before paying the amount due to the non-resident. The amount of
withholding tax is then paid over to SARS. In line with the international ‘uniform
cross-border withholding regime to prevent base erosion’ policy, income paid to
non-residents will become subject to withholding tax. These provisions are listed in
the Act under Parts IVA and IVB with withholding tax on royalties payable from
1 July 2013 and withholding tax on interest from 1 January 2015.
192
REMEMBER
• Any double-tax agreement entered into with the non-resident’s country of residence
must be taken into account. Double-tax agreements override any other legislation and
must be applied first. Where there is no double-tax agreement, the Act is applicable.
• Where, for example, a double-tax agreement states that an amount of interest received
by a non-resident was subject to tax in the foreign country and not South Africa, that
‘rule’ will then be applied. The fact that the normal South African rules determine that
the amount is subject to tax in South Africa is then irrelevant.
• A double-tax agreement is an agreement that is entered into by the South African
government with the governments of other countries for the prevention of double tax-
ation on trading or investment that takes place between those two countries.
• In such an agreement, the principles of, for example, the circumstances in which in-
terest will be taxable in the Republic or when it will be taxable in another country, will
be decided.
REMEMBER
193
REMEMBER
• Even though income is from a source in the Republic, it might be specifically exempted
in terms of section 10 of the Act.
• The Act defines the Republic as the Republic of South Africa and when used in a geo-
graphical sense, it includes the territorial seas thereof as well as any area outside the
territorial seas which has been or may be designated, under international law and the
laws of South Africa, as areas within which South Africa may exercise sovereign rights
or jurisdiction in regard to the exploration or exploitation of natural resources.
Where a non-resident has earned income that could be connected to South Africa, one
must first consider the deemed source of the income (refer to 7.3.2 and 7.4) which is
defined in section 9. If section 9 deems the income to be of a South African source, the
amount is taxable here and the non-resident will include the amount in his/her South
African gross income.
If section 9 is not applicable, reference must be made to case law to determine the
true source of income.
194
The general rules that are discussed form only a framework for the determination of
the actual source of income. Each case must be decided by taking the specific details,
situation and facts into account.
The most important tests include:
• Source means origin, not place
In CIR v Lever Brothers and Another 14 SATC 1, Chief Justice Watermeyer consid-
ered 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 a combination of these.
After the source has been determined, the problem is to locate where it is situated.
There is thus a two-step process, namely
– ascertaining the originating cause of the income (source); and
– locating this source (in the Republic or not).
• Ascertaining source is a practical, hard matter of fact
In Rhodesia Metals Ltd v COT 11 SATC 244, it was held that source is not a legal
concept, but what the average person would regard as being the actual source of
income. The determination of the source of income is a factual question that can
change from case to case.
• Place where the capital is employed determines the source
In Rhodesian Metals Ltd Liquidator v COT 9 SATC 263, it was held that the place
where the capital is used, and not where the ‘brain’ of the company is situated, was
instrumental in producing the profit (COT v Dunn & Co Ltd 1918 AD 607 and Over-
seas Trust Corporation Ltd v CIR 2 SATC 71). A farmer whose farm is situated in the
Republic, or a manufacturer whose factory is situated here, employ their capital
here. They may sell their produce all over the world, but the source of their income
will be the Republic.
• The activities test
This test was formulated in Millin v CIR 3 SATC 170. In this case, it was held that
the source of royalties received by a South African novelist from her publishers in
England was in the Republic because she employed her faculties here, both in writ-
ing the book and in dealing with her publishers, although the contract was made in
England and the books were sold there.
The place where the business is operating (the ‘activities test’) was the determining
factor in locating the source of income of a South African partner in a partnership
operating in Argentina. The source of this partner’s income from the partnership
was held to be the Republic, because he did all his work here (CIR v Epstein 19
SATC 221).
195
• The dominant source, the source of incidental income and multiple sources
The question of dominant source in relation to business activities arises most often
when buying and selling, as each activity is carried out at a different location. If
one of the activities can be said to be dominant, the place at which this activity is
carried out will be the dominant source. The source of incidental income will be
located at the source of the main activity (COT v Shein 22 SATC 12). Where there
are multiple sources of income and none of these sources can be said to be dom-
inant or incidental, the profits from each source may have to be dealt with sep-
arately. In CIR v Lever Bros and Another 14 SATC 1, Chief Justice Watermeyer stated
(as an obiter dictum) that ‘such a state of affairs may lead to the conclusion that the
whole of a receipt, or part of it, or none of it is taxable as income from a source within
the Union (South Africa before May 1961), according to the particular circumstances
of the case’ (ITC 1103 29 SATC 35).
There are no provisions in the Act for the apportionment of source and the courts
appear reluctant to apportion source, preferring to find ‘the main, the real, the
dominant, the substantial source of income’ (CIR v Epstein 19 SATC 221). In Trans-
vaal Associated Hide and Skin Merchants v COT 1967 (BCA) 29 SATC 97, the court
was not prepared to apportion because the Botswana Act did not provide specif-
ically for it. However, the Rhodesian court apportioned source in ITC 1104 29 SATC
46. The South African courts have been prepared to apply apportionment in relation to
other sections of the Act.
196
4.4.1 Interest
Section 9 source of income rules
Interest, as defined in section 24J, is deemed, in terms of section 9(2)(b), to be received
or accrued from a source in the Republic if:
• the interest is paid by a resident (unless it is attributable to a permanent establish-
ment outside the Republic);
• the interest is received or accrues from the use or application in the Republic by a
person of funds or credit obtained in terms of a form of interest-bearing arrange-
ment.
These rules do not override the true source test, but broaden it.
REMEMBER
True source
In the case of CIR v Lever Bros and Another 14 SATC 1, the view was expressed that the
provision of money or granting of credit was the service the lender performed for the
borrower and for which the borrower paid interest.
The provision of the money or granting of credit was therefore the originating cause
or the source of the interest, not the debt itself. The place where the credit or money is
made available will determine the location of the source of interest income. The
granting of credit generally takes place at the creditor’s enterprise and the source will
be there as well.
However, in the case of First National Bank v C:SARS it was found that the source of
interest income was the Republic, due to the bank’s business activities being in South
Africa, even though the loans were made outside the Republic and to foreign clients.
The general principles, as laid out in the Lever Bros case, will thus always be applied
to transactions entered into by taxpayers who are not moneylenders (that is to say
non-financial institutions). Where a moneylender is concerned, the source of the
interest will be the place where the financial institution carries on business.
197
REMEMBER
• The general interest exemption in terms of section 10(1)(i) of R23 800 (or R34 500 if
65 years and older) is also available to all taxpayers who are natural persons.
• In spite of the exemptions, a taxpayer must always declare all interest received in their
income tax return. These exemptions will be calculated when the taxpayer is assessed.
198
4.4.2 Dividends
Section 9 source of income and the definition of ‘gross income’ (section 1)
All South African dividends are included in gross income in terms of paragraph (k) of
the definition of gross income (specific inclusions). In terms of section 9(2)(a), all
dividends received (except for foreign dividends (section 9(4)(a)) are from a source
within the Republic.
True source
The true source of dividends is the share in respect of which the dividend is declared
and the source is where the share is registered (Boyd v CIR 1951 AD), or, where shares
are registered in a branch register, it is where the main register is held (Lamb v CIR 20
SATC 1).
All South African companies are compelled to keep their share registers in the Repub-
lic and therefore all dividends declared by South African companies will be from a
source in the Republic.
4.4.3 Rental
Section 9 does not contain any provisions relating to rental income therefore the true
source tests or case law will apply.
True source
The source of rent received from the renting of immovable property is usually the
place where the property is situated (Rhodesian Metals Ltd v COT 11 SATC 244). This
means that where a non-resident earns rental income on a property situated in South
Africa, the rental will always form part of his/her gross income. The non-resident
will also be entitled to avail themselves of all the provisions of the Act relating to
applicable deductions.
Where movable property is rented, the source is then where the business of the lessor
is situated or where the movable property is used. The nature of the movable
property and length of the usage will form a guideline to determine whether the
source is the location of the business of the lessor or where the property is used (COT
v British United Shoe Machinery (Pty) Ltd 26 SATC 163). If it is the nature of the
business that many movable assets are leased at different places (as in the case of a
motorcar rental agent), the business and not the rental assets determine the source.
If only one movable asset is leased, the use of the asset will usually determine the
source of the income.
199
Example 4.1
Andries te Groen, a non-resident, earns a pension of R3 500 per month. Andries retired on
31 December 2020 and received a pension from 1 January 2021. He was employed by a
South African employer for 25 years. During this time, he was employed outside the
Republic from time to time for a total of 12 years.
You are required to calculate the taxable portion of Andries’ pension for the current year
of assessment.
Solution 4.1
R
Total pension received for the current year of assessment
R3 500 × 12 months 42 000
Portion deemed to be from a source in the Republic (Note):
13
× R42 000 21 840
25
R21 840 is included in Andries’ South African taxable income for the current year of assess-
ment.
200
True source
In the case of CIR v Epstein 19 SATC 221, the court held that the source of the income
was the taxpayer’s activities that were carried out in the Republic. These activities led
to the profit that was made and therefore the profit is taxable in the Republic. This
means that where non-residents sell stock in the Republic they would be taxable on
this as well.
201
REMEMBER
• If the amount owing is paid in instalments, the withholding amount must be calculated
on each payment (instalment) made to the non-resident.
• The amount withheld is a prepaid tax. It is not a final tax and therefore the non-resident
must complete and submit a tax return at the end of the year of assessment to SARS to
calculate the final amount due.
In most situations, the amount paid to the seller is subject to an amount being with-
held. However, the seller may apply for a directive from SARS to change the percent-
age used. The request for a directive not to withhold an amount or to reduce the
amount to be withheld can only be made:
• if the seller provides adequate security for the tax due;
• if the seller has other assets in the Republic that can be used to recover outstanding
tax;
• if the seller is not subject to tax due to some other stipulation in the Act, for exam-
ple a double-tax agreement; or
• if the actual tax liability is less than the amount to be withheld.
No amount has to be withheld where the total purchase price of the property is less
than R2 million.
If a deposit is paid to secure the transaction, no amount is withheld from this deposit.
Where the agreement for the disposal becomes unconditional, the amount that should
have been withheld from the deposit must be withheld from the first following pay-
ment.
REMEMBER
• If the amount is not paid within the prescribed time, interest, as well as a 10% penalty,
will be charged on the outstanding amount.
If the purchaser knows or should reasonably have known that the seller is a non-
resident, the purchaser is personally liable for the tax. If the person makes use of an
estate agent or conveyancer who failed to inform them, in writing before a payment is
made, of the fact that the seller is a non-resident, they are all jointly and separately
liable for the tax due. However, the estate agent and conveyancer’s liability is limited
to the amount of remuneration or other income received.
202
The purchaser has a right of recovery for the amount withheld against the seller.
Note, however, that they may not recover any interest.
4.6 Summary
Where the taxability of any receipts or accruals of a non-resident must be determined,
one should first consider if any specific provisions of section 9, which deem the
income to be from a South African source, are applicable. If section 9 does not apply,
the true source of the income should be considered, taking into account decisions that
have been made by the courts (case law). Any exemptions that are applicable must be
carefully considered, as source rules might regard the income as being from a source
in the Republic, but it may be specifically exempted.
Double-tax agreements must also always be consulted as they take precedence over
the provisions contained in the Income Tax Act where trade takes place within the
borders of other countries.
The following are a number of questions where your knowledge of the taxing of non-
residents can be tested.
Question 4.1
Didier Schloss was born and raised in Germany. He only visits the Republic on the odd
occasion. He does not carry on a business in South Africa and did not visit the Republic in
the current year. Didier invested an amount in a fixed deposit with a South African bank
when he visited South Africa for the first time in 1996. He received R32 000 interest on his
investment during the current year of assessment.
Answer 4.1
Didier is not a South African resident as defined. He will therefore be taxed in South
Africa only on receipts/accruals from a South African source.
Section 9(2)(b) deems the interest to be from a South African source if it is received because
of the use of any funds in the Republic. The source of the income is therefore in South
Africa, and the income is included in the taxpayer’s gross income.
However, section 10(1)(h) exempts the interest from tax, provided the taxpayer is not
• physically present in the Republic for more than 183 days; and
• at any time carrying on a business through a permanent establishment in the Republic.
As Didier was not present in the Republic during the current year of assessment and he
was not carrying on a business in the Republic, the R32 000 interest received will be
exempt from tax.
203
Question 4.2
Abel Sidinile is a resident of another African country. Abel is employed by the local gov-
ernment in his country. He also earns other income in his country. For a number of years
Abel has been investing money in South African investments, as he was concerned about
the political climate in his country. He has never visited South Africa for longer than a
month a year and he is also not carrying on any business in South Africa. Abel is 45 years
old.
He earned the following income during the current year of assessment from a number of
different sources. You can accept that the rand equivalent of all the incomes has been cor-
rectly calculated.
Investment income: R
Dividends from a South African source 250 000
Dividends from an investment in his home country 125 000
(Assume that Abel does not have an interest of more than 10% in this compa-
ny and it is not listed on any stock exchange.)
Interest on fixed deposit from a South African bank 58 000
Interest on fixed deposit from a United Kingdom bank 205 000
Investment income:
He purchased a flat in Clifton, Cape Town, for his annual holiday. While he is
not in South Africa, he rents out the flat. Rental earned from this flat during
the current year of assessment 880 000
His monthly expenses for the flat amount to R56 000, which includes an
amount of R30 000 in respect of interest on his bond
204
Answer 4.2
(a) Calculation of the taxes payable by Abel (non-resident)
As Abel is not a resident of South Africa, he will only be taxed on income that has a South
African source.
Gross income: R
Dividends from a South African company 250 000
Dividends from his home country – Not a source in the Republic, therefore
not taxable nil
Interest received on an investment in the Republic 58 000
Interest received from a UK bank – Not a source in the Republic, therefore
not taxable nil
Rent received 880 000
Gross income 1 188 000
Less: Exemptions
Dividend exemption – section 10(1)(k) 250 000
Interest exemption – section 10(1)(h) 58 000
Income 880 000
Less: Deductions
Expenses in respect of rental income (R56 000 × 12) – section 11(a) 672 000
Taxable income 208 000
Calculation of net normal tax
Tax on ((R208 000 – R205 900 ) × 26%) + R37 062 37 608
Less: Primary rebate (14 958)
Tax payable 22 650
continued
205
206
Question 4.3
Tony Clair is not a resident of the Republic. He is 35 years old and unmarried. For the past
eight years, he visited the Republic for six weeks (42 days) each year.
During the current year of assessment, he had the following income and expenses:
R
Salary – from an employer in Britain 325 000
Dividends from a South African company 15 000
Interest on a savings account in the Republic 8 300
Rent received from a property in the Republic 290 000
Tony used his excess funds to purchase this property, as property is
much cheaper here than in Britain. Tony intends to use the property as
a holiday home for himself and his family in the future, but rented out
the house for ten months during the current year.
Expenses incurred in respect of the house
Expenses in order to make the house rentable 125 000
Replacement of a broken ceiling fan – the lessee broke the fan during a
party. Tony recouped R500 from the lessee but had to pay the balance
himself 1 600
Water and electricity for the full year (incurred evenly throughout the
year) 24 000
207
Page
5.1 Introduction............................................................................................................ 209
5.2 Exemptions resulting from the status of the taxpayer (section 10) ................. 210
5.3 Exemptions based on the nature of the income (section 10) ............................ 213
5.3.1 Pensions ..................................................................................................... 213
5.3.2 Benefits ...................................................................................................... 214
5.3.3 Amounts relating to employment ......................................................... 214
5.3.4 Investment income ................................................................................... 220
5.3.5 Other exemptions ..................................................................................... 225
5.4 Summary................................................................................................................. 227
5.5 Examination preparation ...................................................................................... 228
5.1 Introduction
If an amount complies with the definition of ‘gross income’, it is included in the
taxpayer’s gross income. In certain cases the Income Tax Act 58 of 1962 (the Act)
makes provision for certain types of income to be exempt (not subject to tax). In other
words, this income is free from normal tax. This income, which was included in gross
income, then has to be subtracted from a taxpayer’s gross income. Section 10 provides
for the list of the exempt income while section 10A provides for an exempt portion of
purchased annuities, section 10B for foreign dividends and headquarter companies
and section 12T for an exemption of interest earned on tax free investments. When
calculating taxable income, you have to be sure that you subtract the exempt income
from the gross income to determine the income. Allowable deductions are then also
subtracted from the income to determine the taxable income.
209
R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
210
211
212
REMEMBER
• The listed organisations are exempt from normal tax in terms of section 10 and not
because they might be non-profit organisations.
• Some of the organisations or bodies only enjoy a partial exemption relating only to
certain income received.
• The provisions of section 10(1) only apply to normal tax.
REMEMBER
5.3.1 Pensions
War pensions and awards for diseases
In section 10(1)(g) provision is made for the exemption of an amount received as:
• a war pension; or
• compensation in respect of diseases contracted in mining operations.
213
5.3.2 Benefits
Funeral benefits
Section 10(1)(gD) exempts amounts received by or accrued to a resident who receives
a funeral benefit in terms of the Special Pensions Act 69 of 1996.
Insurance policies
An amount received or accrued in respect of an insurance policy that covers the
policyholder or an employee of the policyholder for:
• death;
• disability;
• illness; or
• unemployment,
is exempt in terms of section 10(1)(gI) so long as the benefits are not paid or payable
by a retirement fund.
REMEMBER
• The apportionment of annuities (section 9(2)(i)) does not apply to retirement annuity
funds as their payment is not linked to employment.
214
Other policies
The amount received is exempt where an amount equal to all premiums paid has
been included in the income of the person receiving the amount as a fringe benefit
since the date that the policy was entered into.
REMEMBER
Compensation plans
All premiums paid in respect of employer-owned investment policies (not pure risk)
for the benefit of employees must be included in the income of employees as a fringe
benefit. The result is that a cession or pay-out of the policy is exempt in the hands of
the employee, as long as ALL the premiums paid by the employer have been subjected
to tax as a fringe benefit in the hands of the employee.
215
Example 5.1
Rose Turpin is employed by Blooming Gorgeous, a florist. Rose receives a uniform allow-
ance of R1 000 per month because she is only allowed to wear pink clothes to work.
During the year Rose spent R8 900 on pink clothes. She has all her receipts.
You are required to explain the income tax implications of the uniform allowance that
Rose received.
Solution 5.1
The uniform allowance of R12 000 (R1 000 × 12 months) will form part of Rose’s gross
income. It will not be exempt.
Relocation benefits
Section 10(1)(nB) determines that the benefit an employee receives, where their
employer paid the cost to relocate an employee from one place to another on the
appointment or termination of the employee’s employment, may be exempt from
tax. The following expenditure may qualify for the exemption:
• transporting the employee, their household and their personal possessions from
their previous place of residence to their new place of residence;
• the costs incurred by the employee in respect of the sale of their previous residence
and in settling in permanent residential accommodation at their new place of resi-
dence; or
• hiring residential accommodation in an hotel or elsewhere for the employee or
members of their household for a period ending 183 days after the transfer took
effect or after they took up appointment (if it was occupied temporarily).
Examples of the above-mentioned costs that qualify for the exemption in respect of
the sale of the employee’s previous residence are:
• cancellation of bond;
• agent’s commission on sale of previous residence.
Examples of settling in costs (as mentioned above) that qualify for the exemption are
• bond registration and legal fees;
• transfer duty;
• new school uniforms;
• replacement of curtains;
• motor vehicle registration fees; and
• telephone, water and electricity connections.
216
The Commissioner will also accept an amount equal to one month’s basic salary paid
by the employer to cover settling-in costs (excluding expenses relating to transport,
temporary accommodation and the purchase and/or sale of residence). This amount
is tax free and not treated as a benefit (SARS Employers Guide).
The following expenses are listed in the SARS Employers Guide as being taxable in
the hands of the employee:
• payments to reimburse the employee for a loss on the sale of a previous residence
during transfer;
• architect’s fees for the design or alteration of a new residence.
Example 5.2
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months during which
Anike had to wait for the previous owners to move out of the house that she bought.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
Solution 5.2
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and can be paid back to Anike tax free.
Item 5 is a taxable benefit and if XYZ Ltd pays this amount to Anike, it is taxable in full.
Items 6 and 7 qualify again for the exempt relocation allowance.
217
REMEMBER
• XYZ Ltd could have paid Anike R8 700 (one month’s basic salary) without withholding
employees’ tax (also not taxable on assessment) in respect of settling-in expenses as per
SARS’s practice. If they chose this option, they could not refund her for items 1 to 4 and
6 and 7 again (as this must be covered from her additional one month’s basic salary).
Fringe benefits
The provisions of section 10(1)(nC) (broad-based employee share plan), (nD) (equity
instruments), and (nE) (share incentive scheme), dealing with taxable fringe benefits,
are discussed in chapter 13.
218
REMEMBER
• Scholarships and bursaries granted to a relative of an employee who retired are subject
to the same conditions as bursaries granted to a relative of a current employee.
• Research is not considered to be studying and will not qualify for an exemption in
terms of this section.
• A scholarship or bursary that is granted subject to repayment if all the conditions
stipulated are not met will be treated as a bona fide bursary until non-compliance
occurs. In the year the non-compliance occurs, a taxable fringe benefit will arise.
• A reward or reimbursement to an employee for a qualification or for having successfully
completed a course or to assist in covering private study expenses is taxable remuneration.
Employers to employees
In terms of section 10(1)(q) and (qA), where the scholarship or bursary is granted by
an employer (or associated institution) to an employee, it will only be exempt where
the employee agrees to reimburse the employer if they fail to complete their studies
for reasons other than death, ill-health or injury.
219
Where the employee has a remuneration proxy of more than R600 000, the full schol-
arship or bursary will be taxed.
‘Remuneration proxy’ is defined as the remuneration derived by the employee in the
previous year of assessment (excluding the cash equivalent of residential accommo-
dation).
If the employee was not employed for a full year in the previous year, the remunera-
tion proxy will have to be determined in the ratio that 365/366 days bears to the
period of employment.
Interest and dividends received from tax free investments (section 12T)
Interest received or accrued from a tax free investment (as defined in section 12T) is
exempt from income tax.
A tax free investment must meet the following four requirements:
• It must be issued by:
– a bank;
– a long-term insurer;
– a portfolio of a collective investment scheme in property;
– a portfolio of a collective investment scheme in securities; or
– the government of the Republic (national sphere).
• It must be administered by:
– an authorised user; or
– an administrative FSP (financial service provider).
• It must be held by:
– a natural person;
– the deceased estate; or
– the insolvent estate of a person.
• It must meet the requirements of a tax free investment in accordance with either:
– the Policyholder Protection Rules under the Long-term Insurance Act; or
– the regulations contemplated in the Collective Investment Schemes Control Act.
An amount received or accrued from a tax free investment by a natural person is
exempt from normal tax. The disposal of a tax free investment will also not be subject
to capital gains tax.
The amount contributed to these investments (in total) is limited to R36 000 per year
of assessment and R500 000 in total (excluding reinvestment of interest). Where a
220
person exceeds these limits, a penalty of 40% on the excess contribution will be levied
as deemed normal tax payable.
Example 5.3
In each of the following case studies you are required to calculate the taxpayer’s ‘income’.
Taxpayer A B C D
Age 48 35 76 68
Foreign interest earned – R2 900 R3 000 R600
South African interest earned (not from R15 000 R24000 R27 000 R39 500
a tax free investment)
Interest received – tax free investment – – 1 900 –
Solution 5.3
A B C D
R R R R
Gross income
Foreign interest – 2 900 3 000 600
South African interest 15 000 24 000 27 000 39 500
Interest received – tax free investment – – 1 900 –
15 000 26 900 31 900 40 100
Less: Exempt income
Tax free investment interest (1 900)
South African interest (15 000) (23 800) (27 000) (34 500)
Income nil 3 100 3 000 5 600
221
222
REMEMBER
• An equity share is a share in a company, excluding a share that does not have the right
to participate beyond a specified amount in a distribution (of dividends or of capital).
This means that, in order to be an equity share, there must be an unlimited right to par-
ticipate in company distributions.
REMEMBER
Example 5.4
Simon Tshabalala earned foreign dividends of R2 400. They are not subject to any of the
specific exemptions.
You are required to calculate the taxable portion of the foreign dividends.
Solution 5.4
R
Gross income: Foreign dividends received 2 400
Less: Section 10B(3) exemption (R2 400 × 25 / 45) (1 333)
Taxable portion 1 067
223
This exemption ensures that the capital portion (that was already subject to tax) of a
purchased annuity is exempt from tax.
The capital portion is calculated in terms of the following formula:
A
Y = ×C
B
where:
Y is the capital element to be calculated;
A is the total cash price payable by the purchaser to the insurance company in
terms of the annuity contract;
B is the sum of all the expected returns over the term of the contract; and
C is the total receipt during the current year of assessment.
Once the capital portion has been calculated, it is deducted from the amount received
in terms of the annuity and the balance (or return on the amount that was invested) is
taxable.
Example 5.5
On 1 August 2018, when Chris Gray was 56 years old, he purchased an annuity from an
insurer. He paid R250 000 for the annuity and receives a monthly annuity of R2 000 from
1 September 2018 for the rest of his life. His life expectancy, according to the tables in
Appendix C, is 17,18 years (based on his age when the annuity contract was concluded).
You are required to calculate the taxable amount of the annuity received for the current
year of assessment.
Solution 5.5
The total expected returns from the purchased annuity amount to
R2 000 × 12 months × 17,18 years = R412 320.
In the formula
A
Y= ×C
B
A = R250 000 (total cost price)
B = R412 320 (expected returns)
C = R2 000 × 12 months = R24 000 (receipts in current year)
R250 000
Y= × R24 000
R412 320
Y= R14 551,80
continued
224
Note
You may find small differences due to rounding.
Why is the current year of assessment’s taxable amount for the annuity not
reduced pro rata?
REMEMBER
225
Example 5.6
Ms Nkele Matuang (40 years of age), who is resident in the Republic, received the follow-
ing amounts during the year of assessment:
R
Compensation in terms of the Workmen’s Compensation Act for an injury suf-
fered while on duty 30 000
Unemployment Insurance Fund compensation for the period 1 July to
31 December while she was unemployed 13 900
Salary for the period 1 January to 28 February, as a trainee game ranger 25 600
Uniform allowance for the period 1 January to 28 February in respect of a dis-
tinctive uniform she was required to wear while on duty 1 600
During this period she received a scholarship from her employer to study for a
game ranger’s certificate on a part-time basis at the local University of Technol-
ogy (she has to pay the scholarship back if she does not pass the course) 15 000
When she was first employed, her employer paid the cost of transferring her
personal belongings to her place of employment, as well as the cost of her hotel
for the first month. The value of these amounted to 26 000
Taxable foreign dividends 3 800
Interest on a South African investment (not a tax free investment) 20 000
Nkele’s gross income amounts to 135 900
You are required to calculate Nkele’s income for the current year of assessment.
226
Solution 5.6
The following amounts are exempt from normal tax:
R
Compensation in terms of the Workmen’s Compensation Act –
section 10(1)(gB) 30 000
Benefit in terms of the Unemployment Insurance Act 63 of 2001 –
section 10(1)(mB) 13 900
Uniform allowance for a special uniform to be worn while on duty –
section 10(1)(nA) 1 600
Bona fide scholarship to study at a recognised educational institution –
section 10(1)(q) 15 000
Cost of transfer paid by her employer, as well as the cost of temporary
accommodation (up to 183 days permitted) – section 10(1)(nB) 26 000
Foreign dividends (R3 800 × 25 / 45) – section 10B(3) 2 111
Interest – she is entitled to an exemption of up to R23 800 as she is
under 65 years of age – however, she only received R20 000, therefore the full
amount is exempt – section 10(1)(i) 20 000
108 611
Nkele’s income in terms of the definition in section 1 of the Act is
therefore determined as follows:
Gross income 135 900
Less: Exempt income (108 611)
Income 27 289
REMEMBER
• The list contains gross income that is exempt from taxation due to the nature or type of
income.
• In order to exempt an amount, it must have been included in gross income.
• You can never exempt more than taxpayers have included in their gross income.
• There is a difference between an exemption and a deduction in the sense that to be able
to claim an exemption you have to earn the particular type of income (as listed). By con-
trast, a deduction depends on the nature of the expense.
5.4 Summary
Although an amount is included in gross income in terms of the definition, in certain
cases, owing to its nature, it is exempt from taxation in terms of the specific provi-
sions discussed in this chapter. This chapter focuses mainly on the exemptions based
on the nature of the income, for example interest, dividends, bursaries, gratuities etc.
In terms of the Act, a taxpayer’s income is their gross income less exempt income. The
concept of income is important as the deduction of certain expenses depends on the
amount of the taxpayer’s income.
227
In the questions that follow, the principles as discussed in the chapter are highlighted.
Question 5.1
The following taxpayers are uncertain whether or not the amounts listed below constitute
exempt income:
1. Simon Shabalala is a retired miner. During the current year of assessment he received
the following amounts:
R
Pension received for past services rendered 120 000
Pension received for a disease contracted during employment at the mine 60 000
The R60 000 is payable under law relating to the payment of compensation for diseases
contracted by persons employed in the mining industry.
2. Major Peter Sinclair received a war pension of R12 000 for the current year of assess-
ment.
3. Kirsh Naidoo (40 years old) received R24 800 interest from a bank investment
account and reinvested the full interest amount during the current year of assessment.
She also received interest of R800 from a tax free investment during the current year
of assessment.
4. During 2000, Pieter and Sandra Pietersen separated and divorced. Pieter pays alimony
to Sandra to finance her living costs. Pieter passed away on 31 July 2020. Prior to his
death, he had created a trust to ensure that Sandra would still receive alimony after
his death.
During the current year of assessment, she received the following amounts:
R
Alimony received from Pieter for the period before his death 40 000
Alimony received from the trust 56 000
Answer 5.1
Discussion of whether the amounts are exempt from tax.
1. Simon Shabalala will be taxed on the pension received for past services rendered as it
is related to services rendered. The pension in respect of a disease contracted in
mining operations will be exempt in terms of section 10(1)(g).
2. In terms of section 10(1)(g), Major Peter Sinclair will not be taxed on the war pension
received, as this type of income is exempt from tax.
continued
228
3. Kirsh Naidoo will be taxed on the interest received. In terms of section 10(1)(i), a
taxpayer under the age of 65 is entitled to an exemption of R23 800, thus Kirsh will be
taxed on R1 000 (R24 800 – R23 800) for the current year of assessment.
She will not be taxed on the interest from the tax free investment.
4. In terms of section 10(1)(u), the alimony received by Sandra Pietersen from her former
spouse and the trust (after his death) will be exempt from tax.
Question 5.2
Your friend is a professional cricket player and you receive the following e-mail from him:
I need your advice on the following matter. As you know, I am ordinarily resident in
the Republic. I am an employee of the United Cricket Board of South Africa. I have
been selected to tour Pakistan, India, England, Australia and New Zealand with the
South African cricket team. I earn a monthly salary from the South African Cricket
Board and will be paid my salary while ‘working’ (playing cricket) in the above-
mentioned countries. The South African Cricket Board is not regarded as an employer
as contemplated in section 9(2)(h) (one of the provisions of section 10(1)(o)). The tour is
for nine weeks in total. We are not allowed to return home (the Republic) during this
nine-week period. All nine weeks fall in the current year of assessment.
Answer 5.2
Advice regarding the taxability of the salary earned outside the Republic
You are a resident of the Republic. Your gross income comprises all worldwide receipts
and accruals. The salary you earn while working for the United Cricket Board of South
Africa outside the Republic will be included in your gross income. The salary may, however,
be exempt from normal tax in terms of section 10(1)(o)(ii). To qualify for this exemption,
• you must render services outside the Republic and you must be an employee;
• these services must be for or on behalf of an employer;
• you must be outside the Republic for a period (or periods) exceeding 183 full days in
aggregate during a 12-month period commencing or ending during the year of assess-
ment;
• you must be outside the Republic for a continuous period exceeding 60 full days
during this 12-month period; and
• you must not be employed by an employer as contemplated in section 9(1)(e) (stated in
the question).
continued
229
You state that you are going to be outside the Republic for nine weeks (that is to say 63
days). We assume that you have no other international tours during the current year and
that you are not going to go for an international holiday that would increase the number
of days outside the Republic to more than 183 days for the year. It seems that you will not
qualify for this exemption as you will not be outside the Republic for a period or periods
exceeding 183 full days in aggregate during a 12-month period commencing or ending
during the year of assessment. The salary will therefore be subject to normal tax.
Question 5.3
In the following scenarios, the amounts received or accrued by taxpayers may or may not
be exempt from normal tax:
1. Sam Cellini, 48 years old and divorced, contributed R40 000 to a tax free investment
during the current year of assessment. He earned R2 400 interest on this investment,
which was reinvested. This is his only contribution to a tax free investment. Other than
the interest, he also earned a salary of R420 000 for the year of assessment. He does not
belong to a retirement fund. He belongs to a medical aid fund to which he contributed
R20 000 for the year of assessment and his employer contributed R35 000. He had no
additional medical expenses.
2. Thato Maluka works for MPK auditors. During the current year of assessment MPK
gave Thato a bursary to cover his children’s school fees. Thato has twins in grade 7
(NQF level is less than level 4). Thato earns R500 000 per annum. The bursary amounted
to R5 000 per child. Thato does not need to repay any amount. Thato had already paid
their school fees in full so he used the money to purchase school uniforms for them.
3. Pabs Mashile, a 38-year-old unemployed South African resident, received the invest-
ment income listed below during the current year of assessment. It arose from an
inheritance he received. He also received R8 000 from the unemployment insurance
fund and his incredibly rich mother gave him R500 000 to live on until he was able to
get employment again.
Investment income:
R
South African dividends (not from a tax free investment) 3 000
Foreign dividends from a non-listed company 1 200
Interest on a South African bank account (not a tax free investment) 15 000
South African dividends on property shares in a collective investment
scheme (not out of capital reserves) 400
230
Answer 5.3
Calculation of income R
1. Sam Cellini
Taxable income 420 000
Normal tax 91 616
2. Thato Maluka
Income 500 000
3. Pabs Mashile
Income 933
The comprehensive solution can be downloaded by following the instructions below.
231
General deduction
6 formula
General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals
Page
6.1 Introduction............................................................................................................ 234
6.2 Carrying on a trade (section 1) ............................................................................ 234
6.2.1 General ...................................................................................................... 234
6.3 The general deduction formula (sections 11(a) and s 23(g)) ............................ 237
6.3.1 Expenditure and losses ........................................................................... 238
6.3.2 Actually incurred ..................................................................................... 239
6.3.3 Year of assessment ................................................................................... 243
6.3.4 In the production of income ................................................................... 244
6.3.5 Not of a capital nature ............................................................................. 253
6.3.6 Laid out or expended for the purposes of trade (section 23(g))......... 259
6.4 Prohibited deductions (section 23) ...................................................................... 259
6.4.1 Private maintenance expenditure (section 23(a)) ................................. 259
6.4.2 Domestic or private expenditure (section 23(b)) .................................. 259
6.4.3 Recoverable expenditure (section 23(c)) ............................................... 261
6.4.4 Interest, penalties and taxes (section 23(d)) .......................................... 261
6.4.5 Provisions and reserves (section 23(e)).................................................. 261
6.4.6 Expenditure incurred to produce exempt income (section 23(f)) ...... 261
6.4.7 Non-trade expenditure (section 23(g)) .................................................. 261
6.4.8 Notional interest (section 23(h)) ............................................................. 261
6.4.9 Deductions against fund lump sums (section 23(i)) ............................ 261
233
Page
6.4.10 Expenditure incurred by labour brokers and personal
service providers (section 23(k)) ............................................................. 262
6.4.11 Restraint of trade (section 23(l)) ............................................................. 262
6.4.12 Expenditure relating to employment or holding of an office
(section 23(m)) ........................................................................................... 262
6.4.13 Unlawful activities (section 23(o)) .......................................................... 264
6.4.14 Cessation of policies of insurance (section 23(p)) ................................ 264
6.4.15 Expenditure incurred in the production of foreign dividends
(section 23(q)) ............................................................................................ 264
6.4.16 Premiums in respect of insurance policies (section 23(r)) .................. 264
6.5 Specific transactions .............................................................................................. 265
6.6 Summary................................................................................................................. 269
6.7 Examination preparation ...................................................................................... 269
6.1 Introduction
In the process of determining the taxable income, certain expenses incurred are
deducted from the income. If you are in the process of calculating a taxpayer’s taxable
income, you will have to know which amounts of the expenditure may be deducted,
as a taxpayer would like to be able to deduct as much of their expenses as possible.
Section 11 of the Act makes provision for the deduction of expenses from a taxpayer’s
taxable income. Section 11(a) contains the requirements for deductions of a general
nature, while section 11(c) to (x) makes provision for specific deductions. Before any
of the provisions contained in section 11 can be applied, the Act specifies that the
taxpayer must be carrying on a trade.
6.2.1 General
As stated above, for an amount to be deductible in terms of section 11 of the Act, the
taxpayer must be carrying on a trade.
Legislation:
Section 11: Preamble
for the purpose of determining the taxable income derived by any person from carrying on
any trade, there shall be allowed as deductions from the income of such person so derived
...
234
Legislation:
Section 1: Interpretation
‘Trade’ every profession, trade, business, employment, calling, occupation or venture,
including the letting of any property and the use of or the grant of permission to use any
patent . . . or any design . . . or any trade mark . . . or any copyright . . . or any other
property which is of a similar nature.
Although this definition is very wide, it does not include all forms of income-
producing activities. Passive investment activities are not considered to be trading
activities. For example, activities producing interest, dividends, annuities and pen-
sions are not included in the definition of trade. The extent of the activities might,
however, indicate that you are carrying on a trade. When a taxpayer speculates in
securities or shares, for instance, this constitutes carrying on a trade and even if the
scale of investment in securities or shares is not very extensive, it may amount to
carrying on a trade (ITC 770 (1953) 19 SATC 216).
The earning of interest by a taxpayer other than a moneylender does not constitute
‘carrying on a trade’. In theory, no deduction will be allowed for an expense incurred
in earning the interest income. In Practice Note No. 31, however, the Commissioner
indicated that they will allow the deduction of interest expenditure incurred in
earning the interest income, but limited to the amount of the interest income. The
interest expenditure cannot create a loss.
A taxpayer may also carry on several trades during the year of assessment, but, in
order to determine ‘taxable income’, the income or losses from each trade must be
aggregated. The insertion of section 20A limits the setting-off of losses of different
trades in certain circumstances of a natural person. This limitation only applies to
natural persons. This aspect is discussed in detail in chapter 12.
The definition of trade includes a ‘venture’, which has been held to be a transaction in
which a person risks something with the object of making a profit, for example
financial or commercial speculation (ITC 368 9 SATC 211).
There is some confusion concerning the question of whether a profit motive is neces-
sary before it can be said that a taxpayer is carrying on a trade. In ITC 1292 41 SATC
163, Judge Myburgh said that the test for deductibility of expenditure is ‘the real hope
to make a profit. Such hope must not be based on fanciful expectations but on
reasonable possibility’. In CIR v De Beers Holdings (Pty) Ltd 46 SATC 47, it was held
that ‘the absence of a profit does not necessarily exclude a transaction from being part
of a taxpayer’s trade’ and in ITC 1274 40 SATC 185, the court held that there is no
requirement in our Income Tax Act that the taxpayer concerned should be aiming at a
net profit in their trading operations. A trader may deliberately sell articles at a loss
‘for business purposes’.
In carrying on a trade, therefore, there should preferably be a profit or an expectation
of profit. If a transaction is entered into with the purpose of not making a profit or
in fact registering a loss, it must then be shown to have been so connected with the
pursuit of the taxpayer’s trade so as to justify the conclusion that, despite the lack
of profit motive, the moneys paid out under the transaction were wholly and
235
exclusively expended for the purposes of trade (CIR v De Beers Holdings). The court
will look at all the facts and circumstances in deciding the issue.
In Burgess v Commissioner for Inland Revenue 55 SATC 185 the court provided some
guidelines for determining whether a person is busy with trading activities.
CASE:
Burgess v Commissioner for Inland Revenue
55 SATC 185
Facts: The taxpayer operated a scheme ruled that if the actions of a taxpayer,
where it borrowed money from a bank and when viewed in isolation, constitute the
invested in an insurance company for a carrying on of a trade, he would not cease
short period in a single-premium pure carrying on that trade merely because one
endowment policy. The stock market of his purposes, or even his main purpose,
crashed and the value of the fund plum- was to obtain some tax advantage. If he
meted, resulting in the accounts reflecting carries on a trade, his motive for doing so
a loss due to interest payable to the bank. is irrelevant. The definition of ‘trade’
The taxpayer had provided a bank guaran- should be given a wide interpretation and
tee and the cost thereof was the only includes a ‘venture’, being a transaction in
which a person risks something to make a
outlay on the part of the individual in-
profit. The taxpayer clearly undertook a
vestor. The policy was a non-standard pol-
venture in that he laid out the money
icy and the proceeds on maturity fell
required to obtain a bank guarantee and
within the investor’s gross income. One of
risked the amount of the guarantee in the
the selling points of the scheme was that it hope of making a profit – it was a specu-
provided certain tax advantages. No part lative enterprise par excellence. The invest-
of the structures could be described as ment in the insurance policy did not con-
artificial, as each one was designed for a stitute a capital asset – the scheme was a
commercial purpose. The taxpayer had short-term speculation with borrowed
testified that the tax savings generated by money and the intention was to surrender
the scheme did not play a substantial part the policy after a year or two so as to
in his decision to participate in the scheme realise the appreciation of its underlying
and that it was the prospect of profit as assets.
contained in the brochure’s profit forecasts
Principle: In order to claim an amount
that had attracted him.
under section 11, it is necessary for a tax-
Judgment: No part of the structures was payer to be ‘carrying on a trade’. The fact
artificial as each step was designed for a that there is no continuity, or there is a lack
commercial purpose. Although there was of a profit motive or risk, does not neces-
an expected benefit by reason of the tax sarily mean that a trade is not being car-
deferment (namely that interest became ried on. However, the taxpayer’s burden of
due before any profit was realised), it was proof increases when one or the other
not contrived in an artificial way. The courts element is not present.
While the ‘facts and circumstances’ test is generally appropriate, special concern
exists when taxpayers disguise private consumption. Private consumption can often
masquerade as a trade (that is to say it is in fact a hobby) so that individuals can set
off these expenditures and losses against other income (usually salary or professional
income) (refer to chapter 12).
236
REMEMBER
• Passive investment activities that produce interest and dividends do not form part of
carrying on of a trade. Interest and dividend income are, however, still included in
gross income since there is no ‘trade’ requirement for an amount to be included in gross
income.
• A profit motive is not a prerequisite for the carrying on of a trade.
• If no trade is carried on, there can be no deduction in terms of section 11.
Legislation:
Section 11(a)
[f]or the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so
derived . . . expenditure and losses actually incurred in the production of the income, pro-
vided such expenditure and losses are not of a capital nature.
This so-called ‘general deduction formula’ will be broken down into its components,
each of which will be discussed briefly:
• carrying on a trade (refer to 6.2 and 6.3.6);
• expenditure and losses (refer to 6.3.1);
• actually incurred (refer to 6.3.2);
• during the year of assessment (refer to 6.3.3);
• in the production of income (refer to 6.3.4);
• not of a capital nature (refer to 6.3.5); and
• laid out or expended for the purposes of trade (refer to 6.3.6).
REMEMBER
• All the components of the general deduction formula must be present for an expense to
be deductible.
237
Example 6.1
Gladys Botha manufactures leather purses. Due to cash flow constraints, she was unable
to pay for the latest consignment of leather, costing R25 000. She offered the supplier a
delivery motorcycle with a market value of R28 000 in settlement of the consignment of
the leather.
You are required to discuss the deductibility of the amounts.
Solution 6.1
Gladys would be able to deduct the market value of the delivery motorcycle in respect of
the purchase of the leather (R28 000). Expenses and losses do not only include amounts
payable in cash, as long as the consideration has a determinable money value.
REMEMBER
• Expenses need not be in cash only. They can be in a form other than cash, for example a
trade-in of an asset as part of the payment of an expense incurred.
238
CASE:
Nasionale Pers Bpk v
Kommissaris van Binnelandse Inkomste
48 SATC 55
Facts: The taxpayer claimed a provision of service, half the amount of the anticipated
one month’s salary for bonuses to be paid bonus payable on 30 September if then still
to staff. The financial year end of the tax- in the taxpayer’s employ.
payer was 31 March but the bonus would
only be paid on 30 September of that year. Judgment: The future uncertain event
The policy in regard to the bonus reads as (namely whether the employee would be
follows: ‘The annual holiday bonus is in the taxpayer’s employ on 31 October) to
equal to a full month’s salary for officials which the legal obligation to pay a holiday
who have completed a full year’s service bonus to an employee was made subject,
and pro rata less for officials who have was an event which fell outside the year of
completed less than a full year’s service. A assessment of the taxpayer. Therefore the
bonus will only be paid to officials who are question whether the taxpayer was in law
in service on 31 October. The full amount
obliged to pay a holiday bonus to an em-
of the bonus will be recovered from an
ployee could only be answered on 31 Octo-
official who after payment thereof gives
notice of termination of service and leaves ber, and not 31 March. The provision for
the service before 31 October.’ The tax- the bonus had, accordingly, not been actu-
payer accepted that the bonus – pro rata to ally incurred until that date.
length of service – was immediately pay- Principle: If a payment is conditional on the
able in the case of an employee whose happening of an event, whether suspensive
service terminated through retirement on (coming into effect immediately, but sus-
attaining retirement age, or by reason of
pended until the c ondition had been met) or
ill-health or upon re-organisation of the
taxpayer’s activities or, in the case of resolutive (not effective until the condition
female employees, by reason of pregnancy. has been met), the expense is only actually
In its accounts as at 31 March, the tax- incurred once the condition has been met.
payer’s practice was to include, in the case Until the condition has been met, it remains a
of an employee who already had six months’ contingent liability that is not tax deductible.
239
This principle was confirmed in Edgars Stores Ltd v Commissioner for Inland Revenue.
CASE:
Edgars Stores Ltd v Commissioner for Inland Revenue
50 SATC 81
Facts: The taxpayer entered into several Judgment: The crucial issue was whether
lease agreements for premises on which it the conditions relating to the turnover
would conduct its businesses. The rental rental created a contingent obligation which
was determined as a ‘basic rental’ (paid was incurred, if at all, only at the end of
monthly) and a ‘turnover rental’ (to be the annual lease period or whether the
calculated if the annual turnover exceeded provisions of the lease gave rise to an
a specific amount). The ‘turnover rental’ unconditional obligation, the quantifica-
could only be ascertained subsequent to tion of which took place at the end of the
the last day of the taxpayer’s year of lease year. The court ruled that the obli-
assessment in many instances (where the gation to pay turnover rental is contingent
financial year end of the taxpayer was dif- until the turnover for the lease year is
ferent to the end of the lease year). The dis- determined; thus the expenditure was not
pute with the Commissioner only related actually incurred in a year of assessment
to those instances where the lease year that ended prior to the termination of the
ended after the taxpayer’s year of assess- lease year and therefore could not be
ment and the liability to pay turnover deducted in that tax year.
rental could not be determined before the Principle: Before an expense can be
end of the taxpayer’s tax year. Included in deducted in terms of section 11(a), it must
the rental expenses claimed for tax pur- be unconditional; that is to say the expense
poses were two amounts representing must not be contingent; the event must
genuine estimates (the accurate figures not have taken place. It does not matter that
being available yet) of the respective the condition imposed is resolutive (not
amounts by which the turnover rentals effective until the condition has been met) or
exceeded the basic rentals in the years in suspensive (coming into effect imme-
question. These estimated rentals were dis- diately, but suspended until the condition
allowed by the Commissioner. had been met).
240
In Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd, the court ruled on when
a liability becomes unconditional in the event of a dispute.
CASE:
Commissioner for Inland Revenue v
Golden Dumps (Pty) Ltd
[2011] 55 SATC 198
Facts: A dispute arose between the tax- Only if the claim is admitted, or if it is
payer and a former employee which result- finally upheld by the decision of a court or
ed in the taxpayer withholding the deliv- arbitrator, will a liability arise. If at the end
ery of shares previously promised to the of a tax year the outcome of the dispute is
employee. The employee instituted legal undetermined, the liability has not been
proceedings to compel the delivery of the actually incurred and cannot be claimed.
shares promised. The legal proceedings At the end of the 1981 year of assessment,
were instituted in 1981 but the action was the outcome of the action instituted by the
only heard in 1983. The appeal by the employee was undetermined. The liability
employee to the Appellate Division was on the part of the taxpayer was then ‘no
upheld in 1985. The taxpayer was then more than impending, threatened, or
ordered to deliver the shares promised to expected’. The ultimate outcome was only
the employee. The taxpayer claimed the known upon the delivery of the Appellate
cost of the shares awarded as a deduction Division’s judgment, which lay four years
in terms of section 11(a). The Commis- in the future. Accordingly, the expenditure
sioner contended that the expenditure on in question was ‘actually incurred’ in 1985
the shares had been ‘actually incurred’ and not 1981.
during the 1981 year of assessment when
Principle: If the outcome of a bona fide
the action had been instituted. The tax-
legal dispute is unresolved by the end of
payer countered that the expenditure was
the year of assessment of a taxpayer, any
‘actually incurred’ only in 1985 when the
possible compensation payable is only
dispute was finally resolved.
incurred when the dispute is settled. If a
Judgment: A liability is only contingent in dispute goes to court, it is only when the
a case where there is a claim which is final court renders its decision that the
genuinely disputed and not vexatiously or expenditure is actually incurred (that is, the
frivolously made for the purposes of delay. decision is not taken on appeal).
In Port Elizabeth Electric Tramway Company v CIR 8 SATC 13, Acting Judge
Watermeyer stated the following about the meaning of ‘actually incurred’: ‘But
expenses actually incurred cannot mean ‘actually paid’. So long as the liability to pay
them actually has been incurred they may be deductible.’ In Ackermans Limited v the
Commissioner for the South African Revenue Services [2010] ZASCA 131, the court found
that contingent liabilities transferred to a purchaser were not costs incurred and were,
therefore, not deductible.
Before it may be said that expenditure has actually been incurred, there must be a
clear legal liability to pay at that particular time (ITC 1094 28 SATC 275). Where the
item of expenditure in question is the subject of a bona fide dispute, the court has
held (ITC 1499 53 SATC 266) that it lacks the degree of certainty and finality to render it
actually incurred. In C: SARS v Labat (2011), the Appeal Court considered the
implications of issuing shares.
241
CASE:
Commissioner for South African Revenue Service v
Labat Africa Ltd
[2011] ZASCA 157
Facts: The company purchased a trade- Principle: The court found that the issue
mark from the seller and instead of paying of shares was not ‘expenditure actually
cash, the company entered a sale of busi- incurred’ and that the taxpayer cannot
ness agreement, in terms of which it issued deduct the cost. The court indicated if
a part of its own authorised share capital. two separate contracts existed, one to buy
Judgment: The question was whether the the trademark and a second to issue the
issue of authorised capital was an ‘expend- shares, the cost would have been
iture actually incurred’ for the purposes of deductible.
section 11(gA) of the Income Tax Act.
Example 6.2
Jan Els has his own biltong retail outlet. His shop is situated in a shopping centre. He
pays a monthly rental of R10 000 on the 28th of each month. Apart from the R10 000, he
must also pay 2% rental based on his annual turnover for the period 1 April 2020 to
31 March 2021 if the annual turnover exceeds R500 000. His turnover for the period from
1 April 2020 to 31 March 2021 amounted to R580 000.
You are required to discuss the deductibility of the above amounts for the current year of
assessment ended 28 February 2021.
242
Solution 6.2
The monthly rental of R10 000 is actually incurred and will be deductible. The rental
based on annual turnover exceeding R500 000 depends on a condition and there is no
definite and absolute liability to pay this amount at the end of his year of assessment
(28 February 2021), therefore it has not been actually incurred yet and is not deductible in
the 2021 year of assessment.
REMEMBER
• ‘Incurred’ means an unconditional liability to pay the expense that was incurred.
• The actual payment of the expenditure is not essential for the deduction of the expend-
iture.
REMEMBER
• Specific sections have been added to the Act, resulting in the issuing of shares to
acquire assets (including stock) being seen as expenditure actually incurred.
REMEMBER
• The general rule for income tax is that expenditure can be deducted only in the year of
assessment in which it was incurred. If it is not deducted, it cannot be claimed in a
future year of assessment, except where section 23H applies to prepaid expenses (refer
to chapter 7).
243
CASE:
Port Elizabeth Electric Tramway Company Ltd v
Commissioner for Inland Revenue
8 SATC 13
Facts: The taxpayer company carried on the business of the company and the
business as a tramway transporter. A employment of drivers carried with it, as a
driver of one of its tram-cars lost control necessary consequence, a potential liability
while descending a steep gradient. He died to pay compensation if such drivers were
sometime afterwards as a result of the injured in the course of their employment,
injuries sustained in the accident. A claim the payment made by the company by way
for damages was lodged against the tax- of compensation was to be regarded as part
payer in terms of the Workman’s Compen- of the cost of the company’s operations for
sation Act. The Cape Provincial Division of the purpose of earning income and was
the Supreme Court compelled the taxpayer thus deductible. The legal costs incurred in
to pay an amount as compensation to the resisting the claim for compensation had
driver’s widow. In addition, the taxpayer not been expended in an operation entered
also incurred legal costs in resisting the upon for the purpose of earning income and
claim. The taxpayer claimed these two were not allowable as a deduction.
amounts as a deduction, but these claims Principle: The test (called the ‘inevitable
were disallowed by the Commissioner. concomitant’ or ‘closely connected’test)
Judgment: Section 11(a) permits the firstly required that the purpose (task per-
deduction of all expenses attached to the formed) of the expenditure must be estab-
performance of a business operation lished. Next, it should be determined
that is bona fide performed for the purpose whether the task was necessary and
of earning income regardless of whether whether an expected or foreseeable risk
such expenses are necessary for its perform- attached to that task. Thus, it should be
ance or attached to it by chance, provided asked whether the expense is so closely
they are so closely connected with it that connected with the income earned that it
they may be regarded as part of the cost of may be regarded as part of the cost of per-
performing it. As the employment of forming it. Note that the deductibility of
drivers was necessary for carrying on of legal costs is determined by section 11(c).
Over the years, this basic principle was developed further in Joffe & Co (Pty) Ltd v
Commissioner for Inland Revenue 13 SATC 354, Sub-Nigel Ltd v Commissioner for Inland
Revenue 15 SATC 381, Commissioner for South African Revenue Service v BP South Africa
(Pty) Ltd 68 SATC 229 and Commissioner for Inland Revenue v Drakensberg Garden Hotel
(Pty) Ltd.
244
CASE:
Joffe & Co (Pty) Ltd v Commissioner for Inland Revenue
13 SATC 354
Facts: The taxpayer company carried on Judgment: The expenditure had not been
business as engineers in reinforced con- incurred for the purpose of earning profits,
crete. A concrete hood (tower) for a power nor, as it had not been established that
station which they were supervising, col- negligent construction was a necessary
lapsed, and a workman employed by the concomitant of the trading operations of a
building contractor was killed by the fall- reinforced concrete engineer, had it been
ing material. In a delictual action, it was incurred for the purposes of the taxpayer’s
established that the taxpayer company had trade. The legal expenses were also not
been negligent in the performance of its deductible.
work and it was required to pay damages Principle: Compensation paid is dis-
to the relatives of the deceased workman. allowed as a deduction if the negligent
The Commissioner disallowed the claim action is not a necessary concomitant of the
for compensation as well as the legal costs trading operations.
incurred in defending the action.
CASE:
Sub-Nigel Ltd v Commissioner for Inland Revenue
15 SATC 381
Facts: The taxpayer company carried on Judgment: The expenditure upon premiums
the business of mining for gold. It made a was incurred for the purpose of earning
practice of taking out policies of insurance income in the event of certain happenings
against loss incurred by fire in respect of net and was not of a capital nature. As any
profits and standing charges. The insurance amount received under the policies would
against the loss of net profits was under- constitute a trading receipt, the expend-
taken in order to enable the company to iture on the premiums had been laid out or
maintain a steady rate of dividend to its expended for the purposes of the tax-
shareholders, notwithstanding a cessation payer’s trade. The premiums of the poli-
of operations in part or in whole by reason cies were admissible expenditure.
of fire. The insurance in respect of standing
Principle: Section 11(a) does not require
charges was designed to enable the com-
that claimable expenditure must have pro-
pany to carry on its essential services with-
duced income in the same year it was
out loss, notwithstanding any such cessation
incurred.
of mining operations. These insurance pre-
miums were claimed as a deduction by the
taxpayer although no insurance claims
were received during that year.
245
CASE:
Commissioner for Inland Revenue v Drakensberg
Garden Hotel (Pty) Ltd
23 SATC 251 (A) – 1960
Facts: The taxpayer, a private company, shares and the production of the rental
leased a hotel from another private com- income were sufficiently closely connected
pany (known as the Stiebel company) for to allow a deduction of the interest paid.
4¼ years. It then sub-let the hotel to a part- Judgment: The court held that the tax-
nership who thereafter ran the hotel. A payer’s purpose in buying the shares was
farm on which there was a trading store, is not to secure dividend income, but to en-
surrounded by the hotel premises. The tax- sure the taxpayer’s control of its revenue-
payer leased the store initially from one of producing asset and thereby securing the
the Stiebel company’s two shareholders continuance of an increased income from
and then later from the Stiebel company his trading/business operations. Therefore
itself. So at this point in time the taxpayer the payment of interest and the production
held two leases from the Stiebel company. of income were sufficiently close to allow
The taxpayer then acquired all the shares the deduction.
in the Stiebel company for the purpose of Principle: Interest paid on a loan to
obtaining absolute control over the hotel acquire shares can be deductible, if the tax-
and store premises (thus to secure and payer’s purpose with the acquisition of the
preserve the two leases). Interest was shares is to ensure the continuance of his
payable on the outstanding balance of the business activities. The new section 24)
purchase price of the shares. The court had confirms and extends the principle in this
to decide whether the purchase of the case.
The principles developed several years ago were recently confirmed in Commissioner
for South African Revenue Service v BP South Africa (Pty) Ltd.
246
CASE:
Commissioner for South African Revenue Service v
BP South Africa (Pty) Ltd
68 SATC 229
Facts: The taxpayer company, being a mar- Judgment:
keter of petroleum products, was wholly
• In regard to the first claim, the loan
owned by a British parent company. Two
was not required to pay the dividend.
items of expenditure were at stake.
Therefore, the purpose of the loan was
• The first claim concerned interest paid to continue its income-producing activ-
on a loan from its parent company, ities. The interest paid on the loan was
which at the same time required that thus an expense incurred in order to
dividends be declared quarterly. The produce income.
company had sufficient funds to pay
the full dividends without any loan • In regard to the second claim, the lump
from the parent. However, the loan sum payments were more closely
was required for the purchase of related to the taxpayer’s income-earn-
capital equipment so that the business ing structure than its income-producing
could expand. If the dividends had not operations, as they were incurred not
been declared, the taxpayer could have to carry on the business of the tax-
funded the purchase out of its own payer, but to establish it. The nature of
funds. The obtaining of the long-term the advantage obtained, namely to en-
loan also enabled the company to make sure that the taxpayer’s products
additional local borrowings (local bor- would be sold from the leased prem-
rowings were restricted in the case of a ises for a substantial period, resulted in
foreign-owned company). the expenditure being of a capital na-
ture. Accordingly, expenses had to be
• The second claim concerned a lump
deducted in terms of section 11(f) –
sum ‘up front’ rental payment in re-
deduction of lease premiums.
spect of leases which endured for some
20 years. The purpose of the lump sum Principle: The principle established in PE
payments ‘up front’ was to secure sites Electric Tramways (that the purpose of the
from which the taxpayer’s petrol could expenditure must be looked at to deter-
be sold and from which income would mine whether such expenditure produces
be produced for 20 years. income as defined) is confirmed.
247
CASE:
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
45 SATC 241
Facts: The taxpayer company was a share- Judgment: The taxpayer had a dual pur-
dealing company, making profits from pose, namely the receipt of moneys on
buying and selling shares in dormant com- resale of the shares (which would consti-
panies holding cash reserves available tute income in its hands) and the receipt of
for distribution by way of dividends. a dividend after declaration thereof (exempt
In common terms, it carried on dividend- income in its hands). The expenditure in
stripping operations. When the company issue thus did not pass the dual test of
was so ‘stripped’, the taxpayer sold the sections 11(a) and 23(f) of the Act and
shares at a loss (because all the reserves therefore it would be appropriate to apply
had by that time been declared as divi- the principle of apportionment. Thus, only
dends). The dividends received by the a proportion of the expenditure on the
taxpayer were exempt from tax and the shares would qualify as a deduction.
whole loss on the sale of the shares was
Principle: Where expenditure is incurred
claimed as a deduction being offset against
for two purposes and only one of those
a bag-cleaning business operated by the
qualified for deduction, the expenditure
company. The Commissioner limited the
can be apportioned. Note that section 23(g)
loss on the sale of the shares to the
now allows apportionment where there is
proceeds received for the shares.
trade and non-trade or private-purpose
expenditure.
Example 6.3
Karin Marais operates a catering business from home. She does catering for office parties
and meetings. During June, she calculated that 80% (R50 000) of her grocery purchases
related to her catering business. During the same month, she paid her domestic worker an
extra R5 000 for her help in the preparation of the food.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 6.3
The R50 000 (80%) of her grocery purchases and the R5 000 paid to her domestic worker
are deductible in terms of section 11(a), as these expenses were incurred in the production
of her catering income. The 80% of the grocery purchases as well as the ‘wage’ of R5 000
relate to her trading activities.
With regard to the closeness of the connection, the court held, in CIR v Hickson
23 SATC 243, that expenditure would be regarded as part of the cost of performing
the income-earning operations if ‘it would be proper, natural or reasonable to regard
the expenses as part of the cost of performing the operation’.
248
Theft
In regard to losses resulting from theft or embezzlement, these are losses attached to
the business operations by chance. They will be deductible provided they are so
closely connected to the operation that they may be regarded as part of the cost of
performing it. Theft of trading stock by third parties in a supermarket, for example,
would fall into this category.
In relation to ‘employee theft’, the court held in COT v Rendle 26 SATC 326 that the
expenditure
was sufficiently closely connected with the firm’s business operations as to be
regarded as part of the cost of performing those operations.
In ITC 1221 36 SATC 233, it was confirmed that theft losses by a managing director, a
director or a manager in the position of a proprietor will not be deductible. In
ITC 1242 37 SATC 306, it was held that,
as a prerequisite to deductibility the taxpayer must establish that the risk of the loss
which he seeks to deduct from his income is inseparable from, or a necessary ingre-
dient of, the carrying on of the particular business.
This case also involved junior employees.
In ITC 1383 46 SATC 90, which dealt with defalcations by a senior employee of a
bank, it was held that the risk of theft is inherent in and an inseparable element of
such business and the loss in issue was therefore deductible.
Example 6.4
Marlene Vorster has a takeaway outlet that only operates on a cash basis. During the
current year of assessment it came to her attention that the cashier stole money from the
cash register amounting to R10 000. During the year, Marlene was also robbed of her
takings of the day during an armed robbery. The loss amounted to R7 500. She was not
insured for such losses.
You are required to discuss the deductibility of the above amounts for the current year of
assessment.
Solution 6.4
Marlene will be able to deduct both amounts during the current year of assessment as
they are closely connected to the operation of a cash-based business and the risk of theft
can be regarded as part of the cost of performing such a business.
249
CASE:
Warner Lambert SA (Pty) Ltd v Commissioner for South
African Revenue Service
65 SATC 346
Facts: The taxpayer, an American-owned a capital nature since the purpose of the
South African company operating in South expenditure was to protect the taxpayer’s
Africa during the height of the apartheid income-earning structure.
regime, had joined an association of local Judgment: The money spent by a taxpayer
signatories of the Sullivan Code in 1978. in order to advance the interests of the
Subsequently, the USA promulgated the group of companies to which it belonged
Comprehensive Anti-Apartheid Act 1986, was not regarded as expenditure in the pro-
which compelled American companies and duction of income. The link between the
their subsidiaries operating in South Africa expenditure and the production of income
to comply with the Sullivan Code principles. was too tenuous; moneys expended by a
If they did not comply, fines and even taxpayer from motives of pure liberality
imprisonment for the directors of the also failed to qualify as expenditure in the
American holding company could be im- production of income. The evidence on the
posed. The Sullivan Code principles pro- appellant’s behalf was to the effect that the
vided for the non-segregation of races in purpose of the Sullivan Code expenditure
the workplace, equal and fair employment was not merely to serve a social responsi-
for all employees, equal pay, the devel- bility but also to insure against the risk of
opment of training programmes, in- losing its treasured subsidiary status. It was
creasing the number of disadvantaged true that the link between the appellant’s
persons in management and supervisory trade and the social responsibility expend-
positions, and improving the quality of iture was not as close and obvious in the
employees’ lives outside the work environ- second category (social spending) as in the
ment. The social responsibility expenses first (increased wages), but that did not
incurred in complying with the Sullivan mean that the connection was too remote.
Code principles, namely the expenses If the appellant had lost its subsidiary
incurred in ‘Working to Eliminate Laws status, it might have directly brought
and Customs that Impede Social, Eco- about the loss of all kinds of trade advan-
nomic and Political Justice’, which was tages and it was therefore unthinkable that
the seventh principle of the Sullivan the appellant would not comply with the
Code, were claimed by the taxpayer as Sullivan Code. The Sullivan Code expenses
deductions. The taxpayer contended that it were therefore bona fide incurred for the
was instructed by its American parent to performance of its income-producing opera-
incur expenses that went with the perform- tion and formed part of the cost of per-
ance of its Code obligations and if it failed forming it, and therefore the social respon-
to do so, it would almost certainly have sibility expenditure was incurred for the
suffered a loss of income. Such expen- purposes of trade and for no other. The
diture included participation in national expenses incurred by the appellant were
conventions, peace initiatives, providing not of a capital nature, as no asset was cre-
information, technology support, adopting ated or improved. The appellant’s income-
schools and helping small businesses start earning structure had been erected long
up operations. The Commissioner dis- ago and it was now a question of protect-
allowed the social responsibility expenses ing its earnings. The periodic payments
claimed on the basis that the expenditure made were to preserve it from harm, or at
had not been incurred in the production of least to avert the risk of harm and therefore
taxpayer’s income and was expenditure of these payments were similar to insurance
continued
250
premiums and of a revenue nature. Accord- the production of income. However, as the
ingly, the expenditure in issue was social responsibility expenditure reduced
deductible in terms of section 11(a) read the risk that the appellant might lose its
with section 23(g). subsidiary privileges and it was linked
Principle: Money spent by a taxpayer in closely enough to the company’s trading
order to advance the interests of the group activities, the court found that no capital
of companies to which it belongs, and asset was created or improved by the
money expended from motives of pure lib- expenditure, which was therefore
erality, are not regarded as expenditure in deductible.
Recurrent expenses
There are certain recurrent expenses that are not incurred in the production of
income, such as accounting fees. Practice Note No. 37 provides for the deduction of
fees paid to accountants, bookkeepers and tax consultants for the completion of
income tax returns for taxpayers whose remuneration includes income such as
commission, or for taxpayers who earn income in the form of interest or dividends, as
well as administration fees charged by institutions administering the affairs of
pensioners. In the case of Commissioner for the South African Revenue Service v Mobile
Telephone Networks Holdings (Pty) Ltd the court considered whether these costs should
be apportioned where both taxable and exempt income is earned.
251
CASE:
Commissioner for the South African Revenue Service
v Mobile Telephone Networks Holdings (Pty) Ltd
(966/12) [2014] ZASCA 4
Facts: The taxpayer, a holding company, Judgment: The Supreme Court held that in
has five subsidiaries and a number of order to determine whether moneys out-
indirectly held subsidiaries and joint ven- laid by a taxpayer constitute ‘expenditure
tures. The company is a wholly owned incurred in the production of the income’,
subsidiary of a listed entity and the collect- it is important to consider the purpose of
ive business of this group of companies is the expenditure and its underlying cause.
the provision of mobile telecommunication The court thus had to assess the closeness
networks and related services. The tax-
of the connection between the expenditure
payer’s business activities comprised the
and the taxpayer’s income-earning oper-
earning of dividends from the holding of
ations. It agreed with the Tax Court’s
shares in its subsidiaries, as well as the
provision of loans. The provision of loans, conclusion that ‘the auditing of financial
in turn, comprised loan funding to its sub- records is clearly a function which is
sidiaries (mainly interest-free) and loan “necessarily attached” to the performance
funding as part of a debenture scheme of the taxpayer company’s income-earning
arrangement whereby the taxpayer com- operations’. In this case the expenditure
pany borrowed funds (through the issue was incurred for a dual or mixed purpose,
of debentures) and then loaned the funds therefore an apportionment of such
to group companies at a higher interest expenditure should take place. The appor-
rate. The taxpayer thus had two sources of tionment that should be used is dependent
income, that is to say dividend income on the facts of each case, but must be fair
(exempt income) and interest income and reasonable. In this case the taxpayer
(taxable income). company’s value lay in its principal busi-
The taxpayer had claimed the deduction of ness as a holding company. It appears that
the audit fees incurred in respect of the the audit time spent specifically on divi-
annual statutory audit of the company’s dend and interest entries made up a rela-
financial statements for each of the 2001 to tively small component of the overall audit
2004 years of assessment. In addition, the time. The audit function involved the
taxpayer also claimed a professional fee auditing of the taxpayer company’s affairs
(training fee) incurred during its 2014 year as a whole, the major part of which con-
of assessment, for the ‘implementation, cerned the consolidation of the subsid-
adjustment, fine tuning and user operation iaries’ results into the taxpayer company’s
of a new accounting computer system’. results. Therefore the apportionment must
The Commissioner for SARS disallowed be heavily weighted in favour of the dis-
the professional fee deduction in full on allowance of the deduction given the pre-
the basis that the expense was capital in dominant role played by the taxpayer com-
nature. The Commissioner apportioned the pany’s equity and dividend operations as
deduction of the audit fees incurred for opposed to its far more limited income-
each year of assessment, on the basis of the earning operations.
ratio between the interest income and the
dividend income. Since the dividend The court then ruled that it would be fair
income comprised the bulk of the tax- and reasonable that only 10% of the audit
payer’s income each year, the bulk of the fees be allowed. As the taxpayer gave
audit fees was disallowed every year, inadequate evidence with regards to the
leaving a small percentage of between 2% professional fee, the court had to rule that
and 6% that was allowed as a deduction in the professional fee was disallowed in
each of the relevant years of assessment. full.
252
Ex gratia payments
A taxpayer who makes voluntary payments related to their trade still qualifies for a
deduction, as was the case in PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40.
CASE:
PROVIDER v Commissioner of Taxes, Southern Rhodesia
17 SATC 40
Facts: The taxpayer started two schemes Judgment: There are no clear distinctions
for the benefit of its employees – a ‘Life that could be drawn between the two sets
Assurance Scheme’ and a ‘Service Bonus of payments since both were clearly
Scheme’. Both schemes were non-con- designed by the taxpayer to induce its
tributory and could be withdrawn from employees to enter and remain in its ser-
at will by the company. In terms of vice. Both payments were validly deduct-
the schemes, the company undertook to ed as constituting expenditure actually
pay, firstly, a bonus on retirement to any incurred in the production of income.
employee who had been in the company’s
service for a certain period, and, secondly, Principle: To be incurred ‘in the produc-
a benefit to the dependants of men tion of income’ does not mean that a tax-
who died in the company’s service, the payer is legally obliged to incur the expen-
amount of the bonus or benefit, as the diture. Ex gratia payments made by an
case might be, being graduated for the employer to promote happy and content-
service of the employee and calculated ed staff may also qualify for a deduction
based on the length of employment. The under section 11(a) under certain con-
Commissioner allowed the deduction of ditions, namely if there is a contract in
the bonuses but not the benefits paid to existence with an employee for a deferred
their dependants. payment on retirement or if there is an
established policy to that effect.
REMEMBER
253
CASE:
New State Areas Ltd v Commissioner for Inland Revenue
14 SATC 155
Facts: The taxpayer company carried on Judgment: The payments made in respect
the business of gold mining. The company of the internal sewers were of a capital
was legally required to install a system nature, being the payment of instalments
of water-borne sewerage and to link up towards the acquisition of an asset owned
with the local authority’s system. The by the company. The payments made in
system installed consisted of sewers and respect of the external connections, which
connections upon the company’s own pro- did not produce any permanent asset, con-
perty and sewers upon land outside the stituted a charge for the use of the local
company’s property linking the system authority’s system, which remained a
into the local authority’s main system. The
recurrent business charge.
system was installed at the local authority’s
cost but this was recovered by way of Principle: Expenditure is to be regarded as
charges payable by the company over part of the cost of performing income-
60 months for the cost of the system on its earning operations, or as part of the cost of
own property (which would become its establishing or improving or adding to the
own property) and over 180 months for the income-earning structure, the so-called
cost of the system which was not located ‘operations vs structure’ test. The other
on the local authority’s property. When tests used for assistance in deciding the
claimed as a deduction, the Commissioner matter were the ‘fixed vs floating capital’
disallowed all the monthly amounts test; the test to establish whether there was
payable to the local authority as being any enduring benefit or permanent asset
expenditure of a capital nature. created by the expenditure, and even the
recurrence test, which is not of much use.
254
255
CASE:
BP Southern Africa (Pty) Ltd v Commissioner For South
African Revenue Services
2007 SATC 7
Facts: The taxpayer, BPSA, was the manu- Judgment: The annual royalty payments
facturer, supplier and marketer of fuel in incurred in consideration for the right to
South Africa. BPSA obtained the non- use intellectual property were not of a
exclusive right to use certain licensed capital nature and were accordingly
products and marketing material from its deductible. The court also reconfirmed the
offshore holding company and paid an principle that regard must principally
annual royalty, based on the quantity of be had to their agreement to determine
product supplied for these rights of use. the true rights and obligations between
The special court found that the royalty parties, unless it was a simulated trans-
expenditure incurred for the use of intel- action. As the royalty was paid in con-
lectual property (trademarks and other sideration for the use of, and not the
marketing material) was not comparable to ownership, of intellectual property, it is for
rentals paid for business premises, but that all intents and purposes indistinguishable
it rather resembled expenditure incurred in from recurrent rent paid for the use of
setting up a business (for example franchise another’s property.
fees). It found that the rights and obli-
gations between BPSA and its holding Principle: Royalty payments made in
company were of an enduring nature, terms of a licence agreement are revenue in
despite the fact that the parties had enjoyed nature and are therefore deductible in
a clear contractual right to terminate these terms of section 11(a).
obligations.
• Fixed or floating capital A further test that has been developed is whether the
expenditure relates to fixed or floating capital. This distinction was referred to in
the New State Areas case as follows:
[W]hen the capital employed in a business is frequently changing its form from
money to goods and vice versa (for example, the purchase and sale of stock by a
merchant or the purchase of raw material by a manufacturer for the purpose of
conversion to a manufactured article) and this is done for the purpose of making a
profit, then the capital so employed is floating capital. The expenditure of a capital
nature, the deduction of which is prohibited. . ., is expenditure of a fixed capital
nature, not expenditure of a floating capital nature, because expenditure which
constitutes the use of floating capital for the purpose of earning a profit, such as the
purchase price of stock-in-trade, must necessarily be deducted from the proceeds of
the sale of stock-in-trade in order to arrive at the taxable income derived by the
taxpayer from that trade.
In Stone v SIR 36 SATC 117, the issue considered was whether the loss of moneys
advanced was of a capital or revenue nature. The court used the test of fixed or
floating capital as follows: The capital was not consumed in the very process of
income production; it did not disappear to be replaced by something that, when
received by the taxpayer, forms part of their income.
In a business of banking or money lending, losses incurred as a result of irrecover-
able loans made in the course of that business are of a revenue nature and are
deductible.
256
• ‘Once and for all’ expenditure Another test referred to by the court was whether
the expenditure was once and for all expenditure. In Vallambrosa Rubber Company v
Farmer 1910 SC 519, the opinion was expressed that ‘in a rough way’ it was ‘not a
bad criterion that capital expenditure is a thing that is going to be spent once and
for all while income expenditure is a thing that is going to recur every year’. This
test can clearly not be of universal application, but should not be dismissed as
useless (British Insulated and Helsby Cables Ltd v Atherton).
• Nature of the business carried on The nature of the business a taxpayer is
engaged in may determine whether an expenditure or loss is deductible. In Rand
Mines (Mining and Services) Ltd v CIR 59 SATC 85, the type of business the taxpayer
carried on had an impact on the decision as to whether the expenditure was of a
capital or revenue nature.
CASE:
Rand Mines (Mining & Services) Ltd v
Commissioner or Inland Revenue
59 SATC 85
Facts: The taxpayer was a mine manage- purposes, the taxpayer had received, via
ment company and a member of a large management fees, the amount originally
group of mining companies. Its principal paid for the right to manage the mine.
function was the administration and man-
agement of 40 mines controlled by the Judgment: The expenditure in question
was made in order to acquire an asset
group. The group’s policy was to require
which was intended to provide an endur-
the taxpayer to manage all its mines as it
ing benefit for the taxpayer, as the
would ordinarily not invest in a mine contract was to endure for at least 20
unless it could be managed by the tax- years. Only on one other occasion did the
payer. After a mining company outside the taxpayer pay to acquire a management
group began to experience financial diffi- contract. It was not the taxpayer’s stock-in-
culties, the group acquired a controlling trade. The expenditure in question had
interest in the ailing company, on the con- been incurred to acquire an asset which
dition that it cancelled an existing manage- added to the income-earning structure of
ment agreement and concluded a new the business and was not expenditure
agreement with the taxpayer. The taxpayer routinely occurring in the running of the
had to pay a ‘management termination taxpayer’s business. The contracts per se
agreement’ amount of R30 million to the generated no income but they did provide
previous management company before it the taxpayer with the opportunity of
entered into a new management contract generating income by providing the man-
agement services for which payment
with the mine with a term of not less than
would be made. The contract was ‘a source
twenty years. When the price of platinum
of profit’ and the R30 million was spent to
dropped, the group elected to relinquish its
acquire it. Accordingly, the cost had been
controlling interests in the newly acquired of a capital nature.
company. As a consequence, the taxpayer
was obliged to terminate its management Principle: Expenditure that provides an
of that mine. The taxpayer, however, had ‘enduring benefit’ is capital in nature.
already received R30 million in manage- Expenditure more closely linked to the
ment fees (which had been taxed) by the income-earning structure than the income-
time it was obliged to terminate the manage- earning operations of the taxpayer is
ment agreement. Thus, for all intents and capital in nature.
257
A taxpayer, whose business it was to insure farmers, was not granted a deduction in
respect of a loss incurred, as the court held that the taxpayer was not engaged in a
banking or money-lending business. As a result, the loss was of a capital nature
(Sentra-Oes Koöperatief Bpk v KBI 57 SATC 109).
• Halfway house between capital and income It has also been held that there is no
halfway house between capital and income. However, in Tuck v CIR 50 SATC 98,
the court sanctioned the apportionment of income between a capital and a non-
capital element. The apportionment of expenditure between capital and revenue
should therefore also be possible, but the matter is, as yet, not tested.
From the norms established by the courts, it is obvious that the purchase (other
than by a trader in these assets) of buildings, plant and machinery, which are fixed
assets, constitutes capital expenditure, while the purchase of trading stock
constitutes non-capital expenditure. The acquisition of the goodwill of a business,
which confers an enduring benefit, is a capital expense, while expenditure on a
continuing advertising campaign is of a revenue nature. The cost of improving or
adding to capital assets is a capital expense, but the cost of effecting necessary
repairs to the property is a revenue expense. Unfortunately, not all capital/revenue
decisions are as clear cut as these and each case will have to be decided on its own
particular facts.
Example 6.5
During the current year of assessment, James Dolby purchased a piece of land adjoining his
business premises to use as parking for his clients. The cost of the land amounted to
R100 000 and was paid for in cash during August 2020.
You are required to discuss whether the above expense is of a capital nature.
Solution 6.5
The amount of R100 000 incurred to purchase the vacant land is an expense of capital
nature as the land forms part of the income-earning structure, is not connected to the
income-earning operations and was also incurred as part of the fixed capital of the
business, rather than the floating capital. The expense will not be deductible during the
current year of assessment.
258
REMEMBER
• The true nature of each transaction must be examined in order to determine whether
the expenditure is of a capital or revenue nature.
• The purpose of the expenditure and whether it is connected to the income-producing
structure (capital nature) or the income-earning operations (revenue nature) is an
important norm.
• Generally, expenditure resulting in the creation of a new asset will be of a capital
nature.
• The relation of the expenditure to the fixed capital (fixed asset) or the floating capital
(trading stock) will determine whether the expenditure is of a capital or revenue nature.
• Generally, capital expenditure is spent once and for all and revenue expenditure is
recurrent in nature.
6.3.6 Laid out or expended for the purposes of trade (section 23(g))
Section 23(g), the negative part of the general deduction formula, must be read with
section 11(a) to determine whether a particular amount may be deducted from the
income.
Section 23(g) reads as follows, prohibiting the deduction of
any moneys, claimed as a deduction from income derived from trade, to the extent to
which such moneys were not laid out or expended for the purposes of trade.
Apportionment has therefore officially been sanctioned by the Act. In other words, if
a portion of the amount is not for purposes of trade, that portion may not be
deducted for tax purposes. In CIR v Nemojim (Pty) Ltd, Judge Corbett said that
in making such an apportionment the court considers what would be fair and
reasonable in all circumstances of the case.
Apportionment may be made in various ways, for example on a time basis, a piece-
work basis, on the basis of the capital employed etc., as long as it is fair.
259
260
261
262
Example 6.6
Mr Rex Mtulu would like to deduct the cost of the clothes that he wears to work from his
taxable income. He feels that he would not have purchased these clothes if he did not go
to work. Rex is a professional businessman who purchased five suits at a cost of R15 000
each on one of his clothing store accounts. The account has not been settled at the end of
the year of assessment.
You are required to determine, according to the general deduction formula, whether Rex
will be able to deduct the cost of his working clothes from his taxable income.
Solution 6.6
Rex is carrying on a trade. He is a professional businessman and this falls under the
definition of ‘trade’.
An expense of R75 000 (R15 000 × 5) was incurred. Rex purchased the suits on credit to the
value of R75 000. The R75 000 expenditure was actually incurred. Rex did not pay cash for
the suits but by buying the suits on credit, the expense is also seen as actually incurred. It is a
fact that the purchase was made and therefore no contingency exists. The expense does not
have to be ‘actually paid’ for it to be ‘actually incurred’.
The purchase occurred in the year of assessment. Even though Rex will only pay the
clothing store account in the following year of assessment, the debt was incurred in the
current year of assessment, and can therefore be deducted in this year, if all the other
requirements of the general deduction formula are met.
In the production of income. The suits were purchased due to Rex’s profession. A
businessman normally wears suits. The questions to be answered, however, are: ‘How
closely connected is the purchase of the suits to the production of the income?’ and ‘Was
the expense a necessary concomitant of the business operation?’ Rex can argue that without
his suits, he would not look like a professional and would probably not produce the
income, since none of his clients would take him seriously and therefore the suits are
necessary to his income-earning operations.
Of a capital nature or not. What was the true nature of the transaction? It was to
purchase clothing, which will be worn when performing income-producing business
operations. Do the suits create an enduring benefit? The suits will create a benefit until
they become worn out and the next set of suits has to be purchased. Due to there being no
prescribed period for the term ‘enduring’, the period is very subjective and some may say
that the suits create an enduring benefit and others will differ.
Are the suits considered to be once and for all expenditure? No, due to the nature of
clothing, suits will be purchased every two to three years.
From the above discussion it seems that the expenditure is of a capital nature.
continued
263
Laid out or expended for the purposes of trade. Were the suits only purchased due to
Rex’s trade? A suit is a type of clothing that can be worn on many different occasions. It is
not only limited to business hours. Suits are not like overalls or nurses’ outfits that
normally indicate what profession the wearer is a member of. Rex could have a dual
purpose for the suits, both business and private purposes. The expense can be appor-
tioned, but the apportionment will be difficult to determine.
There is also no specific deduction that covers this type of expense. Section 23(m)
prohibits deductions, except for certain listed deductions relating to a salaried person.
Section 23(a) also prohibits expenditure relating to the maintenance of the taxpayer.
The expense does not comply with all the requirements of the general deduction formula
(it could be seen to be of a capital nature). Even if one argued that the suits are not of a
capital nature and all the requirements of the general deduction formula are met, in terms
of section 23(m) and (a) the cost of the suits will not be deductible and the deduction of
the costs will not be allowed against his income.
REMEMBER
• The expenditure listed in section 23 are prohibited deductions for tax purposes, despite
them sometimes complying with section 11(a).
264
Example 6.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 270 000
Commission on sales 125 000
Entertainment allowance 12 000
397 000
During the year, Samuel incurred business-related entertainment expenditure amounting to
R15 000 for meals of clients.
You are required to calculate the amount that Samuel may claim as a deduction in respect
of entertainment expenditure.
265
Solution 6.7
As Samuel does not earn remuneration mainly (more than 50%) (R125 000 / R397 000 =
31%) by way of commission on sales, he may not claim a deduction in terms of sec-
tion 11(a) even though it was incurred for trade purposes.
If more than 50% of his remuneration had consisted of commission earnings, he would
have been able to claim the full amount of his entertainment expenditure in terms of
section 11(a) since it was incurred in the production of his income and was not of a capital
nature.
266
• Wasting assets Assets such as mines, quarries and forests are exhausted in the
course of their use. Nevertheless, expenditure incurred in the acquisition of these
assets is of a capital nature.
Example 6.8
Max Roper is a retired army officer. Since retirement he has been operating a security
business using guards and guard dogs. He seeks advice on whether the following
expenses and losses are deductible in terms of the general deduction formula:
1. One of Max’s guards was badly bitten by one of the guard dogs while on duty. The court
granted the guard compensation amounting to R25 000. Max paid the amount during
March 2021 after the court decision on 20 February 2021.
2. One of Max’s trucks, with a tax value of R50 000 on the date, was hijacked when the
driver was returning with the truck after having transported a team of guards to a
client’s premises. The truck was not insured.
3. Max erected a billboard on the pavement outside his business premises, advertising his
security business. The billboard cost R30 000. Max also paid R80 000 for advertisements
that appear in the local newspaper every Saturday, in which his security services are
advertised. The local municipality fined Max R10 000 for the obstruction to
pedestriantraffic caused by his billboard. Max also paid R2 000 to have the billboard
moved inside the boundary of his property.
4. Four of Max’s team leaders attended a two-day training seminar on the latest security
techniques, at a cost of R18 000 per person.
5. Max borrowed R100 000 on 1 March 2020 and paid interest on this loan amounting to
R12 000 for the current year of assessment. He used R50 000 to buy shares in his
brother’s private company, R30 000 to buy ammunition to be issued to his security
guards and R20 000 to pay the account for veterinary services that had been unpaid
since July 2019 when four of his guard dogs were injured in a dog fight.
You are required to determine whether the expenses and losses above are deductible in
terms of the general deduction formula.
267
Solution 6.8
1. The question of whether Max will be able to deduct the amount of R25 000 in terms of
section 11(a) will depend on whether it is a non-capital expense actually incurred
during the year of assessment in the production of Max’s income. The expense is not of
a capital nature because it was not incurred to purchase or improve a capital asset or to
give rise to an enduring benefit. Although the payment was only made after the end of
the year of assessment, Max incurred an unconditional liability on 20 February 2020 to
pay the amount so that, if it is deductible, it will have to be deducted during the cur-
rent year of assessment. The essential problem to be addressed, however, is whether
this amount was incurred in the production of Max’s income. In Port Elizabeth Electric
Tramway Co Ltd v CIR 8 SATC 13, it was held that expenses are deductible provided
they are so closely connected to a business operation that they may be regarded as part
of the cost of performing it. In the case of fortuitous or chance expenditure arising from
an accidental injury, one must therefore examine the closeness of the connection. Was
the act leading to the expense ‘a necessary concomitant’ of the business operation (Joffe
& Co (Pty) Ltd v CIR 13 SATC 354)? It would appear that the type of business Max is
engaged in carries the risk of employees or the public being bitten by one of his guard
dogs. The expense of R25 000 should therefore be deductible in terms of section 11(a).
2. The loss of the truck is a loss of a capital nature as the truck formed part of the fixed
capital structure of Max’s business (CIR v George Forest Timber Co Ltd 1 SATC 20). The
loss of R50 000 is therefore not deductible in terms of the general deduction formula.
3. The cost of the billboard (R10 000) is an expense of a capital nature as it was
expended to create an enduring benefit for Max’s business and is also not an expense
that is closely connected to his income-producing operations (New State Areas Ltd v
CIR 14 SATC 155). The ongoing advertisements in the newspaper at a cost of R80 000
constitute recurring expenses of a non-capital nature. No single advertisement could
be said to create an enduring benefit. The fine of R10 000 is not an expense incurred in
the production of Max’s income, but a punishment for the contravention of a law. Sec-
tion 23(o) prohibits the deduction of fines. The expense of R2 000 incurred in moving
the billboard is also an expense of a capital nature as it is closely connected to the
income-producing structure, rather than the income-producing operations of his
business.
4. The cost of R72 000 (R18 000 × 4) incurred by Max in training his workers will be
deductible as it is an expense incurred in the production of his income (by training
them to perform their services more effectively). This is not of a capital nature.
5. The interest of R6 000 (R12 000 × R50 000/R100 000) incurred on R50 000 of the loan
will not be deductible in terms of the general deduction provisions as it is not an
expense which produces income as defined (section 23(f)). Dividends earned on the
shares are exempt from tax and therefore do not constitute income. Interest of R3 600
(R12 000 × R30 000 / R100 000) incurred on the purchase of ammunition is deductible
as the expense was closely connected with his income-producing operations. The
ammunition is not part of the capital structure of his business. The interest of R2 400
(R12 000 × R20 000/R100 000) incurred on the R20 000 used to pay the veterinary costs
for his dogs is an expense incurred in the production of Max’s income, as the risk of
dog fights and the attendant injuries are closely connected to his type of business. The
interest will therefore be deductible. The actual payment of R20 000 would not be de-
ductible in the current year of assessment as this expense was actually incurred in the
previous year of assessment. If Max did not claim it as a deduction in that year of
assessment, he may not deduct it in this year. His only recourse would be to object to
the 2020 assessment issued by SARS.
268
6.6 Summary
In this chapter, the different components that make up the so-called ‘general deduc-
tion formula’ were discussed. All these components or requirements must be present
for an expense to be deductible.
The key requirements of the general deduction formula are that the taxpayer must be
carrying on a trade and that the expense must be in the production of income, not of a
capital nature and expended for the purpose of trade. These requirements are not all
defined in the Act and certain tests were laid down by the court. The deductibility of
an expense will have to be decided on its own facts and circumstances.
If the expense does not comply with all the requirements of the general deduction
formula, it will be necessary to determine whether a specific deduction in terms of the
Act might apply. The specific deductions are dealt with in chapter 7.
In the questions that follow, the requirements of the general deduction formula will
be illustrated.
Question 6.1
Kyle is a South African resident, aged 36 years. He owns a bar in Bloemfontein. Due to the
good reputation and popularity of his business, Kyle needed to appoint two bouncers to
ensure the safety of his customers and to minimise fights.
During the 2021 year of assessment one customer had five drinks too many and started a
fight with another customer. One of the bouncers tried to control the issue and stop the
fight; however, he ended up having two of his ribs broken. The fight was eventually
stopped by the other bouncer. Kyle incurred costs amounting to R76 000 to cover the
medical expenditure of the bouncer who got injured.
269
Answer 6.1
Discussion of the deduction of medical expenses
For an expense to be deductible it has to comply with all the components of the general
deduction formula. The issue is whether the medical expense incurred by Kyle were
incurred in the production of income.
The medical expense was incurred in the production of income as one of Kyle’s bouncers
was injured during his employement.
Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue 8 SATC 13:
‘closely connected’ test
What action gave rise to the expenditure?
The medical expenses were incurred because a bouncer tried to stop a fight between
customers and was consequently injured. This is his job.
Is the action so closely linked to the income earned that it may be regarded as part of the cost of
performing it?
It might be necessary to incur such expense in order to produce income, as stopping fights
between customers are in the ordinary course of his business of operating a bar.
Conclusion: The medical expense incurred does qualify as a deduction as it is closely
connected to the business operation.
Question 6.2
Mr James Glansbeek, an accounting officer, incurred the following expenses:
1. James entered into an agreement that gave him the right to purchase stationery for
R12 000. This stationery normally costs R17 000. James has not exercised the option by
the end of the year of assessment.
2. James paid his gardener R3 000 per month to oversee his garden at his private resi-
dence. James needs these services because his business keeps him busy for 18 hours a
day and therefore the garden has become neglected.
3. James rents out a holiday house near Cape Town. He incurs the following expenses on
this property: Rates and taxes of R50 000, agent’s fees of R10 000, and repairs of R5 000.
4. James paid a web designer R5 000 to design a website that would enable James to
advertise his business and provide information to his current and prospective clients.
The web designer also receives R500 per month to update and maintain the web page.
270
Answer 6.2
Discussion of the deduction of certain expenses
1. The stationery amounting to R12 000 is not an expense that has actually been incurred
until the date that James exercises his option and decides to purchase the stationery at
the option price. The deduction will be included in the tax calculation in the year of
assessment in which the option is exercised and not when the option agreement was
entered into.
2. The R3 000 per month paid to the gardener does not fulfil the requirement that the
expense must be laid out for purposes of trade. This expense is not connected closely
enough to James’ trade. The expense is therefore not deductible for income tax pur-
poses. It is also excluded by section 23(b) since it falls into the definition of a ‘domestic
expense’.
3. All the expenses are deductible for tax purposes. These expenses were incurred to
produce the rental income which is included in James’s gross income. James must
apportion the expenses if this holiday house was used by him or his family, since the
expense would then not have been expended for purposes of trade.
4. The R5 000 is an expense that was actually incurred in the production of income. This
website expense will help James to obtain clients, which in turn will produce income.
The R5 000 was laid out for the purposes of trade, but the general deduction require-
ment, which may not be met, is whether this expense is of a capital nature. The setting
up of the website is a ‘once and for all’ cost. It should also create an enduring benefit.
For these reasons, the website falls into the category of ‘capital in nature’ and is therefore
not deductible for income tax purposes. The monthly expense paid to maintain the
website does not create an enduring benefit and it will therefore be classified as an
expense of a revenue nature and is therefore deductible.
Ouestion 6.3
After completing your studies in taxation, you begin a tax column in your local weekly
newspaper. This week you receive the following queries:
Dear Taxpert
I have my own business at home and, due to all the load-shedding and cable theft
recently, I purchased a generator so that I can continue to make craft items when the
electricity goes off. Without the generator I would not be earning any income on the
days that we are have no power. I would like to know whether I can deduct the cost of
the generator from my income. I estimate that I will use the generator 50% for business
and 50% for private purposes.
Regards
Crafty Cathy
continued
271
Dear Taxpert
I am a dentist who runs a practice from specially designed rooms that have been added
to my home. During the past year I incurred the following expenses:
• At the beginning of the year I purchased a new appointment book for the year.
• I paid my dental nurse R3 000 a month over and above her salary on condition that
she would continue to work for me for at least one year and not go and work for the
other dentist in the area. This will save me having to train a new person.
• I had the rooms redecorated by an interior designer. I specifically asked her to make
the waiting room peaceful in order to calm my patients.
• 20% of the fees owed to me by patients I saw during the previous year of assessment
were never received by me, and I have been informed by lawyers that I will not be
able to find the patients. I had to pay the lawyers to try to collect these debts.
• I had an image consultant evaluate my practice, and I paid her to redesign my logo.
After she redesigned the logo, I had all my stationery and business cards reprinted
and I put up a new sign outside my premises.
I would like to know whether the above expenses are deductible for income tax purposes.
Yours truly
Dentist Dube
Answer 6.3
Discussion of whether or not the expenses are deductible
In the case of Crafty Cathy:
• The expense of purchasing the generator is part of the capital structure of the business.
It will create an enduring benefit, and it will therefore be of a capital nature and not
deductible in terms of the general deduction formula.
In the case of Dentist Dube:
• The purchase of the appointment book is a recurring expense and it creates a benefit for
one year, which cannot be said to be an enduring benefit. The cost of the appointment
book will not be of a capital nature, and will therefore be deductible in the year of
assessment that it was purchased.
• The extra R3 000 paid to the dental nurse creates an enduring benefit for the dentist and
will therefore be of a capital nature, and not deductible in terms of the general deduc-
tion formula.
• The improved decor will have a lasting impression on the clients, and therefore creates
an enduring benefit. The improvement of the waiting room can also be seen as part of
the capital structure of the business. It is therefore of a capital nature and not deductible
in terms of the general deduction formula.
continued
272
• The payment to lawyers to collect debts will not create an enduring benefit to the busi-
ness, as it is trade debtors that are being collected. The expense is therefore of a revenue
nature, but not incurred in the production of income; therefore, it is not deductible.
Section 11(c) allows a deduction for legal costs incurred if the original income was
taxed, therefore the legal costs will be deductible.
• The consultation fee charged by the image consultant will be of a capital nature, as her
services will create an enduring benefit, namely the new image. The cost of the
stationery and business cards will not be of a capital nature, as these are recurring costs
and the items are also consumed in the production of income. These costs are therefore
deductible. The cost of the new sign will also create an enduring benefit, and will
therefore be of a capital nature and not deductible in terms of the general deduction
formula.
273
General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula
Page
7.1 Introduction............................................................................................................ 276
7.2 Foreign exchange transactions (sections 1, 24I and 25D) ................................. 277
7.3 Trading stock (section 1) ....................................................................................... 285
7.3.1 Trading stock: Introduction (section 22) ............................................... 286
7.3.2 Closing stock (section 22(1)) ................................................................... 286
7.3.3 Opening stock (section 22(2)) ................................................................. 287
7.3.4 Deduction of stock purchased during the year (section 11(a)) .......... 289
7.3.5 Cost price of stock (section 22(3) and (5)) ............................................. 289
7.3.6 Trading stock acquired for no consideration (section 22(4)) .............. 291
7.3.7 Consumable stores ................................................................................... 292
7.3.8 Disposal of stock other than normal trading (section 22(8)) .............. 292
7.3.9 Trading stock: Year of assessment (section 22(6)) ............................... 294
7.3.10 Acquisition or disposal of trading stock (section 23F) ........................ 294
7.3.11 Debt reduction: Trading stock (section 19) ........................................... 295
7.3.12 Trading stock: Share dealers (sections 22 and 9C)............................... 296
7.4 Employee-related expenses .................................................................................. 299
7.4.1 Contributions to funds (section 11(l) and (a)) ...................................... 299
7.4.2 Annuities in respect of former employees (section 11(m)) ................. 300
7.4.3 Restraint of trade payments (section 11(cA)) ....................................... 300
7.4.4 Learnership agreements (section 12H) .................................................. 302
275
Page
7.5 Deductions relating to trade debtors and similar matters ............................... 304
7.5.1 Bad debts (section 11(i)) .......................................................................... 304
7.5.2 Doubtful debts (section 11(j)) ................................................................. 305
7.5.3 Allowances on credit sales (debtors’ allowance) (section 24) ............ 308
7.6 Expenditure and allowances relating to capital assets ..................................... 310
7.6.1 Capital expenditure on patents, designs, trademarks
and copyright (section 11(gB) and (gC)) ............................................... 310
7.6.2 Deduction of intellectual properties (section 11(gC)).......................... 313
7.7 Other expenses ....................................................................................................... 313
7.7.1 Legal expenses (section 11(c)) ................................................................. 313
7.7.2 Donations (section 18A) .......................................................................... 314
7.7.3 Unemployment insurance benefits ........................................................ 317
7.7.4 Future expenditure on contracts (section 24C) .................................... 317
7.7.5 The accrual and incurral of interest (section 24J) ................................. 318
7.8 Double deductions (section 23B) ......................................................................... 319
7.9 Value-added tax (VAT) (section 23C) ................................................................. 319
7.10 Prepaid expenses (section 23H) ........................................................................... 320
7.11 Pre-trade expenditure (section 11A) ................................................................... 323
7.12 Assessed losses (section 20).................................................................................. 324
7.13 Calculating taxable income of a company ......................................................... 326
7.14 Summary................................................................................................................. 329
7.15 Examination preparation ...................................................................................... 329
7.1 Introduction
A taxpayer who carries on a business incurs expenses in respect of his business. Some
of the expenses are allowed under the general deduction formula in section 11(a),
while others are not allowed because they are of a capital nature or because they
cannot satisfy the restrictive test that the expenditure be incurred in the production of
income. These deductions are either permitted in terms of the special deductions
contained in the Income Tax Act 58 of 1962 (the Act) or they are not deductible
for income tax purposes. Section 11(x) also provides for the deduction of
amounts allowed to be deducted in terms of any provisions other than section 11;
these would include, for example, losses on foreign exchange transactions permitted
by section 24I.
276
Is section 24I
applicable?
YES NO
Section 25D
The translation of the purchase sum must be made at the spot rate, since section 25D
determines that expenditure incurred in a foreign currency must be translated by
applying the spot rate on the transaction date. For purposes of section 25D the
transaction date is the date on which the expenditure or loss is actually incurred, in
other words, the date on which there is an unconditional liability to pay the
outstanding amount. In the case where goods are acquired in a foreign currency, the
date on which the expense is actually incurred is usually the date on which the risks
and rewards of ownership are transferred from the seller to the purchaser (that is to
say the taxpayer). A common accounting term used to indicate when the risks and
rewards of ownership are transferred, is ‘free-on-board’ (FOB). When goods are
delivered free-on-board at the port of departure, the risks and rewards associated
277
with ownership are transferred to the purchaser on the delivery of the goods to the
port of departure.
A natural person or a trust (other than a trading trust) may elect that all transactions
be translated by applying the average exchange rate for the relevant year of
assessment.
The other category of taxpayers who can still use the average rate is taxpayers with
foreign permanent establishments. In that case, the taxable income must be
determined in the currency used by that permanent establishment for purposes of
financial reporting and the result must be translated into rands using the average
rate. However, if that currency is not the currency used for financial reporting
purposes by the permanent establishment and that country has an official rate of
inflation of 100% or more throughout the year of assessment, the taxable income of
the permanent establishment is ignored, providing relief in the case of hyper-
inflationary currencies.
The calculation of the average exchange rate can be a very complex issue and can
vary greatly from taxpayer to taxpayer depending on the chosen method of
calculation. Fortunately, the average exchange rate is available on SARS’s website
and need not be calculated by the taxpayer himself.
It is important to note that section 25D does not determine the deductibility of an
amount actually incurred. This section sets out the rules to use to translate the foreign
currency amount to our local currency (rands). The deductibility of expenditure is
determined in terms of the general deduction formula (refer to chapter 6) or, in the
case of capital assets, the provisions of the capital allowance sections, for example
section 12C (refer to chapter 8).
REMEMBER
• A company and trading trust will always translate underlying assets and expenses
acquired in foreign currency to rand by using the spot rate on the transaction date.
• Natural persons and non-trading trusts can elect to either use the spot rate on the
transaction date or the average exchange rate for the relevant year of assessment when
translating underlying assets and expenses acquired in foreign currency to rand.
Whichever option is chosen must be consistently used for that specific year of
assessment.
• The foreign permanent establishment (a fixed place of business) of a South African
resident has to translate its taxable income using the average exchange rate for the
relevant year of assessment.
Section 24I
Section 24I requires that all gains and losses on foreign exchange transactions,
irrespective of whether realised or not and irrespective of whether of a capital nature
or not, be included in the determination of taxable income.
278
Definitions
‘Spot rate’ is the appropriate quoted exchange rate, at a specific time, by an
authorised dealer in foreign exchange for the delivery of currency.
‘Average exchange rate’ in relation to a year of assessment means the average,
determined by using the closing spot rate, at the end of the daily or monthly intervals
during the year of assessment, consistently applied.
‘Foreign exchange transactions’ are transactions involving foreign currencies, for
example:
• the sale of goods to a customer in a foreign country with payment in the currency
of that country; and
• the purchase of goods from a supplier in a foreign country to be paid for in the
currency of that country.
An ‘exchange difference’ is:
• the foreign exchange gain or loss;
• in respect of an exchange item;
• arising during a year of assessment; and
• determined by multiplying the exchange item by the difference between:
– the ruling rate at the payment date and the ruling rate at the transaction date if
the transaction arises and is settled in the same tax year;
– the ruling rate on the translation date (year-end) and the ruling rate at the
transaction date if the transaction arises in the current year and is settled in a
later year;
– the ruling rate at the previous translation date and the ruling rate at the current
translation date if the debt is not settled during the current year; and
– the ruling rate at realisation date and the ruling rate at the previous translation
date if the debt is settled in the current year of assessment but arose in a
previous year of assessment.
An ‘exchange item’ is the amount in a foreign currency:
• which constitutes a unit of currency acquired and not disposed of by that person;
• owing to a person in respect of a loan, advance or debt payable to the person by
another person;
• owing by or to a person in respect of a forward exchange contract; and
• in respect of which the person has the right or contingent obligation to buy or sell
in terms of a foreign currency option contract.
‘Foreign currency’ is a currency that is not a legal tender in the Republic.
279
280
• acquired in an earlier year of assessment but not realised during the current year of
assessment.
Acquisition of assets
Section 24I(7) provides that an exchange difference that relates to the acquisition of
certain assets must be deferred and included in taxable income in the year of
assessment during which the asset is brought into use for trade purposes.
The provisions of section 24I(7) apply to:
• an exchange difference arising from a loan, advance or debt;
• that has been used in the acquisition, installation, erection or construction;
• of any machinery, plant, implement, utensil, building or improvements to a
building; or
• the devising, developing, creation, production, acquisition or restoration of an
invention, patent, design, trademark, copyright or other similar property or
knowledge.
An exchange difference that arises before the asset is brought into use is deferred to
the tax year in which it is brought into use and a carry-back to the year in which it
was incurred is not allowed.
Proviso
If the Commissioner is satisfied that during a subsequent year of assessment:
• the loan, advance or debt to be obtained or incurred will no longer be obtained or
incurred;
• the loan, advance or debt has not been used as contemplated above; or
281
• the asset, property or knowledge will no longer be brought into use for trade pur-
poses,
the exchange difference may no longer be carried forward but must be included in
the taxable income in that year of assessment.
Example 7.1
Avoca Ltd’s year of assessment ends on the last day of February. On 1 November 2020 the
company purchased a second-hand machine from a supplier in another country for a
foreign currency (FC) amount of FC100 000. The machine is delivered at the company’s
premises on 15 February 2021 and is brought into use on 1 April 2021.
Avoca Ltd incurs the following costs in addition to the purchase price:
R
Freight and insurance 10 000
Import duty 45 000
VAT 57 120
The purchase consideration is settled in full on 31 May 2020.
Assume that the spot rates on the relevant dates are as follows:
1 November 2020 FC1 = R7,60
28 February 2021 FC1 = R7,74
31 May 2021 FC1 = R8,00
Assume that the average exchange rate for the 2021 year of assessment is as follows:
FC1 = R7,80.
You are required to calculate the exchange differences of Avoca Ltd for the 2021 and 2022
years of assessment. No forward exchange contract was entered into.
Solution 7.1
R
2021 year of assessment
Cost of machine
Purchase price (FC100 000 × R7,60) (section 25D) 760 000
Freight and insurance 10 000
Import duty 45 000
VAT – not included in cost of machine as claimed as input tax deduction nil
815 000
Exchange loss in respect of 2021 tax year
FC100 000 × (R7,74 – R7,60) (14 000)
Limited to (Note) nil
2022 year of assessment
Exchange loss in respect of 2022 tax year
FC100 000 × (R8,00 – R7,74) (26 000)
Total deduction in 2022 year of assessment (R26 000 + R14 000) (40 000)
continued
282
Note
Since the machine is only brought into use on 1 April 2021, the exchange loss is not
deductible in the 2021 year of assessment. The deduction is therefore deferred to the year
during which the machine is brought into use, namely, the 2022 year of assessment
(section 24I(7)).
Example 7.2
On 30 November 2020, Motsepe (Pty) Ltd purchased trading stock for US$100 000 from a
supplier in America. It also entered into a contract for manufacturing machinery costing
US$500 000 with the same supplier in America. The trading stock was sent by air (FOB on
30 November 2020) and was received by the taxpayer on 5 December 2020. Air freight
and customs and clearing expenses amounted to R10 000. The manufacturing machinery
was dispatched by ship (FOB on 30 November 2020) and was received and brought into
use by the taxpayer on 15 February 2021. At 28 February 2021, 80% of the trading stock
was still on hand and the cost of the trading stock and of the manufacturing machinery
was still unpaid. The total debt of US$600 000 was paid on 30 June 2021.
The spot rates were as follows:
30 November 2020 $1 = R6,90
5 December 2020 $1 = R6,96
15 February 2021 $1 = R6,98
28 February 2021 $1 = R7,03
30 June 2021 $1 = R6,82
The average exchange rate for the 2021 year of assessment was $1 = R6,95
You are required to calculate the tax consequences of these transactions for the 2021 and
2022 years of assessment (ending 29/28 February)
Solution 7.2
R
2021 year of assessment
Deduction in respect of the cost of trading stock (Note 1)
$100 000 at a spot rate of $1 = R6,90 (section 25D) (Note 2) (690 000)
Add: Cost of getting the stock into its present place and condition – air
freight, customs and clearing cost (10 000)
Section 11(a) deduction (700 000)
Section 24I: Deduction of unrealised foreign exchange loss
$600 000 × (R6,90 – R7,03) (exchange rate at 28 February 2021) (78 000)
Cost price of manufacturing machinery for tax allowances $500 000 × R6,90 =
R3 450 000 (section 25D)
Section 12C: Wear-and-tear: R3 450 000 × 40% (1 380 000)
Section 22: Closing stock on hand to be included in taxable income 80% of 560 000
R700 000
continued
283
Notes
1. Section 22(3) provides for the valuation of trading stock, this value being:
• the cost incurred in acquiring the stock; plus
• any further costs incurred in getting the trading stock into its existing condition and
location but excluding foreign exchange differences.
2. The cost price of the manufacturing machinery and trading stock has been calculated
by applying the spot rate in terms of section 25D.
3. Section 24I applies because assets were acquired in foreign currency on credit (there is
debt that constitutes an exchange item as defined) and therefore all realised and
unrealised gains and losses, irrespective of whether it is of a capital nature or not, are
included in the determination of taxable income.
REMEMBER
• The foreign exchange differences on trading stock and other movable assets financed by
a loan, advance or debt in a foreign currency are included in the taxpayer’s taxable
income in terms of section 24I.
• If the amount of any foreign exchange gain relating to debt becomes bad and it was
included in taxable income in the current or a previous year of assessment, it must be
deducted from income. If the amount of a foreign exchange loss relating to debt
becomes bad and it was deducted from income in the current or a previous year of
assessment, it must be included in income.
• Section 24I only addresses the foreign exchange differences on the exchange items (the
underlying debt) and not the underlying asset. The conversion of the underlying asset
or expense is dealt with in terms of section 25D (converted into the local monetary unit
by using the spot rate on the transaction date). In certain cases, the average exchange
rate is used. The deductibility of the underlying asset or expense is determined in terms
of section 11(a) or the allowances relating to capital assets (refer to chapter 6).
• If a headquarter company received or paid an amount in a currency other than its
functional currency or the Rand, that amount must be determined in its functional
currency and must then be translated to Rand by applying the average exchange rate
for that year of assessment.
284
Legislation:
Section 1: Definitions: Trading stock
(a) includes:
(i) anything produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer for the purposes of manufacture, sale or
exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds from the disposal of which forms or will form part of the
taxpayer’s gross income; but
(iii) any consumable stores and spare parts acquired by the taxpayer to be used or
consumed in the course of the taxpayer‘s trade; but
(b) does not include:
(i) a foreign currency option contract; or
(ii) a forward exchange contract, as defined in section 24I(1).
REMEMBER
In Ernst Bester Trust v Commissioner for South African Revenue Service the court had to
decide if sand on a farm can be trading stock.
Case:
Ernst Bester Trust v Commissioner for South African
Revenue Service 70 SATC 151 (SCA)
Facts: A contractor obtained a mining Judgment: The income received from the
licence to mine sand on a farm from the sales of sand was made in the operation of
taxpayer. The taxpayer played no part in an on-going scheme of profit-making over
the extraction or disposal of the sand. The many years and is income in nature. The
taxpayer merely required due payment per agreement was similar to a mineral lease
cubic meter of sand removed as and when and that the rental or royalties were ‘the
it suited the contractor to exercise its product of capital productively employed’
rights. The taxpayer contended that the and therefore constituted income.
proceeds derived from the sales of sand Section 22 was not applicable to unsepa-
were capital in its hands or in the rated in situ (still in the ground) deposits of
alternative, if it is revenue in nature then sand. Accordingly, that the sand deposit
he can claim an opening stock deduction in could not fairly be described as trading
respect of the sand still in the ground at stock held by the taxpayer for the purposes
the beginning of each of the years of of section 22.
assessment valued at its market value.
285
REMEMBER
286
In the Commissioner for South African Revenue Service v Volkswagen SA (Pty) Ltd the
court had to decide if the Commissioner could grant the taxpayer a reasonable
allowance for the diminished value of closing stock.
Case:
Commissioner for South African Revenue Service v
Volkswagen South Africa (Pty) Ltd
Facts: The taxpayer holds a number of Judgment: The Commissioner rejected the
unsold vehicles at the end of each tax year. contention that the NRV represented the
Some of them are manufactured while diminished value of the training stock at
others are imported. The taxpayer calcul- the end of the year and also refused the
ated the value of its trading stock at year deduction claimed by the taxpayer. The
end using its ‘net realisable value’ (NRV) court held that the difference between the
in terms of IAS2. This yielded an amount cost price and the NRV was not justifiable
less than the cost price of the trading stock to claim a deduction and the taxpayer had
and the taxpayer claimed a deduction from to pay the additional tax levied. The value
the cost price that was represented by the of trading stock can only be reduced below
difference between the cost price and the cost price if the trading stock is worth less
NRV. due to damage, deterioration, change in
fashion, decrease in market value or any
other reason accepted by the Commission-
er in terms of section 22(1)(a) (but this does
not include future expenditure.
287
Example 7.3
Stewart Bailey (Pty) Ltd provides the following information in connection with stock on
hand and stock purchased:
Cost Market
price value
1 March 2020 R R
Completed products 200 000 800 000
Raw materials (purchased on 1 March 2020) 30 000 24 000
Packing material 54 000 14 000
Machinery spares 6 600 13 200
28 February 2021
Completed products 160 000 620 000
Raw materials 40 000 32 000
Packing material 3 000 1 000
Machinery spares 7 800 14 800
Note
The Commissioner accepts these market values as reasonable values.
You are required to calculate the value of the opening and closing stock of Stewart
Bailey (Pty) Ltd.
Solution 7.3
R
Completed products at cost price 200 000
Raw materials at cost price
(did not form part of closing stock from the previous year of assessment) 30 000
Packing material at market value 14 000
Machinery spares at cost price 6 600
Opening stock 250 600
Completed products at cost price 160 000
Raw materials at market value 32 000
Packing material at market value 1 000
Machinery spares at cost price 7 800
Closing stock 200 800
288
Example 7.4
Gala (Pty) Ltd provided you with an extract from its Statement of profit or loss and other
comprehensive income for the 2021 year of assessment:
R R
Sales 1 000 000
Less: Cost of sales (375 000)
Opening stock 150 000
Add: Purchases 350 000
500 000
Less: Closing stock (125 000)
Gross profit 625 000
You are required to calculate the effect of the cost of sales on Gala (Pty) Ltd’s taxable
income.
Solution 7.4
R R
Sales 1 000 000
Add: Closing stock (section 22(1)) 125 000
Gross income 1 125 000
Less: Expenditure
Opening stock (section 22(2)) 150 000
Purchases (section 11(a)) 350 000 (500 000)
Taxable income 625 000
289
Example 7.5
Sam Gumbo (Pty) Ltd purchased stock for R50 000 (VAT excluded). The company also
incurred handling fees of R2 500 (VAT excluded) and paid a transporter R5 000 (VAT
excluded) to deliver the stock.
You are required to calculate the cost price of the stock for tax purposes.
Solution 7.5
R
Purchase price 50 000
Add: Handling fees 2 500
Transport 5 000
Cost price 57 500
290
Will the answer differ if the company is not a registered VAT vendor?
Example 7.6
Blue Hills (Pty) Ltd, a South African resident, acquired trading stock by way of an
inheritance on 1 March 2021. The market value on the date of inheritance was R760 000
(VAT excluded). The stock was not sold at year-end and the market value at year-end was
R780 000. Purchases of trading stock of R2 500 000 were acquired during the 2021year of
assessment and the opening stock and closing stock was R580 000 and R620 000,
excluding the trading stock acquired by inheritance above, respectively.
You are required to calculate the effect of the above transaction on the taxable income of
Blue Hills (Pty) Ltd, for its year of assessment ended 28 February 2021.
Solution 7.6
R
Opening stock – section 22(2) (R580 000 + R760 000 SARS practice) (1 340 000)
Purchases – section 11(a) (2 500 000)
Closing stock – section 22(1) (R620 000 + R760 000) 1 380 000
291
Case:
Everyready (Pty) Ltd v Commissioner for South African
Revenue Service 74 SATC 185 (SCA)
Facts: A taxpayer company acquired a agreed between the parties. It was apparent
business as a going concern. The company from the subject matter of the sale that in
claimed a deduction for trading stock terms of the agreement the business as a
acquired for no consideration, at market whole was the subject of the sale, which
value according to section 22(4). The included payment for the purchase of
Commissioner disallowed the deduction in trading stock.
full, but only allowed a partial deduction
Section 22(4) was not applicable, and the
and levied section 89quat interest on the
trading stock was not acquired for no consi-
‘unpaid’ tax. The court had to decide if the
deration. The taxpayer therefore could not
amount could be claimed by the company.
deduct the market value of the trading stock
in terms of SARS practice, but had to allo-
Judgment: Whether the stock was acquired cate a reasonable portion of the actual
for no consideration depended on what was purchase consideration to trading stock.
292
REMEMBER
• Only a natural person can apply assets such as trading stock for private use or domestic
consumption.
• If a director of a company takes stock for private or domestic use or consumption, he or
she is effectively not the taxpayer and only an employee of the taxpayer (which is the
company) and therefore the stock will be recouped at market value.
• Non-natural persons, such as trusts and companies, cannot apply assets for private or
domestic purposes.
Where the taxpayer has applied the trading stock in any other manner as set out
above or has ceased to hold it as trading stock, he is deemed to have recouped the
market value of the stock (less any reduction in terms of section 22(1) as a result of a
decrease in value) and this amount is included in his taxable income in the year of
assessment in which the stock is so applied, or no longer held as trading stock.
Where the taxpayer has applied the trading stock for the purpose of making a
donation in respect of which the provisions of section 18A apply, he is deemed to
have recouped an amount equal to the amount that was taken into account for that
year of assessment in respect of the value of that trading stock (usually the cost price)
(refer to 7.7.2).
Where the asset was applied by the taxpayer for the purposes of his trade (for
example, withdrawn as trading stock but applied in the production process), the
amount recovered or recouped as above is deemed to be the expenditure incurred in
acquiring the asset for use in carrying on his trade. For example: A motor dealer who
withdraws a motor vehicle from stock to be used by one of his salesman for business
purposes, is deemed to have recouped an amount equal to the market value and is then
also deemed to have incurred expenditure equal to the market value of the vehicle and
will base his wear-and-tear allowance in terms of section 11(e) on the deemed price of
acquisition (refer to chapter 8).
Example 7.7
Trading stock, which cost the taxpayer (a natural person) R6 000, is removed by him for
private use. The market value of the trading stock on the date it was used was R8 000.
You are required to calculate the effect of the above transaction on taxable income.
Solution 7.7
R
Recoupment included in taxable income at cost price (section 22(8)(A)) 6 000
293
Example 7.8
Refer to the information as set out in example 4.7. However, the taxpayer distributed the
trading stock as a dividend.
You are required to calculate the effect of the above transaction on taxable income.
Solution 7.8
R
Recoupment included in taxable income at market value (section 22(8)(B)) 8 000
Example 7.9
Refer to the information as set out in example 4.7. However, the taxpayer donated the
trading stock and the donation qualifies for the section 18A deduction.
Solution 7.9
R
Recoupment included in taxable income at cost price (section 22(8)(C)) 6 000
Note
If the donation did not qualify for the section 18A deduction, the recoupment would have
been included at the market value.
294
A deduction which may be granted in terms of section 11(a) in respect of the ex-
penditure incurred is not granted in the year of assessment it was actually incurred,
but is deemed to have been incurred in the subsequent year of assessment in which:
• the trading stock is disposed of;
• the value of the trading stock is included in the closing stock on hand (in terms of
section 22(1)); or
• it is shown that, by reason of the loss or destruction of the trading stock or the
termination of the agreement in terms of which the stock was acquired or for any
other reason, the trading stock is neither disposed of nor included in the closing
stock,
to the extent that the expenditure has actually been paid.
REMEMBER
• Trading stock includes consumables and spare parts used in the course of trade.
• Closing stock is added to gross income.
• Opening stock is deducted from income.
• The cost price of trading stock includes the cost incurred in acquiring the stock plus any
further costs incurred in getting the stock into its existing condition and location.
• Trading stock purchases during the year are deductible in terms of section 11(a).
• Trading stock acquired for no consideration is deemed to be acquired at the market value.
• The amount included in the taxpayer’s income as a result of the disposal of trading
stock other than normal trading is reduced by the amount of consideration received by
or accrued for the disposal of the trading stock.
• Trading stock used or consumed for private use by the taxpayer (a natural person) is
deemed to have been recouped equal to the cost price of the trading stock by the
taxpayer.
• Where trading stock is donated in terms of section 18A, an amount equal to the section
11(a) deduction (cost price) of the trading stock is deemed to have been recouped by the
taxpayer making the donation.
• VAT incurred on the acquisition of trading stock is excluded from the cost price of the
stock if an input tax deduction was claimed.
• The purchase of trading inventory that qualifies as a deduction is limited to the amount
received or accrued as a result of that inventory during that year of assessment. This is
an anti-avoidance measure.
295
If the amount of the reduction is greater than the amount claimed, the amount is a
recoupment in terms of section 8(4)(a) and must be added to the taxpayer’s gross
income.
Section 19 does not apply if the debt benefit in respect of a debt owed by a person:
• constitutes ‘property’ (as defined for estate duty purposes) in a deceased estate and
the debt is reduced in favour of an heir or legatee by virtue of a bequest from the
deceased (refer to chapter 17);
• qualifies as a donation in respect of which donations tax is payable (refer chapter
16); or
• stems from an employer-employee relationship and is regarded as a fringe benefit
(refer to chapter 13).
296
Example 7.10
Xavier (Pty) Ltd is a share dealer and a South African resident. The company bought
18 000 shares in another company, A Ltd, in the previous year of assessment at a total cost
of R10 000. Xavier (Pty) Ltd sold 12 000 of these shares for R1 each.
You are required to calculate Xavier (Pty) Ltd’s taxable income for the 2021year of
assessment on the disposal of the shares in company A Limited.
Solution 7.10
R
Gross income: Cash proceeds (12 000 x R1) 12 000
Less:Opening stock – 18 000 A Ltd shares (10 000)
Add:Closing stock – 6 000 A Ltd shares
6 000
× R10 000 3 333
18 000
Taxable income 5 333
Note
Capital gains tax is not applicable as the shares are disposed of by a share dealer as part of
his business activities and the shares were not held for more than three years. The profit is
therefore taxed as part of his normal business income.
297
298
REMEMBER
• Where the profit on the sale of shares by a share dealer is taxable, it is not subject to
capital gains tax.
• Section 9C makes provision for circumstances in which the disposal of listed shares is
deemed to be a transaction of a capital nature that may give rise to capital gains tax.
• If an investor sells shares that has been held for a period of less than three years, it will
not automatically be seen as capital in nature and the intention of the taxpayer must be
investigated (refer to the gross income definition in chapter 2).
299
Example 7.11
During the current year of assessment, Matsaung (Pty) Ltd paid the following annuities to
former employees and their dependants:
R
Mrs Sarah Ntuli, the wife of an employee who died during the year 60 000
Jeffrey and Martha, the children of a retired employee, to each 20 000
Mr Thomas Mbeki, a retired employee on the grounds of old age 10 000
You are required to calculate the amounts that Matsaung (Pty) Ltd can claim as a
deduction in determining his taxable income for the 2021 year of assessment.
Solution 7.11
R
Sarah 60 000
Jeffrey and Martha (R20 000 × 2) 40 000
Thomas 10 000
Deduction that can be claimed 110 000
300
Example 7.12
Mickey Ltd made a restraint of trade payment of R160 000 to a retiring executive, Mr
Gavin Donald, on 1 March. Gavin was restrained from competing with the company for
four years from the date of the payment. Mickey Ltd’s financial year ends on the last day
of February. Gavin will be taxed on this amount.
You are required to calculate the amount that will be deductible for the current year of
assessment.
Solution 7.12
R
Amount paid 160 000
Current year of assessment
Deduction allowed
(the lesser of (R160 000 / 4) or (1 / 3 × R160 000)) 40 000
Note
The payment is deductible in equal instalments over the period to which it relates, four
years. Gavin is taxed on the full amount at date of receipt or accrual.
REMEMBER
• The deduction is only allowed to the extent that the amount incurred constitutes or will
constitute the income of the recipient.
• The minimum period for writing the payment off is three years.
• The deduction must not be apportioned for a part of the year, and the full deduction
calculated must be claimed by the taxpayer.
301
Available deduction
In addition to any deductions allowable in terms of the Income Tax Act (for example
salaries) there is a deduction available to the employer on entering and on completion
of a registered learnership agreement.
The learnership agreement is deemed to be registered throughout the period of the
agreement as long as the learnership agreement is registered within six months after
the employer’s year of assessment.
302
Example 7.13
On 1 February 2020 BCN (Pty) Ltd enters into a learnership agreement with an employee
with a NQF level 5 qualification for a 12-month period. The company’s year of assessment
ends on 31 January 2021. At the end of July 2020, the employee leaves the employment of
BCN (Pty) Ltd and on 1 August 2020 takes up employment with another employer,
MJ Productions (Pty) Ltd, where he continues with the original learnership agreement.
The employee successfully completes the learnership agreement six months later. The
employee does not have a disability as defined.
You are required to calculate allowances that will be claimed on the learnership
agreement for the 2021 year of assessment.
Solution 7.13
BCN (Pty) Ltd – 2021 year of assessment R
Entering allowance of R40 000 × 6 / 12 20 000
MJ Productions (Pty) Ltd – 2021 year of assessment
Entering allowance of R40 000 × 6 / 12 20 000
Completion allowance of R40 000 (full amount) 40 000
Note
BCN (Pty) Ltd is only entitled to the equivalent of six months of the entry allowance, as
the employee was only party to the agreement with BCN (Pty) Ltd for six months. MJ
Productions (Pty) Ltd is entitled to the entering allowance only for six months, as well as
the full completion allowance.
303
Example 7.14
Apple Airlines (Pty) Ltd concludes a three-year learnership agreement with an employee
with a NQF level 8 qualification at the beginning of 1 January 2020. The employee
completes the learnership with Apple Airlines (Pty) Ltd on 31 December 2022. The
employee does not have a disability as defined.
You are required to calculate the learnership allowances that will be deductible by Apple
Airlines (Pty) Ltd who has a December year-end.
Solution 7.14
Apple Airlines (Pty) Ltd R
December 2020
Entering allowance 20 000
December 2021
Entering allowance of R20 000 20 000
April 2022
Entering allowance of R20 000 x 3 / 12 5 000
Completion allowance of R20 000 × 3 60 000
Note
The completion allowance of R20 000 is claimed in the year of completion for each
consecutive 12 months that are completed, R20 000 × 3 years (36 months) = R60 000.
REMEMBER
• The entering allowance is claimed in every year for the duration of the agreement,
whereas the completion allowance is claimed in the year that the agreement is
completed.
• An employer is not entitled to the allowances under the provisions of section 12H if a
learnership agreement is entered into and the employee was previously party to
another similarly registered learnership agreement with the same employer or associated
institution, but which they failed to complete.
304
Example 7.15
Furnish Ltd sells second-hand furniture on credit. The following information relates to the
current year of assessment:
R
Bad debts
• Trade debtors 20 400
• Loan owing by an employee 3 000
These amounts have proved to be irrecoverable.
You are required to calculate the amount that can be claimed as bad debts for the 2021
year of assessment.
Solution 7.15
R
Bad debts
• Trade debts 20 400
• Employee loan nil
Why can the R3 000 with regards to the employee loan not be claimed as
a bad debt deduction?
REMEMBER
• The debts must be trade debts which at some stage formed part of the taxpayer’s income;
irrecoverable staff loans would therefore not qualify unless the staff member borrowed
the money to buy trading stock from his employer.
• The debts also must be proved to be bad and the mere possibility that a debt may in the
future prove to be irrecoverable, does not suffice.
• If amounts allowed as irrecoverable are subsequently recovered, the amounts (excluding
VAT) form part of the gross income in the year of receipt in terms of paragraph (n) of the
gross income definition and section 8(4)(a).
305
Debt to which IFRS 9 is applied for financial reporting purposes (excluding lease
receivables):
• 40% of the face value of doubtful debts that are in arrears for 120 days or more.
Add:
• 25% of the face value of doubtful debts that are in arrears for 60 days or more.
For taxpayers who do not apply IFRS 9 for financial reporting purposes, the amount
of doubtful debt must be reduced by any security that is available in respect of that
debt before the 25% and 40% are applied (proviso added to section 11(j) with effect
from 1 January 2021).
REMEMBER
• This allowance must be added to the income of the taxpayer in the following year,
when the new allowance is granted and deducted against the taxable income of the
taxpayer.
306
Example 7.16
Caz (Pty) Ltd owns a business that sells second-hand furniture. The company sells goods
for cash and on credit. The following information relates to the current and previous year
of assessment and the company does not apply IFRS 9:
Previous Current
year year
R R
List of doubtful debts (older than 60 days, but none older 30 000 60 000
than 120 days)
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 7.16
The doubtful-debt allowance for the previous year must be added to taxable income:
25% × R30 000 = R7 500
The doubtful-debt allowance for the current year must be deducted from taxable
income:
25% × R60 000 = R15 000
Example 7.17
Blue Craze (Pty) Ltd owns a business that sells swimming pool equipment. The following
information relates to the current and previous year of assessment (the company does not
apply IFRS 9):
The debtors clerk indicated that the list of doubtful debts amounted to R2 500 000. 70% of
the list of doubtful debts as at year end are in arrears for more than 90 days, but less than
120 days. The doubtful debt allowance (correctly calculated) claimed in the previous year
of assessment amounted to R760 000.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 7.17
The doubtful-debt allowance for the previous year must be added to taxable income:
R760 000.
The doubtful-debt allowance for the current year must be deducted from taxable income:
R2 500 000 × 70% x 25% = R437 500.
307
Example 7.18
Red Dot (Pty) Ltd owns a business that sells computer equipment. The company has a
July year end and applies IFRS 9 for financial reporting purposes.
At the end of the year, the company’s IFRS 9 loss allowance relating to impairment (equal
to its lifetime expected credit loss) was R45 000. Lease receivables were excluded from the
debt figures used in calculating the loss allowance.
You are required to calculate the effect of the above amounts on the taxable income for
the current year of assessment.
Solution 7.18
The doubtful-debt allowance for the current year must be deducted from taxable
income:
R45 000 × 40% = R18 000
308
Example 7.19
Molopi Ltd imports stationery that it sells for cash to wholesalers and to retailers in terms
of instalment credit agreements. These instalment credit agreements provide for the
payment of a deposit of 25% and the balance (including the finance charges) over a period of
18 months. The company applies IFRS 9 and the total doubtful debts amount relates to the
lifetime expected credit loss.
The following information relates to Molopi Ltd’s debtors in respect of instalment credit
agreements:
Current Previous
year year
R R
Debtors’ balances at 28February 2021 – sales
(excluding finance charges) 320 000 360 000
Doubtful debts (included in the above amounts)
• debtors (excluding finance charges) 80 000 40 000
• finance charges accrued in terms of section 24J 64 000 32 000
Gross profit percentage 40% 40%
Molopi Ltd’s taxable income for the 2020 year of assessment amounted to R124 000 and
to R318 000 for the 2021 year of assessment, before taking any adjustments in respect of
debtors into account.
You are required to calculate Molopi Ltd’s taxable income for the 2020 and 2021 years
of assessment.
Solution 7.19
R R
Previous year of assessment
Net profit (taxable income before debtor adjustments) 124 000
Less: Doubtful-debt allowance (Note 2)
(section 11(j) – 40% × (R40 000 + R32 000)) (28 800)
95 200
Less: Section 24 allowance
40% × (R360 000 – (40% × R40 000)) (137 600)
Limited to taxable income (Note 1) (95 200)
Taxable income nil
Current year of assessment
Taxable income before debtor adjustments 318 000
Add: Debtors’ allowances claimed in the previous year
to be added back in the current year of assessment
(R40 000 + R32000) x 40% 28 800
346 800
Less: Doubtful-debt allowance
(section 11(j)) – 40% × (R80 000 + R64 000)) (57 600)
289 200
Less: Section 24 allowance
40% × (R320 000 – (40% × R80 000)) (115 200)
Taxable income 174 000
continued
309
Notes
1. The allowance granted in terms of section 24 is limited to the available income. In the
previous year of assessment, only R95 200 of the R137 600 (as calculated) could be
claimed. The balance is lost. In the current year of assessment, only the amount
claimed as a deduction, namely R95 200, is added to the taxable income before
debtors’ adjustments.
2. The doubtful-debt allowance would also be available in respect of any finance charges
that have accrued (in the present or any previous year of assessment) in terms of
section 24J and are included in the balances owing by debtors who are judged to be
doubtful.
3. The doubtful-debt allowance can create a loss but is calculated and deducted before
the section 24 allowances (the order of the sections in the Act).
REMEMBER
• This allowance cannot create or increase an assessed loss and must be added to the
income of the taxpayer in the following year, when a new allowance is granted.
310
311
Example 7.20
Aqua (Pty) Ltd owns a shop that sells water sport equipment. The company also designs
and manufactures surfboards.
The company incurred the following expenses in connection with patents and designs on
surfboards (all patents and designs having been developed in South Africa):
R
Expenses incurred in acquiring design E for a surfboard for children. 18 000
The design was registered on 31 July 2020.
Expenses incurred in acquiring patent F for a new type of shoe used by surfers. 4 500
The patent was registered on 31 October 2020.
You are required to calculate the allowances that Aqua (Pty) Ltd can claim
during the current year of assessment (ending 31 March 2021).
Solution 7.20
R
Current year of assessment
Design E: R18 000 × 10% 1 800
Patent F: (Note 1) 4 500
Allowances that Aqua (Pty) Ltd can claim 6 300
Note
The expenditure incurred in acquiring patent F is deductible in full in terms of sec-
tion 11(gC) as it does not exceed R5 000.
REMEMBER
• Only acquisition costs can be claimed in terms of section 11(gC). The costs that relate to
the developing, devising or creating are claimed in terms of section 11D.
• Different rates apply depending on whether it is an invention, patent, copyright or a
design:
– 5% in the case of an invention, patent or copyright; or
– 10% in the case of a design.
• If the acquisition costs do not exceed R5 000, it can be claimed in full as a deduction.
• No allowance may be deducted if a trade mark is acquired from another person.
• These assets must be used in the production of income or income must be derived from
them.
312
REMEMBER
• Section 23I disallows the deduction of expenditure incurred in respect of affected intel-
lectual property to the extent that the expenditure is not income for another party, unless
the expenditure is incurred for the acquisition of intellectual property (section 11(gC)).
313
Examples
• Legal expenses in connection with the collection of trade debtors that are long
outstanding are allowed.
• Legal expenses incurred in drawing up a deed of lease by a lessor of property are
non-capital and are deductible as the taxpayer carries on business as a lessor of
property. To the lessee, this is a capital expense incurred in obtaining the use of an
asset and is therefore not deductible.
• Legal expenses incurred in an appeal against the imposition of tax would not have
been incurred in the production of income from trade and would therefore not be
deductible.
Each circumstance resulting in legal expenses would have to be decided on the facts
to determine the capital or revenue nature of the expense or its connection with the
taxpayer’s trade.
REMEMBER
314
Section 18A(3) deals with donations in kind and states, that if, a deduction is claimed
by a taxpayer of a donation of property in kind, the amount of the deduction must be
determined as follows:
• when the property constitutes a financial instrument that is trading stock of the
taxpayer, the lower of its fair market value on the date of that donation or the
amount that has been considered for the purposes of section 22(8);
• when the property constitutes another trading stock of the taxpayer, the amount is
the amount that has been considered for the purposes of section 22(8). This value is
the market value of the property, but section 22(8) brings this amount into account
only if the cost price of the trading stock has been considered in the determination
of the taxpayer’s taxable income for a year of assessment;
• when the property (but excluding trading stock) constitutes an asset used by the
taxpayer for trade purposes, the lower of its fair market value on the date of that
donation or its cost to the taxpayer less an allowance allowed to be deducted from
the taxpayer’s income;
• when the property does not constitute the taxpayer’s trading stock, or an asset
used by him for trade purposes, the lower of its fair market value on the date of
that donation or its cost to the taxpayer less, for moveable property that has de-
teriorated in condition by reason of use or other causes, a reducing-balance
depreciation allowance at the rate of 20% a year; or
• when the property is purchased, manufactured, erected, assembled, installed or
constructed by, or on behalf of, the taxpayer so as to form the subject of the donation,
the lower of its fair market value on the date of the donation or its cost to the taxpayer.
Section 18A(3A) provides that if immovable property of a capital nature, is donated
and the lower of market value or municipal value exceeds cost, the following formula
must be used:
A = B + (C × D) where:
A is the amount deductible;
B is the cost of the immovable property being donated;
C is the amount of a capital gain (if any); and
D is 60% in the case of a natural person or special trust or 20% in any other case.
The formula effectively takes the capital gains tax into account for donated property.
Section 18A(3B) provides that no deduction must be allowed for the donation of any
property in kind that constitutes, or is subject to a fiduciary right, usufruct or other
similar right, or that constitutes an intangible asset or financial instrument, unless
that financial instrument is:
• a share in a listed company; or
• issued by an eligible financial institution.
315
Example 7.21
Smile (Pty) Ltd made the following donations to a qualifying public-benefit organisation
and received the appropriate receipt for the 2021 year of assessment.
(a) The donation amounted to R1 600 and the taxable income before the donation
amounted to R50 000.
(b) The donation amounted to R600 and the taxable income before the donation
amounted to R5 000.
You are required to calculate the section 18A deduction allowed to Smile (Pty) Ltd in
each case.
Solution 7.21
(a) The section 18A deduction is limited to 10% of R50 000, R5 000. Therefore, the total
actual donation of R1 600 can be claimed as a section 18A deduction.
(b) The section 18A deduction is limited to 10% of R5 000, R500. Therefore, only R500 of
the actual donation of R600 can be claimed as a section 18A deduction; however, the
R100 that cannot be claimed as a deduction in the current year is carried forward to
the following year of assessment.
Example 7.22
Frown Ltd owns land with a base cost of R250 000. In 2020 Frown Ltd donated the land
with a municipal value of R3 million and a market value of R3.4 million. Frown Ltd has a
taxable income of R1 million for the current year of assessment.
You are required to calculate the section 18A deduction allowed to Frown Ltd. You can
assume that the municipal value can be used in calculating the capital gains tax.
Solution 7.22
The immovable property is donated and the lower of market value or municipal value
exceeds cost, therefore the following formula must be applied:
A = B + (C × D)
B = R250 000 base cost of land
C = Capital gain R2 750 000 (Municipal value of R3 000 000 – Base cost of R250 000)
D = 20%
A = R250 000 + (R2 750 000 x 20%) = R800 000.
The total potential deduction accordingly equals R800 000 (R250 000 + R550 000). This
amount is limited to R100 000 during the current year due to the 10% deductible donation
ceiling. The excess of R700 000 can be carried forward to future years.
316
REMEMBER
• The deduction is limited to 10% of the taxable income of the taxpayer, however the
amount that exceeds the 10% allowable deduction, can be carried forward to the next
year of assessment.
• A claim for a deduction is not allowed unless supported by a receipt issued by the
relevant body to which the donation was made.
• Special rules apply when a deduction is claimed of a donation of property in kind.
317
Example 7.23
Easy Move (Pty) Ltd has a building contractor business. During the current year of
assessment, the company started on a large contract, the details of which are as follows:
R
Budgeted total income on the contract 2 000 000
Budgeted total expenditure 1 200 000
Budgeted total profit 800 000
During the year of assessment:
Income received 700 000
Actual expenditure (all tax deductible) 20 000
You are required to calculate Easy Move (Pty) Ltd’s taxable income for this contract
(assuming that this is his only contract during the 2021 year) for the 2021 year of
assessment.
Solution 7.23
R R R
Income received 700 000
Less: Actual expenditure (20 000)
Section 24C allowance:
Gross profit budgeted
R800 000 / R2 000 000 × 100 = 40%
Therefore, expenses are budgeted at 60% of income
Allowance:
60% of R700 000 420 000
Less:Actual expenditure (20 000) (400 000) (420 000)
Taxable income 280 000
REMEMBER
• The allowance must be added to income in the following year of assessment.
• The allowance may be deducted only to the extent necessary to reduce taxable income
to nil, any unclaimed balance of the allowance being lost.
• Actual expenditure incurred must be deducted from the section 24C allowance as calcu-
lated.
318
financial instrument that gives rise to the interest on a daily basis. Where section 24J
applies, the interest calculated must be included in income for the lender (holder of
the financial instrument) and is deductible from income for the borrower (issuer of
the financial instrument).
The deductibility of interest is determined by applying the requirements set out in the
general deduction formula (section 11(a)).
If interest is received, the taxability is determined by the ‘gross income’ definition,
whereby it is determined whether the amount is taxable, while section 24J determines
the timing of the accrual of the interest. This section is not applicable to the accrual of
interest on the following instruments:
• saving accounts;
• call accounts; and
• fixed deposits with a term not exceeding one year.
REMEMBER
• The transferor of an interest-bearing instrument will realise an adjusted gain or
adjusted loss on the transfer of the instrument in terms of this section of the Act despite
transferring these instruments through transactions that could qualify for roll-over
relief in terms of the corporate rules.
319
Example 7.24
Where a taxpayer pays for repairs to his delivery vehicle amounting to R863 (including
VAT of 15%), the expense which is deductible for normal tax purposes amounts to R750
(R863 less VAT amounting to R113). Where a taxpayer purchases trading stock for
R11 500 (including VAT amounting to R1 500), the cost of the trading stock for normal tax
purposes amounts to R10 000 (R11 500 less VAT amounting to R1 500).
320
assessment during which services are rendered bears to the total number of
months during which the services will be rendered; should the period during
which the services will be rendered not be determinable, the period that the
services will be likely rendered in; or
• any other benefit to which the person becomes entitled to, the deduction is limited
to an amount which bears to the total amount of the expenditure the same ratio as
the number of months in the year of assessment during which the person will be
entitled to the benefit bears to the total number of months during which the person
will be entitled to the benefit.
The provisions of the section do not apply:
• where all the goods or services are to be supplied or rendered within six months
after the end of the year of assessment during which the expenditure was incurred,
or where the person becomes entitled to the full benefit within that period, unless
the expenditure is allowable as a deduction in terms of section 11D(2);
• where the total of all amounts of expenditure incurred by the person, which would
otherwise be limited by the section, does not exceed R100 000;
• to an expenditure to which the provisions of section 24K or 24L apply (section 24K
regulates the accrual and incurral of amounts in respect of interest rate agreements
(generally referred to as interest rate swap agreements) and section 24L deals with
the incurral and accrual of amounts in respect of an option contract); or
• to an expenditure actually paid in respect of an unconditional liability to pay an
amount imposed by legislation.
Where the Commissioner is satisfied that the apportionment of expenditure in terms
of this section does not reasonably represent a fair apportionment, he may direct that
the apportionment be made in another manner that appears to him to be fair and
reasonable.
Where, during any year of assessment, it is shown that:
• the goods or services for which expenditure has been incurred are never be
received by or rendered to the person; or
• the person will never become entitled to another benefit for which expenditure has
been incurred,
the expenditure is allowed as a deduction in the year in which it is actually paid.
Example 7.25
Tackle Ltd, a South African resident, paid an amount of R56 000 on 1 January 2021 to the
local municipality for municipal services (water and electricity). The services are to be
supplied within the period ending 31 July 2021. The expense qualifies for a deduction in
terms of section 11(a). Tackle Ltd has a February year-end.
You are required to calculate the amount which may be deducted in terms of section 23H
in the current year of assessment ended 28 February 2021.
321
Solution 7.25
The full amount may be deducted in the current year of assessment, as section 23H
determines that there is no limit on the deduction if the services are to be supplied within
six months after the end of the year during which the expenditure was incurred.
Example 7.26
PeeteeWhy (Pty) Ltd incurred the following expenditure during the 2021 year of
assessment:
R
1 December 2020 – Electricity for the period 1 December 2010
to 30 November 2021 52 000
1 December 2020 – Insurance premium for the period 1 December 2020
to 30 November 2021 58 000
1 February 2021 – Telephone expenses for the period 1 February 2021
to 31 January 2022 22 000
You are required to calculate the amount that may be deducted in terms of section 23H in
the current year of assessment ended 28 February 2021.
Solution 7.26
Electricity
Current portion = R52 000 x 3 / 12 = R13 000
Prepaid portion = R52 000 x 9 / 12 = R39 000
Insurance premium
Current portion = R58 000 x 9 / 12 = R14 500
Prepaid portion = RR58 000 x 9 / 12 = R43 500
Telephone expenses
Current portion = R22 000 1 / 12 = R1 833
Prepaid portion = R22 000 x 11 / 12 = R20 167
Total amount current portion = R29 333
Total amount prepaid portion = R102 667
Section 23H does not apply to the current portion of each expense as it relates to the
current year of assessment. Consideration must be given to section 23H for the prepaid
portion of each expense.
None of the expenditure above is imposed by legislation and the prepaid portions need to
be tested against the next possible exclusion from section 23H.
For each expenditure, consider whether the services in relation to it will be rendered
within six months from year-end. All the services from the above-stated expenditure will
not be rendered within six months from year-end (each prepaid portion extends beyond
31 August 2021) and is not excluded from the provisions of section 23H.
Finally, if the aggregate of all the prepaid expenses does not exceed R100 000, section 23H
does not apply and the prepaid portions as well the current portions are deductible in the
current year of assessment. The total amount of the prepaid portions of R102 667 exceeds
the R100 000 threshold and therefore section 23H applies. Only the current year’s portions
amounting to R29 333 are deductible. The prepaid portions of R102 667 will only be
deductible in the 2022 year of assessment.
322
REMEMBER
• Prepaid expenses are fully deductible:
– if the obligation to pay an amount in advance is imposed by legislation; OR
– if the goods or services are supplied within six months after the end of the year of
assessment; OR
– the total amount of prepaid expenses incurred during the year of assessment does
not exceed R100 000.
Example 7.27
Asmal (Pty) Ltd commenced with trade on 1 July 2020 and incurred the following
expenses before trade commenced:
R
Purchase of small storage area 50 000
Rates and taxes – 1 April 2020 – 30 June 2020 2 400
– 1 July 2021 – 28 February 2021 7 200
Other trading expenses (deductible for tax purposes) 40 000
You are required to calculate the taxable income for Asmal (Pty) Ltd for the current year
of assessment (ended 28 February 2021) if the trading income amounted to R75 000
during the trading period.
323
Solution 7.27
R R
Trading income 75 000
Less: Other trading expenses 40 000
Purchase of small storage area (Note) nil
Rates and taxes (R2 400 + R7 200) (Note) 9 600 (49 600)
Taxable income 25 400
Note
The purchase of the small storage area is not deductible because it is of a capital nature.
Section 11A does not allow for the deduction of capital expenses. The rates and taxes of
R2 400 were incurred before a trade was carried on and would have been deductible in
terms of section 11(a) and therefore the expense qualifies as a deduction in terms of
section 11A.
REMEMBER
• Only expenditure that would have been deductible if it was incurred after trade had
commenced is deductible in terms of section 11A.
• An assessed loss can never be created in terms of section 11A. However, if an assessed
loss arises it may be carried forward to the following year of assessment and may only
be set off against income from the same trade.
324
• In the case of a taxpayer other than a company, an assessed loss may be set off
against non-trade income, while in the case of a company this may not be done
(subject to section 20A ring-fencing).
• A taxpayer may carry forward his assessed loss even though he has not carried on
a trade during a year, while again in the case of a company this may not be done.
Section 20A deals with the ring-fencing of assessed losses from certain trades (refer to
chapter 12).
Example 7.28
Modise Ltd had a gross income of R200 000 and expenses of R300 000 for the year ended
29 February 2020. For the 2021 year of assessment the company had gross income
of R240 000 and expenses of R200 000 and, in the 2022-year, gross income of
R380 000 and expenses of R240 000.
You are required to calculate the company’s taxable income or assessed loss for the 2020,
2021 and 2022 years of assessment.
Solution 7.28
2020 2021 2022
R R R
Gross income 200 000 240 000 380 000
Deductions (300 000) (200 000) (240 000)
Assessed loss brought forward nil (100 000) (60 000)
Taxable income/(assessed loss carried forward) (100 000) (60 000) 80 000
REMEMBER
• If a company engages in more than one trade, the assessed losses of the different trades
can be set off against the different trade income.
• Ring-fencing (limitation of the setting off, section 20A) of assessed losses only applies to
natural persons.
• An assessed loss may not be carried forward if a company has not carried on trade
during a year.
• Assessed losses from foreign trades cannot be set off against the taxable income of
South African trades.
• The value of a compromise benefit made with creditors reduces the assessed loss of the
year in which the compromise took place. It does not reduce the previous year’s
assessed loss.
325
Example 7.29
Mr Ben Baker is the sole shareholder of Betterbake (Pty) Ltd (Betterbake), a company that
sells bread.
Betterbake’s Statement of profit or loss and other comprehensive income for the current
year of assessment, ended on the last day of February, is as follows:
R
Income
Sales 750 000
Recoupment of bad debts (Note 1) 10 000
Doubtful-debt allowance – 2020 (Note 4) 2 000
Interest received on current account 3 000
Closing stock – 28 February 2021 140 000
905 000
continued
326
Less: Expenses
Purchases 300 000
Opening stock – 1 March 2020 80 000
Sundry expenses – deductible for tax purposes 95 000
Rent paid (Note 2) 39 000
Employer contributions (Note 3) 7 500
Doubtful-debt allowance – 2021 (Note 4) 3 000
Patent (Note 5) 25 000
Restraint of trade payment (Note 6) 60 000
Net profit 295 500
Notes
1. The recoupment of bad debts is in respect of a debt written off in 2019.
2. A lease agreement was entered into on 1 January 2020 for the lease of shop premises
for five years at a monthly rental of R3 000. The rental for March 2021 was paid in
February 2021. The full amount was included as a deduction in the Statement of profit
or loss and other comprehensive income.
3. Betterbake contributes to a provident fund on behalf of its employees. Its annual
contribution to the provident fund amounts to R7 500.
4. Included in Betterbake’s outstanding debtors are doubtful debts of R30 000. The company
does not apply IFRS 9 and 50% of the list of doubtful debts as at 28 February 2021 have
been in arrears for more than 90 days, but less than 120 days. The other 50% of debtors
have been in arrears for less than 60 days. The previous year’s doubtful debts allowance
that was allowed as a deduction in terms of section 11(j) was 25% of R20 000, = R5 000.
Betterbake allows 10% of the doubtful debts as an allowance for accounting purposes.
5. Betterbake purchased two patents. Patent A was acquired at a cost of R6 000 on
30 September 2020. Patent B was purchased at a cost of R25 000 on 31 May 2020.
6. On 1 July 2020 Betterbake paid an amount of R60 000 as compensation to one of its
former employees, as a restraint of trade payment. The restraining agreement is
effective for five years. Only R30 000 of the amount paid to the former employee was
taxable in his hands.
You are required to calculate the taxable income of Betterbake (Pty) Ltd for the current
year of assessment, starting with the net profit as per the Statement of profit or loss and
other comprehensive income.
327
Solution 7.29
R
Net profit as per Statement of profit or loss and other comprehensive
income 295 500
Sales (taxable – gross income) nil
Recoupment of bad debts (section 8(4)(a)) nil
Interest received on current account nil
Closing stock nil
Purchases nil
Opening stock nil
Sundry expenses nil
Rent paid (Note 1) nil
Employer contributions nil
Doubtful-debt allowance – 2020 (Note 2) 3 000
–2021 (Note 2) (750)
Patent A (Note 3) (300)
Patent B (Note 3) 23 750
Restraint of trade payment (Note 4) 54 000
Taxable income 375 200
Notes
1. The rent for March 2021, which was paid in February 2021, is also claimed as a
deduction as it was actually incurred for tax purposes at the time of payment.
2. The doubtful-debt allowance for taxation purposes is calculated as follows:
2020: 25% × R20 000 = R5 000
2021: 25% × (50% x R30 000) = R3 750.
Therefore, as R2 000 has already been added back for accounting purposes, an
additional R3 000 must be added back in the current year of assessment. As R3 000 has
already been claimed as a doubtful debt allowance for accounting purposes, an
additional R750 should be accounted for to claim the total of R3 750 in terms of section
11(j) for the current year of assessment.
3. As Patent A was registered on 30 September 2020, the allowance that can be claimed is
5% of the expenditure, that is to say R6 000 × 5% = R300. For accounting purposes, the
full amount of R6 000 would have been claimed in the 2021 year of assessment.
Therefore, an amount of R300 per annum can be claimed for taxation purposes.
Patent B: in terms of section 11(gC) 5% of R25 000 = R1 250 can be claimed, therefore,
R25 000 must be added back.
4. The allowance that can be claimed in respect of the restraint of trade payment is the
amount that was taxable in the former employee’s hands, but limited to the lesser of:
R30 000 / 5 years = R6 000; or
1 / 3 × R30 000 = R10 000.
R60 000 must be added back to income as R6 000 can only be claimed for tax purposes.
328
7.14 Summary
In this chapter, certain business deductions are discussed for which special pro-
vision has been made in the Act. These expenses are those which would not qualify
for deduction in terms of section 11(a) because they are of a capital nature (such as
patent development expenditure and fixed assets used for scientific research) or have
not actually been incurred (such as provisions for doubtful debts and future
expenditure on contracts).
Section 11(x) provides for the deduction of ‘any amounts which in terms of any other
provision in this Part, are allowed to be deducted from the income of the taxpayer’.
It should be noted that the deductions provided for in section 11 of the Act are
restricted to the income from trade; the deductions in the other sections have no such
general restriction, but certain sections do specifically impose this restriction.
The next section contains questions to test your knowledge on specific deductions
and allowances.
Question 7.1
Walk for Life (Pty) Ltd is a South African resident. It is a manufacturing business that
manufactures shoes. The different types of shoes manufactured include running and
walking shoes, as well as high heels and flip-flops. The company’s financial year ends on
31 March. Walk for Life (Pty) Ltd is a registered VAT vendor and the company does not
apply IFRS 9 for financial reporting purposes.
The following information is available to calculate the normal tax liability of Walk for Life
(Pty) Ltd for the year of assessment ended on 31 March 2021 (all amounts exclude VAT
unless otherwise stated):
continued
329
Notes
1. A dividend of R28 000 accrued to Walk for Life (Pty) Ltd on 15 August 2020 from a
wholly owned South African subsidiary company.
2. The cost price of the opening stock was R310 000 and the market value was R285 000 as
on 1 April 2020. The cost price of the closing stock was R365 000 and the market value
was R425 000 on 31 March 2021.
3. The list of doubtful debts as at 31 March 2021 amounted to R69 000 and 72% of the total
amount have been in arrears for more than 120 days. The rest of the debtors have not
been in arrears for more than 60 days. The doubtful debt allowance allowed by the
Commissioner for the 2020 year of assessment, amounted to R18 750.
4. Salaries paid during the current year of assessment amounted to R750 000 and the
company also contributed R56 000 towards the provident fund on behalf of the
company’s employees.
5. Legal costs of R157 000 were incurred for the following: Drafting of all the lease
contracts for the company, R40 000. The collection of outstanding trade debtors,
R65 000 and court cases in respect of employee remuneration claims, R52 000.
6. Walk for Life (Pty) Ltd incurred an expense of R41 300 in acquiring a design on its
children’s shoes that lights up when walking with them.
7. An amount of R25 000 was incurred on painting the entire exterior of the
manufacturing building. The building was badly damaged due to excessive rainwater
filtering through the cracks.
8. The company paid an amount of R36 500 in respect of electricity for the period
1 March 2021 to 30 October 2021.
9. R160 000 was paid to the former financial manager on 1 March 2021 for agreeing not to
start a similar business in the Republic within a period of five years. Only R120 000
constituted income in the former employee’s hands.
Answer 7.1
Calculation of Walk for Life (Pty) Ltd’s taxable income for the current year of assessment
R R
Sales 3 500 000
Add:
Dividend income (Note 1) nil
Closing stock (Note 2) 365 000
Doubtful debt allowance – 2020 (Note 3) 18 750
Income 3 883 750
continued
330
Less:Expenses
Purchases of raw material (R985 000 × 100 / 115) (Note 3) (856 522)
Opening stock (Note 2) (285 000)
Bad debts (46 200)
2021 Doubtful-debt allowance (Note 4) (19 872)
Salaries and wages (750 000)
Contribution to provident fund (56 000)
Legal costs (Note 5) (117 000)
Design acquired (Note 6) (4 130)
Painting of building (Note 7) (25 000)
Prepaid electricity – Current portion (4 563)
– Prepaid portion (Note 8) (31 937)
Restraint of trade (Note 9) (24 000) 2 220 224
Taxable income 1 663 526
Notes
1. Dividends are exempt from tax as per section (section 10(1)(k)) and therefore they will
not be included in income.
2. Opening and closing stock are always stated at the lower of cost price or market value.
Opening stock is deducted from income and closing stock is added back to income.
3. As the purchases were made after 1 April 2018, the VAT that needs to be removed,
must be at 15%.
4. The full doubtful debt allowance of the 2020 year of assessment must be added back to
taxable income. 40% of 72% of the list of doubtful debts for the current year of
assessment must be deducted from income as they have been in arrears for more than
120 days (R69 000 × 72% x 40%).
5. The drafting of lease contracts is capital in nature and therefore not deductible in terms
of section 11(c). The legal costs relating to the collection of outstanding trade debtors
and court cases are deductible in terms of section 11(c) as they are not of a capital
nature.
6. 10% of the amount paid to acquire a design is allowed as a deduction (section 11gC).
7. The painting of the building constitutes a repair and is deductible as per section 11(d)
(refer to chapter 8).
8. The current portion of the prepaid electricity is R36 500 × 1 / 8, as only the first month
of the prepayment falls within the current year of assessment. The rest of the
prepayment amount relates to the following year of assessment and because it is more
than six months after year-end (seven months), but less than R100 000 in aggregate, the
prepaid portion will still be deductible within the current year of assessment.
9. The deductible portion is the portion that is regarded as income in the hands of the
former employee (R120 000). The deduction is limited to the lesser of R120 000 / 3 years
= R40 000; or R120 000 / 5 = R24 000; therefore, R24 000 is deductible.
331
Question 7.2
Furniture (Pty) Ltd is a South African resident company that manufactures living room
furniture. The following information relates to its current year of assessment ending
31 March 2021.
R
Taxable income for the year before the below items: 1 025 000
Notes
The following transactions have not been taken into account in the calculation of the above
taxable income:
1. The company concluded a registered learnership agreement with Mr Naidoo that has a
NQF level 4 qualification on 1 October 2020. The agreement was for a six-month period
ending 31 March 2021. Mr Naidoo successfully completed the learnership on
31 March 2021. Mr Naidoo does not have a disability as defined.
Mr Naidoo is entitled to a monthly salary of R4 000 per month, without any other
benefits. Mr Naidoo’s salary for the six-month period has been taken into account in
the above taxable income figure.
2. Furniture (Pty) Ltd paid the following restraint of trade payments to two former
managers who wanted to start their own furniture manufacturing concern. The
agreements concluded were the following:
R
Mr Jennings for 2 years 200 000
Mr Green for 4,5 years 450 000
3. Furniture (Pty) Ltd paid the following annuities in the current year of
assessment.
R
Mr Smit – a retired employee 15 000
Mrs Mabula – the widow of a former employee 27 000
42 000
Payments are made annually and commenced in December 2020.
4. Furniture (Pty) Ltd donated the following amounts during the current year of
assessment:
R
Nelson Mandela Children’s Fund (section 18A certificate obtained) 26 000
SAICA Thuthuka programme (no section 18A certificate obtained) 5 000
5. Total rental of R100 000 was paid for the year. This relates to the lease of a factory as
well as a number of warehouses. The lease on the one of the warehouses expired on
30 June 2020 and a warehouse was leased from 1 July 2020 for a period of three years.
6. A patent for a more effective way to colour the leather used in the manufacture of
furniture was acquired from another company at a cost of R80 000. It was purchased in
the previous year of assessment on 1 June.
7. Contributions paid on behalf of employees to a pension fund amounted to R240 000 for
the year.
8. All amounts exclude VAT, unless otherwise stated.
332
Answer 7.2
Calculation of the taxable income of Furniture (Pty) Ltd for the current year of assessment
ended 31 March
R
Assessed loss (412 333)
Question 7.3
Seven years ago, Mr Joseph Afrique invented a new game, ‘Afriqana’. He acquired
business premises in Polokwane and started manufacturing ‘Afriqana’ in a company,
Games (Pty) Ltd.
The following information relates to the income and expenditure for the current year of
assessment ended 31 March:
R
Gross profit 1 484 440
Sundry expenses – allowable in full 140 000
Notes
1. The company is registered as a vendor for VAT purposes. All amounts exclude VAT
(where applicable), unless otherwise stated.
2. The costs were incurred to relocate an employee to Polokwane, who was recruited in
Durban.
3. The royalties were paid to Joseph for the use of the design of the game ‘Afriqana’ that
he had developed.
4. The new design was acquired on 1 May 2019. It relates to another game that is going to
be manufactured by Games (Pty) Ltd.
5. Joseph earned a salary of R40 000 per month for the period 1 April 2020 to
31 March 2021.
6. The company incurred legal expenses of R900 in respect of the collection of
irrecoverable debts.
7. The company incurred an assessed loss of R150 000 during the previous year of
assessment.
333
Answer 7.3
Calculation of Games (Pty) Ltd’s taxable income for the current year of assessment ended
31 March
R R
Gross profit 1 484 440
Less:Expenses
Sundry expenses 140 000
Relocation costs (in production of income) 3 900
Royalties paid to Joseph 30 000
Acquisition of design (R9 600 × 10%) (section 11(gC)) 960
Salary paid to Joseph (R40 000 × 12) 480 000
Legal expenses 900 (655 760)
Taxable income before assessed loss 828 680
Assessed loss brought forward (150 000)
Taxable income 678 680
334
Expenditure and
8 allowances relating to
capital assets
Gross Exempt
– – Deductions = Taxable income Tax payable
income income
General
Specific Capital Deductions for
deduction
deductions allowances individuals
formula
Page
8.1 Introduction............................................................................................................ 336
8.2 Connected persons (section 1) ............................................................................ 338
8.3 Repairs and improvements (section 11(d)) ......................................................... 339
8.4 Process of manufacture ......................................................................................... 341
8.5 Cost of an asset ...................................................................................................... 342
8.6 Deduction in respect of improvements to assets not owned by the
taxpayer (section 12N) .......................................................................................... 344
8.7 Assets used by a small business corporation (section 12E) ............................. 345
8.7.1 Manufacturing plant and machinery .................................................... 345
8.7.2 Other assets ............................................................................................... 345
8.8 Assets used in a process of manufacture (section 12C) .................................... 347
8.8.1 Accelerated allowance for new and unused assets ............................. 348
8.8.2 Allowance for used assets ....................................................................... 349
8.9 Wear-and-tear allowances (section 11(e)) ........................................................... 351
335
Page
8.10 Buildings ................................................................................................................. 353
8.10.1 Manufacturing building allowances (section 13)................................. 353
8.10.2 Commercial buildings (section 13quin) ................................................. 355
8.10.3 Residential units (section 13sex) ............................................................. 356
8.11 Disposal of assets ................................................................................................... 359
8.11.1 Allowance on the disposal of assets at a loss (section 11(o)) .............. 359
8.11.2 Recoupment on the sale of assets (section 8(4)(a)) ............................... 360
8.11.3 Replacement asset: Recoupment (section 8(4)(e)) ................................ 361
8.11.4 Donations and dividends: Recoupment (section 8(4)(k)).................... 364
8.12 Leased assets .......................................................................................................... 364
8.12.1 Rental paid (section 11(a)) ....................................................................... 364
8.12.2 Lease premiums (section 11(f )) .............................................................. 365
8.12.3 Leasehold improvements (section 11(g) and (h)) ................................. 366
8.13 Summary................................................................................................................. 368
8.14 Examination preparation ...................................................................................... 369
8.1 Introduction
In terms of the general deduction formula (section 11(a)) which is dealt with in chap-
ter 3, expenditure of a capital nature is not deductible. In other words, if a person
buys an asset such as a computer, delivery vehicle or machinery for use in the per-
son’s business, the person is not allowed to deduct the cost of such an asset for tax
purposes. However, special allowances in the Income Tax Act 58 of 1962 (the Act)
provide that the costs of fixed assets can be deducted over a period of time. These
special allowances make provision for the fact that the value of an asset depreciates
over time.
In this chapter, certain general concepts relating to capital allowances are discussed.
The remainder of the chapter deals with the different allowances that can be claimed
on specific assets.
For tax purposes the costs that can be incurred relating to assets can be divided into
two main groups. Firstly, those costs incurred for assets that are owned and secondly
the costs incurred for assets that are leased by the taxpayer. The costs incurred relat-
ing to assets being leased have specific rules, depending on the type of cost incurred,
for example lease premiums and leasehold improvements.
The tax implications for the first group of assets are more complicated. The allowances
that can be claimed are not only dependent on the type of asset used, but also on the
status of the taxpayer that owns it. Remember these rules are mutually exclusive, and
it is important to ensure that you understand how to decide which rules to use before
studying the individual rules. The following structure will assist you in deciding
which allowances may be claimed.
336
REMEMBER
• A person for tax purposes refers to natural persons, companies, trusts and estates
(insolvent or deceased estates).
Immovable assets
(e.g. buildings)
Movable assets
(e.g. machinery)
REMEMBER
• In terms of section 11(e) the Commissioner must publish a list of the period over which
an asset must be written off. This list was published in Interpretation Note 47.
337
338
REMEMBER
• Special rules apply, for example, the determination of the cost of an asset, when
transactions between connected persons take place.
• A relative, in relation to a person, refers to the spouse or anybody related to him to the
third degree, including the spouse of such a person.
• An adoptive child is considered to be related to the adoptive parents in the first degree.
Legislation:
Section 11(d)
For the purpose of determining the taxable income derived by any person from carrying
on any trade, there shall be allowed as deductions from the income of such person so
derived—
(d) expenditure actually incurred during the year of assessment on repairs of property
occupied for the purpose of trade or in respect of which income is receivable,
including any expenditure so incurred on the treatment against attack by beetles of
any timber forming part of such property and sums expended for the repair of
machinery, implements, utensils and other articles employed by the taxpayer for the
purposes of his trade;
An analysis of the section indicates that repair expenses may be claimed if:
• the expense is actually incurred;
• it is incurred during the year of assessment;
• it relates to property used for the purposes of trade or income is derived from it; and
• it relates to other assets, for example, machinery, implements etc., used for the
purposes of trade.
REMEMBER
Many court cases have dealt with the issue regarding the differentiation between a
‘repair’ and an ‘improvement’. The two most important cases dealing with this aspect
339
was Flemming v Kommissaris van Binnelandse Inkomste and Commissioner for Inland
Revenue v African Products Manufacturing Co Ltd.
CASE:
Flemming v Kommissaris van Binnelandse Inkomste
57 SATC 73 (A)
Facts: Judgment:
Water was vital for farming activities of There was no evidence that anything
the taxpayer. Due to the fact that the went wrong with the borehole itself
existing borehole on the farm yielded less requiring its replacement. Expenditure
and less water to feed the existing dam, was therefore not incurred on the repair
the taxpayer drilled a new borehole, of the borehole as a subordinate and
erected a windmill for the borehole and inseparable part of the farm. The avail-
installed piping to feed water from the abiity of water from the original borehole
borehole to a newly constructed dam. The had decreased merely as a result of the
taxpayer contended that all these expenses fact that there was less water available
were repairs of property occupied for the underground at that place and on that
purpose of trade or in respect of which ground the new borehole could not be
income is receivable and claimed a sec- regarded as a repair by virtue of its
tion 11(d) deduction. The basis of his claim replacement of the original. It was simply
was that the borehole and windmill had to improving the water supply which had
be regarded as a subordinate part of the nothing to do with ‘repairs of property’.
farm and that repairs of property as used
in the section also included the replace-
ment of a subordinate portion of property.
CASE:
Commissioner for Inland Revenue v African Products
Manufacturing Co Ltd 13 SATC 164
Facts: Judgment:
The original roof of a factory was in a bad The taxpayer had restored the roof to its
state of repair. The timber roof trusses original condition and the use of material
had been damaged and could not be other than that originally used was not
replaced with the same timber as such for the purpose of improvement but in
timber was unprocurable owing to the order to restore the roof to its original
war. The local wood was unsuitable. A condition. The expenditure thus fell with-
new roof, made of reinforced concrete, in the term ‘repairs’.
was installed in its place.
340
Example 8.1
Marajash (Pty) Ltd incurred the following expenses during the 2021 year of assessment
ended on 28 February 2021.
R
Repairs to the shop’s roof which was leaking 6 000
Replacement of worn carpets in the shop, with tiles (the replacement of the
carpets would have cost R8 000) 12 000
Paving the area in front of the shop to prevent excess dust 22 000
Painting the shop interior, which was damaged due to the leaking roof 10 000
You are required to determine which expenses can be deducted as repairs.
Solution 8.1
R
Repairs to the roof (Note 1) 6 000
Replacement of carpets (Note 2) 12 000
Paving of the area (Note 3) nil
Painting the shop (Note 4) 10 000
Total expenses 28 000
Notes
1. The repair to the roof is the restoration of a part of the shop.
2. Although the cost of tiling exceeds the amount that would have been spent on
replacing the carpets, it is not necessary that the materials used be identical to the
materials replaced.
3. The cost of the paving is not deductible as it was an improvement to the asset.
4. The cost of painting is deductible as it is the restoration of a part of the shop to its
original condition.
341
of the article and the process must be continuous (SIR v Hersamer (Pty) Ltd
29 SATC 53).
• The process need not produce the end-product as long as it contributes towards it
(COT v Processing Enterprises (Pvt) Ltd 3 SATC 109).
• A standardised product must be produced on a large scale by a continuous process
using human effort and specialised equipment in an organised manner (SIR v
Safranmark (Pty) Ltd 43 SATC 235).
The South African Revenue Service (SARS) has issued Practice Note 42 which
contains lists of processes which have been accepted as being processes similar to a
process of manufacture and ‘direct’ manufacturing processes which are not
exhaustive as these processes do not require specific approval as well as a list of
processes considered not to be a direct process of manufacture or a similar process.
REMEMBER
Legislation:
Section 1: Interpretation
‘depreciable asset’ means an asset as defined in paragraph 1 of the Eighth Schedule (other
than any trading stock and any debt), in respect of which a deduction or allowance
determined wholly or partly with reference to the cost or value of that asset is allowable in
terms of this Act for purposes other than the determination of any capital gain or capital loss;
342
remaining useful life of the asset if they are incurred after the asset was brought into
use.
If a taxpayer acquires an asset without paying for it (only applicable to section 11(e)),
a reasonable value must be placed on the asset. For all other sections, the ‘cost’ must
be used. Certain sections (such as sections 12C, 12E, 13quin and 13sex), however,
provide that the cost of an asset is the lower of the actual cost or the market value of
the asset on the date of acquisition.
Example 8.2
Kompane (Pty) Ltd (a registered VAT vendor) purchased a second-hand machine on
1 September 2020. The machine was brought into use on that date in a process of
manufacture. The purchase price was made up as follows:
R
Cost price 125 400
Finance charges (R1 500 per month for 30 months) 45 000
Foundations (including VAT) 11 500
181 900
The machine was purchased from a person who is not registered as a vendor for VAT
purposes. However, the cost of the foundation was incurred from a person registered for
VAT purposes.
You are required to calculate the cost of the machine.
Solution 8.2
R
Cost price 125 400
Less: VAT (R125 400 × 15 /115) (Note 1) (16 357)
109 043
Add: Foundations excluding VAT (R11 500 × 100 /115) (Note 2) 10 000
Cost price of machine (Note 4) 119 043
Notes
1. The second-hand machine was purchased from a non-vendor and a deemed input
tax can be claimed.
2. The VAT payable on the foundation may be claimed as an input tax; therefore, it
must be excluded from the cost of the asset.
3. The finance charges may be claimed in terms of section 24J and therefore cannot be
included in the cost of the asset. Finance charges are an exempt supply for VAT
purposes and therefore have no VAT consequences.
4. The allowance is claimed in terms of section 12C since it is a machine used in a
process of manufacture. The cost for purposes of section 12C is the lower of the
actual cost incurred (R109 043) or the market value of the asset on the date of
acquisition (not provided in the question). The R10 000 foundation costs are added to
either the cost or the market value, depending on which is the lowest.
continued
343
REMEMBER
• The determination of the cost of an asset for tax purposes differs from the cost of an
asset for accounting purposes.
• Certain sections (such as sections 12C, 12E, 13quin and 13sex) provide that the cost of an
asset is the lower of the actual cost or the market value of the asset on the date of acquisition.
• Shipping and delivery charges are included in the installation and erection cost and
form part of the cost of an asset.
• Foreign travel expenses incurred in order to buy the asset do not form part of the cost of
the asset.
344
345
• 30% in the second year and 20% in the third year of assessment respectively.
The cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction concluded at arm’s length.
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.
REMEMBER
• This allowance is calculated for the full year (in other words, it will not be apportioned),
irrespective of the period it was in use during that year of assessment.
• The section 12E allowance does not apply to buildings.
• The allowance can be claimed on new and used assets as long as it is the first time that
that particular asset is brought into use by that particular taxpayer.
Example 8.3
Shoe Lace, a small business corporation as defined, manufactures school shoes. On
6 April 2020, the corporation purchased a new manufacturing machine to the value of
R150 000 (excluding VAT) and it was brought into use on the same date. Due to the
expansion of the business, the corporation purchased four new computers during
September 2020 for use by the administrative staff. The total cost of the four computers
amounted to R65 000 (excluding VAT). The computers were brought into use on
1 October 2020.
You are required to calculate the most advantageous capital allowance for the taxpayer
to claim in the current year of assessment ended on 28 February 2021.
Solution 8.3
R
Manufacturing machine
Cost (excluding VAT) 150 000
Allowance (100% × R150 000) 150 000
Four computers
Cost (excluding VAT) 65 000
Allowance (50% × R65 000) 32 500
continued
346
Note
The taxpayer elected the 50:30:20 write-off, because that would be more advantageous
than the three-year write-off for personal computers allowed according to section 11(e)
and Interpretation Note No. 47 (refer to 8.9). The taxpayer will be able to deduct a
greater amount in the first year when he elects the 50:30:20 write off, which will reduce
his taxable income.
Asset Description
Machinery or plant/ • Used by taxpayer or lessee (if the trade is rental) for
Agricultural co-operative purposes of his trade (other than mining or farming).
machinery or plant • Storing of packing of pastoral, agricultural or other farm
products of its members or for subjecting such products to
a primary process.
• Used directly in process of manufacture/similar process.
• Asset must be owned by the taxpayer or acquired in
terms of an agreement contemplated in paragraph (a) of
the definition of instalment credit agreement of the VAT
Act (a suspensive sale agreement).
Aircraft and ships • Used by taxpayer for purposes of his/her trade.
• Asset must be owned by the taxpayer or acquired in
terms of an agreement contemplated in paragraph (a) of
the definition of instalment credit agreement of the VAT
Act (a suspensive sale agreement).
Improvements • Improvements to any of the above assets, except aircraft
and ships.
For the purposes of section 12C, the cost of the asset is the lesser of:
• the actual cost of the asset; or
• the cost of the asset under a cash transaction at the time of acquisition concluded at
arm’s length (therefore the market value on the date of acquisition).
The costs incurred by the taxpayer in moving the assets from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use. Finance charges are not included in the cost of the asset and can be claimed as a
deduction in terms of section 24J.
Section 12C also provides that:
• where an allowance can be claimed in respect of machinery or plant; and
• the machinery or plant was used by the taxpayer in a previous year of assessment
for the purposes of a trade of which the receipts and accruals were not included in
the income of the taxpayer;
347
– a deduction which could have been allowed during the previous year of
assessment;
– is deemed to have been allowed during the year of assessment concerned, as if
the receipts and accruals had been included in the taxpayer’s income.
REMEMBER
• The accelerated allowance is calculated for the full year (in other words, it will not be
apportioned), irrespective of the period it was in use during that year of assessment.
• The accelerated allowance only applies to new or unused machinery and plant used in
a process of manufacture.
• This allowance may not be claimed on a used or second-hand machine or plant (the
20% allowance is then applicable).
• The taxpayer cannot use this allowance unless he has brought the asset into use for the
first time.
• If the asset is not used by the taxpayer (the owner) himself in a process of manufacture
but is leased to a lessee who uses it in a process of manufacture, the taxpayer cannot
claim this accelerated allowance. The taxpayer can, however, claim the allowance over a
five-year period (20% per annum as discussed below).
Example 8.4
Mahlare (Pty) Ltd (a registered VAT vendor) purchased a new machine on 1 August 2020
for a cash amount of R1 092 500 (VAT inclusive). The machine was brought into use on
the same date in a manufacturing process by Mahlare (Pty) Ltd.
You are required to calculate the capital allowance that can be claimed for the 2021 year
of assessment ended on 28 February 2021.
348
Solution 8.4
R
Cost (R1 092 500 – (15 / 115 × R1 092 500)) 950 000
Allowance (R950 000 × 40%) 380 000
Note
The allowance of 40% may be claimed as the asset is new and unused and is used by the
owner of the asset in a process of manufacture. If the asset was used by another person
in a process of manufacture (not by Mahlare (Pty) Ltd), the company can still claim an
allowance but at a rate of 20% per annum.
Should the allowance not be claimed for only the seven months it was
used? (Therefore R950 000 × 40% × 7 / 12?)
Example 8.5
Machine XT was used by Modisa (Pty) Ltd (a registered vendor) for the first time during
the current year of assessment to manufacture candles. It was previously used in manu-
facturing activities overseas of which the income did not form part of the company’s gross
income. The machine was purchased during January 2019 for R150 000 (excluding VAT).
You are required to calculate the capital allowance that can be claimed for machine XT
for the 2021 year of assessment ended on 28 February 2021.
Solution 8.5
R
Cost 150 000
Allowance (20% × R150 000) 30 000
Note
The 40% and 20% allowances for the 2019 and 2020 years of assessment are deemed to
have been allowed in those two years of assessment and are not deductible in the current
year of assessment; only the current year’s allowance is deductible.
349
• If the taxpayer (owner of the asset) does not use the plant and machinery (which is
either new and unused or used) himself but leases it to a lessee who uses it in a
process of manufacture.
• For hotelkeepers, if the hotel is not new and unused and is used by the taxpayer in
the process of his/her trade.
• For aircrafts/ships used by the taxpayer in his/her trade, regardless of whether the
aircrafts/ships are new and unused or used.
In the case where the asset is used by the lessee, the taxpayer (lessor) can claim the
allowance, if:
• he/she carries on a trade;
• derives income from the use of the machinery or plant; aircrafts or ships (or
derives income from the taxpayer’s trade as a hotelkeeper) in his business; and
• the machinery or plant is used by the lessee directly in a process of manufacture
carried on by the lessee.
Example 8.6
On 1 January 2019, Nasmeen Manufacturers (Pty) Ltd (a registered VAT vendor) pur-
chased a second-hand machine for a cash amount of R230 000 (VAT inclusive). The
machine was brought into use on the same date in a process of manufacture. The
company moved the machine to another site on 1 February 2021 at a cost of R12 000.
You are required to calculate the capital allowance that can be claimed for the 2021 year
of assessment ended on 28 February 2021.
Solution 8.6
R
Cost (R230 000 x 100 / 115 × R230 000) 200 000
Allowance (20% × R200 000 plus 1 / 3 of R12 000) 44 000
Note
The removal costs are deductible in equal instalments over the remaining years (in this
case three years since the first 20% allowance on the machine was already claimed in the
2019 and 2020 year of assessment) over which the allowance on the machine can be
claimed.
REMEMBER
• The allowance of 20% is calculated for the full year (in other word, it will not be
apportioned), irrespective of the period it was in use during the year of assessment.
350
Legislation:
Section 11(e)
The wear-and-tear allowances may be used for assets which did not qualify for allow-
ances in any of the other capital allowance sections. The allowance will be granted as
long as the asset is used for purposes of the taxpayer’s trade. The wear-and-tear
allowance is not applicable to buildings or structures of a permanent nature.
The allowance is claimed on the value of the asset and not on the cost of the asset, as
is the case with the other capital allowance sections discussed above. The implication
is that an allowance can be claimed on a qualifying asset even if the taxpayer did not
incur any expense in respect of the acquisition of the asset (for example if the asset
was inherited, donated or received as a dividend in specie). The taxpayer must be the
owner of the asset in order to claim this capital allowance.
If cost was actually incurred by the taxpayer in order to acquire the asset, the
allowance must, however, be claimed on the actual cost incurred in respect of the
acquisition of the asset and not on the value of asset. However, if cost was incurred
but the asset was purchased from a connected person, the value of the asset on the
date of acquisition should always be used regardless of whether the value is more or
less than the actual cost incurred (Interpretation Note No. 47).
The costs incurred by the taxpayer in moving an asset from one location to another
also form part of the cost of the asset. The removal costs are written off over the
remaining useful life of the asset if they are incurred after the asset was brought into
use.
Interpretation Note No. 47 (Issue 3) ‘Wear-and-Tear or Depreciation Allowance’ was
published as a Binding General Ruling under section 89 of the Tax Administration
Act No. 28 of 2011. Portions of it were also reproduced in Binding General Ruling No.
7. These documents contain the period for which wear-and-tear allowances can be
claimed.
The wear-and-tear allowance can be calculated on the straight-line basis over the
specified write-off periods. The straight-line basis rather than the reducing-balance
method may be used if the taxpayer complies with the following requirements:
• the straight-line basis must apply to all assets of the same class;
• assets written off in full must be indicated at a residual value of R1;
351
• adequate records regarding cost, tax value, disposals, acquisitions, proceeds etc.,
must be kept; and
• the first year’s allowance must be reduced proportionately when it is brought into
use during the year of assessment.
The depreciation used for accounting purposes differs from the wear-and-tear allow-
ance because, for accounting purposes, assets are normally written off over their
useful life, which can lead to a different rate.
A taxpayer may apply to SARS to use a different write-off period from those
provided in Interpretation Note No. 47. Interpretation Note No. 47 makes allowance
for small items costing less than R7 000 to be written off in full during the year of
purchase. The asset should, however, be used by the taxpayer and should not be used
by the lessee to qualify. A small item is regarded as an item that can function
normally in its own right and does not form part of a set.
Section 11(e) also provides that:
• where an allowance can be claimed in respect of an asset, and
• the asset was used by the taxpayer in a previous year of assessment for the pur-
poses of a trade of which the receipts and accruals were not included in the income
of the taxpayer,
• a deduction which could have been allowed during the previous year of assess-
ment,
• is deemed to have been allowed during the year of assessment concerned, as if the
receipts and accruals had been included in the taxpayer’s income.
REMEMBER
• The allowance is calculated pro rata for the period the asset was in use during the year
of assessment.
• The asset must be owned or purchased in terms of an instalment credit agreement and
used by a taxpayer for the purposes of his trade.
352
Example 8.7
On 1 September 2020, JAY Manufacturers (Pty) Ltd purchased a delivery cycle for
R14 950 (including VAT of R1 950) and brought it into use on the same date. In terms of
Interpretation Note No. 47, the write-off period for delivery vehicles is four years.
You are required to calculate the wear-and-tear allowance for the 2021 year of assess-
ment ended on 28 February 2021.
Solution 8.7
R
Cost (R14 950 – R1 950) 13 000
Wear-and-tear allowance (R13 000 / 4 years × 6 / 12) 1 625
What period should I use if the asset that I purchased is not on the
Interpretation Note No. 47 list?
8.10 Buildings
The cost of buildings may be written off at a certain rate, depending on the date they
were brought into use as well as the purpose that the building is being used for.
353
354
• a deduction which could have been allowed during the previous year of assessment,
• is deemed to have been allowed during the year of assessment concerned, as if the
receipts and accruals had been included in the income of the taxpayer.
Example 8.8
On 30 June 2019 Mountainview Properties Ltd concluded a contract with a developer to
build a new office park, to be used for the purposes of trade. The work commenced on
15 July 2019 and was completed and on 31 May 2021 at a cost of R3 000 000. On the same
day, the building was brought into use. Mountainview Properties Ltd has a December
year-end.
You are required to calculate the amount allowed as a deduction from income.
355
Solution 8.8
2021 year of assessment R
Section 13quin allowance (R3 000 000 × 5%) 150 000
Note
The full allowance must be claimed, without any apportionment, even though the build-
ing was not used for the full year. The R3 000 000 is not multiplied with 55% since the
R3 000 000 consist only of the cost of the building and does not include the cost of the
land.
Example 8.9
On 30 June 2020 Lavender Properties Ltd purchased part of a new office block from a
developer at a cost of R1 million, to be used for the purposes of trade. The offices were
brought into use on 1 August 2020. Lavender Properties Ltd has a December year-end.
You are required to calculate the amount allowed as a deduction from income.
Solution 8.9
Year of assessment ended 31 December 2020 R
Deemed cost R1 000 000 × 55% = R550 000
Section 13quin allowance R550 000 × 5% 27 500
Note
A part of a building was acquired after 21 October 2008, therefore the deemed cost of the
asset is 55% of the cost. Even if the entire building was aqcuired, the cost of the building
will still be multiplied by 55% of the total cost, since the total cost include the cost of the
land on which no allowance can be claimed.
The full allowance must be claimed, without any apportionment, even though the
building was not used for the full year.
REMEMBER
• The building must be new, and unused by the taxpayer to qualify for the deduction.
• If the building was used by a previous owner, the allowance cannot be claimed.
• The allowance is only available to the owner of the building.
356
• the unit or improvements are solely used by the taxpayer for the purposes of a
trade;
• the unit is situated in the Republic; and
• the taxpayer owns at least five residential units in the Republic.
The allowance is:
• 5% per year on the cost of a new and unused residential unit (or improvement);
and
• an additional 5% of the cost if it is a low-cost residential unit as defined.
Legislation:
Section 1: Interpretation
‘residential unit’ means a building or self-contained apartment mainly used for residential
accommodation, unless the building or apartment is used by a person in carrying on a
trade as a hotel keeper;
‘low-cost residential unit’ means—
(a) an apartment qualifying as a residential unit in a building located within the
Republic, where—
(i) the cost of the apartment does not exceed R350 000; and
(ii) the owner of the apartment does not charge a monthly rental in respect of that
apartment that exceeds one per cent of the cost; or
(b) a building qualifying as a residential unit located within the Republic, where—
(i) the cost of the building does not exceed R300 000; and
(ii) the owner of the building does not charge a monthly rental in respect of that
building that exceeds one per cent of the cost contemplated in subparagraph (i)
plus a proportionate share of the cost of the land and the bulk infrastructure:
Provided that for the purposes of paragraphs (a)(ii) and (b)(ii), the cost is deemed to be
increased by 10% in each year succeeding the year in which the apartment or building is
first brought into use;
REMEMBER
• The cost is deemed to be increased by 10% in each year succeeding the year in which
the apartment or building is first purchased.
• This section applies where the units were acquired, or the erection commenced on or
after 21 October 2008. Before 21 October 2008 section 13ter must be used.
357
If the taxpayer acquired a residential unit which is only a part of a building without
erecting that unit (or improvement), then the cost is deemed to be:
• 55% of the acquisition price if a part is acquired; and
• 30% of the acquisition price if an improvement part is acquired.
The full allowance is deductible, even if the residential unit is brought into use for
only part of the year of assessment.
Note that a section 12N improvement (refer to 8.6) qualifies for this allowance.
Example 8.10
On 1 February 2020 Contructo (Pty) Ltd bought seven new apartments in a residential
building situated in the center of Johannesburg at a cost of R750 000 each. All the apart-
ments were rented from 1 March 2020.
You are required to calculate the allowance on the apartments for the year of assessment
ended 31 December 2020.
Solution 8.10
Section 13sex allowance:
R750 000 × 7 × 55% = R2 887 500 × 5% = R144 375
Note
Section 13sex is applicable because the taxpayer owns at least five apartments, which are
used for purposes of trade (renting out) and are situated in South Africa.
The cost of the apartments is deemed to be 55% of the acquisition price because only a
part of a building was acquired and the acquisition cost of that part includes the cost of
the land on which no allowances can be claimed
REMEMBER
• The section 13sex allowance is only available to the owner of the asset (therefore lessees
do not qualify for the deduction, except for section 12N assets).
• A residential unit purchased from a seller who previously used the building does not
qualify for this allowance, since the residential unit is not new or unused.
• The taxpayer must own at least five residential units in South Africa and they must be
solely used for the purposes of carrying on a trade.
• The full allowance is deductible, even if the residential unit is brought into use for only
part of the year of assessment.
358
Example 8.11
KZQ Limited (a registered VAT vendor) purchased a second-hand manufacturing
machine for R115 000 on 1 January 2019 (including VAT amounting to R15 000). The
machine was sold on 30 November 2020 for an amount of R25 000 (VAT excluded)
because it was outdated.
You are required to calculate the allowance on the sale of the machine for the 2021 year
of assessment ended on 28 February 2021. (KZQ Limited elected the deduction of this
allowance.)
359
Solution 8.11
R
Cost 115 000
Less: VAT (15 000)
100 000
Proceeds 25 000
Capital allowances allowed up to date of sale 60 000
(R100 000 × 20% × 3 years (2019, 2020 and 2021))
Sum of the proceeds and capital allowances (R25 000 + R60 000) 85 000
Allowance (R100 000 – R85 000) 15 000
Note
The allowance can also be calculated as the difference between the proceeds (R25 000)
and the tax value (R40 000). The tax value is the cost (R100 000) less the capital allow-
ances granted (R60 000).
REMEMBER
• The taxpayer must elect to have this allowance deducted from his income.
• Losses can be claimed on the sale of depreciable assets with a useful life which does not
exceed ten years.
Example 8.12
Saffranja Limited (a registered VAT vendor) purchased machine P on 1 May 2017 for
R171 000 (including VAT). The machine was used from that date in a process not
regarded as a manufacturing process. This machine was sold on 31 January 2021 for
R161 000 (including VAT).
SARS granted a wear-and-tear allowance that is calculated according to the straight-line
method of 20% a year on this machinery and these allowances amounted to R120 000 up to
date of sale.
You are required to calculate the recoupment Saffranja Limited will have to add to income.
360
Solution 8.12
R
Cost R171 000 x 100/114 Note 1 150 000
Less: Wear-and-tear allowances (given) (120 000)
Tax value 30 000
Proceeds R161 000 x 100/15 140 000
Recoupment (R140 000 – R120 000) 20 000
Recoupment not in respect of a replacement machine. R20 000 added to income.
Note
1. The VAT rate changed from 14% to 15% on 1 April 2018 and therefore the VAT
percentage included in the purchase price of machine P is 14%.
2. The recoupment can never be more than the actual amounts claimed as deduc-
tions. In this case, R120 000 was claimed and the full amount of R20 000 is there-
fore recouped.
REMEMBER
• The amount recouped for tax purposes may not exceed the amounts allowed as deduc-
tions in the previous years.
• The recoupment is added to the taxpayer’s income.
• The capital profit (the amount of the proceeds exceeding the original cost of the asset) is
subject to the rules of capital gains tax.
361
Example 8.13
Wilcars Limited purchased a secondhand manufacturing machine on 1 August 2017 for
R150 000 (excluding VAT). This machine (Machine X) was used in a manufacturing
process from 1 September 2017. Machine X was replaced on 31 May 2020. The capital
allowances up to this date amounted to R120 000. Machine X was sold for R110 000
(excluding VAT). Machine S was purchased brand new on 31 August 2020 to replace
Machine X, and was brought into use on the same date. The cost of Machine S amounted
to R182 400 (excluding VAT). Wilcars Limited elects that the provisions of paragraph 66
of the Eighth Schedule apply.
You are required to calculate the allowances and recoupments for the 2021 year of as-
sessment.
362
Solution 8.13
R
Cost 150 000
Less: Capital allowances (given) (120 000)
Tax value 30 000
Proceeds 110 000
Recoupment (R110 000 – R30 000) 80 000
Recoupment must be deferred
Add to income portion of deferred recoupment
R80 000 × 40% 32 000
Machine S section 12C (R182 400 × 40%) (72 960)
REMEMBER
Example 8.14
Cars (Pty) Ltd needed more spcae to manufacture motor vehicle parts which the
company sold to different motor vehichle dealers. The company disposed of their main
factory (Factory A) on 1 September 2020 for R6 440 000 (including VAT). The company
purchased a new factory (Factory B) to replace Factory A on 1 December 2020 for
R8 500 000 (excluding VAT). The factory was brought into use on the same date.
Factory A was purchased new on 1 February 2012 for R3 200 000 (excluding VAT). The
company has a March year end.
You are required to calculate the allowances and recoupments for the current year of
assessment ended 31 March 2021.
363
Solution 8.14
R
Cost of Factory A 3 200 000
Less: Capital allowances (R3 200 000 x 5% x 10) (1 600 000)
Tax value 1 600 000
Proceeds (R6 440 000 x 100/115) 5 600 000
Less: Tax value (1 600 000)
Recoupment 4 000 000
Limited to allowances 1 600 000
Recoupment not included in income (Note)
Factory B – R8 500 000 – R1 600 000 = R6 900 000
Factory B - section 13 allowance (R6 900 000 x 5%) (345 000)
Note
The recoupment will not be deferred in terms of section 8(4)(e) as it does
not meet the requirements of paragraph 65 of the Eight Schedule as it is
not an involuntary disposal. Paragraph 66 of the Eight Schedule is also not
applicable, as this relates to immovable property, and therefore para-
graph 13(3) will apply.
364
Example 8.15
Thebe Manufacturers Ltd entered into a lease agreement with Kaqala Properties Ltd on
1 May 2020 to lease an administration building for 15 years from that date. In terms of
the lease agreement, Thebe must pay a lease premium of R60 000 before 31 May 2020 and
a monthly rental of R6 000 from that date.
You are required to calculate what amounts Thebe Manufacturers Ltd can claim for the
current year of assessment ended on the last day of February 2021.
Solution 8.15
R
Lease premium: R60 000 / 15 × 10 / 12 3 333
Rental: 10 × R6 000 60 000
Total deductions 63 333
Note
The lease premium is written off over the period of the lease agreement, that is to say 15
years. The deduction is reduced pro rata as the building is only let for ten months in the
current year of assessment. In the next 14 years of assessment, R4 000 is written off each
year and, in the last year of assessment, R4 000 × 2 / 12 = R667 is written off.
365
Example 8.16
On 1 May 2019 Mowbray Manufacturers entered into an agreement with Steven Moti for
the lease of land owned by him. The lease agreement provided the following:
• the term of the lease agreement was 20 years from 1 May 2019; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2019 and the factory was completed and brought into
use on 1 October 2020 at a cost of R1 200 000.
You are required to calculate the amount Mowbray Manufacturers may claim in respect
of the leasehold improvements for the 2021 year of assessment ended on the last day of
February.
366
Solution 8.16
R
Leasehold improvements R1 000 000 / 18 years 7 months × 5 / 12 (Note 1) 22 422
Annual building allowance 5% × (R1 200 000 – R1 000 000) (Note 2) 10 000
Total deduction that can be claimed 32 422
Notes
1. Mowbray Manufacturers must write the leasehold improvements off over the period
during which the building is in use, that is to say 20 years, less the 17 months it took
to complete the building from the date of agreement = 18 years and 7 months. It was
only in use for 5 months (1 October 2020 to 28 February 2021) in the current year of
assessment.
2. The contract value is written off over the useful life of the building and the annual
allowance is calculated on the difference between the actual cost (R1 200 000) and the
contract value (R1 000 000).
Example 8.17
On 1 September 2018, Moti (Pty) Ltd purchased a piece of land for R400 000. On
1 May 2019, the company entered into an agreement with Mowbray Manufacturers for
the lease of the land. The lease agreement provided the following:
• the terms of the lease agreement were 20 years from 1 May 2019; and
• the lessees would erect a factory on the land at a cost of R1 000 000.
Building commenced on 1 October 2019 and the factory was completed and brought into
use on 1 October 2020 at a cost of R1 200 000.
You are required to calculate what amounts Moti (Pty) Ltd must include in his income
for the 2021 year of assessment ended on the last day of February. (The discounting rate
is 0,312.)
367
Solution 8.17
Gross income R
Value of leasehold improvements (Note) 1 000 000
Moti (Pty) Ltd can claim the following deduction: 688 000
Value of improvements included in income 1 000 000
Less: R1 000 000 discounted at 6% a year over the remaining period
of the lease, that is to say 18 years and seven months
(R1 000 000 × 0,312) (Note) (312 000)
Note
The value of the leasehold improvements included in the contract is included in Moti
(Pty) Ltd’s gross income in terms of paragraph (h)(i) of the definition of ‘gross income’,
thus, the amount of R1 000 000 and not the actual cost of R1 200 000. Although the
amount accrues on the date of the agreement, in practice it is included in gross income in
the year in which the improvements are completed.
REMEMBER
• The lease premium is claimed from the date the lessee has the right of use of the leased
asset and the asset is actually used in the production of income.
• The leasehold improvements are claimed from the date that the improvements are
brought into use.
• The allowance for both the lease premium and leasehold improvements is calculated
pro rata for the period the asset was in use during the year of assessment.
• A lessee is allowed to fully write off any remaining costs of buildings and improvements
on leased property if those costs have not been fully taken into account by the lease termi-
nation date (and would have otherwise been deductible had the lease continued).
8.13 Summary
In this chapter, the allowances that a taxpayer may claim in connection with capital
assets used in the production of income or from which income is derived, are dis-
cussed in detail. The distinction between repairs and improvements are discussed.
Repairs can be claimed immediately in the year the expense was incurred.
The concepts of the ‘cost of the asset’ and a ‘process of manufacture’ are dealt with
separately as these apply to most assets. In the case of plant and machinery used in a
process of manufacture, the different rates depend on the date the plant or machinery
is brought into use. The allowance is claimed in full even if the asset was not brought
into use for the full year of assessment.
Assets not used in a process of manufacture (for example, computers, delivery vehi-
cles etc.) are written off over periods prescribed by SARS. These wear-and-tear allow-
ances may only be claimed for the period the assets were in use during that year of
assessment.
368
Buildings used in a process of manufacture are written off at specific rates, depending
on the date the erection or improvements commenced and the date they were
brought into use. In certain cases, buildings purchased by the taxpayer can also be
written off at a certain rate. The cost of land cannot be claimed as it constitutes a cost
of a capital nature and the Act makes no special provision for it.
This chapter also deals with the disposal of assets and the allowances relating thereto.
The loss on the sale of an asset can be claimed as a deduction or in the case of a re-
coupment, the amount is added to the taxpayer’s income except where it relates to a
replacement asset. In the case of a replacement asset, the recoupment is deferred, and
a portion of the recoupment is added to income every year.
In the questions that follow, the principles as discussed in the chapter are high-
lighted.
Question 8.1
Frames Manufacturer (Pty) Ltd (a registered VAT vendor) manufactures frames for the
retail market. It owns a small factory in Strijdompark in Randburg. The accountant of
Frames Manufacturers (Pty) Ltd asks you to calculate the capital allowances relating to the
following assets:
R
Factory
Cost of land 100 000
Cost of erection of factory (excluding VAT) 500 000
Date completed: 1 November 2019 and was brought into use on the same date.
Manufacturing machinery
Cost of machinery (including VAT) 200 000
Installation cost (including VAT) 12 000
Transportation cost (including VAT) 5 000
Date of purchase: 1 May 2019
Date brought into use: 1 June 2019
Passenger vehicle
Cost of passenger vehicle (excluding VAT) 120 000
Date of purchase: 1 August 2020
Date brought into use: 1 August 2020
Write-off period in terms of Interpretation Note No. 47: five years.
369
Answer 8.1
(a) Calculation of the tax allowances claimed by Frames Manufacturers (Pty) Ltd for the
current year of assessment
R
Cost of land nil
Section 13 building allowance
Factory (R500 000 × 5%) 25 000
Section 12C allowance
Manufacturing machinery
20% × ((R200 000 + R12 000 + R5 000) × 100 / 115) 37 739
Section 11(e) allowance
Passenger vehicle R120 000 / 5 × 7 / 12 14 000
(b) Recalculation of tax allowances if Frames Manufacturers (Pty) Ltd is a small business
corporation
Cost of land nil
Section 13 building allowance
Factory (R500 000 × 5%) 25 000
Section 12E(1) allowance – Manufacturing machinery
No allowance as the full cost price of R190 350 (excluding VAT) was
claimed in the 2020 year of assessment nil
Section 12E(1A) allowance
Passenger vehicle 50% × R120 000 60 000
Question 8.2
Paint Pot (Pty) Ltd is a manufacturing business that manufactures arts and crafts. The
company is not a small business corporation as defined in the Income Tax Act and its
financial year ends on 31 March. Paint Pot (Pty) Ltd is a registered VAT vendor and all
amounts exclude VAT, unless stated otherwise.
1. Paint Pot (Pty) Ltd donated four office computers with a cost price of R12 000 each to a
local school (not a public benefit organisation) on 1 January 2021 for no consideration.
The market value of the office computers was R16 500 each on 1 January 2021. The
computers were originally purchased and brought into use on 1 August 2019. Binding
General Ruling No. 7 allows for a three-year write off period for computers.
2. The company purchased two machines on 16 September 2020 that were used in the
manufacturing process from that date. Machine X was purchased new at a cost of
R87 000 (including VAT) and machine Z was purchased second-hand from a
competitor for R56 000 (excluding VAT).
3. Paint Pot (Pty) Ltd decided to extend the manufacturing building to improve the
industrial capacity of the building. The extension commenced on 15 July 2020 and was
completed and brought into use on 1 October 2020. The cost of the improvement was
R1 100 000, including the architect’s fees of R125 000. The original manufacturing
building is fully written-off for income tax purposes.
continued
370
4. In spite of the fact that the company extended the manufacturing building, it still
required extra space for manufacturing its best seller, the paint brush that lights up
when you paint. The company approached Steelworks (Pty) Ltd for additional
manufacturing space and signed a lease agreement to lease the building with effect
from 1 May 2020 for a period of six years, with the option to extend the lease for
another four years. A monthly rental amount of R12 500 was payable to Steelworks
(Pty) Ltd from 1 May 2020. A lease premium of R120 000 was payable on 1 May 2020.
Answer 8.2
Paint Pot (Pty) Ltd can claim the following allowances for the year ending 31 March 2021:
Office computers R R
Cost (R12 000 x 4) 48 000
Less: Section 11(e) allowance 2020 (R48 000 / 3 x 8 / 12) (10 667)
Less: Section 11(e) allowance 2021 (R48 000 / 3 x 9 / 12) (12 000) (12 000)
Tax value 25 333
Donation at market value (R16 500 x 4) (Deemed proceeds) 66 000
(Note 1)
Recoupment (section 8(4)(k)) 40 667
Limited to previous allowances (R10 667 + R12 000) (Note 1) 22 667
Machine X – (R87 000 x 100 / 115 x 40%) – section 12C (30 261)
Machine Z – (R56 000 x 20%) – section 12C (11 200)
Extension to building (section 13) – (R1 100 000 - R125 000) x 5% (48 750)
Rental (R12 500 x 11) – section 11(a) (137 500)
Lease premium (R120 000 / (10 years x 12 months) x 11months) –
section 11(f) (Note 2) (11 000)
Notes
1. Remember that the recoupment can never exceed the previous allowances claimed. To
ensure that the recoupment does not exceed the allowances claimed, the proceeds can
also be limited to the cost price in the calculation, which is R48 000. The tax value is
deducted from the proceeds (R25 333) and this gives you the recoupment amount of
R22 667.
2. The calculation can also be done in years, R120 000 / 10 years x 11 / 12 months.
371
Question 8.3
Checkmate (Pty) Ltd (a registered VAT vendor) manufactures marble chess sets. The ac-
countant has nearly completed compiling the taxable income for the current year of as-
sessment (ended on 31 March 2021). He has worked from the net profit according to the
trial balance to a taxable income of R1 580 000 so far. The last calculations concern the
company’s assets.
R
The depreciation as per the trial balance is as follows and included in the fig-
ure of R1 580 000:
Manufacturing equipment (Note 1) 102 632
Computer equipment (Note 2) 60 856
Vehicles (Note 3) 16 082
Repairs per the trial balance are as follows:
Vehicles (Note 4) 5 400
Factory (Note 5) 32 500
Notes
1. Manufacturing equipment consists of the following:
• new equipment #1 purchased on 8 May 2012 for R480 000; and
• new equipment #2 which was damaged due to the malfunctioning of circuitry on
1 August 2020. Equipment #2 had been purchased on 3 March 2018 for R510 000
(VAT inclusive). The insurance company paid out R400 000 on 1 September 2020.
The accounting profit was R119 738, which is also taken into account in the figure
of R1 580 000;
• new equipment #3 was purchased to replace equipment #2 on 30 September 2020
for R670 000 (VAT inclusive). Checkmate (Pty) Ltd elected that paragraph 66 of the
Eighth Schedule apply.
2. Computer equipment was purchased:
• on 1 April 2019 for R150 000 (VAT inclusive); and
• 30 June 2020 for R170 000 (VAT inclusive).
3. Due to limited storage in the delivery vehicle, the vehicle became redundant to the
company. It was therefore donated on 28 February 2021 to a charity organisation. No
section 18A certificate was obtained from the organisation. The cost of the vehicle
amounted to R121 052 (VAT included) on 1 October 2018. It was brought into use on
the same date. The market value at the date of the donation amounted to R130 000
(VAT inclusive).
The following journal was put through for the donation (included in the figure of
R1 580 000):
Dr Donation R62 865
Dr Accumulated depreciation R42 398
Cr Vehicles R105 263
continued
372
4. The vehicle was serviced at a cost of R3 000 (VAT excluded) on 1 May 2020. Tyres were
replaced on 1 December 2020 for R2 400 (VAT excluded).
5. The factory roof was repaired at a cost of R5 000 (VAT excluded) and a separate parking
outside the factory for factory workers was erected at a cost of R5 000 (VAT excluded) on
10 May 2020. The factory was also painted on 15 July 20209 for R15 000 (VAT excluded)
and the damaged floor was repaired at a cost of R7 500 (VAT excluded) on the same
date.
6. Depreciation for accounting purposes is written off as follows:
Manufacturing equipment 5 years
Computer equipment 4 years
Vehicles 6 years
Interpretation Note No. 47 provides for the following
write-off periods for assets:
Computer equipment 3 years
Vehicles 5 years
7. Checkmate (Pty) Ltd is registered on the invoice basis for VAT purposes.
8. This company is not a small business corporation as defined in the Act.
Answer 8.3
Taxable income R1 829 504
373
Taxable
capital
gain
Page
9.1 Introduction............................................................................................................ 377
9.2 Application of capital gains tax (paragraphs 2 to 10) ....................................... 377
9.3 Determine whether capital gains tax is applicable (Step 1)
(paragraph 1 and section 1) .................................................................................. 380
9.3.1 Definition of an asset (Step 1.1) .............................................................. 381
9.3.2 Nature of an asset (Step 1.2) ................................................................... 381
9.3.3 Disposals for capital gains tax purposes (Step 1.3)
(paragraphs 11 and 12) ............................................................................ 381
9.3.4 Timing of disposals (Step 1.4) (paragraph 13) ..................................... 383
9.4 Capital gain or loss on the disposal of an asset (Step 2)
(paragraphs 3 and 4) ............................................................................................. 385
9.4.1 Capital gain on the disposal of an asset (paragraph 3) ....................... 386
9.4.2 Capital loss on the disposal of an asset (paragraph 4) ........................ 386
9.5 Proceeds from the disposal of an asset (Step 2.1) .............................................. 388
9.5.1 Proceeds (paragraph 35) ......................................................................... 388
9.5.2 Donations and transactions between related parties
(paragraph 38) .......................................................................................... 389
9.5.3 Disposals for proceeds not yet accrued (paragraph 39A) .................. 390
9.6 Base cost of an asset (Step 2.2) ............................................................................. 391
9.6.1 Cost included in the base cost of an asset (paragraph 20) .................. 391
375
Page
9.6.2 Cost not included in the base cost of an asset
(paragraph 20(2) and (3)) and the limitation of expenditure
(paragraph 21) ...................................................................................... 393
9.6.3 Base-cost calculation of a pre-valuation date asset ......................... 395
9.7 Market value of assets (paragraphs 29 and 31) ............................................... 396
9.8 Time-apportionment base cost (TAB) (paragraph 30).................................... 399
9.8.1 TAB: Cost only incurred before the valuation date ........................ 399
9.8.2 TAB: Cost incurred before and after the valuation date ................ 403
9.8.3 TAB: Depreciable assets...................................................................... 405
9.9 The 20% rule......................................................................................................... 409
9.10 Selecting the valuation date value (paragraphs 26 and 27) ........................... 410
9.11 Exclusions (Step 2.4) ........................................................................................... 416
9.11.1 Exclusion: Primary residence (paragraphs 44 to 51) ....................... 416
9.11.2 Exclusion: Personal-use assets (paragraph 53) ................................ 422
9.11.3 Exclusion: Disposal of small business assets (paragraph 57) ........ 423
9.11.4 Exclusions: Other ................................................................................. 425
9.11.4.1 Retirement benefits (paragraph 54) .................................. 425
9.11.4.2 Long-term insurance (paragraph 55) ............................... 426
9.11.4.3 Compensation for personal injury, illness or
defamation (paragraph 59) ................................................ 427
9.11.4.4 Gambling, games and competitions (paragraph 60) ...... 427
9.11.4.5 Exempt persons (paragraph 63) ........................................ 428
9.11.4.6 Assets that produce exempt income (paragraph 64) ..... 428
9.11.4.7 Donations and bequests to public benefit
organisations (paragraph 62) ............................................ 428
9.11.4.8 Public benefit organisations (paragraph 63A) ................ 428
9.11.5 Annual exclusion (paragraph 5) ........................................................ 429
9.12 Limitation of losses (paragraphs 15 to 19, 39, 56 and 83) ............................... 429
9.12.1 Non-personal use assets (paragraph 15) .......................................... 429
9.12.2 Intangible assets (paragraph 16) ........................................................ 429
9.12.3 Forfeited deposits (paragraph 17) ..................................................... 430
9.12.4 Options (paragraph 18) ....................................................................... 430
9.12.5 Shares disposed of at a loss following an extraordinary
dividend (paragraph 19) ..................................................................... 430
9.12.6 Assets disposed of to a connected person at a loss
(paragraph 39) ...................................................................................... 431
9.12.7 Waiving or cancelling of debt by a creditor (paragraph 56) .......... 432
9.13 Assessed capital loss carried forward (paragraphs 6 and 7) ......................... 432
9.14 Roll-overs ............................................................................................................. 433
9.14.1 Involuntary disposal of assets (paragraph 65)................................. 433
9.14.2 Reinvestment in replacement assets (paragraph 69) ...................... 435
9.14.3 Disposals to a spouse (section 9HB).................................................. 438
9.15 Inclusion rate (paragraphs 9 and 10) ................................................................ 440
9.16 Summary .............................................................................................................. 440
9.17 Examination preparation ................................................................................... 441
376
9.1 Introduction
A gain or loss that is realised on the disposal of an asset can be of either a revenue
nature or a capital nature. In determining whether the disposal of a particular asset
will result in a capital gain, and therefore be subject to capital gains tax, it is first
necessary to determine whether the profit or loss is revenue in nature by applying the
basic principles of income tax. If it is determined that the disposal is revenue in
nature, the gain or loss will then be subject to normal income tax, not capital gains
tax. If it is determined that the disposal is not revenue in nature, the gain or loss will
be subject to capital gains tax in terms of the Eighth Schedule of the Act. The Eighth
Schedule excludes capital gains on certain assets. Therefore, it is important to note
which assets are not subject to capital gains tax and which are only partly subject to
capital gains tax. References to paragraphs in this chapter are references to the Eighth
Schedule.
377
Calculate the tax payable on the capital gain or the assessed capital loss to be
carried forward to the following year of assessment
Step 1: Determine whether the transaction is subject to capital gains tax (refer
to 9.3).
Step 2: Calculate the capital gain or loss on the disposal of each asset (refer to
9.4).
Step 3: Calculate the sum (total) of all capital gains and losses for the year by
adding up the capital gains and losses on the different assets disposed
of.
Step 6: Calculate the net capital gain or assessed capital loss for the year by:
• reducing the aggregate capital gain (Step 4) by the assessed capital
loss (Step 5); or
• adding the aggregate capital loss (Step 4) to the assessed capital
loss (Step 5).
Step 8: Determine the inclusion rate applicable to the taxpayer, that is 80% for
persons other than natural persons and 40% for natural persons (refer
to 9.16).
Step 9: Calculate the taxable capital gain by multiplying the net capital gain
(Step 9) by the inclusion rate (Step 8).
Step 10: The taxable capital gain is added to other taxable income for the year
to calculate the total taxable income for the year. This total taxable
income is then used to calculate the tax liability.
378
REMEMBER
• If an assessed capital loss arises, the amount is carried forward to the next year of
assessment.
• An assessed capital loss cannot be set off against other taxable income (refer to 9.15).
Example 9.1
Quintal (Pty) Ltd has a net income from operations (before the sale of capital assets) of
R100 000 for the current year of assessment. Quintal CC sold two assets during the year.
The sale of the first asset realised a capital gain of R90 000. The sale of the second asset
resulted in a capital loss of R20 000. In the previous year of assessment, Quintal CC had
an assessed capital loss of R10 000.
You are required to
(a) calculate Quintal (Pty) Ltd’s taxable income for the current year of assessment;
(b) calculate Mr P Quintal’s taxable income for the current year of assessment if you
assume that Quintal (Pty) Ltd is a natural person, Mr P Quintal.
Solution 9.1
As assets were sold during the year, capital gains tax is applicable.
(a) Quintal (Pty) Ltd: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (not a natural person) nil
Aggregate capital gain (R70 000 – Rnil) 70 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R70 000 – R10 000) 60 000
Multiply: Inclusion rate – 80% (not a natural person) 80%
Taxable capital gain (R60 000 × 80%) 48 000
Total taxable income:
Normal taxable income (net income from operations) 100 000
Taxable capital gain 48 000
Total taxable income (R100 000 + R48 000) 148 000
continued
379
(b) P Quintal: R
Capital gain on the sale of asset 1 90 000
Capital loss on the sale of asset 2 (20 000)
Sum of all capital gains and losses (R90 000 – R20 000) 70 000
Less: Annual exclusion (not a natural person) (40 000)
Aggregate capital gain (R70 000 – R40 000) 30 000
Less: Assessed capital loss – previous year (10 000)
Net capital gain (R30 000 – R10 000) 20 000
Multiply: Inclusion rate – 40% (not a natural person) 40%
Taxable capital gain (R20 000 × 40%) 8 000
Total taxable income:
Normal taxable income (net income from operations) 100 000
Taxable capital gain 8 000
Total taxable income (R100 000 + R8 000) 108 000
REMEMBER
• If the result of Step 6 (net capital gain or assessed capital loss) represents an assessed
capital loss, the amount will be carried forward to the following year of assessment and
will not be deducted from the other taxable income.
• The taxable capital gain for individuals must be included in the calculation of taxable
income before the deduction of allowable expenses for donations.
• Only natural persons and paragraph (a) special trusts qualify for the annual exclusion
of R40 000.
380
Step 1.2: Determine the nature of the asset and whether the asset was subject to
income tax (refer to 9.3.2).
381
382
383
Change of ownership
The time of the disposal of an asset by means of a change of ownership is, in the case of:
• an agreement subject to a suspensive condition:
– the date on which the condition is satisfied;
• agreement without a suspensive condition:
– the date of conclusion of the agreement;
• the distribution of an asset of a trust by a trustee to a beneficiary to the extent that
the beneficiary has a vested interest in the asset:
– the date on which the interest vests;
• where a section 8C equity instrument is granted to a beneficiary by a trust:
– the date that the equity instrument vests in that beneficiary in terms of section 8C;
• a donation of an asset:
– the date of compliance with all legal requirements for a valid donation;
• the expropriation of an asset:
– the date on which the person receives the full compensation agreed on or finally
determined by a competent tribunal or court;
• the conversion of an asset:
– the date on which the asset is converted;
• the granting, renewal or extension of an option:
– the date on which the option is granted, renewed or extended;
• the exercise of an option:
– the date on which the option is exercised;
• the termination of an option granted by a company to a person to acquire a share,
participatory interest or debenture of the company:
– the date on which the option terminates;
• or in any other case:
– the date of change of ownership.
384
REMEMBER
• The person acquiring the asset is deemed to have acquired the asset on the date of the
disposal.
Step 2.1: Calculate the proceeds on the disposal of the asset (refer to 9.5).
Step 2.2: Calculate the base cost of the asset (refer to 9.6).
Step 2.3: Calculate the capital gain (refer to 9.4.1) or capital loss (refer to 9.4.2)
on the disposal of the asset by deducting the base cost from the
proceeds.
Step 2.4: Determine whether any portion of the capital gain or loss is excluded
from capital gains tax in terms of the Act (refer to 9.11).
Step 2.5: Determine whether any part of the capital loss is limited by the Act
(refer to 9.12) or whether any roll-over relief exists (refer to 9.13).
385
386
REMEMBER
• In certain situations, the capital gain or capital loss on the disposal of the asset must be
recalculated. For example, where further proceeds accrue in a subsequent year,
following the year of disposal, the additional proceeds are recognised as a capital gain
in the subsequent year.
Example 9.2
Zonke (Pty) Ltd sells the shares in its investment portfolio. The company acquired the
shares for a cost price of R850 000 and sells it for R500 000 net of sales commission of
R50 000. In terms of a loss limitation rule R100 000 of the loss is limited. The company
also earned other taxable income of R200 000 during the same year of assessment. In the
previous year of assessment he had an assessed capital loss of R40 000.
You are required to calculate the capital gain or loss to be included in taxable income for
the current year of assessment.
Solution 9.2
As shares (an asset) was sold (a disposal) during the year of assessment, capital gains tax
is applicable.
Calculate the capital gain or capital loss on the disposal of the asset: R
Proceeds (selling price) 500 000
Less: Base cost (R850 000 + R50 000) (900 000)
(400 000)
Less: Loss limited in terms of a loss limitation rule 100 000
Capital loss on disposal of an asset (R400 000 – R100 000) (300 000)
Less: Assessed capital loss – previous year (40 000)
Assessed capital loss carried forward to following year of assessment (340 000)
The assessed capital loss of R340 000 is not multiplied with the inclusion rate and it
cannot be set off against the other taxable income of R200 000. Instead, the assessed
capital loss is carried forward and it can be set off against any future capital gain on the
disposal of an asset.
387
Paragraph 35 states that if a person is entitled to any amount payable after year end,
it is deemed that the amount accrued to him in the current year of assessment.
REMEMBER
• Where an amount was included in a person’s gross income, it cannot be included in the
proceeds. A person can therefore not be taxed twice on the same amount.
• The amount of wear-and-tear that is recouped for income tax purposes must be
excluded from the proceeds of the asset.
• Where a proceeds amount changes in a subsequent year of assessment, the Act provides
for the capital gain or loss to be recalculated in that subsequent year of assessment.
Example 9.3
Umar CC sold its holiday home in Cape Town during the current year of assessment.
The contract states that R500 000 will be paid on the signing of the contract. Another
R400 000 will be payable 12 months after the signing of the contract. During the current
year of assessment, after the sale of the house, it was found that a part of the plumbing
had to be replaced. The contract made provision for the repayment of part of the initial
payment if any hidden faults were found. The cost of repairing the plumbing amounts to
R75 000, and Umar CC will repay the amount in the next year of assessment. Umar CC
does not speculate in houses.
You are required to calculate the proceeds on the sale of the asset.
388
Solution 9.3
R
Amount received (Note 1) 500 000
Add: Amount payable after year end (Note 2) 400 000
Less: Amount repayable (Note 3) (75 000)
Proceeds 825 000
Notes
1. Any amount received by the taxpayer that has not been included in gross income
must be included in the proceeds. As Umar CC is not a speculator in houses, the sale
of the house will be of a capital nature.
2. Paragraph 35 states that the amount payable in future must be included in the
proceeds if the seller is entitled to the payment of the amount.
3. If an amount will have to be repaid, the proceeds can be reduced by the amount of
the repayment.
What will the capital gains tax implication be if the fault in the
plumbing was only found in the next year of assessment?
389
Example 9.4
Joy Mogale is a resident of the Republic and 41 years old. She is unmarried and therefore
feels that she has a lot to give. During the 2021 year of assessment, she decided to donate
shares to her sister. The shares had a market value of R230 000 on the date of donation.
Joy had originally purchased the shares for R125 000 during the 2016 year of assessment.
Assume that there are no donations tax implications.
You are required to calculate the capital gain or loss for the 2021 year of assessment.
Solution 9.4
Because Joy donated an asset (which is less than market value) to a connected person,
paragraph 38 will apply.
Capital gain or capital loss for the current year of assessment (2021): R
Proceeds (proceeds deemed to be the market value) (note) 230 000
Less: Base cost (125 000)
Capital gain 105 000
Note
Joy’s sister is deemed to have acquired the shares at a base cost of R230 000 despite the
fact that she paid Rnil for the asset.
Example 9.5
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 for R450 000. The contract determined that the
purchase price was payable in annual instalments over three years, with the first
payment due on 28 February 2021. Each instalment was payable only if the block of flats
achieved a net rental return of at least 10% during the specific year. The block of flats
achieved the net rental return of at least 10% during the first year and Jessica paid the
first instalment of R150 000 as required by the contract, on 28 February 2021.
You are required to calculate the capital gain or loss for the 2021 year of assessment.
390
Solution 9.5
The entire proceeds from the disposal of the block of flats do not accrue to Mark in the
2020 year of assessment. They accrue at the end of each year of assessment, as the
condition (net rental return of at least 10%) is met. In terms of paragraph 39A any
capital loss that arise in this situation is ring-fenced until sufficient proceeds have
accrued to Marc to absorb the capital loss.
Capital gain or capital loss for the current year of assessment (2021): R
Proceeds (only the amount that accrued unconditionally) (note 1) 150 000
Less: Base cost (250 000)
Capital loss (note 2) (100 000)
Note
1. Further proceeds (R450 000 less R150 000) will be taxed in future years as capital
gains only when it accrues.
2. The capital loss of R100 000 is ring-fenced in terms of the provisions of par 39A and
cannot be set off against any other capital gains and losses of Marc. It can only be
carried forward and be set off against future proceeds from this transaction, taxed as
capital gains, when it accrues. If it becomes certain in future years that no further
proceeds will accrue, any previously ‘ring-fenced’ capital loss relating to that asset
may be taken into account for CGT purposes
391
– donations tax paid by the donee: as much of the donations tax that bears the
same ratio to the total donations tax as the capital gain of the donor bears to the
market value of the asset; and
– if the asset is acquired or disposed of as a result of the exercise of an option, the
cost actually incurred to acquire the option;
• expenditure actually incurred in establishing, maintaining or defending a legal title
or right in an asset;
• expenditure actually incurred to improve an asset or to enhance its value (the
requirement that the relevant improvement must still be reflected in the asset at the
time of disposal of the property was deleted from the Act);
• where the asset is acquired or disposed of on or after the valuation date by the
exercise of an option acquired prior to the valuation date, the market value of the
option on the valuation date must be treated as expenditure to acquire the asset.
Where the asset was acquired by the exercise of an option after the valuation date,
the expenditure actually incurred in acquiring the option is included in the cost;
• one-third of the interest (in terms of section 24J excluding any interest in terms of
section 24O) on money borrowed to finance expenditure in respect of shares listed
on a recognised exchange or a participatory interest in a portfolio of a collective
investment scheme (including money borrowed to refinance those borrowings);
• in the case of:
– an equity instrument in respect of a share incentive scheme, the market value of
the marketable security or the equity instrument taken into account in deter-
mining the gain or loss for income tax purposes in terms of section 8A or 8C;
– any other asset:
* the amount that has been included in that person’s income in terms of a sec-
tion 8(5) recoupment (rental paid, which was deducted from the cost of the
asset upon acquisition); or
* the amount included in a person’s gross income in terms of paragraph (i) of
the definition of gross income (the cash equivalent of a fringe benefit as
calculated in terms of the Seventh Schedule);
* the amount included in gross income in terms of paragraph (h) of the gross
income definition (leasehold improvements) reduced by the allowance grant-
ed in terms of section 11(h) (leasehold improvements); and
* the amount included in the person’s gross income in terms of paragraph (c)
of the definition of gross income;
– assets inherited from a non-resident: The base cost of assets inherited from the
estate of a non-resident is the sum of the market value of these assets immediately
before death and all costs incurred by the executor. This provision is not ap-
plicable if the non-resident’s assets were subject to South African capital gains tax.
392
Example 9.6
Mpho Malatse sold his holiday house on 1 December 2020. He originally bought the
house in January 2005 for R200 000. Mpho improved the house over the years. He
installed a sauna at a cost of R50 000, as well as an alarm system at a cost of R10 000. He
also had to repair the kitchen cupboards at a cost of R20 000 as the cupboards were
damaged. During the 2019 year of assessment the sauna was damaged during a storm
and, therefore, not used anymore.
You are required to calculate the base cost of the holiday house in the hands of Mpho on
1 December 2020.
Solution 9.6
R
Purchase price 200 000
Add: Improvements (R50 000 (sauna) and R10 000 (alarm system) - see note) 60 000
Base cost 260 000
Note
The repair cost to the kitchen cupboards of R20 000 are not considered improvements
but repairs and maintenance. The amount of R20 000 can therefore not be added to the
base cost. The sauna of R50 000 is an improvement and can be added to the base cost.
The fact that it has been damaged before date of sale does not make a difference.
REMEMBER
• The cost of selling an asset, for example, the sales commission, is included in the base
cost of the asset.
• Only one-third of interest expenditure can be included in the base cost of listed shares
or an interest in a collective investment scheme (equity unit trust) regardless of whether
these assets were held as an investment or for trading purposes. The interest normally
qualifies as a deduction for income tax purposes when the shares are held for trading
purposes and would therefore not again be included in the base cost of the shares sold.
• Donations tax paid by the donor forms part of the base cost of the asset for the donor. If
the donee pays the donations tax, he is entitled to also include a portion of the
donations tax in his base cost.
9.6.2 Cost not included in the base cost of an asset (paragraph 20(2)
and (3)) and the limitation of expenditure (paragraph 21)
The following costs cannot be included in the base cost of an asset:
• borrowing cost (interest as defined in section 24J) (other than the one-third in terms
of paragraph 20(1)(g)), raising fees, bond registration costs and bond cancellation
costs;
• repairs and maintenance;
• protection and insurance;
393
Example 9.7
Small (Pty) Ltd sold its land and factory building during its 2021 year of assessment. The
company originally acquired the land for R57 000 (including VAT of R7 000) and the new
building for R228 000 (including VAT of R28 000), in the 2006 of assessment, 15 years
earlier. Small (Pty) Ltd is a VAT vendor making 100% taxable supplies and claimed the
VAT on the original transaction as input tax. The company could not pay the building in
cash and acquired the building using a bond from the bank. Bond registration cost of
R5 000 was incurred. The interest on the bond over the past 15 years was R80 000 in total.
The company claimed a s 13(1) allowance of 5% per annum for 15 years which in total
amounts to R150 000.
You are required to calculate the base cost of the building in the hands of Small (Pty)
Ltd.
394
Solution 9.7
R
Purchase price (R228 000 + R57 000) 285 000
Less: VAT (R28 000 + R7 000) (s 23C) (35 000)
Add: Interest and bond registration cost (note) -
Less: Allowances claimed for income tax purposes (150 000)
Base cost 100 000
Note
Borrowing cost (interest as defined in section 24J) (other than the one-third in terms of
paragraph 20(1)(g)) and bond registration costs cannot be included in base cost.
REMEMBER
• Section 23C of the Income Tax Act provides that VAT is excluded from the base cost of
an asset if it has been allowed as an input deduction.
395
Example 9.8
Tshego Moloi sold his holiday house for R2 100 000 on 1 March 2020. He bought the
house for R200 000 in November 1985. The property was valued on 1 October 2001 for
R1 700 000. The time-apportionment base cost of the asset is R876 571. In January 2005,
Mpho installed a sauna at a cost of R50 000.
You are required to calculate the base cost of the asset.
Solution 9.8
Calculating the base cost of a pre-valuation date asset consists of two components, the
valuation date value and the cost incurred after the introduction of capital gains tax.
Firstly, calculate the valuation date value of the asset:
• Market value on 1 October 2001 = R1 700 000;
• Time-apportionment base cost = R876 571; or
• 20% of proceeds = R420 000 (R2 100 000 × 20%).
Selected value (highest): R1 700 000
The valuation date value is therefore R1 700 000.
Secondly, add the cost incurred after 1 October 2001 in order to determine base cost.
Cost incurred on or after 1 October 2001: R50 000
Base cost: R1 700 000 + R50 000 = R1 750 000
The base cost of the asset is therefore R1 750 000 (the valuation date value plus the cost
incurred after the valuation date).
396
SARS does not require the taxpayer to submit the valuation with his tax return in the
year of disposal. However, the taxpayer is still required to retain the valuation for
SARS audit purposes. The valuation of the following assets had to be submitted with
the 2005 year of assessment tax return:
• assets of which the market value exceeded R10 million;
• unlisted shares owned by the taxpayer of which the total value is more than
R10 million; and
• intangible assets (excluding financial instruments) of which the market value is
more than R1 million.
The following rules apply to specific assets when determining the market value on
the valuation date:
• Financial instruments listed on the JSE Ltd The aggregate value of all trans-
actions in a financial instrument as traded on each of the five days of trading
preceding the valuation date (Monday 24 September to Friday 28 September 2001)
divided by the total quantity of that financial instrument traded during these five
days. The prices were published by the Commissioner in the Government Gazette.
• Financial instruments listed on an exchange outside the Republic The average of the
sale and purchase price at the end of the last business day before 1 October 2001.
• Collective investment scheme in equity shares and collective investment scheme
in property shares in the Republic The price published by the Commissioner in
the Government Gazette, being the average of the price at which a participatory in-
terest could be sold to the management company of the scheme for the last five
trading days before the valuation date.
• Foreign collective investment scheme The last price published before the
valuation date at which a participatory interest could be sold to the management
company of the scheme or, if there is no management company, the price which
could have been obtained upon a sale of the asset between a willing buyer and a
willing seller dealing at arm’s length in an open market.
REMEMBER
• Where a person’s valuation date is after 1 October 2001 the above-mentioned rules
cannot be used to determine the valuation date value. The market value must be
determined by using the rules discussed below.
• Where a person’s valuation date is after 1 October 2001 (for example, a tax-exempt body that
loses its exempt status), his assets, excluding listed assets, must be valued within twoyears
of the valuation date.
397
398
• Unlisted shares: The selling price of a share obtained from a sale between a willing
buyer and a willing seller dealing at arm’s length in an open market, ignoring the
following conditions:
– restrictions on the transferability of the share; and
– under which method the value of the shares is to be determined.
If the person is entitled to a greater share in the assets upon winding up of the
company, the value must not be less than the amount to which the person would
have been entitled upon winding up.
• Any other asset: The price which could have been obtained upon a sale between a
willing buyer and a willing seller dealing at arm’s length in an open market.
REMEMBER
• When the taxpayer elects to use the market value as the valuation date value of an asset,
the loss limitation rules can limit the amount that can be used as the base cost (refer to
9.10).
• The Act does not indicate how the market value should be obtained. It therefore seems
unnecessary that the valuation should be done by a sworn valuer. It should always be
remembered that the burden of proof is on the taxpayer to prove the correctness of the
value.
• Where an asset is transferred from one spouse to another in terms of the roll-over rules
and the transferor spouse adopted or determined the market value, it is deemed that
the transferee spouse adopted or determined the said market value.
Example 9.9
Twenty years after the valuation date, an asset with a historical cost of R100, is sold for
R700. This asset was originally acquired ten years before the valuation date. The capital
gain is R600 (R700 – R100). A portion of the gain of R600 refers to the pre-valuation date
period and is not subject to CGT, but a portion of this gain of R600 refers to the post-
valuation date period and is therefore subject to CGT.
You are required to discuss which portion of the R600 is subject to CGT by using the
principles underlying the TAB cost method.
399
Solution 9.9
The TAB cost method seeks to achieve a linear spread of the historical gain or loss
between the pre- and post-valuation date periods. If the asset has been sold for a profit
based on historical cost of R600 (R700 – R100), the period before 1 October 2001, is ten
years and the period after 1 October 2001 is 20 years.
It follows that one third of the profit relates to the pre-CGT period, that is R600 × 10/30 =
R200. The valuation date value is determined by adding the gain relating to the pre-CGT
period to the original cost: R100 + (R600 × 1/3) = R300.
The capital gain will then be: R700 less R300 = R400 (that is, two-thirds of the profit relates
to the post-CGT period, that is R600 × 20/30).
The following diagram illustrates how the TAB method achieves a linear spread of
the gain or loss over the period:
This linear spread principle led to the introduction of two sets of formulas under the
TAB method:
(1) two standard TAB formulas (a standard apportionment formula and a standard
proceeds formula); and
(2) two depreciable asset TAB formulas (a depreciable asset apportionment
formula and depreciable asset proceeds formula);
In order to determine which formula to use, it must be determined when the
expenditure was incurred.
400
Where the asset qualified for capital allowances, the second set of formulas is used.
The left hand column provides the three requirements that must be met before the
depreciable asset formulas can be applied. The depreciable asset TAB cost formula
and the depreciable asset proceeds formula must always be used together.
401
Calculate the TAB if all expenditure was incurred before 1 October 2001
REMEMBER
• Selling costs are all the costs that are directly incurred in order to dispose of the asset.
The selling costs includes also the valuation costs.
• For purposes of the TAB formula, the selling cost incurred on or after the valuation date
must be used to reduce the proceeds on the disposal of an asset. The cost is not to be
included in the after-valuation date costs (‘A’ in the TAB formula).
Example 9.10
Simon Dippenaar CC bought an office building on 1 October 1984 at a cost of R500 000.
In 1995 certain improvements were made to the building at a total cost of R400 000. The
building was sold for R3 500 000 on 30 December 2020.
You are required to calculate the valuation date value of the building using the TAB.
402
Solution 9.10
To calculate the TAB, the time-apportionment formula has to be used. It is not necessary
to use the proceeds formula as all the costs were incurred before 1 October 2001.
Y = B + {(P – B) × (N / (T + N))}
B = R500 000 + R400 000 = R900 000
P = R3 500 000
N = 17 years
T = 20 years
Y = R900 000 + {(R3 500 000 – R900 000) × (17 / (20 + 17))}
= R900 000 + R1 194 595
= R2 094 595
The valuation date value is therefore R2 094 595.
9.8.2 TAB: Cost incurred before and after the valuation date
If expenditure was incurred in years of assessment prior to and on or after
1 October 2001, the time-apportionment formula and the proceeds formula must be
used to determine the valuation date value. The proceeds formula is used to divide
the proceeds into two parts, the first relating to the part of the asset for which the
costs were incurred before 1 October 2001 and the rest to costs incurred on or after
1 October 2001. The portion of the proceeds that relates to the cost incurred before
1 October 2001 is used in the time-apportionment formula.
Calculate the TAB of an asset if the expenditure was incurred before and on
or after 1 October 2001
The first formula that needs to be applied is the proceeds formula, which is used
to determine the proceeds relating to the before-valuation date costs:
P = R × B / (A + B)
where:
R = the total proceeds of the sale of the asset less selling cost;
A = the total costs incurred on or after the valuation date (excluding selling cost);
B = the costs incurred before the valuation date; and
P = the proceeds that relate to the cost incurred before 1 October 2001.
403
REMEMBER
Example 9.11
Kgogo Ltd bought an office building for R600 000 on 1 October 1994. In 2004 they made
improvements to the building at a total cost of R900 000. The building was sold for
R6 000 000 on 30 November 2020.
You are required to calculate the base cost of the building using the TAB.
404
Solution 9.11
The costs were incurred before and after 1 October 2001. To calculate the TAB, the
proceeds formula must be applied first.
Proceeds formula:
P = R × B / (A + B)
R = R6 000 000
A = R900 000
B = R600 000
P = R × B / (A + B)
= R6 000 000 × R600 000 / (R900 000 + R600 000)
= R2 400 000
The value of proceeds to be used in the time-apportionment formula is therefore
R2 400 000.
The time-apportionment formula:
Y = B + {(P – B) × (N / (T + N))}
B = R600 000
P = R2 400 000
N = 7 years
T = 20 years
Y = R600 000 + {(R2 400 000 – R600 000) × (7 / (20+ 7))}
= R600 000 + R466 667
= R1 066 667
The TAB of the building on the valuation date is therefore R1 066 667.
The total base cost of the building is R1 966 667 (R1 066 667 + R900 000 (cost after
1 October 2001 + valuation date)).
REMEMBER
• When a taxpayer sells a depreciable asset, the wear-and-tear allowance and any
recoupment or section 11(o) deduction must be taken into account when calculating the
proceeds and the base cost.
405
The first formula that needs to be applied is the depreciable asset proceeds
formula which determines the proceeds relating to the before-valuation date
costs:
P1 = R1 × B1 / (A1 + B1)
The symbols in the formula are defined as follows:
R1 = the proceeds on the sale of the asset
plus any amount that has been recouped and included in gross income
less selling cost;
A1 = the cost incurred (in terms of paragraph 20) on or after the valuation date
(excluding selling cost) plus any wear and tear that has been claimed for
income tax purposes;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear and tear that has been claimed for income tax purposes; and
P1 = the proceeds that relate to the cost incurred before 1 October 2001.
The next step is to apply the depreciable asset TAB formula:
Y = B + {(P1 – B1) × (N / (T + N))}
The symbols in the formula are defined as follows:
B = the cost incurred before the valuation date. Remember that the base cost of
the asset has to be reduced by the wear-and-tear claimed for income tax
purposes;
P1 = the answer of the depreciable asset proceeds formula;
B1 = the cost (in terms of paragraph 20) incurred before the valuation date plus
any wear-and-tear that has been claimed for income tax purposes;
N = the number of years (a part of a year is regarded to be a full year) from the
date on which the asset was acquired to the day before the valuation date.
Where the allowable expenditure was incurred in more than one year of
assessment prior to the valuation date, the number of years may not exceed
20; and
T = the number of years during which the asset was held from the valuation
date until the date the asset was disposed of. A part of a year is regarded as
a full year.
406
Example 9.12
Siphum Ltd bought a used manufacturing asset on 2 October 2000 for R400 000. The asset
qualified for the section 12C allowance at 20%. On 2 November 2016 it made improve-
ments to the asset at a total cost of R600 000. These improvements qualify for their own
capital allowance of 20% in terms of section 12C. The asset was sold for R2 000 000 on
30 September 2021. The company’s financial year end is 31 December 2021.
You are required to calculate the capital gain on the disposal of the asset. The valuation
date value of the asset must be calculated using the TAB.
Solution 9.12
Tax value of asset on date of sale
Cost before valuation date: R
Cost incurred on 2 October 2000 400 000
Less: Wear-and-tear (2000–2004 years of assessment) (400 000)
Tax value of pre-valuation date cost on date of sale nil
Cost after valuation date:
Cost incurred on 2 November 2015 600 000
Less: Wear-and-tear (R600 000 × 20% × 4) (480 000)
Tax value of post-valuation date cost on date of sale 120 000
Tax value of asset on date of sale:
R120 000 (Rnil + R120 000)
Recoupment for income tax purposes
Amount received on disposal 2 000 000
Less: Tax value of asset sold (120 000)
Possible recoupment 1 880 000
The amount of the recoupment is, however, limited to the amount of capital
allowances previously claimed, namely R880 000 (R400 000 + R480 000).
The recoupment is therefore R880 000.
Proceeds on disposal:
Amount received 2 000 000
Less: Recoupment (880 000)
Proceeds 1 120 000
continued
407
REMEMBER
• When calculating the value of B, the wear-and-tear until the date of sale must be taken
into account and not just until the valuation date.
• The recoupment for income tax purposes must be deducted from the proceeds.
408
Step 1: Determine the value to be used: The proceeds from the sale of the
asset less costs incurred on or after 1 October 2001.
Step 2: Multiply the value calculated in Step 1 by 20% to get the valuation
date value.
Example 9.13
Pat Apadile bought a house for R100 000 in 1960. She did not keep any records of the
purchase or the R150 000 for improvements made before the valuation date. In Decem-
ber 2006 she made improvements with a cost of R200 000 and kept records of these
improvements. The house was not valued on 1 October 2001. Pat sold the house on
20 February 2021 for R5 500 000.
You are required to calculate the valuation date value of the house.
Solution 9.13
Calculating the valuation date value:
• The property was not valued on 1 October 2001. Therefore, the market value cannot be
used as the valuation date value.
• As Pat did not keep record of the pre-valuation date costs, she cannot use the TAB cost
as an option to calculate the valuation date value.
• The only option that is available to calculate the valuation date value is the 20% rule.
R
The proceeds from sale 5 500 000
Costs incurred on or after 1 October 2001 200 000
Valuation date value = 20% × (R5 500 000 – R200 000) 1 060 000
The valuation date value of the asset is therefore R1 060 000.
409
REMEMBER
• When calculating the value of the proceeds, amounts already taken into account for
income tax purposes (such as recoupments) must be deducted (refer to 9.5.1).
• When calculating the value of the costs incurred on or after 1 October 2001, amounts
already taken into account for income tax purposes (such as allowances claimed) must
be deducted (refer to 9.6.2).
410
26. Valuation date value where proceeds exceed expenditure or where expenditure
in respect of an asset cannot be determined.–
20 expenditure
Proceeds incurred
of disposal exceeds
par 20 on
before, expenditure
or after incurred
1 October
2001 before, on or after
1 October 2001
Yes No
No
Yes
411
20Proceeds
expenditure
of disposalincurred
does
NOT exceed
before, paragraph
on or after 20
1 October
expenditure incurred before,
2001
on or after 1 October 2001
Yes No
Yes No
412
Step 1: Determine whether the proceeds (excluding VAT and income tax
amounts) exceed the total expenditure (before and after valuation date,
excluding VAT and income tax amounts).
No: Continue with Step 2 if a historic loss (paragraph 27).
Yes: Continue with Step 4 if a historic gain (paragraph 26).
Step 2: Determine whether the market value on 1 October 2001 was determined.
Yes: Continue with Step 3 (paragraph 27(3)).
No:
The valuation date value is the TAB (paragraph 27(4)).
Step 4: Determine the valuation date value in terms of paragraph 26(1) as the
highest of:
• the TAB; or
• the market value on the valuation date; or
• 20% (of proceeds less costs incurred on or after 1 October
2001).
If the market value is adopted and market value exceeds the proceeds
on 1 October 2001, the valuation date value is:
• the proceeds less expenditure incurred on or after 1 October
2001.
413
The application of the rules can best be illustrated by means of a couple of examples.
Example 9.14
Dala CC provides the following information relating to assets sold during the year of
assessment. The only cost incurred for these assets is the original purchase price.
Expense Market
Selling
Asset incurred before value on TAB
price
1 October 2001 1 October 2001
R R R R
A 100 85 94 90
B 100 Not determined 87 85
C 100 60 55 50
D 100 110 105 120
E 100 122 108 112
F 100 150 75 45
Assume no expenses were incurred after 1 October 2001.
You are required to calculate the capital gain or loss for each asset.
Solution 9.14
Asset A
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation: market value has been determined and is less than ex-
penditure, therefore paragraph 27(3)(a) applies: The valuation date value is the higher of
• market value on 1 October 2001 = R85; or
• proceeds less expenses on or after 1 October 2001 = R90 – Rnil = R90
The valuation date value is therefore R90, resulting in a loss of Rnil (R90 – R90).
Asset B
Proceeds < Expenditure
This is a historic loss situation and as the market value has not been determined on
1 October 2001, paragraph 27(4) applies: The valuation date value is the TAB, that is to
say R87, resulting in a loss of R2 (R85 – R87).
Asset C
Proceeds < Expenditure and Expenditure > Market value
This is a historic loss situation, market value has been determined on 1 October 2001 and
is less than expenditure, therefore paragraph 27(3)(a) applies: The valuation date value is
the higher of
• market value on 1 October 2001 = R60; or
• proceeds less expenses on or after 1 October 2001 = R50 – Rnil = R50
The valuation date value is therefore R60, resulting in a loss of R10 (R50 – R60).
continued
414
Asset D
Proceeds > Expenditure
This is a historic gain situation, market value has been determined and is less than
proceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R110;
• time-apportionment base = R105; or
• 20% (proceeds less expenditure on or after 1 October 2001) = 20% × (R120 – Rnil) =
R24.
The market value is the highest but as the proceeds exceed the market value, the market
value can be used.
The valuation date value is therefore R110, resulting in a profit of R10 (R120 – R110).
Asset E
Proceeds > Expenditure
This is a historic gain situation, market value has been determined, but is more than
proceeds, therefore paragraph 26(1) applies: The valuation date value is the highest of
• market value on 1 October 2001 = R122;
• time-apportionment base = R108; or
• 20% (proceeds less expenditure on or after 1 October 2001) = R112 × 20% = R22,40
The market value is therefore the highest and, as the market value is higher than the
proceeds, paragraph 26(3) determines that the valuation date value is proceeds less the
cost on or after the valuation date = R112 – Rnil = R112.
The valuation date value is therefore R112, resulting in a loss of Rnil (R112 – R112).
Asset F
Proceeds < Expenditure and Expenditure > Proceeds but
Expenditure < Market value
This is a historic loss situation, market value has been determined but is more than ex-
penditure, therefore paragraph 27(3)(b) applies: The valuation date value is the lower of
• TAB = R75; or
• market value on valuation date = R150.
The valuation date value is therefore R75 resulting in a loss of R30 (R45 – R75).
415
Step 2.4.1: Determine whether the asset qualifies for one of the following
exclusions:
• primary residence (refer to 9.11.1);
• personal-use assets (refer to 9.11.2);
• disposal of small business assets (refer to 9.11.3);
• other exclusions (refer to 9.11.4).
Step 2.4.2: Determine which portion of the capital gain or loss is excluded for
capital gains tax purposes. Note that some exclusions are only
applicable to losses and that others only exclude a portion or
specific amount of the gain or loss.
416
Example 9.15
Joe Soap sold his primary residence for R6 000 000 during the current year of assessment.
The base cost of the residence is R3 200 000.
You are required to
(a) calculate the capital gain on the disposal of the primary residence after the primary
residence exclusion;
(b) re-calculate the capital gain or loss on the disposal of the primary residence after the
primary residence exclusion if the primary residence is sold for R1 000 000.
417
Solution 9.15
(a) Where the primary residence is sold for R6 000 000: R
Proceeds 6 000 000
Less: Base cost (3 200 000)
Gain on disposal (R6 000 000 – R3 200 000) 2 800 000
Less: Primary residence exclusion (2 000 000)
Capital gain on the disposal of the asset (R2 800 000 – R2 000 000) 800 000
Since the proceeds on disposal is more than R2 million, the entire capital gain cannot be
disregarded (paragraph 45(1)(b) therefore does not apply). However, the first
R2 million of the gain should still be disregarded in terms of paragraph 45(1)(a).
The R2 million gain or loss exclusion is a per residence exclusion. Where more than
one natural person owns the property and uses it as their ordinary residence, the
R2 million gain or loss exclusion must be divided between the persons according to
their ownership. Where a person owns more than one residence, only one of the
residences will qualify as a primary residence.
If the property is owned by a combination of natural persons and persons other than
natural persons, only the natural persons can claim their portion of the R2 million
gain or loss exclusion. Therefore, if one natural person and one or more companies
jointly hold the interest in the property, only the natural person will qualify for the
R2 million gain or loss exclusion. However, if two natural persons and one or more
companies hold the interest in the property, the natural persons will only qualify for
a R1 000 000 exclusion each.
Amounts excluded from the primary residence exclusion
The following does not qualify for the exclusion:
• Where a natural person or the beneficiary of a special trust or their spouse was not
ordinarily resident in the residence throughout the period on or after the valuation
date during which the person or special trust held the interest in that residence, the
418
exclusion cannot be claimed for the period during which they were not ordinarily
resident in that residence.
• Where a primary residence is disposed of together with the land on which it is
situated, the exclusion of R2 million gain or loss exclusion applies to
– a maximum of two hectares of the gain relating to the land;
– land used mainly for domestic purposes together with that residence; and
– land which is disposed of at the same time and to the same person as the
residence.
• The primary residence exclusion does not apply to non-residents.
Example 9.16
Sid Naidoo sold his small holding which he used as a primary residence. The selling price
in the contract is as follows: R500 000 for the house and R3 000 000 for the ten hectares of
land on which the house is situated. The house and land were mainly used for domestic
purposes. The base cost of the house is R300 000 and the base cost of the land is
R1 000 000.
You are required to calculate the taxable capital gain on the sale of the residence.
Solution 9.16
House Land
R R
Proceeds 500 000 3 000 000
Base cost (300 000) (1 000 000)
Gain on disposal 200 000 2 000 000
Less: Amount that does not qualify for the exclusion (Note) nil (1 600 000)
Amount qualifying for the exclusion 200 000 400 000
The total amount qualifying for the exclusion is therefore R200 000 + R400 000 =
R600 000. The maximum amount of the exclusion is R2 000 000, thus the whole R600 000
is excluded.
The taxable portion is therefore: R
Total gain on disposal (R200 000 + R2 000 000) 2 200 000
Less: Primary residence exclusion (R200 000 + R400 000) (600 000)
Capital gain on the disposal of the asset 1 600 000
Note
The amount that does not qualify for the exclusion:
As the property is larger than two hectares, only the first two hectares qualify for the
primary residence exclusion.
The following amount does not qualify for the exclusion:
= R2 000 000 × 8 ha/10 ha
= R1 600 000
419
Example 9.17
Thabo Zonke sold his primary residence for R2 200 000 during the current year of assess-
ment. The base cost of the house is R1 200 000. Thabo used a home study and claimed
10% of the running cost as a deduction for income tax purposes every year.
You are required to calculate the taxable capital gain on the sale of the residence.
Solution 9.17
R
Proceeds 2 200 000
Less: Base cost (1 200 000)
Gain on disposal (R2 200 000 – R1 200 000) 1 000 000
Less: Primary residence exclusion (Note) (900 000)
Capital gain on the sale of the residence (R1 000 000 – R900 000) 100 000
Note
The amount that does not qualify for the exclusion:
The portion of the property that is used for business purposes does not qualify for the
primary residence exclusion. Thabo claimed 10% of the running cost of the house as busi-
ness expenditure for income tax purposes; therefore, 10% of the gain on the disposal of
the property does not qualify for the exclusion.
The following amount does not qualify for the exclusion:
= R1 000 000 × 10%
= R100 000
The amount of the exclusion is therefore R1 000 000 – R100 000 = R900 000, which is less
than the maximum of R2 000 000, thus the whole R900 000 qualifies for the exclusion.
420
REMEMBER
• A person is only allowed to have one primary residence at a time. The reason for the
rules listed above is that there can be an overlap of two years, resulting in a person
having two primary residences at the same time. The person can therefore claim the full
exclusion for both houses.
421
REMEMBER
• The gains and losses on the disposal of personal-use assets are disregarded for capital
gains tax purposes.
• If a person receives an allowance in respect of an asset used partly for business pur-
poses (for example a travel allowance or cell phone allowance), the asset must be
treated as being used mainly for purposes other than the carrying on of a trade.
Limiting of losses
If an asset that is excluded from the definition of a personal-use asset is disposed of, a
capital gain or loss should be calculated. Paragraph 15 of the Eighth Schedule states
that the capital loss attributable to that portion of the asset that is not used for
carrying on of a trade, cannot be claimed for the following assets:
• an aircraft with an empty mass exceeding 450 kilograms;
• a boat exceeding ten meters in length;
• a fiduciary, usufructuary or similar interest, the value of which decreases over
time;
• a lease of immovable property;
• a time-sharing interest or share in a share-block company with a fixed life of which
the value decreases over time; and
• a right or interest of whatever nature to or in an asset referred to above.
422
REMEMBER
• If the disposal of one of the above assets results in a gain, the gain will be taxed but the
loss may not be claimed.
Example 9.18
Peter disposes of (none of which was used for purposes of trade)
1. a town house;
2. a motor vehicle for which Peter receives a travel allowance from his employer;
3. a boat 15 metres in length solely used by Peter for recreational purposes; and
4. a portfolio of shares listed on the Johannesburg Securities Exchange.
You are required to indicate which of the above assets will qualify as personal-use assets.
Solution 9.18
1. Town house – not a personal-use asset as immovable property is excluded (could
qualify for primary residence exclusion if Peter used it as his primary residence).
2. Motor vehicle – is a personal-use asset as it is a qualifying asset on which a business
allowance is paid.
3. Boat exceeding ten metres in length – not a personal-use asset as specifically excluded
(in terms of paragraph 15 any capital loss must be disregarded but a capital gain
must be included).
4. Portfolio of listed shares – not a personal-use asset as financial instruments are
excluded.
Note
Because Peter is a natural person, some assets like the motor vehicle will be considered
personal-use assets and a capital gain or loss on the disposal thereof must be disregarded.
This would also be the case if the motor vehicle was sold by a special trust. If, however,
the same motor vehicle was sold by a company, it would not qualify as a personal-use
asset and the capital gain or loss would not be disregarded.
423
extent that it is used for business purposes and other assets used wholly and exclu-
sively for business purposes. It excludes a financial instrument and an asset held in
the course of carrying on a business mainly to derive income in the form of an
annuity, rental income, a foreign exchange gain, royalty or similar income.
The exclusion applies only where the person:
• held the interest for a continuous period of at least five years prior to its disposal;
• was substantially involved in the operations of the business during the five-year
period; and
• has attained the age of 55 years; or
• has disposed of the interest as a consequence of ill-health, other infirmity, super-
annuation or death.
Paragraph 57 also provides that all qualifying capital gains on the disposal of assets
of the small business must be realised within 24 months from the date of the disposal
of the first qualifying asset in order to qualify for the exclusion.
Example 9.19
Labani Kompi, a sole proprietor, is 56 years old and owns a chain of small clothing shops
and a building which he rents out. Labane started the clothing business from scratch and
built it up over a period of 20 years. He decided to sell his chain of clothing shops to an
independent third party on 28 February 2021.
The parties agreed on a selling price of R1 200 000 which consists of:
Trading stock (clothing) (cost price of R980 000) R900 000
Goodwill (clothing business) R300 000
His building is not used in his clothing business and he conducted the clothing shops
only from rented premises. Labane also offered his building for sale but he has not
received any propositions yet. The building which originally cost R1 000 000 has a market
value of R3 400 000.
You are required to calculate the taxable capital gain on the sale of the chain of clothing
shops.
Solution 9.19
R
Proceeds (note 1) 300 000
Less: Base cost (note 2) (nil)
Capital Gain on disposal 300 000
Less: Small business asset exclusion (note 3) (300 000)
Capital gain on the sale of the chain of clothing shops nil
continued
424
Notes
1. The proceeds of R900 000 relating to trading stock is excluded as it is already taxed in
terms of the gross income definition. Only the proceeds relating to the goodwill is
included.
2. The cost of R980 000 relating to trading stock is excluded as it is already deducted in
terms of the general deduction formula in section 11(a). The cost that relates to the
goodwill is Rnil as Labane had built the business from scratch. He did not acquire the
business from another person and, therefore, Rnil can be claimed as base cost as
Labane incurred Rnil cost in respect of the goodwill.
3. Labane qualifies for the R1 800 000 relief provided for in par 57 of the 8th Schedule
limited to actual capital gain. The following requirements are met:
x The combined market value of all Labane’s assets (active and passive assets) is less
than R10 000 000:
- Building: R3 400 000
- Trading stock: R900 000
- Goodwill: R800 000
- Total: R5 100 000
x The disposal of his chain of clothing shops represents business assets of a sole
proprietor which is allowed in terms of par 57.
x Labane has held the small business for his own benefit for a continuous period of
at least five years prior to selling it.
x Labane has been substantially involved in the operations of the small business
during the period that he held the business.
x Labane has attained the age of 55 years
4. If Labane sells the building, he will not be entitled to claim the remainder of the
R1 800 000 exclusion as the building represents a passive asset (earns rental income
from it).
REMEMBER
• This exclusion does not apply if a person owns more than one business as sole
proprietor, partner or shareholder (with a direct interest of 10% or more) and the
market value of all the assets of all the businesses together with that person’s passive
assets exceeds R10 million.
425
• a lump sum benefit paid for services rendered from a fund, arrangement or instru-
ment situated outside the Republic, which is similar to a pension, pension preser-
vation, provident, provident preservation or retirement annuity fund, is disregard-
ed for capital gains tax purposes.
To determine whether an amount is subject to the Second Schedule to the Act, refer to
chapter 14.
REMEMBER
• If an amount is taxed in terms of the income tax rules, the same amount cannot be
subject to capital gains tax rules. Thus, the tax-free amount of retirement benefits calcu-
lated in terms of the income tax rules cannot be subject to capital gains tax.
REMEMBER
• This exclusion does not apply to the disposal of a long-term insurance policy abroad or
the disposal of a second-hand policy.
• On certain second-hand policies, the capital gains or losses may still be disregarded.
• All risk policies are specifically excluded from the application of capital gains tax. A
specific exemption from capital gains tax applies in respect of employer-owned long-
term insurance policies if the amount to be taxed is included in the gross income of a
person, regardless of whether that amount is subsequently exempted from gross
income. Therefore, when policy proceeds from an employer-owned insurance policy
are exempt from gross income, the exemption should not trigger an adverse capital
gains result. In effect, the exemptions should be broad enough to effectively exempt the
policy proceeds from the income tax as well as from the capital gains tax regime.
426
REMEMBER
• Only gains made in terms of South African laws are excluded; winnings from foreign
sources are subject to capital gains tax.
• All losses, whether from a local or foreign source, are disregarded for capital gains
purposes.
• All gains made by persons other than natural persons (for example companies) are
subject to capital gains tax.
Example 9.20
Isabelle Chase retired during the year of assessment and received a lump sum of
R3 200 000 million from her pension fund. She took the money in cash and started
gambling at the local casino. In the first three months after her retirement she lost
R3 000 000 on gambling bets. Her husband was so upset by his wife’s behaviour that he
had a heart attack. She rushed to hospital with her husband but due to the negligence of
the medical doctor at the emergency ward he died the following day. After his death, she
received R1 800 000 from his long-term life insurance. Isabelle was convinced that her
husband would still be alive had the medical doctor taken reasonable care. She claimed
compensation from the hospital and was paid R2 000 000 compensation, following a
settlement. After receiving the money she felt extremely lucky. Once again, she returned
to the casino, convinced that this time she will win. She won R5 500 000 at the roulette
table.
You are required to calculate the aggregate capital gain or loss for Isabelle for the current
year of assessment.
427
Solution 9.20
Calculate the aggregate capital gain or loss for the year of assessment: R
Capital gain from retirement benefit (R3 200 000 is excluded) nil
Capital losses from gambling bets (R3 000 000 is excluded) nil
Capital gain from long-term life insurance disposal (R1 800 000 is excluded) nil
Capital gain from compensation claim against hospital (R2 000 000 is excluded) nil
Capital gain from winnings at the casino (R5 500 000 is excluded) nil
Aggregate capital gain or loss for the year of assessment nil
428
REMEMBER
• ‘Substantially the whole’ is regarded by SARS as being 90% or more but a percentage of
not less than 85% will also be accepted. The percentage usage is determined using a
method appropriate to the circumstances, which may be based on the time used or area.
• The valuation date of a public benefit organisation in existence on 1 April 2006 will be
the first day of its first year of assessment commencing on or after 1 April 2006.
• The public benefit organisation can determine the base cost of an asset on valuation
date using the same methods available for other assets as per paragraph 26 or 27. If the
market value is adopted, the public benefit organisation must determine the market
value of the asset within two years from the valuation date except for financial instru-
ments (where the market value will equal the ruling price on the last business day
before valuation date) and participatory interest in a local collective investment scheme
in securities of property (the price at which the participatory interest can be sold to the
management of the company of the scheme on valuation date). The weighted average
method is available for identical assets.
429
430
Example 9.21
Ace Ltd., a SA resident company who is not a share-dealer, owns shares in Bongo Ltd (a
JSE-listed SA resident company) which it acquired for R100 000 on 1 March 2006. On 31
May 2019 B 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.
You are required to calculate Ace Ltd's capital gain or loss.
Solution 9.21
R
Proceeds (return of capital R20 000 × 25%) 5 000
Less: Base cost (R100 000 × 10%) (10 000)
Capital loss (5 000)
The dividend portion of the consideration of R15 000 (R20 000 × 75%) is an ‘exempt
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.
R
Exempt dividend received or accrued as a result of the share buy-back 15 000
Capital loss disregarded (limited to R15 000 exempt dividend) 5 000
Capital loss allowed (R5 000 – R5 000) nil
REMEMBER
The practical effect of par 19 is that it will not apply to a natural person holding shares in a
resident company because these dividends are subject to dividends tax. It will, however,
apply to resident companies receiving dividends from resident companies because such
dividends are exempt from dividends tax under s 64F(a).
431
limitation does not apply where a share incentive trusts disposes of a right, a
marketable security or equity instrument to the beneficiaries of the trust (in terms
of section 8A or 8C).
Where a company redeems its shares, the holder of those shares must be treated as
having disposed of the shares to that company. If the holder is a connected person
to the company immediately before the transaction and a capital loss arises, the
loss is clogged.
432
Example 9.22
Farah Sansodien realises a capital loss of R60 000 on the sale of her holiday home to her
sister and a capital loss of R10 000 on the sale of shares in her investment portfolio. She
also earned other taxable income of R200 000 during the same year of assessment. In the
previous year of assessment she had an assessed capital loss of R4 000.
You are required to calculate the assessed capital loss to be carried forward to the next
year of assessment.
Solution 9.22
R
Capital loss on the sale of her holiday home (note 1) nil
Capital loss on disposal of shares in her investment portfolio (10 000)
Assessed capital loss – previous year (4 000)
Assessed capital loss for the year (note 2) (14 000)
Notes
1. The capital loss on the holiday home is ring-fenced and cannot be added to the
assessed capital loss that is carried forward to the following year. It can only be set
off against future capital gains that arise from transactions with the same connected
person.
2. The assessed capital loss of the year of R14 000 is not multiplied with the inclusion
rate and it cannot be set off against the other taxable income of R200 000. Instead, the
assessed capital loss is carried forward and it can be set off against any future capital
gain on the disposal of an asset
9.14 Roll-overs
The Act makes provision for the postponement of the payment of capital gains tax
under certain circumstances, having the effect that the base cost of the asset before the
disposal is rolled over, and when the asset is finally disposed of, capital gains tax is
paid on the difference between the proceeds and the original base cost.
433
• that asset is not deemed to have been disposed of and to have been reacquired by
that person;
• an amount at least equal to the receipts from the disposal has been or will be
expended to acquire one or more replacement assets;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. An interest in immovable property includes a direct or
indirect interest of at least 20% held by a non-resident (alone or together with
connected persons) of the equity share capital of a company or any other entity
(where 80% or more of the market value of the net asset value of that company or
entity, at the time of disposal, is attributable to immovable property situated in the
Republic);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.
REMEMBER
• The Commissioner may extend the period within which the contract must be concluded
or the asset is brought into use by no more than six months if all reasonable steps were
taken to conclude those contracts or bring those assets into use.
• If a taxpayer fails to comply with the periods as laid down:
– the capital gain should be recognised on the date on which the relevant period
ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.
• This rule does not apply to personal-use assets or financial instruments.
• This rule is not applicable when there is a loss.
Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
Where the new asset is a depreciable asset, the capital gain must be realised over the
same time period and in the same ratio that is used to calculate the wear-and-tear
allowances on the replacement asset. Therefore, if an asset qualifies for a 40% deduc-
tion in the first year of assessment it is used, 40% of the gain allocated to the asset
must be recognised as a gain during the first year of assessment. If the taxpayer sells
the replacement asset and there is still an amount of the capital gain allocated to the
original asset that has not been recognised, the full amount is recognised as a gain for
that year of assessment.
434
Where the new asset is not a depreciable asset, the capital gain must be recognised in
the year of assessment when the taxpayer sells the new asset.
Example 9.23
You are required to determine the capital gains for the 2018 to 2021 years of assessment.
Solution 9.23
The capital gain on disposal of the old machine amounts to R20 000. Under par 65 this
must be disregarded and spread over future years of assessment in proportion to the
capital allowances to be claimed on the replacement asset.
The capital allowances on the new machine will be as follows:
2018: R150 000 × 40% = R60 000
2019: R150 000 × 20% = R30 000
2020: R150 000 × 20% = R30 000
2021: R150 000 × 20% = R30 000
The capital gain of R20 000 must be recognised as follows:
2018: R20 000 × R60 000/R150 000 (40%) = R8 000
2019: R20 000 × R30 000/R150 000 (20%) = R4 000
2020: R20 000 × R30 000/R150 000 (20%) = R4 000
2021: R20 000 × R30 000/R150 000 (20%) = R4 000
Note
Had there been a recoupment (section 8(4)), it would have been taxed to the same extent
as the capital gain.
435
• an amount at least equal to the proceeds received from the disposal has been or
will be expended to acquire a replacement asset or assets and this asset or assets
will qualify for a capital deduction or allowance in terms of section 11(e), 11D, 12B,
12C, 12DA, 12E or 37B;
• all the replacement assets are from a source in the Republic, including an interest
in immovable property. This includes immovable property held by that person or
interest or right in immovable property of whatever nature of that person. An
interest in immovable property includes a direct or indirect interest of at least 20%
held by a non-resident (alone or together with connected persons) of the equity
share capital of a company or any other entity (where 80% or more of the market
value of the net asset value of that company or entity, at the time of disposal, is
attributable to immovable property);
• the contracts for the acquisition of the replacement asset or assets have all been or
will be concluded within 12 months after the date of the disposal of that asset; and
• the replacement asset or assets will all be brought into use within three years of the
disposal of the original asset.
Example 9.24
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
2018 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 2018 and also
qualifies for the s 12C allowance. The company’s year-end is the last day of December
each year.
You are required to calculate the normal tax implications for Choice (Pty) Ltd arising
from the above transactions, assuming that the company elects to apply the provisions of
par 66. (Assume that the company has no other capital gains or losses for the relevant tax
years.)
436
Solution 9.24
R
Old machine:
Original cost 100 000
Less: Section 12C allowance (2017 tax year) (40% of R100 000) (40 000)
Section 12C allowance (2018 tax year) (20% of R100 000) (20 000)
Income tax value on date of sale 40 000
Recoupment on old machine:
Proceeds of R150 000 (limited to cost price of R100 000) 100 000
Less: Income tax value on date of sale (calculated above) (40 000)
Section 8(4)(a) recoupment 60 000
This recoupment is not fully included in income (for income tax purposes)
if the taxpayer has elected the provisions of par 66 (s 8(4)(e)). Instead,
the inclusion in the taxpayer’s income in the 2018 tax year will be
R60 000 × 40% 24 000
The inclusion in the 2019, 2020 and 2021 tax years will be R60 000 × 20% 12 000
New machine:
Original cost 450 000
Less: Section 12C allowance (2018 tax year) (40% of R450 000) (180 000)
Income tax value at end of year 270 000
Capital gain on disposal of old machine:
Proceeds on disposal 150 000
Less: Section 8(4)(a) recoupment (60 000)
90 000
Less: Base cost (income tax value calculated above) (40 000)
Capital gain 50 000
The capital gain of R50 000 on the old machine must be rolled over. The
company must account only for 40% of the capital gain of R50 000 in the
2018 year of assessment. This means 40% × R50 000 = R20 000 multiplied
with the inclusion rate of 80% should be included in taxable income
16 000
The inclusion in the 2019, 2020 and 2021 tax years will be
R50 000 × 20% × 80% 8 000
Note
If the company disposes of the new machine or ceases to use it for the purposes of its
trade in a year of assessment before the full capital gain has been brought into account,
it must treat the balance of the capital gain that has not yet been brought into account
as a capital gain in that year.
437
REMEMBER
• On application by the taxpayer, the Commissioner may decide to extend the period
within which the contract must be concluded or the asset brought into use by no more
than six months if all reasonable steps were taken to conclude those contracts or to
bring those assets into use.
• If a taxpayer fails to comply with the period as laid down:
– the capital gain should be recognised on the date on which the relevant period ends;
– interest is calculated at the prescribed rate on that capital gain from the date of that
disposal until the date on which the relevant period ends; and
– the interest is deemed to be a capital gain on the date on which the relevant period
ends.
Where the taxpayer acquires more than one replacement asset, the capital gain must
be apportioned between the different assets. The following formula can be used to
apportion the gain per replacement asset:
Cost of the specific replacement asset
Capital gain per asset = Total gain ×
Total cost of all replacement assets
The capital gain must be realised over the same time period and in the same ratio as
the amount of any deduction or allowance allowed on the replacement asset in that
year in terms of section 11(e), 11D, 12B, 12C, 12DA, 12E or 37B.
REMEMBER
• If the taxpayer sells the replacement asset or stops using the asset in his trade and there
is still an amount of the capital gain that has not been recognised, the full amount is a
capital gain for that year of assessment.
• This rule is not applicable when there is a loss.
438
REMEMBER
• This relief is unavailable if the asset is disposed of to a spouse who is not a resident,
unless the asset is an asset that remains in the tax net for non-residents, for example,
immovable property situated in South Africa or assets of a permanent establishment in
South Africa.
A person must also be treated as having disposed of an asset to his or her spouse for
the purposes of this-roll over provision if the asset is transferred to the spouse:
• in settling an accrual claim of the deceased spouse against the surviving spouse
where an asset of the surviving spouse is transferred to the deceased estate; and
• in consequence of a divorce order or an agreement (dividing the assets) made in a
court order.
In settling an accrual claim of the deceased spouse, the surviving spouse is treated as
having disposed of the assets immediately before the death of the deceased spouse.
This means that the surviving spouse is not subject to normal tax on capital gains on
the transfer of the assets to the deceased estate in terms of the accrual claim.
(section 9HB(2)).
Example 9.25
Hans and Gretel Schoeman are both SA residents married out of community of property.
Hans transfers an asset with a market value of R200 000 and a base cost of R160 000 to his
wife during the year of assessment.
You are required to determine the capital gains tax consequences for both Hans and
Gretel.
439
Solution 9.25
Determine the capital gains tax effect for Hans: R
Capital gain or loss for the year of assessment is excluded nil
Determine the capital gains tax effect for Gretel:
Gretel is treated as having acquired the asset on the same date on which it was acquired
by Hans; for an amount equal to the base cost expenditure incurred by the Hans,
namely R160 000; incurred that expenditure on the same date and in the same currency;
and used the asset in the same manner that it was used by Hans. In essence, Gretel steps
into the shoes of Hans with regard to the asset.
REMEMBER
• The roll-over relief is also available where the asset consists of trading stock that
includes a farmer’s livestock.
• Where a spouse dies this relief only applies in respect of the settling of an accrual claim
of the deceased spouse. It does not apply if his or her surviving spouse inherits any
asset. In such an instance, section 9HA determines the roll over consequences for the
deceased spouse.
REMEMBER
• The effective tax rate on a capital gain is therefore a maximum of 18% (40% × 45%)
for individuals and 22,4% (28% × 80%) for companies.
9.16 Summary
When calculating the capital gain on the disposal of an asset, you need to determine
four things, namely the proceeds on the disposal, the base cost of the asset, the
amount excluded from capital gains tax and whether there are any rules limiting the
losses on the disposal of the asset.
440
Before starting to calculate the capital gain on the disposal, it first has to be deter-
mined whether any portion of the income is taxed as part of the taxpayer’s income
tax calculation, for example recoupments.
The proceeds on the disposal of the asset are normally the compensation received on
the disposal of the asset. This amount has to be adjusted for amounts included in
taxable income for income tax purposes, as a person cannot be taxed twice on the
same amount.
The base cost of the asset is the valuation date value (on 1 October 2001) plus the
expenditure incurred on or after 1 October 2001. The Eighth Schedule of the Act
allows three methods that can be used to calculate the value of the asset on 1 October
2001, namely:
• the market value;
• the time-apportionment base cost; and
• the 20% rule.
The capital gain or loss on the disposal of an asset is the proceeds from the disposal
less the base cost. The Act excludes the gains and/or losses on certain assets from the
calculation of the aggregate capital gain or loss for the year of assessment. Remember
that there is no annual exclusion for persons other than natural persons. The net
capital gain for the year is then multiplied by the inclusion rate (80% for persons
other than natural persons) to calculate the taxable capital gain. The taxable capital
gain is not the amount of tax to be paid; it is included in the taxable income and the
applicable tax rate is then applied to calculate the tax payable.
The next section contains a number of questions that can be completed to evaluate
your knowledge on capital gains tax.
Question 9.1
Green Finger Ltd is a company manufacturing pot plant holders and it is also a VAT
vendor. Due to the success of the company’s products, it had to acquire a bigger manufac-
turing plant. All amounts include VAT unless stated otherwise. The company’s year of
assessment ends on 31 July.
Old plant
The old plant (previously used) was purchased on 1 November 2018 from another manu-
facturing company (who was a registered VAT vendor) for 2 081 739 (excluding VAT).
Green Finger Ltd sold this plant for R5 244 000 on 1 February 2020.
New plant
A new plant (replacement asset, new and unused) was purchased for R6 100 000 on 1 July
2020. The plant was brought into use on 1 January 2021 after modifications costing
R350 000 were undertaken.
Assume that the only other disposal for the years of assessment ended 31 July 2020 and
31 July 2021 was on 1 November 2020, which created a capital loss of R15 000.
441
Answer 9.1
Calculation of the taxable capital gain of Green Finger Ltd for the year of assessment
ended 31 July 2020
R
Proceeds (Note 2) 3 727 304
Less: Base cost (Note 3) (1 249 043)
Capital gain 2 478 261
Less: Roll-over relief (Note 4) (2 478 261)
Taxable capital gain nil
Calculation of the taxable capital gain of Green Finger Ltd for the
year of assessment ended 31 July 2021
R
Capital gain – rolled over (R2 478 261 × 40%) (Note 5) 991 304
Less: Capital loss (given) (15 000)
Net capital gain 976 304
Multiplied by: Inclusion rate 80%
Taxable capital gain 781 043
Notes
1. Income tax calculations
Tax value
Cost 1 November 2018 2 081 739
Less: Section 12C allowance
2019: R2 081 739 × 20% (416 348)
2020: R2 081 739 × 20% (416 348)
Tax value on 1 February 2020 1 249 043
Recoupment
Selling price (R5 244 000 × 100 / 115) limited to cost 2 081 739
Less: Tax value (1 249 043)
Recoupment 832 696
2. Proceeds
Proceeds (R5 244 000 × 100 / 115) 4 560 000
Less: Recoupment (Note 1) (832 696)
Proceeds for capital gains tax purposes 3 727 304
continued
442
3. Base cost
Original cost price (excluding VAT) 2 081 739
Less: Section 12C allowances claimed (832 696)
Base cost 1 249 043
Question 9.2
Rent-a-lot Ltd (a VAT vendor) owns a fleet of hovercrafts which it rents out. The com-
pany’s year of assessment ends on the last day of February. On 30 November 2020 the
company sold two of its hovercrafts to purchasers who are not connected persons to Rent-
a-lot Ltd.
The following information relates to the sale:
Note
Hovercraft #2 had modifications done to it on 1 April 2005 which cost R59 280 (VAT
included at 14%).
SARS allows wear-and-tear to be written off over ten years for these hovercrafts.
All amounts include VAT.
443
Answer 9.2
Calculation of the taxable capital gain or loss of Rent-a-Lot Ltd
R
Capital loss on disposal of hovercraft #1 (Note 1) nil
Add: Capital gain on disposal of hovercraft #2 (Note 2) 16 418
Aggregate capital gain for the year 16 418
The taxable capital gain is therefore 80% × R16 418 = R13 134
Notes
1. Capital loss on disposal of hovercraft #1
Proceeds 77 322
Less: Base cost (77 322)
Capital loss on disposal of hovercraft #1 nil
There is no capital loss because the whole amount is claimed as an
income tax deduction in terms of section 11(o).
2. Capital gain or loss on disposal of hovercraft #2
Proceeds 20 522
Less: Base cost (4 104)
Capital gain 16 418
Question 9.3
During the 2016 year of assessment, Daisy Ltd purchased ten used manufacturing
machines for R2 250 000. On 2 January 2017, the company sold all its manufacturing
machinery to Donald Ltd, which is not a connected person to Daisy Ltd. In terms of the
sales agreement, the selling price is equal to 10% of Donald Ltd’s profit for the next five
years. Donald Ltd’s profit for the next five years (ended 31 December) is as follows:
2017: R10 000 000
2018: R8 000 000
2019: R15 000 000
2020: R3 500 000 (loss)
2021: R5 000 000
All amounts exclude VAT. The company’s year of assessment ends 31 December.
444
Answer 9.3
1. 2016 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
2. 2017 year of assessment:
The company can claim a section 12C allowance:
R2 250 000 × 20% (used asset) = R450 000
The company can claim a section 11(o) deduction: R
Selling price (R10 000 000 × 10%) 1 000 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Possible section 11(o) deduction (350 000)
As the full proceeds did not accrue to the company in the first year,
the section 11(o) deduction must be disregarded (section 20B(1)).
Section 11(o) deduction nil
The total proceeds are less than the original cost and therefore
there is no capital gain for the year.
Capital loss for the current year:
Proceeds (R1 000 000 – Rnil (recoupment)) 1 000 000
Less: Base cost (R2 250 000 (cost) – R900 000 (section 12C allowance)) (1 350 000)
Capital loss (350 000)
Capital loss must be disregarded in the 2017 year of assessment (paragraph 39A(1)).
3. 2018 year of assessment:
R
An amount of R800 000 (R8 000 000 × 10%) accrued to the company.
A recoupment must be calculated for income tax purposes:
Total receipts (R1 000 000 + R800 000) 1 800 000
Less: Tax value (R2 250 000 – R450 000 – R450 000) (1 350 000)
Income tax recoupment 450 000
*The section 11(o) allowance of R350 000 that was disregarded in 2017
cannot be deducted in 2018 as the section 11(o) loss now becomes a
recoupment and is no longer a loss.
Section 11(o) allowance -
Capital gain/loss for the current year:
Further proceeds (further amount accrued to company) 800 000
Further deduction in proceeds (recoupment) (450 000)
Capital gain for 2018 year of assessment 350 000
Capital loss from 2017 year of assessment (paragraph 39A(2)) (350 000)
Net capital gain/loss nil
continued
445
Question 9.4
You are a tax consultant at a local firm. During the year you received the query from a
client:
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 R400 000. Hunter
Ltd sells the shares on 1 May 2021 for R100 000.
All amounts exclude VAT. The company’s year of assessment ends 31 July.
Calculate Hunter Ltd’s capital gains or losses for the year of assessment assuming these
were the only transactions with CGT consequences.
446
Answer 9.4
Query 1:
Calculation of the taxable capital gain or loss of Hunter Ltd for the year of assessment
ended 31 July 2021
R
Proceeds R100 000
Less: Base cost (550 000)
Capital loss (R450 000)
The capital loss is disregarded to the extent that any extraordinary exempt
dividend is received by or accrues to Hunter Ltd within 18 months prior to or
as part of the disposal (refer to 9.12.5).
Extraordinary exempt dividend:
Dividend received or accrued within 18 months before date of disposal R400 000
Less: 15% of proceeds (15% × R100 000) 15 000
Capital loss disregarded R385 000
Capital loss allowed (R450 000 – R385 000) R65 000
447
Taxation of
10 companies and
company distributions
Adjustments
Partnerships Companies Trusts for tax
avoidance
Page
10.1 Introduction ......................................................................................................... 450
10.2 The nature of a company (section 1) ................................................................. 451
10.3 Tax implications for a company ........................................................................ 453
10.4 Small business corporations and personal service providers ....................... 455
10.4.1 Small business corporations (section 12E) .......................................... 455
10.4.2 Personal service providers.................................................................... 458
10.5 Non-resident companies .................................................................................... 460
10.6 Collection of tax due by a company (Fourth Schedule of the Act) ............... 461
10.7 Classification of companies................................................................................ 464
10.8 Tax implications of company distributions ..................................................... 464
449
Page
10.9 Dividends tax (sections 1 and 64D to 64N).................................................... 465
10.9.1 Definition of a dividend (sections 1 and 64D) ............................... 465
10.9.2 Definition of contributed tax capital (section 1) ............................ 466
10.9.3 Levying of dividends tax on a dividend paid in cash
(sections 64E and 64EA) ................................................................... 470
10.9.4 Levying of dividends tax on a dividend in specie
(sections 64E and 64EA) ................................................................... 470
10.9.5 Dividends tax for foreign companies (sections 64E and 64EA) .. 472
10.9.6 Exemptions from dividends tax (section 64F) ............................... 472
10.9.7 Exemption from and reduction of dividends tax in respect
of dividends in specie (section 64FA)............................................... 475
10.9.8 Deemed beneficial owner of a dividend (section 64EB)............... 477
10.10 Withholding of dividends tax (section 64G) ................................................. 478
10.11 Refund of dividends tax (sections 64L and 64M) ......................................... 480
10.12 Payment and recovery of dividends tax (section 64K) ................................ 481
10.13 Dividends tax: Summary ................................................................................. 482
10.14 Normal tax implications of dividends (section 10(1)(k)) ............................. 482
10.14.1 Tax-free dividends (section 10(1)(k)) .............................................. 483
10.14.2 Taxable dividends from a REIT (section 10(1)(k)(aa)) .................. 483
10.14.3 Taxable dividends received from collective investment
schemes (section 10(1)(iB)) ............................................................... 484
10.14.4 Other taxable dividends (section 10(1)(k)(i)(dd) to (jj)) ............... 486
10.14.5 Taxable foreign dividends ............................................................... 486
10.14.5.1 The definition of a foreign dividend (section 1) ....... 486
10.14.5.2 Foreign dividends declared by a headquarter
company (section 10(1)(k)(i)) ....................................... 486
10.14.5.3 Foreign dividends exemption (section 10B) ............. 486
10.14.6 Taxable dividends received by way of annuity ............................ 488
10.15 Summary ............................................................................................................ 488
10.16 Examination preparation ................................................................................. 488
10.1 Introduction
Lillian Mtombe decided that she wanted to start her own business. She wants to bake
rusks and sell it to different entities. She knows that she will incur certain expenses
and that she is going to earn income from the sale of the rusks. She is unsure of what
she has to do and heard from a friend that she needs to choose a certain form of
enterprise in which she will operate her business. Lillian decided on a company as
her form of enterprise.
A company is a fictitious separate person or entity that has been clothed with a legal
personality. It is not a building that can be seen. It is just a form or legal entity within
450
which activities take place and are regulated. For income tax purposes, a company is
also treated as a separate person and a separate tax calculation must be prepared for
the company itself, over and above that of its owners (shareholders) and managers
(directors).
If Lillian Mtombe therefore chooses a company as her form of enterprise, she will
undertake all her trading activities within the company and at the end of the year she
will summarise the activities and prepare a tax calculation for the company. She will
also have to prepare a tax calculation in her own name, but it will not include the
trading activities of the company; just possibly a salary that she received for services
rendered to the company, as well as dividends on any shares that she may hold in the
company.
If one has specifically decided upon a company or close corporation (CC) as a form of
enterprise, after studying this chapter one should understand the tax implications of
this form of enterprise.
451
REMEMBER
• Any reference hereafter to a company refers to the definition in terms of the Act and
include, among others, a close corporation and a foreign collective investment scheme.
Example 10.1
50%
A
D 70%
25% B
80%
From the diagram it is clear that all the companies form part of the same group of com-
panies. Company A is the controlling group company. Since Company A has a 70% in-
terest in Company B, the second requirement will be fulfilled and at the same time the
first requirement regarding Company B will also be fulfilled (controlling group company
holds 70% directly).
Company C is also part of the group of companies. Although the effective interest of
Company A in Company C is only 56% (70% × 80%), it is not the effective interest that is
relevant. Since Company B (controlled group company) holds a direct interest of 80% in
Company C, the first requirement is also fulfilled.
continued
452
Since Company A (controlling group company) holds a direct interest of 50% in Compa-
ny D, and Company B (controlled group company) holds a direct interest of 25% in
Company D, a controlling and controlled group company together directly hold at least
70% of the shares of the company and therefore Company D also forms part of the same
group of companies.
REMEMBER
• The definition of ‘group of companies’ differs from the definition of ‘connected person’
(refer to chapter 8). A company will be a connected person to another company if, for
example, at least 50% of the equity shares are directly held in that other company, not
70%.
Gross income
453
Therefore, when a company’s taxable income is calculated, basically the same pro-
cedure is used as applied for natural persons. The normal tax liability of a natural
person is calculated on a sliding scale by means of the tax tables. Companies,
however, pay normal tax at a fixed rate of 28%.
Every year the tax rates for the following year of assessment are announced in the
budget speech. The tax rate announced in the budget of February 2020 for individuals
applies to the year of assessment of 1 March 2020 to 28 February 2021.
For companies, it applies to years of assessment that end on any date during the
South African fiscal year from 1 April 2020 to 31 March 2021. It is therefore possible
that a company with a 30 April 2020 year end will only be informed in February 2020
during the budget speech that it will have to pay tax at a higher or lower rate for the
2021 year of assessment.
The rate for companies (small business corporations excluded) has been fixed at 28%
of taxable income (taxable income for the current year, less the balance of an assessed
loss incurred in a previous year that has been carried forward from the preceding
year of assessment) (section 20(1)(a)).
A company’s normal tax calculation is done for its year of assessment. This is the
financial year of the company that ends during the relevant fiscal year. It is not
necessarily a period of 12 months, but may be changed with the approval of the Com-
missioner. In this manner, a company with a financial year that ends on 31 March
may be incorporated, for example, on 1 October 2020. The first year of assessment
will then be from 1 October 2020 up to and including 31 March 2021. If the company
then changes its year end on 15 April 2021 to 31 December, the second year of
assessment will extend from 1 April 2021 to 31 December 2021. The third year of
assessment will then extend from 1 January 2022 to 31 December 2022.
Example 10.2
ABC (Pty) Ltd had taxable income of R100 000 for the year of assessment ended
31 January 2021 The company is not a small business corporation as contemplated in
section 12E(4) (refer to 10.4.1).
You are required to calculate the normal tax due by ABC (Pty) Ltd.
Solution 10.2
R100 000 × 28% = R28 000 tax due in respect of the 2021 year of assessment.
If a company did not carry on a trade in the Republic during a year of assessment, the
benefit of an assessed loss is not carried forward and it is lost. This principle was
confirmed in SA Bazaars (Pty) Ltd v CIR 18 SATC 240. The expression ‘carrying on of a
trade’ does not include the earning of passive income such as dividends and interest.
Hence, unless a company carries on the business of a moneylender, an assessed loss
cannot be carried forward from a year that the company solely derived interest
income and did not carry on any other trade. In order to carry forward an assessed
loss, it is further required that a company must derive income from a trade. However,
the Commissioner does not enforce this principle very strictly and allows for an
454
assessed loss to be carried forward if the company has carried on a trade, even if no
income was derived from that trade.
A company is also obliged to withhold (or pay) 20% dividends tax (refer to 10.9) in
respect of cash dividends or dividends in specie declared by the company.
The normal tax for gold-mining companies and insurance companies is calculated in
a different manner, but is not discussed in this text as it is considered to be specialist
in nature.
REMEMBER
455
– a body corporate;
– a share block company;
– a non-profit company that had been formed solely for the purpose of managing
the collective interests common to all its members;
– a less than 5% interest in a social or consumer co-operative or co-operative
burial society;
– any friendly society;
– a less than 5% interest in a primary savings co-operative bank or primary
savings and loans co-operative bank; or
– a venture capital company;
– any company, co-operative or close corporation in the process of liquidation,
winding up or deregistration; or
– any company, close corporation or co-operative that has not during any year of
assessment:
* carried on a trade; and
* owned assets with a total market value of more than R5 000;
• such a company is not a personal service provider as defined in the Fourth
Schedule (refer to 10.4.2); and
• not more than 20% of all the receipts and accruals (other than those of a capital
nature) and all the capital gains of the company, close corporation or co-operative
consist collectively of investment income and income from the rendering of a
personal service.
‘Investment income’ is passive income and is defined as:
• any income in the form of dividends, foreign dividends, royalties, rental derived in
respect of immovable property, annuities or income of a similar nature;
• any interest as contemplated in section 24J (interest earned on instruments other
than interest received by or accrued to an co-operative bank), an amount con-
templated in section 24K (interest on interest rate agreements) and any other income
which is in terms of the Acts of the Republic administered by the Commissioner
subject to the same treatment as income from money lent; and
• any proceeds derived from investment or trading in financial instruments (includ-
ing futures, options and other derivatives), marketable securities or immovable
property.
‘Personal service’ means any service in the field of accounting, actuarial science,
architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, educa-
tion, engineering, financial services broking, health, information technology, journa-
lism, law, management, real estate broking, research, sport, surveying, translation,
valuation or veterinary science, if:
• that service is performed personally by a person who holds an interest in that
company, co-operative or close corporation or by a connected person in relation to
a person holding such an interest; and
456
REMEMBER
457
Example 10.3
ABC (Pty) Ltd, a small business corporation in terms of section 12E of the Act, supplies
goods that it manufactures to private institutions. The Commissioner has approved the
manufacturing process as a similar process. The following represents a summary of
income and expenditure for the current year of assessment ended 31 January:
R
Gross income for goods supplied 4 000 000
Interest income 800 000
Purchase of machine for manufacturing process (brought into use
immediately and for the first time by ABC (Pty) Ltd) 300 000
Office equipment purchased and brought into use 6 000 000
You are required to calculate the tax due by ABC (Pty) Ltd in respect of the current year
ended 31 January. The taxpayer prefers the most preferential wear and tear allowance.
Solution 10.3
R
Gross income for goods supplied 4 000 000
Interest income (Note 1) 800 000
Less: Purchase of machine (section 12E(1) – 100% deduction) (300 000)
Office equipment purchased and brought into use (Note 2) (3 000 000)
Taxable income 1 500 000
Notes
1. Although investment income in the form of interest income was earned, it only represents
16,67% (R800 000 / R4 800 000 (R4 000 000 + R800 000)) of the total gross income. The
investment income is therefore less than the 20% limit and ABC (Pty) Ltd still
qualifies as a small business corporation.
2. In terms of Interpretation Note No. 47, office equipment qualifies to be written off
over five years for purposes of section 11(e). Therefore, it would be more beneficial
for the taxpayer to elect section 12E rates, namely R6 000 000 × 50%.
458
• where those 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 performed or are to be performed in
rendering such service; or
• where more than 80% of the income of such company or trust during the year of
assessment, from services rendered, consists of or is likely to consist of amounts
received directly or indirectly from any one client of such company or trust, or any
associated institution in relation to such client,
except where such company or trust, throughout the year of assessment, employs
three or more full-time employees who are on a full-time basis engaged in the
business of such company or trust of rendering any such service, other than an
employee who is a shareholder of the company or a settlor or beneficiary of the trust
or is a connected person in relation to such person.
(Definition of ‘personal service provider’ in paragraph 1 of the Fourth Schedule.)
A company cannot be a small business corporation if it is a personal service provider
(refer to 10.4.1).
A personal service provider company pays tax at a rate of 28% of taxable income. In
the case of a personal service provider that is a trust, the rate is 45%.
In terms of section 23(k), the permissible deductions of a personal service provider are
limited to:
• an amount paid or payable to an employee for services rendered by such employee,
which is or will be taken into account in the determination of the taxable income of
such employee; and
• the following additional expenses:
– legal costs deductible under section 11(c);
– irrecoverable debts deductible under section 11(i);
– contributions made by an employer for the benefit of his employees to a
pension fund, provident fund or retirement annuity fund deductible under
section 11(l);
– refunds of salary (section 11(nA) and restraint of trade payments (section 11(nB);
and
– expenses in respect of premises, finance charges, insurance, repairs, fuel and
maintenance in respect of assets if such premises or assets are used wholly and
exclusively for purposes of trade.
A personal service provider that is a company must withhold dividends tax on cash
dividends paid (refer to 10.9).
In terms of the Fourth Schedule, a personal service provider is included in the def-
inition of ‘employee’ and when payments are made to such companies, employees’
tax (at a rate of 28% for a company or 45% for a trust) must be withheld from such
payments. These amounts may then be applied as credit when the income tax liability
of the personal service provider is calculated.
459
REMEMBER
Example 10.4
XYZ (Pty) Ltd is classified as a personal service provider and for the current year of
assessment ended 31 January, the following applies:
R
Gross income for services rendered 6 000 000
Employees’ tax withheld on this (R6 million × 28%) 1 680 000
Remuneration paid to employees 4 030 000
Irrecoverable debts 70 000
Other expenses in respect of assets not used wholly and exclusively for trade
purposes. 200 000
You are required to calculate the tax due by or to XYZ (Pty) Ltd, in respect of the current
year of assessment.
Solution 10.4
R
Gross income for services rendered 6 000 000
Less: Remuneration paid to employees (4 030 000)
Irrecoverable debts
(no other expenses are deductible in terms of section 23(k)) (70 000)
Taxable income 1 900 000
Tax due on this (R1 900 000 × 28%) 532 000
Less: Employees’ tax paid by XYZ (Pty) Ltd (1 680 000)
Refund owed to XYZ (Pty) Ltd by SARS (1 148 000)
460
REMEMBER
• When a resident company becomes a non-resident company, all assets (with certain
exceptions) are deemed to have been disposed of by the company at market value on
the day immediately before the company becomes a non-resident.
461
Minimum amount
Taxpayers are divided into two groups when determining the minimum amount:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.
462
the calculated assessed tax. The difference represents an additional amount that must
be paid to SARS or an amount that is owed to the taxpayer by SARS as a refund.
PLEASE NOTE
• Under the Covid-19 tax relief measures, provisional taxpayers that fulfilled certain
requirements could have elected to defer settlement of a portion of the provisional tax
payments that became due on or after 1 April 2020 without incurring any penalties and
interest. This concession only applied for a limited period and falls outside the ambit of
this textbook.
Example 10.5
The year of assessment of Casa Mia CC, a personal service provider as defined, ends on
30 June. The company’s tax assessment in respect of the 2019 year of assessment was
issued on 15 July 2020 and reflects taxable income of R102 593. Included in this taxable
income is a taxable capital gain of R10 000.
The company’s tax assessment in respect of the 2020 year of assessment, which
indicates a taxable income of R80 000, was issued in the current year of assessment on
20 January 2021.
During the 2021 year of assessment, employees’ tax of R25 000 (R10 000 up to and
including 31 December) was withheld on payments received from other persons.
On 31 July 2021, Casa Mia CC’s financial director prepared the tax calculation for the
2021 year of assessment which indicated a taxable income of R200 000. Included in this
taxable income is a taxable capital gain of R20 000.
You are required to calculate the provisional tax payments made by Casa Mia CC in
respect of the 2021 year of assessment. You may assume that all payments were correct
and were made on time, and that Casa Mia CC paid no interest. Ignore the potential
application of the Covid-19 tax relief measures.
Solution 10.5
R
First provisional tax payment – 31 December 2020
Basic amount (R102 593 – R10 000 (taxable capital gain)) 92 593
Tax on this (R92 593 × 28%) (Note 1) 25 926
Half applicable to first payment (R25 926 × 50%) 12 963
Less: Employees’ tax paid (up to 31 December) (10 000)
First provisional payment 2 963
Second provisional tax payment – 30 June 2021
Basic amount 80 000
Tax on this (R80 000 × 28%) 22 400
Less: First provisional payment (2 963)
Less: Total employees’ tax (25 000)
(5 563)
continued
463
Notes
1. Casa Mia CC is a personal service provider and therefore pays tax at 28%.
2. Although the calculation result in a negative answer, there will not be a refund from
SARS and the second provisional payment is taken as Rnil only.
3. If the actual third payment only amounted to R20 000, the difference of R8 037
(R28 037 – R20 000) would have been payable on assessment. If the date of the
assessment was after 31 December 2021, interest on the R8 037 would have been
calculated at the prescribed rate from 1 January 2022 up to the date of the assessment.
464
REMEMBER
REMEMBER
• The term ‘amount’ includes money as well as the value of every property earned by the
taxpayer, whether corporeal or incorporeal, which has a monetary value (Lategan v
CIR). Therefore a dividend includes money, as well as a dividend in specie, which is a
distribution of assets to a holder of shares.
• A share means, in relation to a company, a unit into which the proprietary interest in
that company is divided.
continued
465
• A dividend refers to payments made ‘in respect of’ a share. Therefore, it does not matter
if the payment is made to a person who is not the owner of the share. A dividend is a
payment made because of the particular shareholding. Dividends do not include
payments made, for example, for services rendered to the company.
• The transfer pricing provisions in section 31 of the Act aim to ensure that resident and
non-resident connected persons transact on an arm’s length basis where the relevant
transaction results in a ‘tax benefit’ (that is to say the reduction, avoidance or
postponement of tax) for a party to such a transaction. Failure to transact on an arm’s
length basis firstly triggers a primary adjustment under section 31(2) whereby the
taxable income of each party obtaining a tax benefit must be determined as if the
transaction had been entered into at arm’s length terms and conditions. In addition, the
secondary adjustment under section 31(3)(i) provides that such a primary adjustment to
taxable income must be treated as a deemed dividend in specie declared and paid by the
resident if that person is a company. Alternatively, section 31(3)(ii) regards the primary
adjustment as a deemed donation for donations tax purposes made by the resident if
that person is not a company.
• For purposes of section 1, the concept ‘dividend’ specifically excludes a dividend in
specie resulting from a transfer pricing secondary adjustment in terms of section 31(3).
Nevertheless, such a dividend in specie falls within the ambit of a dividend as defined in
section 64D which therefore attracts dividends tax at a rate of 20%. This exclusion aims
to block any tax treaty relief (such as a reduction in the rate of dividends tax) that
would otherwise have applied in respect of such a dividend in specie.
Step 1: Add share capital and share premium prior to 1 January 2011.
Step 2: Subtract the amount included in share capital and share premium that
would be classified as a dividend (that is to say capitalised profits) as
per the previous dividend definition (the dividend definition prior to
1 January 2011).
(Note:
For a foreign company that became a resident after 1 January 2011
the market value of all the shares in a class is the starting point of your
calculation (that is to say Step 1 and Step 2).
continued
466
Step 3: Add any consideration received or accrued to the company for the
issue or conversion of shares (including cash, assets, loan reduction or
services received).
Step 4: Subtract any amount transferred from contributed tax capital to share-
holders after 1 January 2011. The company must have determined that
it was a reduction in contributed tax capital. It should be determined
by the directors of the company in writing that the amount transferred
constitutes a reduction of the contributed tax capital. The share
transfer must be proportionate in relation to the shareholding.
Example 10.6
Omni Ltd made a distribution to a shareholder with a 40% interest in the company of
R150 000. The directors decided that the distribution represents the entire share premium
of R100 000 plus R50 000 profits and issued a resolution in this regard.
You are required to determine the amount of the distribution that represents a dividend
as defined.
Solution 10.6
Share premium forms part of contributed tax capital. Contributed tax capital is excluded
from the definition of a dividend. Any reduction in contributed tax capital is pro rata for
all shareholders.
R
Distribution paid 150 000
Less: Shareholder portion of contributed tax capital (R100 000 × 40%) (40 000)
Profit distribution that represents a dividend 110 000
Where shares are issued by one company to another company, the provisions of
section 8G apply. Section 8G seeks to combat schemes whereby South African sub-
sidiaries artificially increase their contributed tax capital, which is then applied to
fund capital distributions to their foreign shareholders. Targeted transactions typically
467
REMEMBER
• A distribution of an amount classified as contributed tax capital will not result in
dividends tax.
• Should a company have different classes of shares, the contributed tax capital must be
calculated separately for each different type of share.
• The repurchase by a company of its own shares can result in a dividend to the extent
that it does not represent a reduction of contributed tax capital.
Example 10.7
Adi Ltd made the following distributions
31 May 2020: General repurchase of shares, in compliance with the listing requirements
of JSE to the amount of R50 000. The repurchase was entirely funded by a share premium
(contributed tax capital) per the directors’ resolutions.
15 June 2020: R2,50 distribution per share. The company has 750 000 shares issued. R1 of
the distribution represent a reduction in contributed tax capital.
20 July 2020: Gratutious distribution to a trust in respect of its shareholding in the
company to the amount of R50 000.
30 September 2020: Distribution of trading stock with a market value of R30 000 to a
shareholder. The cost price of the trading stock was R20 000.
30 November 2020: Payment to Thabo Ndou, a shareholder to the amount of R15 000 for
services rendered to the company.
You are required to determine whether the distributions are a dividend as defined.
Solution 10.7
31 May 2020
The general repurchase of shares in terms of the JSE listing requirements are specifically
excluded from the definition of a dividend. The payment is made from contributed tax
capital which is also excluded from the definition of a dividend.
15 June 2020
A total amount of R1 875 000 (R2,50 × 750 000 shares) was distributed to shareholders
(any person holding a share in Adi Ltd). R750 000 (R1 × 750 000 shares) of the amount
represents contributed tax capital, which is excluded from the definition of a dividend.
continued
468
Example 10.8
Vuzi (Pty) Ltd is a South African resident company. All of Vuzi (Pty) Ltd’s shareholders
are natural persons. There has not been a movement in the equity of the company since
the effective date. Equity consists of:
R
Ordinary shares 280 000
Share premium 60 000
Retained profits 150 000
490 000
Peter Janse received 500 shares in exchange for services rendered. The value of the
services rendered amounted to R80 000.
You are required to calculate the value of contributed tax capital after the above-men-
tioned transaction.
Solution 10.8
Calculation of contributed tax capital:
R
Ordinary shares 280 000
Share premium 60 000
Services rendered 80 000
Contributed tax capital 420 000
469
Example 10.9
Encor Ltd, a company listed on the JSE declares a cash dividend on 1 June. The last day
to register for the dividend is 15 June when the dividend becomes due and payable. The
date of payment is 1 July.
You are required to state when the date of payment of the dividends tax will be (that is
to say when the dividends tax must be withheld).
470
Solution 10.9
As the company is a listed company, the date of payment of the dividend is 1 July.
Note
If the company had declared a dividend in specie the payment date would have been the
earlier of when it became due and payable and when it was paid. The date of dividends
tax would have then been 15 June.
Example 10.10
A dividend amounting to R250 000, was paid by a resident company to holders of shares
who are not exempt from dividends tax.
You are required to calculate the dividends tax to be paid over to SARS as well as the
amount of dividends that the holders of shares will receive.
Solution 10.10
The dividends tax liability will amount to R50 000 (R250 000 × 20%). The beneficial
owners will receive a dividend of R200 000, and R50 000 dividends tax will be paid over
to SARS by the resident company on behalf of the beneficial owners. For normal tax
purposes, the beneficial owners must include the gross dividend (instead of the amount
net of dividends tax that was actually received) in their gross income.
REMEMBER
• Dividends tax is a separate tax from normal tax and will be charged regardless of
whether or not the individual is in an assessed loss position for normal tax purposes.
• A dividend in specie is a distribution of a dividend other than cash. A resident company
paying a dividend in specie will be liable for dividends tax on the distribution, not the
beneficial owner, as in the case of a cash dividend.
Example 10.11
ZNM Ltd is a resident listed company. The company declared a distribution of shares in
their subsidiary company, NIK Ltd (also a listed company), to shareholders (all natural
persons). The market value of the shares on the date before the day that the distribution
was approved by the directors amounted to R17 per share. The market value of the
shares at the end of the business day on which the dividend was approved by the
director (that is, the day that the dividend became due and payable), was R15 per share.
A total number of 100 000 shares in NIK Ltd were distributed by ZNM Ltd.
You are required to calculate the dividends tax liability of the distribution in specie.
471
Solution 10.11
Since the distribution constitutes a dividend in specie, dividends tax has to be levied at
20% on the earlier of date of distribution or the date of approval (when it becomes due
and payable).
The asset in this case is listed shares (NIK Ltd is a listed company). The value of the
distribution is thus R17 per share (this is the market value of the shares at the end of the
business day immediately preceding the date that the dividend is deemed to be paid) ×
100 000 = R1 700 000. The dividends tax liability will be R340 000 (R1 700 000 × 20%).
Note
Should NIK Ltd have been an unlisted company, the value of the dividend in specie
would have been the market value on the day that the dividend was approved by the
directors (that is to say when it became due and payable).
How will the answer differ if NIK Ltd was an unlisted company?
472
• a holder of shares in a registered micro business, to the extent that the aggregate
amount of dividends paid during a year of assessment does not exceed R200 000;
• a person who is not a resident if the dividend is paid by a non-resident company in
respect of locally listed shares;
• any person to the extent that the dividend or foreign dividend is not exempt from
normal tax (either in terms of section 10(1)(k)(i) or section 10B);
• any person to the extent that the dividend was subject to secondary tax on com-
panies;
• any fidelity or indemnity fund contemplated in section 10(1)(d)(iii); or
• a small business funding entity.
REMEMBER
A company is not automatically exempt from its obligation to withhold dividends tax if
the provisions of section 64F apply. In order to qualify for these exemptions, the person to
whom the payment is made must provide the company with the prescribed declarations
and written undertakings before the dividend is paid (section 64G). This does not apply if
the beneficial owner forms part of the same group of companies as the company or if the
payment is made to a regulated intermediary.
Step 2: Establish which beneficial owners of the dividends are exempt from
dividends tax.
Step 3: Multiply the dividend paid to the beneficial owners (step 2) that are
not exempt from dividends tax by 20%.
Example 10.12
Roderick Ltd, a resident company, declared a dividend as defined of R65 000. The
dividend was paid to the following shareholders (that did not form part of the same
group of companies as Roderick Ltd):
• PTS (Pty) Ltd, a resident company with a 25% interest (Note 1);
continued
473
• DeCo Ltd, a locally listed resident company with a 15% interest (Note 2);
• MacNaught Ltd, an approved PBO with a 20% interest; and
• Mr Joe Rodderick, a resident with a 40% interest.
Notes
1. PTS (Pty) Ltd proceeded to declare the full dividend received from Roderick Ltd to its
shareholders. PTS (Pty) Ltd is a registered micro business, and this is the first
dividend that it has declared for this year of assessment.
2. DeCo Ltd declared the full dividend received from Roderick Ltd to its shareholders,
who are all natural persons.
You are required to calculate the amount of dividends tax that Roderick Ltd, PTS (Pty)
Ltd and DeCo Ltd is required to withhold in respect of each of the dividends paid.
Solution 10.12
Roderick Ltd
• No dividends tax will be withheld on the dividend declared to PTS (Pty) Ltd.
Dividends paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to DeCo Ltd. Dividends
paid to a resident company are exempt from dividends tax (Note 1).
• No dividends tax will be withheld on the dividends declared to MacNaught Ltd, as it
is an approved public benefit organisation that is exempt from dividends tax (Note 1).
• Dividends tax of R5 200 (R65 000 × 40% × 20%) will be withheld by Roderick Ltd on
behalf of Mr Joe Roderick.
Note 1
The exemptions from dividends tax in terms of section 64F are not automatic exemp-
tions. In each of these cases, the persons to whom the dividends are paid (for example,
resident companies and approved PBOs) should submit a declaration to Roderick Ltd
that was made by the beneficial owner of such dividends confirming that these beneficial
owners qualify for the specific exemption contained in section 64F(1). This should be
accompanied by a written undertaking to, going forward, inform Roderick Ltd should
the circumstances affecting the exemption change or should they cease to be the
beneficial owners of such dividends.
PTS (Pty) Ltd
The dividend declared to the shareholders of PTS (Pty) Ltd will be exempt from
dividends tax, as a holder of a share in a registered micro business is exempt from
dividends tax to the extent that the aggregate dividends paid by that micro business to
all holders of shares do not exceed R200 000 for the year of assessment.
DeCo Ltd
The full dividend paid to the shareholders of DeCo Ltd will be subject to dividends tax
of R1 950 (R65 000 × 15% × 20%).
474
REMEMBER
• The beneficial owner is the person who is entitled to receive the benefits of the dividends
attached to a share and is not necessarily the registered owner of that share
(section 64(D)).
From 1 July 2020, the prescribed declaration and written undertaking that a company
is required to obtain from a person in order to account for dividends tax of Rnil (or at
a reduced rate), would no longer be valid after a period of five years following the
date of such declaration or written undertaking. In terms of the Covid-19 tax relief
measures, a three-month extension is granted up to 1 October 2020, which afforded a
company additional time to renew any declaration or written undertaking that would
have otherwise expired on 1 July 2020, had it been older than five years at that date.
475
REMEMBER
• If a taxpayer enters into a transaction in a foreign country, they may experience the
problem of being taxed in both their country of residence and the foreign country. A
DTA is a means through which a taxpayer can obtain relief in the case of double taxation.
Step 1: Establish which beneficial owners are exempt from dividends tax in
terms of section 64F and whether the prescribed declarations and
undertakings have been received from them, if required.
Example 10.13
• On 1 June 2020, Roderick Ltd, a resident company, distributed shares with a market
value of R100 000, which it held as an investment, to some of its shareholders. These
shareholders are all resident companies and do not form part of the same group of
companies as Roderick Ltd.
• On 1 July 2020, Roderick Ltd made a further distribution of 1 000 of its own shares
(which has a market value of R5 each) to all of its registered shareholders who are
natural persons.
• On 1 August 2020, the company distributed a laptop with a market value of R7 000 to
a shareholder who is a natural person.
continued
476
Note
You can assume that Roderick Ltd has timeously obtained all the prescribed declarations
and written undertakings from the beneficial owners, where applicable. All dividends
were paid on the date of distribution.
You are required to discuss the dividends tax implications that will result from each of
the aforementioned transactions.
Solution 10.13
• The distribution of shares held as investments constitutes a dividend in specie and
Roderick Ltd will be liable for the dividends tax. However, since the beneficial owners
are resident companies that would have been exempt from dividends tax in terms of
section 64F if it did not consist of a dividend in specie and Roderick Ltd has obtained
the prescribed declarations and written undertakings from these beneficial owners,
the dividend will be exempt from dividends tax in terms of section 64FA.
• Roderick Ltd is not liable for dividends tax on the distribution of 1 000 of its own
shares as the latter does not constitute a dividend as defined (refer to paragraph (ii) of
the definition of ‘dividend’ in section 1).
• The distribution of a laptop constitutes a dividend in specie and Roderick Ltd will be
liable for the dividends tax. Since the shareholder is a natural person which does not
qualify for any of the exemptions listed in section 64F, the beneficial owner will not
be able to provide a declaration and written undertaking that the dividend would
have been exempt from dividends tax if it did not constitute a dividend in specie. The
company is therefore liable for dividends tax of R1 400 (R7 000 × 20%). Since the
dividend was paid on 1 August 2020, the dividends tax must be paid over by
Roderick Ltd to SARS on or before 30 September 2020, namely the last day of the
month following the month during which the dividend was paid by the company.
477
that the dividend that is so received or accrued in respect of that share (or any
amount determined with reference to a dividend in respect of that share) exceeds any
amount paid by the exempt beneficial owner to the other person (section 64EB(2)).
The third anti-avoidance provision applies if an exempt beneficial owner acquires a
listed share or the right in respect of a listed share from another person as part of a
resale agreement between the purchaser (the exempt beneficial owner) of the share
and the seller of the share (or a company forming part of the same group of
companies as the seller). If a dividend in respect of that share is received by or
accrues to the purchaser, that seller (or a company forming part of the same group of
companies) is deemed to be the beneficial owner of that listed share (section 64EB(3)).
Example 10.14
Non-Resident Plc, a non-resident company, owns shares in Rota (Pty) Ltd. Non-Resident
Plc ceded the rights to all future dividends in respect of its shares in Rota (Pty) Ltd to a
resident company, Republico Ltd, in exchange for R90 000. After such cession, Non-
Resident Plc declared and paid a dividend of R100 000 to Republico Ltd. The applicable
DTA between South Africa and Non-Resident Plc’s country specifies a 5% dividends tax.
Your are required to calculate the dividends tax effect of the dividend declaration.
Solution 10.14
Non-Resident Plc R
Dividend 100 000
Dividends tax at 5% payable by Non-Resident Plc 5 000
Note
As a resident company, Republico Ltd is an exempt beneficial owner, provided that the
prescribed declaration and written undertaking are in place. Since Republico Ltd, which
is exempt from dividends tax in terms of section 64F, acquired a right to a dividend by
way of cession and then received an amount in respect of such a dividend, the
provisions of section 64EB(1) must be applied. Non-Resident Plc will therefore be
deemed to be the beneficial owner of the dividend amounting to R100 000.
478
• the beneficial owner is exempt from dividends tax and the person to whom the
dividend is paid has submitted the prescribed declaration and written undertaking
to the company before the dividend is paid;
• the beneficial owner is part of the same group of companies as more narrowly
defined in section 41 (refer to 10.2); or
• the payment is made to a regulated intermediary.
A company must withhold dividends tax at a reduced rate if:
• the beneficial owner is subject to dividends tax at a reduced rate as a result of the
application of a DTA and the person to whom the dividend is paid submitted the
prescribed declaration and written undertaking (section 64G(3)).
Example 10.15
Julie Lily is a non-resident shareholder of Timber Ltd, a resident listed company. A
dividend was declared to shareholders by Timber Ltd and Julie Lily received R20 000.
She submitted the required declaration and written undertaking to Timber Ltd that,
according to the DTA, South Africa is limited to withhold dividends tax at 5% on
dividends declared.
You are required to calculate the dividends tax to be withheld.
Solution 10.15
Timber Ltd will be allowed to withhold R1 000 (R20 000 × 5%) dividends tax from the
distribution paid to Julie Lily.
If a company pays a dividend and withholds dividends tax, the company would be
deemed to have paid the amount so withheld to the person who received the
dividend. The gross amount of the dividend (that is to say before reducing it with the
dividends tax withheld) must therefore be included in the gross income of the
beneficial owner.
REMEMBER
• For a dividend to be exempt from dividends tax or for dividends tax to be withheld at a
reduced rate, the person to whom the dividend is paid must submit the prescribed
declaration by the beneficial owner to the company declaring the dividend. The
declaration must be submitted in the form prescribed by the Commissioner before the
dividend is paid. The person receiving the dividend must also submit a written
undertaking in the form prescribed by the Commissioner to, going forward, inform the
company in writing should the circumstances affecting the exemption change or the
beneficial owner cease to be the beneficial owner.
• No declarations or written undertakings are required when a dividend is paid within a
group of companies contemplated in section 41 or where the dividend is paid to a
regulated intermediary.
continued
479
480
by the regulate d intermediary after the submission of the prescribed declaration and
writtenundertaking.
REMEMBER
• A person to whom a dividend was paid is entitled to obtain a refund of dividends tax
withheld should the beneficial owner be exempt from dividends tax or if dividends tax
should have been withheld at a reduced rate and the prescribed declaration and written
undertaking was not timeously submitted. The prescribed declaration and written
undertaking must be submitted within three years after the date of paying the dividend
in order to qualify for the refund.
REMEMBER
• The payment of dividends tax to SARS is due on the last day of the month following the
month during which the dividend was deemed to have been paid.
• Should the payment be late, interest is charged at the prescribed rate.
481
How to calculate dividends tax for local dividends (in cash and in specie) as
well as on foreign dividends declared (cash only) by locally listed companies
Step 2: Examine all the beneficial owners to determine who will be exempt
from dividends tax (refer to 10.9.6 and 10.9.7).
Step 3: Calculate dividends tax on the amount of dividends (after step 2) for
all beneficial owners that are not exempt from dividends tax by multi-
plying the amount by 20%.
For a cash dividend only:
The net amount of the dividend remaining after subtracting the divi-
dends tax liability (if applicable) must be paid to the beneficial owner(s),
as the liability for the dividends tax falls on the beneficial owner.
Step 4: The company must pay over the dividends tax withheld to SARS by
the last day of the month following the month in which the dividend
was paid or became due and payable for an unlisted company or paid
for a listed company (refer to 10.10 for the withholding of dividends
tax and 10.12 for payment). The company is responsible to pay the
dividends tax on a dividend in specie, as the liability rests with the
company, on the last day of the month following the month in which
the dividend is paid.
482
REMEMBER
• In order to qualify as a REIT, the resident company’s equity shares must be listed on a
recognised exchange in South Africa. The mere listing of non-equity shares, for example
preference shares, will not be sufficient for that company to qualify as a REIT.
483
A REIT qualifies for a capital gains tax exemption in respect of the disposal of im-
movable property, a share or linked unit in a company that is a REIT on the date of
disposal and any shares in a company that is a controlled company on the date of
disposal (section 25BB(5)). A REIT is not allowed to deduct the following capital
allowances in terms of section 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex (section
25BB(4)). Where a foreign dividend is received by or accrues to a REIT or controlled
company, the participation exemption, that applies where a person holds at least 10%
of the equity shares and voting rights in the company declaring the foreign dividend,
(refer to 10.14.5.3) will not apply.
Normal tax consequences for the holder of shares in a REIT
Dividends received from a REIT are not exempt from normal tax, unless the dividend
was received by a non-resident (section 10(1)(k)(i)(aa)).
Any dividend declared by a REIT or controlled company (before 1 January 2014) is
exempt from dividends tax, to the extent that it does not consist of a dividend that
comprises a distribution of an asset in specie (section 64F). Interest paid by a REIT is
deemed to be a dividend and is regarded as a dividend for the purposes of dividends
tax (section 25BB(6)(b)).
Example 10.16
Company A is a REIT as defined. For the current year of assessment, the company received
taxable rental income of R100 000. The full R100 000 was distributed to Company B, a resi-
dent, as a dividend.
You are required to explain the tax implications of the above in respect of the current year
of assessment.
Solution 10.16
R
Company A – REIT
Taxable rental income 100 000
Less: Distribution to shareholders (section 11(a) deduction) (100 000)
Taxable income nil
Company B
Taxable section 25BB dividend received 100 000
No exemption for the dividend in terms of section 10(1)(k)(i)(aa) as Company B
is not a non-resident. The dividend is also not a dividend in specie.
484
Unit holders can then use the available exemptions for the income based on the nature
of the income received. Therefore, if dividends are received, use section 10(1)(k) (if
applicable) or if interest is received, use section 10(1)(i) (local interest) or sec-
tion 10(1)(h) for interest received by non-residents or section 10B (foreign dividends)
(if applicable).
The distribution by the collective investment scheme to its holders should be within
12 months after the amount has accrued to the scheme. If the amount is not distribut-
ed by the collective investment scheme within the said period, it is deemed to have
accrued to the scheme on the last day of the 12-month period and the collective
investment scheme will be taxed on such revenue.
Any amount declared as a dividend by the collective scheme after expiry of the
12-month period will be exempt from tax in the hands of the unit holder (sec-
tion 10(1)(iB).
Example 10.17
Suppose Company B in the previous example is a collective investment scheme in
securities and also received other South African dividends amounting to R50 000 and
taxable interest amounting to R30 000. Company B distributes 40% of its current
income as dividends to Mr Tjombe, who is 67 years old.
You are required to explain the tax implications of the above for the current year of assess-
ment.
Solution 10.17
R
Company B
Taxable section 25BB dividends received from Company A 100 000
South African dividends received 50 000
Interest income received 30 000
Less: Amount distributed to Mr Tjombe (72 000)
From taxable section 25BB dividend
(R100 000 × 40% = R40 000)
South African dividend
(R50 000 × 40%= R20 000)
Interest income (R30 000 × 40% = R12 000)
Undistributed income 108 000
Undistributed income 108 000
Less: Exempt local dividends – section 10(1)(k) (30 000)
Taxable income for the year 78 000
Mr Tjombe’s taxable income:
Taxable section 25BB portion of dividend 40 000
Tax-free dividend portion nil
Interest portion of the dividend income 12 000
Interest exemption (R34 500 limited to actually received) (12 000)
Taxable income 40 000
485
486
487
10.15 Summary
In this chapter, the tax principles applicable to companies were examined. It was
found that the calculation of the taxable income for companies does not differ materi-
ally from the calculation of the taxable income for natural persons. Companies (ex-
cept small business corporations, personal service providers and foreign branches)
pay tax at a fixed rate and not on a sliding scale.
Companies are liable to withhold a separate tax on the declaration of dividends at a
rate of 20%. Dividends tax is withheld on local cash dividends as well as foreign cash
dividends declared by foreign listed companies. In terms of a dividend in specie
declared by a local company, the company declaring the dividend is responsible to
pay the dividends tax.
The following section contains a number of practical questions that the student may
use to test his knowledge of the taxation of companies.
Question 10.1
On 1 July 2020 Artécape (Pty) Ltd (Artécape), a resident company, granted an interest-free
loan of R100 000 to a resident, James Blue. James Blue is the brother of John Green, also a
resident, who owns 21% of the equity shares and voting rights in Artécape. James Blue
used the loan to buy jewellery for his wife. The repurchase rate is 3.5%. The amount will be
repaid during the company’s year of assessment that ends on 31 December 2020.
Answer 10.1
Amount subject to dividends tax: R
Deemed dividend in specie 2 250
Dividend tax liability @ 20% 450
488
Question 10.2
During the past financial year ending 31 March 2021, Toys We R Ltd, a resident company,
made the following distributions. Assume all shareholders are natural persons.
• 1 April 2020: Capitalisation issue of equity shares amounting to R100 000.
• 30 June 2020: Repayment of R40 000 of contributed tax capital, supported by a directors’
resolution.
• 31 August 2020: Dividend in specie to shareholders in the form of trading stock that cost
R50 000. The market value of the trading stock was R75 000.
Answer 10.2
R
1 April 2020
Capitalisation issue of shares – excluded from the definition of a dividend,
thus no dividends tax to be withheld.
30 June 2020
Repayment of contributed tax capital – excluded from the definition of a
dividend, thus no dividends tax to be withheld.
31 August 2020
Value of dividend in specie (market value) 75 000
Amount on which dividends tax must be calculated. The liability lies
with the company as it is a dividend in specie. 75 000
Dividends tax @ 20% 15 000
Question 10.3
Transworld Ltd is an unlisted company incorporated in the Republic with a year of assess-
ment that ends on the last day of February of each year. A dividend of R500 000 was de-
clared to shareholders on 30 June during the current year of assessment. The directors of
the company stated that the distribution represents a reduction in contributed tax capital
of R100 000.
Transworld Ltd’s shareholders consists of the following:
• ADM Ltd – a JSE listed resident company (50%) (Note 1)
• Dwayne Barnacle – a South African resident (24%)
• Barnacle Family Trust – (20%). The beneficiaries of the trust have a vested right to
income and consists of Dwayne’s two major children (Mary and John) who share
equally in income accruing to the trust.
EduBooks – (6%), an approved public benefit organisations in terms of section 30 (Note).
Note:
You can assume that all the prescribed declarations and written undertakings are in place.
489
Answer 10.3
Amount subject to dividends tax: R
Dividend declared 500 000
Less: Portion contributed tax capital (100 000)
Share capital 75 000
Share premium 25 000
Amount classified as a dividend 400 000
Shareholders
ADM Ltd (Listed resident company – exempt) 50%
Dwanye (Not exempt) 24%
Edubooks (Approved public benefit organisation – exempt) 6%
Barnacle Family Trust (Not exempt) 20%
100%
Dividend tax liability
ADM Ltd
Dividend accrued: (R400 000 × 50%) 200 000
No dividends tax, ADM Ltd is exempt
Dwayne
Dividend accrued (R400 000 × 24%) 96 000
Dividends tax liability (R96 000 × 20%) 19 200
Edubooks
Dividend accrued (R400 000 × 6%) 24 000
No dividends tax, PBO is exempt
Barnicle Family Trust
• Dividend accrued (R400 000 × 20%) 80 000
• Mary (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000
• John (R80 000 / 2) 40 000
• Dividends tax (R40 000 × 20%) 8 000
490
11 Prepaid taxes
Gross Exempt
– – Deductions = Taxable income Tax payable
income income
Page
11.1 Introduction............................................................................................................ 492
11.2 Employees’ tax (paragraphs 1 to 11A) ................................................................ 492
11.3 Calculation of employees’ tax (paragraphs 1 to 11A) ....................................... 493
11.3.1 Employee................................................................................................... 494
11.3.2 Remuneration ........................................................................................... 494
11.3.3 Balance of remuneration ........................................................................ 496
11.3.4 Employees’ tax.......................................................................................... 497
11.3.5 Annual amounts received (including variable
remuneration) (section 7B)...................................................................... 499
11.4 Identifying the correct employees’ tax rate ........................................................ 502
11.4.1 Process for identifying correct rate to use ............................................ 504
11.4.2 Personal service provider ....................................................................... 506
11.4.3 Independent contractor ........................................................................... 506
11.4.4 Labour broker ........................................................................................... 508
11.4.5 Employees’ tax for directors of private companies and
members of close corporations ............................................................... 509
11.4.6 Employees’ tax for directors of public companies............................... 510
11.4.7 Seasonal workers...................................................................................... 510
11.4.8 Awards by the CCMA and the Labour Court ...................................... 510
11.5 Administration of employees’ tax (paragraphs 13 to 15) ................................. 511
491
Page
11.6 Provisional tax (paragraphs 17 to 27) ................................................................. 511
11.6.1 Persons liable for provisional tax ........................................................... 512
11.6.2 First provisional payment ....................................................................... 513
11.6.3 Second provisional payment .................................................................. 518
11.6.4 Third provisional payment ..................................................................... 520
11.6.5 Additional tax, interest and penalties ................................................... 522
11.7 Summary................................................................................................................. 523
11.8 Examination preparation ...................................................................................... 523
11.1 Introduction
There are 3 main ways that SARS collects the income tax that is due to them: Pay-as-
you-earn (PAYE), provisional tax and tax due on assessment. Both PAYE and provi-
sional tax are collected during the year and are referred to as prepaid taxes.
PAYE is the employee’s tax withheld by an employer from the remuneration that that
employer paid to their employee. This tax is not an additional tax or different from
income tax, it is only a method SARS uses to collect the normal income tax due for
that year.
Where a taxpayer is a company or an individual who earns other income, which is
not from employment, such as interest, royalties, rental etc, then the way SARS col-
lects tax is provisional tax. All companies are provisional taxpayers but not all indi-
viduals are. It is important to realise that provisional tax is also not a new or addi-
tional tax that is being levied. It, again, is only a method of collecting the normal
income tax that is due to SARS for the year of assessment. Employees’ tax is a method
of collecting the tax on remuneration (such as salaries) monthly whereas provisional
tax is a method of collecting the tax on other income as well as the income of compa-
nies on a six-monthly basis.
492
The explanation above gives a simplified view of how employees’ tax is calculated.
Depending on how the taxpayer is categorised as an employee, there are different
rules for the calculation of the tax that should be deducted and withheld by the
employer. During the last couple of years these rules have been extended to combat
specific tax avoidance schemes. It is therefore important to first identify which
category the employee falls into in order to calculate employees’ tax. Most employees
are permanent employees and the normal tax table would be used.
REMEMBER
Step 6: Calculate the tax for the period of employment (answer of Step 5 / 12
months, if for one month).
493
Employees earning remuneration must pay employees’ tax on the balance of remu-
neration received from an employer. Before the calculation can be done, the require-
ments as set out in the steps above must be complied with. In order to comply with
the requirements, a number of definitions as set out in the Act must be met.
REMEMBER
• The taxpayer’s age at the end of the year of assessment (28/29 February) should be
used in order to determine the amount of the rebates (primary, secondary and tertiary
rebates as well as the medical tax credits (where applicable)) when calculating the tax
due for the year.
11.3.1 Employee
An ‘employee’ is defined in paragraph 1 of the Fourth Schedule as:
• a person (other than a company) who receives remuneration or to whom
remuneration accrues;
• a person who receives remuneration or to whom remuneration accrues by reason of
services rendered by such person to or on behalf of a labour broker;
• a labour broker (refer to 11.4.4);
• a person (or class or category of person) whom the Minister of Finance by
notice in the Government Gazette declares to be an employee for the purposes
of this definition; or
• a personal service provider (refer to 11.4.2).
11.3.2 Remuneration
‘Remuneration’ is defined in paragraph 1 of the Fourth Schedule and includes income
received whether in cash or otherwise and whether or not in respect of services
rendered, including:
• salary;
• leave pay;
• wage;
• overtime pay;
• bonus;
• gratuity;
• commission;
• fee;
• emolument;
• pension;
• superannuation allowance;
• retiring allowance;
• stipend;
• annuity;
494
495
• state pensions paid to old-age pensioners, blind persons, disabled persons and
grants in terms of the Child Care Act;
• reimbursive payments to employees for business expenses; and
• annuities payable in terms of a divorce order or separation agreement.
Remuneration therefore includes many forms of income from employment and retire-
ment funds in addition to conventional salaries and wages.
REMEMBER
• The current rate per kilometre fixed by the Minister of Finance (for purposes of the
provisions of a reimbursive travel allowance) is R3.61 per kilometre.
• If a person receives a subsistence allowance because they are required to be away from
home for at least one night for business purposes, the allowance will not form part of
remuneration in the month they receive it. If, by the end of the following month they
have not been away from home on business, this amount is deemed to be paid for
services rendered and included in remuneration for that month.
REMEMBER
• The employer’s contribution to a retirement fund (pension, provident and retirement
annuity fund) is a taxable fringe benefit and it will be a deemed contribuion in the
hands of the employee. Both the employer and employee contributions should therefore
be taken into account in order to calcualte the section 11F deduction.
496
Example 11.1
Peter Ntho (53 years of age) is employed by Gert Ltd. Peter earns the following from
Gert Ltd: a salary of R9 000 per month, an entertainment allowance of R500 per month
and a travelling allowance of R5 000 per month. He contributes R400 per month to a
retirement annuity fund, which his employer has agreed to take into account when
calculating employees’ tax since he provided proof of payment thereof to his employer.
Peter incurred entertainment expenses amounting to R350 per month during the
current year of assessment. He is not a member of a pension fund.
You are required to calculate the monthly employees’ tax that Gert Ltd must deduct during
the current year of assessment.
Solution 11.1
Peter is employed by Gert Ltd, therefore he is an employee R
Remuneration:
Salary received 9 000
Entertainment allowance received 500
Travel allowance received (R5 000 × 80%) 4 000
Remuneration 13 500
Less:
Retirement fund contributions (Note) (400)
Entertainment expenses – not deductible (section 23(m)) nil
Balance of remuneration 13 100
Annual equivalent remuneration (R13 100 × 12 months) 157 200
Tax per tax table (R157 200 × 18%) 28 296
Less: Rebate (14 958)
Tax for the year 13 338
Employees’ tax per month (R13 338 / 12 months) 1 112
continued
497
Note
The retirement annuity fund contribution is limited to the lesser of
• R350 000 / 12 = R29 167; or
• 27,5% of the higher of remuneration (R13 500) or taxable income (the employer will
not know about other taxable income and therefore the employer will base this deduc-
tion on remuneration only for purposes of calculating employees’ tax) therefore 27,5%
× R13 500 = R3 713; or
• taxable income before this deduction and taxable capital gain (the employer will not
have this information available and therefore this limitation will not be applicable in
calculating employees’ tax).
Therefore, the limitation is R3 713 per month.
The actual contribution is less, therefore the R400 per month can be deducted in full.
REMEMBER
• The section 11F deduction will be re-calculated on assessment as the ‘taxable income’
limitation can change due to income and deductions being included in the calculation
of taxable income from sources other than employment.
• If the balance of remuneration was calculated for only a month, it must be multiplied by
12 in order to calculate the annual equivalent. If, however, the balance of remuneration
was for a period of, for example, 7 months, the balance of remuneration calculated for
the 7 months must first be divided by 7 to get to a monthly average amount and must
then be multiplied by 12 to get to the annual equivalent.
• If an employee receives a fringe benefit, the value of the benefit must be determined
according to the rules of the Seventh Schedule (chapter 6). The value of the fringe
benefit must be included in the remuneration.
• If an employee works for more than one employer during the year of assessment, each
employer will perform their own employees’ tax calculation. The separate amounts
received by the employee are only added together when their tax return is completed at
the end of the year of assessment.
• In the examples, months are used to calculate the tax period. In practice, the annual
equivalent and the PAYE payable are calculated by using the number of days in the tax
period in relation to a total of 365/366 days or the number of weeks in relation to 52
weeks.
498
Step 1: Calculate the net normal tax on the annual equivalent of the balance of
remuneration, excluding the annual payment (refer to 11.3.4).
Step 2: Calculate the net normal tax on the total annual equivalent (including
the annual payments) of the balance of remuneration. Total annual
equivalent is calculated by adding the annual remuneration amount(s)
received to the annual equivalent of the balance of remuneration (as
calculated in Step 1).
Step 3: Calculate employees’ tax on the annual amount by deducting the net
normal tax on the annual equivalent of the balance of remuneration
from the net normal tax on the total annual equivalent (Step 2 to Step 1).
REMEMBER
499
Example 11.2
Joe Dlamini (66 years old, unmarried) is employed on a full-time basis at Dirk Ltd.
During the current year of assessment, Joe earned a salary of R18 000 per month and a
travel allowance of R3 000 per month. At the end of December, Joe also received the
following amounts from his employer: taxable bursary of R3 000 and a bonus of
R15 000. He paid pension fund contributions of R500 per month and medical aid
contributions of R400 per month (his employer did not contribute to these funds, but
Joe provide proof of these payments to his employer). Joe paid R3 000 in qualifying
medical costs that were not refunded by his medical aid but did not supply the proof of
this to his employer.
You are required to calculate the employees’ tax that will be withheld on Joe’s bonus
and bursary payment.
Solution 11.2
R
Salary received 18 000
Travel allowance received (Note 1) 2 400
Remuneration 20 400
Less:
Retirement fund contributions (Note 2)
Limited to the lesser of R350 000 / 12 = R29 167 or (500)
27,5 % × remuneration (R20 400) = R5 610 per month, therefore the limit is
R5 610 so the contributions can be allowed in full
Balance of remuneration excluding annual amounts 19 900
Annual equivalent balance of remuneration excluding annual amounts
(Note 3) 238 800
continued
500
Notes
1. The definition of remuneration states that 80% of the gross travel allowance
received is included in remuneration.
2. When calculating employees’ tax, the only deductions that are allowed are retirement
fund contributions and donations made by the employer on behalf of the employee.
The retirement fund contributions remain subject to the limitations of section 11F as
set out in chapter 5.
3. The annual equivalent remuneration is calculated as the actual monthly remuner-
ation received up until that point in time (for example for 10 months) divided by 10
(to get the average) and then multiplied by 12 months to calculate the annual equiva-
lent. Since the actual remuneration was the same for each of the first 10 months, the
calculation is therefore: (R19 900 × 10) / 10 × 12 = R238 800.
4. The annual amounts received must comply with the requirements of remuneration
before they can be included in the calculation.
REMEMBER
• The tax rate increases as a taxpayer’s income increases; therefore, the marginal tax rate
at which the bonus is taxed could be higher than the tax on the salary, even if the
amounts are the same.
• The bonus (or any annual payment) is added to the annual equivalent for the month in
which it is paid and not to the monthly remuneration. The bonus is therefore taxed at
the marginal rate of tax. The bonus is only included in the calculation of annual
equivalent in the month in which it is received.
• The steps for calculating tax on an annual amount may be applied in more than one
month if an employee receives an annual payment in more than one month. In such
case, remember that the amounts that were previously used as annual amounts must
also be included in the calculation of the total annual equivalent remuneration for the
month that the new annual payment is then received. For example, if a person receives
a bonus in September and in December, both months will have an annual equivalent
calculation. The December calculation must also include the annual amount received in
September since the annual equivalent must always be calculated by taking the actual
remuneration that was received up to that stage into account.
501
Example 11.3
Charles Tjale (35 years old) has been employed on a full-time basis by Sarel Ltd since
1 April of the current year of assessment. Charles earned a salary of R122 000 per month.
During December he received a performance bonus of R50 000.
You are required to calculate the total employees’ tax payable by Charles for the year of
assessment.
Solution 11.3
Remuneration: R
Salary received 122 000
Balance of remuneration 122 000
Annual equivalent balance of remuneration (R122 000 × 12) 1 464 000
Tax per tax table ((R1 464 000 – R744 800) × 41% + R218 139) 513 011
Less: Rebate (14 958)
Employees’ tax on the monthly balance of remuneration annual equivalent 498 053
Employees’ tax for the period on monthly income (R498 053 / 12 × 11) 456 549
Annual equivalent balance of remuneration 1 464 000
Add: Annual amounts received
Bonus received 50 000
Total annual equivalent remuneration received 1 514 000
Remuneration: R
Tax per tax table ((R1 514 000 – R744 800) × 41% + R218 139) 533 511
Less: Rebate (14 958)
Employees’ tax for the year on total remuneration 518 553
Less: Employees’ tax for the year on annual equivalent remuneration (498 053)
Employees’ tax on bonus (annual amount) 20 500
Total employees’ tax:
Employees’ tax on monthly income 456 549
Add: Employees’ tax on bonus 20 500
Total employees’ tax for the period 477 049
502
affect how employees’ tax is deducted or in some cases not deducted. Other than
these rules, SARS can also issue a tax directive which instructs the employer how to
deduct employees’ tax from a specific employee’s income.
The Income Tax Act identifies personal service providers, labour brokers, independ-
ent contractors and seasonal workers as workers who are subject to different rules
regarding the deduction of employees’ tax.
503
REMEMBER
• The tax directive is valid for only one tax year or for the period stipulated on the
certificate.
• Tax directives issued to electronic clients via the SARS interface are valid directives.
• The tax directive can also be given to an employer who is a private company and who is
experiencing financial difficulty; this directive will determine how the amount due
must be paid.
• If the tax directive is for a fixed percentage, it must be applied to the amount received
before deducting retirement fund contributions.
continued
504
Step 4: Determine whether the person is a labour broker (refer to 11.4.4) with
one of the following:
• an exemption certificate (refer to 11.4.4): No employees’ tax is
Yes: deducted.
• a tax directive: Deduct employees’ tax as per the directive.
No: • no exemption certificate or tax directive: Go to Step 5.
Step 6: Determine whether the person falls into one of the following cate-
gories:
No: • Is the person in possession of a valid tax directive?
Calculate the employees’ tax in accordance with the instructions
provided by SARS in the tax directive.
• Does the person do seasonal work?
Calculate the employees’ tax in accordance with the guidelines for
seasonal workers (refer to 10.4.6).
• Is the person in standard employment?
Standard employment is when
– the person works at least 22 hours per complete week; or
– the person is prohibited from working for another employer; or
– the persons have declared that they are not working for an
employer.
The person is in standard employment and therefore the
Yes:
employees’ tax must be calculated in accordance with the
standard rules as set out in 11.2 and 11.3.
No: The person is not in standard employment and therefore the
employees’ tax must be calculated at a rate of 25% for natural
persons or 28% for companies.
505
If a company or a trust earns more than 80% of its income from one employer, that
employer must consider the company or trust to be a personal service provider
(except where the company or trust that renders the service employs three or more
employees on a full-time basis for the full year of assessment). If a person meets the
requirements of a personal service provider, the client paying for the services must
withhold employees’ tax at the higher rate (28%/45%). In cases where the person
provides the employer with an affidavit or solemn declaration, the employer can act
in good faith and need not withhold employees’ tax.
REMEMBER
• Employees’ tax is calculated at 28% on personal service providers that are companies
and 45% on personal service providers that are trusts.
• Even if all of the other requirements of a ‘personal service provider’ are met, the
company or trust will not be a personal service provider for tax purposes if the
company or trust employed three or more employees (not connected to the company or
trust) who are engaged in the business of such company or trust on a full-time basis.
506
507
2. Does the contract of employment entitle the employer to a specific product or the
completion of a specific service?
Yes: The person is an independent contractor.
No: The person is not an independent contractor.
3. Does the contract of employment bind the ‘employed’ to perform specified work
or produce a specified result within a time fixed by the contract or within a
reasonable time where no time has been fixed?
Yes: The person is an independent contractor.
No: The person is not an independent contractor.
4. Is the person required to perform the services mainly at the premises of the
person to whom the services are rendered/at the premises of the persons by
whom the amount for the services is paid?
Yes: The person is not an independent contractor.
No: The person is an independent contractor.
REMEMBER
508
REMEMBER
• Only a natural person can be a labour broker as defined for tax purposes.
• A labour broker provides workers to other businesses and does not provide services to
other business.
• The labour broker will issue an invoice to the other businesses for the workers that were
supplied.
• The labour broker pays the workers; the workers are not paid by the other business
directly.
REMEMBER
509
510
REMEMBER
If an employee has not received a tax certificate within the specified period, the onus
is on them to apply immediately to the employer for it. They may also be issued with
a duplicate tax certificate if they lose the original.
511
that is not remuneration (for example interest, rent or earns income from a trade as a
sole trader), they will be required to pay the tax due to SARS on a six-monthly basis.
This method of collecting tax is called provisional tax. Provisional tax payments are
calculated on estimated taxable income (including taxable capital gains) for a
particular year of assessment. These estimates of taxable income are submitted to
SARS on an IRP6 return. There are rules for calculating the estimates of taxable
income for provisional tax purposes. SARS will impose penalties and interest if the
estimates are inaccurate or if the submission of estimates or the payment of
provisional tax is late.
The first provisional tax payment for a natural person (including a sole trader) must
be made within the first six months of the year of assessment (that is on or before
31 August). The second payment must be made on or before the last day of the year
of the assessment (that is 28/29 February). The taxpayer has the option of making
a third provisional payment before the end of September after the end of the year of
assessment.
512
REMEMBER
• Tax threshold depends on the age of the taxpayer and for the 2021 year of assessment
the thresholds were
– below 65 years of age: R83 100 (that is to say the primary rebate of R14 958 divided
by the minimum tax rate of 18%);
– older than 65 and younger than 75 years: R128 650 (that is to say the total of the
primary and secondary rebates (R23 157) divided by the minimum tax rate of 18%);
– older than 75 years of age: R143 850 (that is to say the total of the primary,
secondary and tertiary rebates (R25 893) divided by the minimum tax rate of 18%).
• Directors of private companies are regarded as employees and are not required to
automatically be registered as provisional taxpayers unless they have other business
income.
513
Basic amount
The basic amount is the taxpayer’s taxable income assessed by the Commissioner for
the latest preceding year of assessment less:
• a taxable capital gain;
• the taxable portion of a retirement fund lump sum or withdrawal benefit or
severance benefit; and
• an amount received in terms of paragraph (d) of the gross income definition
(amounts in respect of relinquishment, termination, loss, repudiation, cancellation
or variation of any office or employment or any appointment).
The latest preceding year’s assessment must be an assessment that has been issued
more than 14 days prior to the date of the estimate.
The basic amount must be increased by 8% of the basic amount per year if:
• an estimate is made for a period that ends more than one year after the end of the
latest preceding year of assessment; and
• the estimate is made more than 18 months after the end of that year of assessment.
The 18-month test can be tricky to apply. It is therefore advisable to draw a timeline
and compare the various dates. The timeline should stretch to the latest preceding
year of assessment. The 18-month test refers to ‘more than’ 18 months after the end of
that year of assessment.
28 February 2019 29 February 2020 28 February 2021
31 August 2020
1st payment - estimate
Compare 31 August 2020 with the end of the latest year assessed. Remember you
need to exclude an assessment if it was received less than 14 days before 31 August
2020.
514
Example 11.4
Case A:
The notice of assessment (ITA34) for the 2020 tax year of assessment was issued on
15 August 2020 indicating a taxable income of R180 000.
The notice of assessment (ITA34) for the 2019 tax year of assessment was issued on
1 February 2020 indicating a taxable income of R150 000.
Case B:
The notice of assessment for the 2020 tax year assessment was issued on 19 August 2020
indicating a taxable income of R180 0000.
The notice of assessment for the 2019 tax year of assessment was issued on 1 February
2020 indicating a taxable income of R150 000.
Case C:
The notice of assessment for the 2020 tax year assessment was issued on 25 August 2020
indicating a taxable income of R180 000.
The notice of assessment for the 2019 tax year of assessment has not been issued yet.
The notice of assessment for the 2018 year of assessment was issued on 1 January 2019,
indicating a taxable income amount of R100 000.
You are required to determine whether the basic amount will be increased in respect of
the 18-month rule for the taxpayer’s first provisional tax payment in respect of the 2021
year of assessment for each of the above cases.
Solution 11.4
Case A:
The deadline for submitting the first provisional tax return for 2021 is 31 August 2020.
• The assessment for 2020 was issued 16 days prior to the submission of the provisional
tax estimate. Since this meets the 14-day criterion, the latest assessed preceding year
is the 2020 tax year.
• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2020 with 29 February 2020.
• Therefore, the basic amount increase of 8% will not be taken into account when
determining the basic amount for the first provisional payment for 2021.
Case B:
• The deadline for submitting the first provisional tax return for 2021 is 31 August 2020.
• The 2020 year of assessment was issued 12 days prior to the date on which the
provisional tax estimate was submitted. Therefore, as the 2020 assessment does not
meet the 14-day criterion, the latest assessed preceding year of assessment is the 2019
tax year of assessment.
continued
515
• The estimate is not made more than 18 months after the end of the latest preceding
year.
Compare 31 August 2020 with 28 February 2019 (exactly 18 months).
• Therefore, the basic amount increase of 8% will not be applied.
Case C:
• The deadline for submitting the first provisional tax return for 2021 is 31 August 2020.
• The 2020 year of assessment was issued 6 days prior to the date on which the
provisional tax estimate was submitted. Therefore, the 2020 assessment does not meet
the 14-day criterion and the 2020 assessment can’t be used as the basic amount. As the
2019 year of assessment had not been issued yet, the latest assessed preceding year of
assessment is the 2018 tax year of assessment.
• The estimate is made more than 18 months after the end of the latest preceding year.
Æ Compare 31 August 2020 with 28 February 2018.
• Therefore, the basic amount increase of 8% will apply.
• The 2018 taxable income will increase by 24% in total (that is to say 8% for each of
2019, 2020 and 2021).
• Basic amount = R100 000 + (R100 000 × 8%) + (R100 000 × 8%) + (R100 000 × 8%) =
R124 000
Step 2: Calculate the tax for the full year, that is to say tax according to the tax
table less rebates, medical scheme fees credit and additional medical
expenses tax credit (refer to chapter 12).
Step 3: Calculate the tax for the first provisional payment, that is to say tax for
the full year (Step 2) divided by two.
Step 4: Deduct the employees’ tax actually paid in the first six months of the
current year of assessment.
Step 5: Calculate the amount due for the first provisional tax payment,
namely the tax due for the period (Step 3)
less the employees’ tax paid (Step 4)
less any foreign tax paid (section 6quat).
516
Example 11.5
Puledi Black (51 years old) requested his IRP6 from SARS. The return indicated that the
latest year of assessment was 2019. The taxable income indicated on the IRP6 is R220 000
and the basic amount R255 200. Puledi accepts the basic amount. Puledi estimates his
taxable income for the current year of assessment to be R230 000. His employer deducted
employees’ tax amounting to R14 500 from his salary for the first six months of the year.
Puledi did not belong to a medical aid fund.
You are required to calculate the amount Puledi has to pay as his first provisional
payment.
Solution 11.5
R
Basic amount (estimate is lower than basic amount so use basic amount) 255 200
Tax on taxable income ((R255 200 – R205 900) × 26% + R37 062) 49 880
Less: Tax rebate (14 958)
Total tax for the full year 34 922
Tax for the period (R34 922 / 2) 17 461
Less: Prepaid tax (14 500)
Employees’ tax in respect of the first six months 14 500
Foreign tax paid nil
REMEMBER
• The first provisional payment is only for the first half of the year; therefore, only half of
the total tax for the year is payable.
• The first payment for the 2021 year of assessment is due on or before 31 August 2020 for
individuals.
• Although the taxable income amount is based on the taxable income of the previous
year, the employees’ tax paid for the current year can be used in the calculation.
• If the employees’ tax paid exceeds the amount due for the first payment, the amount
due is Rnil (no amount is payable to SARS).
• If a person does not make a first provisional payment or pays less than the required
amount or does not hand in their provisional tax return, penalties can be charged (refer
to 11.6.5).
• If the taxpayer does not have a basic amount, an estimation of the income for the year
has to be made.
517
Step 1: Determine the estimated taxable income for the year (that is to say the
minimum amount – see below).
Step 2: Calculate the tax for the second provisional payment (that is to say for
the full year of assessment being the tax according to the tax tables
less rebates, medical scheme fees tax credit and additional medical
expenses tax credit).
Step 3: Determine the employees’ tax paid for the current year of assessment.
Step 5: Calculate the amount due for the second provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first
provisional tax payment (Step 4).
Minimum amount
When determining the minimum amount, taxpayers can be classified into one of the
following two groups:
• taxpayers with taxable income of R1 million or less for the current year of assess-
ment; and
• taxpayers with taxable income of more than R1 million for the current year of
assessment.
518
the year of assessment, the basic amount is adjusted by 8% per annum for each
year since the assessed year of assessment; or
• 90% of the actual taxable income for the year of assessment.
The 8% adjustment is not cumulative; in other words, if you adjust for three years
you will adjust by 24%. Where an estimate is used as the basis for calculating the
second provisional tax payment, and it is less than 90% of the actual taxable income
and the basic amount, SARS will impose an automatic penalty of 20% of the shortfall.
According to SARS, the taxpayer may approach them for a full or partial reduction of
the penalty if the taxpayer can prove that the estimate was ‘not deliberately or
negligently understated and was seriously calculated with due regard to the factors
having a bearing thereon’.
Example 11.6
Puledi Black (51 years old) requested his IRP6 from SARS for the second provisional
payment. The return indicated that the latest year of assessment was 2019. The taxable
income indicated on the IRP6 and the basic amount is R255 200. Puledi accepts the
amount as his basic amount. Puledi’s estimated taxable income for the current year of
assessment is R260 000. His employer deducted employees’ tax amounting to R30 000
from his salary for the current year of assessment. Puledi paid foreign tax that qualified
for a foreign taxed rebate of R500. Puledi made a first provisional payment of R4 263.
You are required to calculate the amount Puledi has to pay as his second provisional
payment.
Solution 11.6
R
Taxable income amount (Note) 255 200
Tax on taxable income ((R255 200 – R205 900) × 26% + R37 062) 49 880
Less: Tax rebate (14 958)
Total tax for the full year 34 922
Less: Prepaid tax (34 763)
Employees’ tax in respect of this tax year 30 000
Foreign tax paid 500
First provisional payment 4 263
Note
Penalties will not apply provided Puledi bases his payment on the basic amount or 90%
of his taxable income for the year, whichever is the lowest, R234 000 (90% × R260 000).
The question specifically stated that he elected to use the basic amount for his
assessment.
519
REMEMBER
• The second provisional payment is for the full year of assessment, and a first payment
made must be deducted from the amount due for the year.
• The second payment for the 2021 year of assessment is due on or before 28 Feb-
ruary 2021 for individuals.
• The second payment for the 2021 year of assessment for a company is due on or before
the last day of the company’s financial year end.
• Where the basic amount used is for a year of assessment that closed more than a year
before the provisional tax estimate is due, the basic amount must be increased by 8%
per year.
• Although the estimated taxable income is based on a previous year’s taxable income,
the employees’ tax paid for the current year must be used in the calculation.
• If the taxpayer pays less than the minimum amount or does not file their provisional tax
return, penalties, additional tax and interest can be charged (refer to 11.6.5).
The year of assessment ends for an individual on the date that they die. There is
currently no exemption for the payment of provisional tax by a natural person in
respect of the period ending on the date of death. This could result in penalties being
levied if the executor of the estate does not submit an estimation of taxable income for
the deceased. From the 2020 year of assessment (with effect from 30 October 2019),
the executor is exempt from having to submit an estimate for provisional tax on
behalf of the deceased, in respect of the period up to the date of death.
520
up to the date of assessment. The interest will be levied on the outstanding tax for the
year of assessment. The interest will only be levied on companies whose taxable
income is more than R20 000 per year of assessment and individuals who are
provisional taxpayers and whose taxable income is more than R50 000 per year of
assessment.
The amount that is used to calculate the taxable income for the year of assessment
includes the taxable capital gain for the year. For the purpose of the first two pro-
visional tax payments, the taxable capital gain is ignored. If the taxpayer pays more
provisional tax than the tax due for the year, SARS will pay interest on the amount
overpaid from the due date until the date the amount is repaid. The interest will be
paid at the prescribed rate.
Step 1: Determine the taxable income for the year of assessment (remember
that the taxable capital gain must be included in this amount).
Step 2: Calculate the tax for the third provisional payment, that is to say tax
according to the tax table less the rebates and medical tax credits.
Step 3: Determine the employees’ tax paid (the employees’ tax for the current
year of assessment).
Step 6: Calculate the amount due for the third provisional tax payment,
namely the tax due for the period (Step 2) less the employees’ tax paid
(Step 3) less the foreign tax paid (section 6quat) less the first pro-
visional tax payment (Step 4) less the second provisional tax payment
(Step 5).
Example 11.7
Peter Black’s (48 years old) latest assessed year of assessment for which he was assessed is
the 2020 year of assessment. The taxable income on the IRP6 and the basic amount is
R371 200. Peter calculated his taxable income for the current year of assessment to be
R380 000. His employer deducted employees’ tax amounting to R61 895 from his salary
for the current year of assessment. Peter paid foreign tax amounting to R250. Peter made
a first provisional payment of R4 564 and a second provisional payment of R1 064.
You are required to calculate the amount Peter has to pay as his third provisional
payment if he does not want to pay any interest.
521
Solution 11.7
R
Taxable income 380 000
Tax on taxable income ((R380 000 – R321 600) × 31% + R67 144) 85 248
Less: Tax rebate (14 958)
Total tax for the full year 70 290
Less: Prepaid taxes (67 773)
Employees’ tax in respect of this tax year 61 895
Foreign tax paid 250
First provisional payment 4 564
Second provisional payment 1 064
Late-submission penalty
If the taxpayer does not submit an estimate of their income (on the IRP6) before
the end of the year of assessment (second payment only), SARS may impose a 20%
penalty on the outstanding amount of tax for the failure to submit the return. This is
over and above the 10% late-payment penalty.
522
became due until the payment is received. The Commissioner can reduce or waive
the amount of interest payable.
If a taxpayer should make a third provisional payment and does not make it within
the prescribed period, interest will be calculated from the due date to the date of the
assessment for normal tax according to the Tax Administration Act. The amount on
which this tax is calculated must include the taxable capital gain.
Administrative penalties
A taxpayer might also be subjected to the fixed administrative penalty where there is
non-compliance as listed in paragraph 1.7.
11.7 Summary
In this chapter the different methods used by SARS to collect the tax due to them for a
year of assessment are discussed. If a person receives remuneration, they will pay
employees’ tax on a monthly basis. If a person receives income that is not remuner-
ation, they are required to pay provisional tax on a six-monthly basis. If a person
receives remuneration from their employer, they will pay employees’ tax, but if they
also receive other income, for example interest, they will also pay provisional tax.
The responsibility of calculating, withholding and paying employees’ tax over to
SARS is that of the employer. The responsibility of calculating and paying provisional
tax over to SARS lies with the taxpayers themselves. Employees’ tax and provisional
tax are not additional taxes being levied; they are merely methods used to pay the
income tax that is due to SARS for a year of assessment.
The next section contains questions that allow you to test your knowledge on prepaid
taxes.
Question 11.1
Charles Smith is employed by Ultra Ltd on a full-time basis. Charles is experiencing
financial difficulty and makes the decision to accept a second job at Maxwell Ltd as from
1 September.
You received the following extracts from his letters of appointment:
Income per month: R
Ultra Ltd
Salary 4 600
Travel allowance 8 800
Entertainment allowance 250
Pension fund contributions (based on salary) 400
Retirement annuity fund contributions 200
continued
523
R
Maxwell Ltd
Salary per month 5 389
Annual bonus (non-retirement fund contributing) 7 800
Monthly retirement fund contributions (based on salary) 390
Charles is unmarried and his date of birth is 22 March 1972.
Answer 11.1
Employees’ tax is calculated on balance of remuneration as defined. R
Annual equivalent remuneration 135 480
Employees’ tax for the year 9 428
Question 11.2
Peter Bakwela is 69 years old and unmarried. His income and expenses for the current year
of assessment were as follows:
Income for the year of assessment: R
Pension received 150 000
Interest on fixed deposit (not a tax-free investment) 161 500
Rental income from property in Japan (Note) 139 000
Income from part-time employment (not standard employment) 25 000
Expenses for the year of assessment:
Rental expenses (all deductible for normal tax purposes) 15 750
Note
Peter paid non-refundable foreign tax of R1 000 in Japan. You can assume that the amount
complies with all the requirements of the Act and is within the limit.
524
Answer 11.2
(a) Calculation of the total employees’ tax
Pension R
Pension received 150 000
Balance of remuneration 150 000
Tax on remuneration (R150 000 × 18%) 27 000
Less: Primary and secondary rebates (R14 958 + R8 199) (23 157)
Employees’ tax for the year 3 843
Part-time employment (not standard employment)
Income received 25 000
Employees’ tax for the year at 25% flat rate 6 250
Total employees’ tax (R3 843 + R6 250) 10 093
525
Question 11.3
Tinni Kekana is 52 years old. She is married to Toby. Both their children are full-time
university students. Tinni supplies you with the following information of what happened
on each of the dates as indicated:
31 January 2020 Submitted and was assessed for 2018 year of assessment:
Figures from the ITA34:
• Taxable income: R1 050 732
• Normal tax: R350 230,71
• Rebates: R13 635
• PAYE: R307 808,12
• Current assessment before provisional tax credits: R30 789
• Provisional tax credits: R9 000
• Net amount payable under this assessment: R21 789
31 August 2020 Estimated taxable income: R1 100 000
Employees’ tax: R125 782.60
30 September 2020 Actual taxable income for 2018: R989 552
31 January 2021 Submitted (and was assessed on 17 February 2021) for 2020 year of
assessment.
Figures from ITA34:
• Taxable income: R989 552
• Normal tax: R324 341,22
• Rebates: R14 067
• PAYE: R272 529,20
• Current assessment before provisional tax credits: R38 177,02
• Provisional tax credits: R10 943,84
• Net amount payable under this assessment: R28 174,28
28 February 2021 Estimated taxable income R1 108 368
Employees’ tax: R263 659
Medical fund contributions: As from 1 January 2020 – R10 889 per
month for herself, her husband and two children
Taxable capital gain: R118 459 on sale of shares on 31 January 2021
(included in estimated taxable income)
31 August 2021 Estimated taxable income: R1 100 752
Employees’ tax: R299 562,12
30 September 2021 Actual taxable income for 2021: R1 056 553
Actual employees’ tax for 2021: R263 659
526
Answer 11.3
Calculation of Tinni’s provisional tax liabilities for the 2021 year of assessment:
R
First provisional tax payment – 31 August 2020
Estimated taxable income is R1 100 000; however, this payment can be
based on the basic amount so long as it was assessed more than 14 days
before. 1 050 732
Normal tax 343 571,02
Less: Primary rebate (14 958,00)
Net normal tax 328 613,12
× 50% for first 6 months 164 306,56
Less: Actual PAYE for the period (125 782,60)
First provisional tax payment for 2021 38 523,96
continued
527
R R
Third provisional tax payment – 30 September 2021
Actual taxable income 1 056 553
528
12 Individuals
General Deductions
Specific Capital
deduction for
deductions allowances
formula individuals
Page
12.1 Introduction ......................................................................................................... 530
12.2 Calculation of taxable income of an individual (section 5) ........................... 531
12.3 Specific income .................................................................................................... 536
12.3.1 South African income (section 1 – definition of ‘gross income’) ..... 537
12.3.1.1 South African dividends (section 10(1)(k)........................... 537
12.3.1.2 South African interest exemption (section 10(1)(i)) ........... 537
12.3.1.3 Interest and dividends from tax free investments
(section 12T) ............................................................................ 538
12.3.2 Foreign income ....................................................................................... 538
12.3.2.1 Foreign dividends (paragraph (k) of ‘gross income’
and section 10B) and headquarter company dividends ... 538
12.3.2.2 Other foreign income ............................................................. 540
12.4 Specific deductions ............................................................................................. 541
12.4.1 Expenses and allowances deductible by salaried taxpayers
(section 23(m)) ........................................................................................ 543
12.4.2 Contributions to retirement funds (section 11F)................................ 546
12.4.3 Donations to public benefit organisations
(section 18A and the Ninth Schedule)................................................. 551
529
Page
12.5 Calculation of final normal tax liability (sections 6, 6A, 6B and 6quat) ....... 554
12.5.1 Year or period of assessment (section 1)............................................. 555
12.5.2 Normal tax (section 5) ........................................................................... 556
12.5.3 Normal tax rebates for natural persons (section 6) ........................... 557
12.5.4 Medical scheme fees tax credit (MTC) (section 6A) .......................... 559
12.5.5 Additional medical expenses tax credit (AMTC) (section 6B) ......... 560
12.5.6 Normal tax rebates for specific taxations (section 6quat) ................. 564
12.5.7 Prepaid taxes .......................................................................................... 569
12.6 Limiting losses when calculating taxable income (section 20 and 20A) ...... 570
12.6.1 Suspect trades ......................................................................................... 572
12.6.2 The exclusion rule .................................................................................. 572
12.7 Tax returns, assessments and objections .......................................................... 573
12.8 Summary .............................................................................................................. 574
12.9 Examination preparation ................................................................................... 576
12.1 Introduction
In this chapter, we look at the taxation of individuals. This will include discussing
the earning of investment income as well as the deductions that can be claimed, for
income tax purposes, by a person earning a salary. At the end of the chapter the
calculation of normal tax and net normal tax for individuals is discussed.
After a person starts working and earning an income, they can eventually start saving
some of the income that they earn. This income can then be invested in different
assets, for example shares, fixed deposits or even business ventures. The aim of
investment is to generate additional income. Remember that the gross income def-
inition includes all income received by residents of South Africa. South Africans can
also invest their money offshore (in overseas countries). The income earned on these
foreign investments is also subject to tax in South Africa, but there are special rules
that need to be considered when dealing with this type of income.
Apart from earning income over and above their salary, a person earning a salary will
also have expenses that they would like to deduct for tax purposes. In terms of the
general deduction formula (section 11(a)) read with section 23, a taxpayer may not
deduct any private or domestic expenditure (chapter 6). The Income Tax Act 58 of
1962 (the Act) does however contain a number of provisions where the taxpayer is
allowed to deduct certain private or domestic expenses. In terms of section 23(m) a
person earning only a salary may deduct only the expenses listed in the section. The
same section prohibits all other deductions for this ‘type’ of taxpayer.
530
Tax statistics
According to the 2019 tax statistics South Africa had 20 million registered individual
taxpayers. Some interesting facts are:
• 40,2% of assessed taxpayers were registered in Gauteng.
• 27,3% of assessed taxpayers were 35 to 44 years old.
• 45,5% of assessed taxpayers were female.
• Travel allowances were the largest allowance for individuals: 24,9% of total allowances
assessed.
• Retirement fund contributions paid on behalf of employees was the largest fringe
benefit (60.3% of the total fringe benefits assessed).
• Contributions to retirement funding was the largest deduction (85,2% of all deductions
granted).
531
REMEMBER
• Exempt income is deducted from gross income; therefore, an amount can only be exempt
income if it is already included in gross income.
The next step is to determine which amounts are included in gross income (chapters 2
and 3). A salary received is an example of an amount to be included in gross income
in terms of the general rule as it complies with all the requirements of the definition.
Remember that it is not required that a person must receive an amount before it is
included in gross income, that is to say where an amount accrues to the taxpayer, it
will also be taxable even though they have not physically received it. For example, if
a person invests in a unit trust (also known as a collective investment scheme) and
elects to reinvest the annual interest and dividend earned, they will never receive
these amounts in cash. The income is however reinvested for their benefit and is
therefore included in their gross income as it accrues to them.
As from 1 October 2001 all capital gains are also subject to normal tax. The taxable
portion of the capital gain must be added to the taxable income from the revenue
activities to calculate the total taxable income for the year. The calculation of the
taxable capital gain is discussed in chapter 9.
Framework for the calculation of taxable income for an individual
The definitions discussed above provide a fixed structure that should be used to cal-
culate an individual’s taxable income. This sequence may be set out as in the
following framework:
532
Step 1: Identify amounts that comply with the ‘gross income’ definition (chap-
ters 2 and 3).
Step 2: Identify amounts included in gross income that are exempt in terms of
the Act (chapter 5).
Step 3: Identify amounts that can be deducted for tax purposes (chapters 6
and 12).
Step 4: Calculate the taxable income (before taxable capital gain and
donations) by deducting the exempt income (Step 2) and the
deductions (Step 3) from the gross income (Step 1).
Step 6: Calculate the total taxable income by adding the taxable income (before
taxable capital gain and donations) (Step 4) to the taxable capital
gain (Step 5) and, thereafter, deducting the allowable deductions for
donations.
REMEMBER
• Exempt income can only be exempted if it has been included in gross income.
• Taxable income may be a negative amount which is called ‘an assessed loss’.
• A person is anybody who receives ‘income’. Therefore even a minor (person younger
than 18) who receives income is a taxpayer and pays tax in their own name. In some
cases the parent of a minor can be taxed on the income of the child, but then specific
requirements must be met.
533
Example 12.1
Robert Roberts is a 40-year-old resident of South Africa. During the current year of
assessment he received a salary of R300 000. He owns shares in Sam Ltd (a South African
company) and received a dividend of R4 000 during the current year. Robert contributed
R6 000 to his employer’s pension fund (the total amount is deductible for income tax
purposes). Robert made a taxable capital gain of R1 000.
You are required to calculate Robert’s taxable income for the current year of assessment.
Solution 12.1
R
Gross income
Salary received 300 000
Dividends received 4 000
304 000
Less: Exempt income
Dividends received (4 000)
Income 300 000
Add: Taxable capital gains 1 000
301 000
Less: Deductions
Retirement fund contributions (6 000)
1. Why are the dividends received included in gross income if they are
an exempt income?
2. Must taxable capital gains be included last or can it be added to
gross income?
534
REMEMBER
• Income derived from a trade will only be taxed in the hands of the spouse who is carry-
ing on the trade.
• Income that will be split where spouses are married in community of property therefore
includes –
– local and foreign interest;
– local and foreign dividends;
– income from letting of fixed property.
• Income that will NOT be split where spouses are married in community of property
therefore include –
– a benefit paid by a pension, provident or retirement annuity fund;
– income specifically excluded from the joint estate; and
– a purchased annuity.
Step 1: Add both spouses’ passive income together to get a total passive
income, for example total interest received.
Step 2: Divide the total passive income equally between the two spouses.
Include in each spouse’s calculation half of the total passive income,
and add it to the individual’s gross income.
Example 12.2
John (59 years old) and Jane (66 years old) Naidoo are married in community of property.
John received a salary of R150 000 during the current year of assessment. John also
received R60 000 interest on his savings account. Jane did not receive any income during
the current year of assessment.
You are required to calculate John and Jane’s taxable income for the current year of
assessment.
535
Solution 12.2
John R
Gross income
Salary received 150 000
Interest received (Note) 30 000
180 000
Less: Interest exemption – R23 800 maximum (23 800)
Taxable income 156 200
Jane
Gross income
Interest received (Note) 30 000
Less Interest exemption – R34 500 maximum but limited to amount received (30 000)
Taxable income nil
Note
As John and Jane are married in community of property, it is deemed that the interest was
received in equal shares by each spouse. Therefore they each include R60 000 / 2 = R30 000
in their gross income.
1. Why is R30 000 interest exempt for Jane and only R23 800 for John?
2. As Jane is over 65 years old, why did she not get an interest exemp-
tion of R34 500?
REMEMBER
• Where persons are married in community of property, each spouse qualifies for their
full interest exemption on half of the gross interest received.
536
Example 12.3
Chris Canele (66 years old) and his wife (55 years old), who are married out of community
of property and are both South African residents, earned the following investment income
during the current year of assessment:
Chris R
Interest from local investments (not tax free investments) 37 000
Wife
Interest from local investments (not tax free investments) 21 500
You are required to calculate Chris and his wife’s taxable income for the current year of
assessment.
Solution 12.3
Chris R R
Interest from local investments 37 000
Less: Interest exemption (34 500) 2 500
Taxable income 2 500
Wife
Interest from local investment 21 500
Less: Interest exemption – R23 800, therefore the full
amount is exempt (21 500) nil
537
REMEMBER
• The interest exemption available to natural persons will be left unchanged from 2015
onwards. Investments in approved tax free investments will not be subject to income tax.
12.3.1.3 Interest and dividends from tax free investments (section 12T)
Interest and dividends received from tax free investments are fully exempt from
taxation (refer to chapter 5).
REMEMBER
• Should a double-tax agreement exist between South Africa and another country, all foreign
income derived by South African residents could be subject to that double-tax
agreement. The double-tax agreement overrides the general taxation provisions of the
Act. If a double-tax agreement exists between South Africa and a specific country, one
must first consult the double-tax agreement to see which country has the right to tax the
specific type of income in question. The country that has the taxing right will then
apply the provisions of its Income Tax Act. If no double-tax agreement exists, the Act’s
provisions must be applied.
A double-tax agreement is entered into by the revenue authorities of two countries that
often trade with each other in order to determine who has taxing rights, that is to say
who may tax certain types of income. As a result, certain types of income are only
taxable in one of the two countries. South Africa has comprehensive double-tax
agreements with about 85 countries.
538
Example 12.4
Wiley Wonders earned the following investment income during the current year of
assessment:
R
Taxable foreign dividends 26 200
Interest from foreign investments 900
You are required to calculate how much foreign income will be included in Wiley’s
taxable income for the current year of assessment.
Solution 12.4
Wiley R R
Foreign dividends (gross income special inclusion) 26 200
Less: Exempt (section 10B) (R26 200 × 25 / 45) (14 556) 11 644
Interest from foreign investments (gross income and no exemption) 900
Included in taxable income 12 544
Example 12.5
Joseph Malema, a South African resident, pays income tax at the marginal rate of 41%.
Joseph holds 3% of the total equity share and voting rights in a foreign company. He
receives a foreign dividend of R50 000 on shares, which is subject to a dividend
withholding tax of 10%. Joseph incurred interest expenditure of R2 000 on a loan which
he used to purchase the shares in respect of which the dividend was received.
You are required to calculate how much tax is payable by Joseph in relation to the
foreign dividends for the current year of assessment.
Solution 12.5 R
Foreign dividends (gross income special inclusion) 50 000
Expenditure in the production of income – prohibited in terms
of section 23(q) nil
Less: Exempt (section 10B(3)) (R50 000 × 25 / 45) (Note) (27 778)
Included in taxable income 22 222
Additional tax at 41% 9 111
Less: Foreign tax rebate [Lesser of (R50 000 × 10%) or (R22 222 × 41%)] (5 000)
South African tax payable on foreign dividends 4 111
Note
None of the full exemptions in terms of section 10B(2) applies to these foreign dividends.
539
REMEMBER
• All other foreign income, such as royalties, rental, trade income etc., must also be
included in the gross income of a South African resident.
• Only South African residents can claim the foreign tax rebate (section 6quat). This is a
rebate to reduce the South African tax payable; it is not a deduction from taxable income.
Example 12.6
Sam Shoba (66 years old) and his wife (Sindy, 55 years old), who are married out of
community of property and are both South African residents, earned the following
investment income during the current year of assessment:
Sam R
Taxable foreign dividends 14 200
Interest from foreign investments 11 000
Interest from local investments (not tax free investments) 38 500
Sindy
Taxable foreign dividends 400
Interest from foreign investments 1 500
Interest from local investments (not tax free investments) 24 000
You are required to calculate Sam and Sindy’s taxable income for the current year of
assessment.
540
Solution 12.6
Sam R R
Foreign dividends 14 200
Less: Exemption (R14 200 × 25 / 45) (7 889) 6311
Interest from foreign investments (fully taxable) 11 000
Interest from local investments 38 500
Less: Interest exemption – R34 500 (34 500) 4 000
Taxable income 21 311
Sindy
Foreign dividends 400
Less: Exemption (R400 × 25 / 45) (222) 178
Interest from foreign investments 1 500
Interest from local investment 24 000
Less: Interest exemption – R23 800 (23 800) 200
Taxable income 1 878
541
542
543
and it is outstanding for 90 days or more, the taxpayer is entitled to claim a provision
equal to 25% of the debt as a deduction. This provision must however be included in
income in the following year of assessment.
REMEMBER
• Only a taxpayer who earns commission that is 50% or more of their total remuneration
may deduct entertainment expenses.
• For entertainment expenses to be deductible in these circumstances, they must comply
with all the requirements of section 11(a).
544
Example 12.7
Samuel Gxagxa, a salesman, earned the following income during the year of assessment:
R
Salary 30 000
Commission on sales 25 000
Annual prize for the highest sales for the year 3 000
Entertainment allowance 1 200
59 200
Solution 12.7
As Samuel does not earn remuneration mainly (more than 50%, (R25 000/R59 200 = 42%))
in the form of commission on sales, he may not claim a deduction in terms of
section 11(a). If more than 50% of his remuneration had consisted of commission
earnings,
he would have been able to claim the full amount of his entertainment expenditure in
terms of section 11(a) if it were incurred in the production of his income and not of a capital
nature.
Note that the winning of a prize would, in certain circumstances, constitute a receipt of a
capital nature. In the above circumstances, however, it is earned by virtue of the
taxpayer’s trading activities (his employment) and will therefore be taxable.
REMEMBER
545
Payments related to employment that are refunded (section 11(nA) and (nB))
Where a taxpayer receives an amount, including voluntary awards, for services
rendered or in respect of employment, or a restraint of trade payment, an amount
repaid by the taxpayer may be deducted.
REMEMBER
546
Deduction of contributions
With effect from 1 March 2016, all contributions to retirement funds are deductible
under section 11F, limited to the provisions of the section. Contributions to provident
funds were not allowable as a deduction before 1 March 2016.
547
REMEMBER
• A limit means that you cannot deduct more than that amount from taxable income. This
means that if you contributed R10 000 and the limit is R8 000, you are only entitled to
deduct R8 000; however, if you wish to deduct R5 000 and the limit is R8 000, you are
entitled to deduct the full R5 000 as it is less than the limit.
• You can never deduct more than the taxpayer actually paid.
The inclusion of the third leg of the limitation, namely taxable income, in effect means
that the deduction of retirement fund contributions can never create a loss.
REMEMBER
• For the purposes of section 11F, retirement fund deduction ‘remuneration’ excludes
– a retirement fund lump sum benefit;
– a retirement fund lump sum withdrawal benefit; and
– a severance benefit.
• Contributions consist of all contributions made by the taxpayer to pension, provident
and retirement annuity funds plus contributions made by the employer on which the
taxpayer has been taxed and any unclaimed balance of contributions.
• Allowable contributions to retirement funds are deducted after the inclusion of a
taxable capital gain but before the deduction for donations to public benefit
organisations.
548
Example 12.8
Harry Hadebe earns a salary of R442 000 and a non-pensionable bonus of R5 000. He is a
member of his employer’s pension fund. He contributes R35 000 per annum in respect of
current contributions and R2 000 per annum in respect of ‘past period’ contributions. His
employer did not contribute to the fund. His remuneration amounts to R447 000 and his
taxable income before this deduction is R600 000.
Hilda Hadebe (his wife) is a teacher employed in a government school. She earns a salary
of R235 000 a year and makes an annual contribution of R15 000 to the government pen-
sion fund. Her employer also contributes R15 000 per annum to the fund on her behalf
and this has been included in her taxable income as a fringe benefit. Her remuneration
amounts to R250 000 and her taxable income before this deduction is also R250 000.
You are required to calculate the amount that Harry and Hilda will be able to deduct in
respect of pension fund contributions.
Solution 12.8
Harry
Contributions to retirement fund (R35 000 + R2 000 = R37 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R447 000) or taxable income (R600 000)
Therefore 27,5% × R600 000 = R165 000; or
• R600 000
R165 000 is less than R350 000 and R600 000 therefore the limit is R165 000
Harry can therefore deduct the full amount of his contributions of R37 000 as they are
less than the limit.
Hilda
Contributions to retirement fund (R15 000 (Hilda) + R15 000 (employer) = R30 000)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
remuneration (R250 000) or taxable income (R250 000)
Therefore 27,5% × R250 000 = R68 750; or
• R250 000
R68 750 is less than R350 000 and R250 000 therefore limit is R68 750.
Hilda can therefore deduct the full amount of her contributions of R30 000 as it is less
than the limit.
What would happen If Hilda’s contributions were R70 000 in total (assuming
that her remuneration and taxable income was R250 000)?
549
Example 12.9
For the current year of assessment, William Wonfor had a taxable income of R225 000 (he
did not receive any retirement fund lump sum benefits during the year), before deducting
any retirement fund contributions. His taxable income is derived from the profits of a
small hardware shop that he owns. Wanda Wonfor, his wife, earned a salary of R85 000
during the year of assessment. From that amount, current pension fund contributions
were deducted by her employer. During the year, William and Wanda made the follow-
ing contributions to retirement funds:
William: Retirement annuity fund contributions R40 000
Wanda: Pension fund contributions (her employer did not contribute) R 3 000
Retirement annuity fund contributions R10 500
Reinstatement retirement annuity fund contributions R2 000
You are required to calculate the amount that William and Wanda will be able to deduct
in respect of retirement annuity fund contributions. Neither of them had any other income
or deductions.
Solution 12.9
William
Contributions to retirement fund – R40 000
Limited to the lesser of
• R350 000; or
• 27,5% of the higher of
remuneration (R0) or taxable income (R225 000)
Therefore 27,5% × R225 000 = R61 875; or
• R225 000
R61 875 is less than R350 000 and R225 000 therefore the limit is R61 875.
William can therefore deduct the amount of his contributions of R40 000 in full as they
are less than the limit.
Wanda
Contributions to retirement funds – R3 000 + R10 500 + R2 000 = R15 500
Limited to the lesser of
• R350 000; or
• 27,5% of remuneration (R85 000) or taxable income (R85 000)
Therefore 27,5% × R85 000 = R23 375; or
• R85 000
R23 375 is less than R350 000 and R85 000 therefore the limit is R23 375.
Hilda can therefore deduct the amount of her contributions of R15 500 in full as they
are less than the limit.
550
Example 12.10
Gift Mabija (45 years old) had a taxable income of R300 000 during the current year of
assessment before donating the following amounts:
R
Donation to Natal University 800
Donation to AIDS crisis centre (public benefit organisation) 600
Donation to Trees for Africa (not a public benefit organisation) 500
You are required to calculate the deduction in terms of donations that Gift will be able to
deduct for income tax purposes. You can assume that where applicable all official receipts
were obtained and that Gift did not receive any retirement fund lump sum benefits
during the year.
Solution 12.10
Qualifying donations R
Donation to Natal University – allowable 800
Donation to AIDS crisis centre (public benefit organisation) – allowable 600
Donation to Trees for Africa (not a public benefit organisation) nil
1 400
Limited to 10% × R300 000 = R30 000
Gift only donated R1 400 of allowable donations and can therefore deduct R1 400 in full
because it is less than the limit.
551
REMEMBER
• A donation may only be claimed in respect of section 18A where a receipt, as prescribed
by the Act, has been received.
Example 12.11
The following information relates to Sam Jacombe (30 years old, unmarried) for the
current year of assessment:
R
Salary 270 000
Bonus (non-pensionable) 6 000
South African interest (not tax free investments) 33 800
Medical fund contributions made by Sam (40%) 24 000
His employer pays 60% of the contributions to the fund
Retirement annuity fund contributions – current 4 200
Pension fund contributions – current 8% of salary
Sam pays 100% of his contributions to all retirement funds
Donation to public benefit organisations – official receipt received 800
Donation to non-public benefit organisations – receipt received 300
Medical expenses not covered by the fund 5 340
You are required to calculate Sam’s taxable income for the current year of assessment.
Solution 12.11
Calculation of Sam’s taxable income for the current year of assessment
R R
Salary 270 000
Bonus 6 000
Interest 33 800
Less: Exemption (23 800) 10 000
Medical fringe benefit – employer’s contribution
(R24 000 / 40% × 60%) 36 000
Taxable income before retirement fund deduction 322 000
continued
552
Example 12.12
Joe Mashishi is 54 years old; he is married and has three children, all under 18 years of
age. Joe had the following income and expenses for the current year of assessment:
R
Salary 150 000
Bonus 15 000
Contributions to retirement annuity fund (Note 1) 3 600
Donations (Note 2) 1 600
Contributions to pension fund (Note 3) 12 000
Notes
1. Joe contributed R300 per month to a retirement annuity fund.
A total of R1 300 was not deducted in previous years.
2. He made the following donations during the year:
donation to Natal University 500
donation to AIDS crisis centre (public benefit organisation) 600
donation to Trees for Africa (not a public benefit organisation) 500
3. Joe contributed 8% of his salary to the pension fund and his employer contributed
R500 a month.
You are required to calculate Joe’s taxable income for the current year of assessment. You
can assume that, where applicable, all official receipts were obtained.
553
Solution 12.12
R
Calculation of taxable income
Salary 150 000
Bonus 15 000
Employer’s contribution to pension fund (R500 × 12 months) 6 000
Income 171 000
Less: Contributions to retirement funds
(8% × R150 000 = R12 000 + R6 000 + R3 600 + R1 300 = R22 900)
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
Remuneration (R171 000); or
Taxable income (R171 000)
Therefore 27,5% × R171 000 = R47 025; or
• R171 000
R47 025 is less than R350 000 and R171 000, therefore limit
is R47 025
Allow contributions in full (22 900)
Taxable income before donations deduction 148 100
Less: Donations R R
Donation to Natal University – allowable 500
Donation to AIDS crisis centre – allowable 600
Donation to Trees for Africa – not allowable nil
1 100
Limited to 10% × R148 100 = R14 810 therefore can deduct full amount (1 100)
Taxable income 147 000
R
Normal tax calculated based on the tax tables xxx
Less: Annual rebates (section 6) (xxx)
Less: Medical tax credits (sections 6A and 6B) (xxx)
Net normal tax liability for the year xxx
Less: PAYE and provisional tax (prepaid taxes) (xxx)
Normal tax due by or to the taxpayer xxx
Add: Withholding tax on dividends xxx
Final tax liability of natural person xxx
554
Steps 1–6: Calculate the total taxable income for the year of assessment as dis-
cussed previously.
Step 7: Calculate normal tax by using the tax table (paragraph 1.5.2).
Step 8: Determine the age of the taxpayer on 28/29 February of the current
year of assessment. Determine whether the taxpayer qualifies for the
full rebate for the current year of assessment, if not pro rata the
rebate (paragraph 1.5.3).
Step 9: Calculate the medical scheme fees tax credit and the additional
medical expenses tax credit (paragraphs 1.5.4 and 1.5.5).
Step 10: Calculate tax credits for specific transactions (if any) (paragraph 1.5.6).
Step 11: Calculate net normal tax payable: normal tax for the year (Step 7)
minus
• rebates (Step 8);
• medical credits (Step 9);
• tax credits for specific transactions (Step 10).
Step 12: Calculate prepaid taxes (PAYE and provisional tax) (paragraph 1.5.7).
555
REMEMBER
• Where the period of assessment is less than a full year, the period is reflected by the
total number of days.
Example 12.13
Gershane Yosh has a taxable income of R543 000 for the current year of assessment.
Vershi Yosh has a taxable income of R350 000 for the current year of assessment.
You are required to calculate Gershane and Vershi’s normal tax for the current year of
assessment.
556
Solution 12.13
R
Gershane (taxable income = R543 000)
On R445 100 (per the tax tables) 105 429
Add: 36% of R97 899
(the amount in excess of R445 100 thus R543 000 – R445 100) 35 244
Normal tax 140 673
Vershi (taxable income = R350 000)
On R321 600 (per the tax tables) 67 144
Add: 31% of R28 400
(the amount in excess of R305 850 thus R350 000 – R321 600) 8 804
Normal tax 75 948
The example given here illustrates the calculation of normal tax on taxable income,
but can also be used to explain the two concepts often referred to in tax literature,
namely the marginal and the average rate of tax.
• Marginal rate of tax This rate of tax applies to an additional R1 of taxable income
earned. Referring to Example 12.13, the marginal rate of income tax is 36% because
if Gershane earned R1 more of taxable income, she would have to pay 36% tax on
this R1.
• Average rate of tax This is the rate of tax applying to the total taxable income.
Gershane’s average rate of tax is
R140 673
× 100, therefore the average rate is 25,9%.
R543 000
The marginal rate of tax is high but the average rate of tax is much lower. For natural
persons, the maximum marginal tax rate of 45% comes into operation on taxable
income in excess of R1 500 000.
REMEMBER
• When you evaluate the tax implications of a specific transaction, you always refer to the
marginal tax rate.
557
Step 1–6: Calculate the total taxable income for the year, as explained earlier.
Step 8: Determine the age of the taxpayer at 28/29 February of the current year
of assessment. Determine if the taxpayer will qualify for the full rebate in
the year of assessment. If not, the rebate should be reduced pro rata.
Step 9: The nett normal tax payable will be the normal tax (Step 7) for the
year minus rebates (Step 8).
Example 12.14
Victoria Dlamini was 83 years old when she died on 31 August 2020. She earned a taxable
income of R160 000 from 1 March 2020 to 31 August 2020.
You are required to calculate Victoria’s net normal tax payable for the current year of
assessment.
558
Solution 12.14
R R
Taxable income (given) 160 000
Normal tax on R160 000 @ 18% 28 800
Less: Normal tax rebates: 83 years of age
• Primary rebate (natural person) 14 958
• Secondary rebate (over 65) 8 199
• Tertiary rebate (over 75) 2 736
25 893
Reduced pro rata (Note)
184 days / 365 days × R25 893 (13 053)
Net normal tax payable 15 747
Note
Due to the fact that the taxpayer died during the year of assessment, the tax period is less
than 12 months; therefore the rebate should be reduced on a pro rata basis.
REMEMBER
• If the tax less the rebate results in a negative amount, the answer is limited to nil.
• If a person starts to work during the year, they will still qualify for the full annual
rebate, as their tax year is for a period of 12 months although they only worked for a
couple of months.
• The rebate must be deducted from normal tax and not from taxable income.
559
Example 12.15
Joseph Roos is 35 years old and married to Refilwe (34 years old). They have one child,
Susan (seven years old). None of them have any disabilities. Joseph’s taxable income for
the current year of assessment is R250 000. Joseph belongs to a medical fund.
You are required to
(a) calculate Joseph’s net normal tax for the current year of assessment assuming that
Joseph makes the full medical aid payment;
(b) calculate the amount that Refilwe can claim as a medical tax credit if the full medical
aid payment is R3 000 per month and she pays R1 000 of the payment.
Solution 12.15
(a) Joseph’s net normal tax
Calculate the medical scheme fees tax credits:
(R638 (Joseph + Refilwe) + R215 (Susan)) × 12 months = R10 236
Calculation of net normal tax: R
Taxable income 250 000
Normal tax (R37 062 + (26% × (R250 000 – R205 900))) 48 528
Less: Primary rebate (14 958)
Less: Medical scheme fees tax credit ((R638 + R215) × 12 months) (10 236)
Net normal tax 23 334
(b) Refilwe’s medical tax credit
MTC calculated as above – R10 360
Apportioned for Refilwe’s payment – R10 360 x R12 000 / R36 000 3 453
Note
In this case Joseph’s MTC would also be apportioned and he would be able to deduct a
tax credit of R6 907.
560
scheme or fund and the dependant was, at the time the amounts were paid,
admitted as a dependant of the taxpayer in terms of the fund;
(b) a nursing home or hospital or a nurse, midwife or nursing assistant or to a
nursing agency for the services of such a nurse, midwife or nursing assistant
because of the illness or confinement of the taxpayer or their spouse or child
or a dependant as contemplated in item (a); or
(c) a pharmacist for medicines supplied on the prescription of a person men-
tioned in item (a) above for the taxpayer or their spouse or child.
(3) Amounts (that have not been recovered from the medical scheme) that were paid or
contributed by the taxpayer during the year of assessment for expenditure incurred
outside the Republic on services rendered or medicines supplied to the taxpayer
or their spouse or child that are substantially similar to the services and
medicines for which a deduction may be made under item (a), (b) or (c) above.
(4) Expenditure (that has not been recovered from the medical scheme) necessarily
incurred and paid by the taxpayer in consequence of a disability suffered by the
taxpayer or their spouse or child or a dependant as contemplated in item 2(a).
REMEMBER
• The medical scheme and all practitioners and nurses referred to above have to be regis-
tered with their respective controlling bodies and in terms of certain Acts.
Example 12.16
David Hess is 66 years old. For the year of assessment commencing 1 March 2020, he
made contributions of R3 000 per month to a medical scheme on behalf of himself and his
wife. He paid R23 500 qualifying medical expenses for the year. David earned a salary of
R340 000.
You are required to calculate David’s medical tax credits for the 2021 year of assessment.
561
Solution 12.16
R
Medical scheme fees tax credit (R638 × 12 months) (7 656)
Excess medical scheme fees credit
(R36 000 (monthly contributions) ï (3 × R7 656)) × 33,3% (4 340)
Additional medical expenses tax credit (R23 500 × 33,3%) (7 826)
Total medical tax credits that will reduce his normal tax (19 822)
Example 12.17
Lisa Sharpe is 35 years old. For the year of assessment commencing 1 March 2020, she
made contributions of R2 000 per month to a medical scheme on behalf of herself and her
two children. She paid R23 500 qualifying medical expenses for the year. Her employer
contributed R15 000 to the medical scheme during the year. Lisa earned a salary of
R275 000. Lisa’s son has a disability.
You are required to calculate Lisa’s medical tax credits for the 2021 year of assessment.
Solution 12.17
R
Medical scheme fees tax credit (R638 + R215) × 12 months (10 236)
Excess medical scheme fees credit (R24 000 (own contributions) + R15 000
(fringe benefit employer contributions) – (3 × R10 236)) × 33,3% (2 761)
Additional medical tax credit (R23 500 × 33,3%) (7 826)
Total tax credits (20 823)
562
Example 12.18
Joe Blunt is 35 years old. For the year of assessment commencing 1 March 2020, he made
contributions of R6 000 per month to a medical scheme on behalf of himself, his wife and
a child. He paid R50 000 qualifying medical expenses for the year. His employer
contributed R40 000 to the medical scheme during the year. Joe earned a salary of
R500 000.
You are required to calculate Joe’s medical tax credits for the 2021 year of assessment.
Solution 12.18
R
Medical scheme fees tax credit (R638 + R215) × 12 months (10 236)
Additional medical expenses tax credit: 25% of:
Excess contributions (R6 000 × 12 + R40 000) – (4 × R10 236) R71 056
Add: Qualifying expenses R50 000
Less: 7,5% × taxable income (R540 000) (Note) (R40 500)
R80 556
Therefore: R80 556 × 25% (20 139)
Note
Calculation of taxable income
Salary 500 000
Medical fringe benefit (employer’s contributions) 40 000
540 000
REMEMBER
continued
563
564
the income on which the tax was paid has also been included in their South African
taxable income, the taxpayer will become entitled to a rebate on the foreign tax paid.
However, the rebate cannot exceed the South African normal tax that has been levied
on that foreign income.
The rebate is thus the lesser of:
• the sum of all (total) foreign taxes paid in respect of the above-mentioned income;
or
• the portion of South African normal tax that relates to foreign income.
The portion of South African normal tax that relates to foreign income is calculated as
follows:
Taxable portion of foreign income
(after deductions and exemptions) × SA normal tax
Sum of all (total) taxable income
REMEMBER
• When calculating South African normal tax related to foreign income, tax before the
deduction of rebates must be used.
Where the sum of the foreign taxes is more than the rebate/deduction that is allowed
(that is to say the rebate is limited to the South African normal tax), the excess
amount of foreign taxes is then carried forward to the following year of assessment
and is added to the foreign taxes paid in that year. The excess foreign taxes carried
forward will exclude any foreign tax that has been paid in respect of exempt income.
Example 12.19
Joe Jackson (55 years old) received the following income for the current year of assessment:
R
Gross foreign interest (foreign tax paid R 2 800) 12 000
Local interest (not tax free investments) 24 700
Other gross foreign income (foreign tax paid R6 000) 15 000
South African income 145 500
No exemptions have been taken into account. He paid non-refundable foreign tax on all the
foreign income he received.
You are required to calculate Joe’s tax liability for the current year of assessment.
565
Solution 12.19
R R
Foreign interest 12 000
Local interest 24 700
Less: Investment exemption (23 800) 900
Other foreign income 15 000
South African income 145 500
Taxable income 173 400
Normal tax payable 31 212
Less: Primary rebate (14 958)
16 254
Less: Section 6quat rebate (Note) (4 860)
Net normal tax payable 11 394
Note
Total taxable income from foreign sources:
Foreign interest 12 000
Other foreign income 15 000
27 000
566
Where the person claiming the section 6quat rebate has donated to public benefit
organisations (refer to 12.4.3) that have been deducted from their taxable income, these
deductions must then be apportioned between South African-sourced income and
foreign income. This is best explained with an example.
Example 12.20
During the current year of assessment, Martha Mhlanga (30 years old) earned a pension-
able salary of R100 000 from a South African source, from which an amount of R5 920 was
withheld in respect of employees’ tax.
In addition, she received the following gross investment income:
R
South African source
Dividends (not tax free investments) 50 000
Interest (not tax free investments) 28 500
Foreign source
Interest (including R3 600 withholding tax) 45 000
In terms of her conditions of employment, she is obliged to contribute 8% of her monthly
salary to a pension fund. She made a qualifying donation of R6 000. She does not belong
to a medical aid fund.
You are required to calculate Martha’s tax liability for the current year of assessment.
Solution 12.20
R
Salary income 100 000
Dividend income – exempt nil
Foreign interest 45 000
South African interest income
(R28 500 – R23 800) 4 700
Income 149 700
Less:
Retirement fund contributions – R8 000
continued
567
R
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– R100 000 or
– R149 700
Therefore R149 700 × 27,5% = R41 168; or
• R149 700
The limitation is therefore R41 168 – contributions will be allowed in full (8 000)
141 700
Less:
Donation – R6 000
Limited to 10% × R141 700 = R14 170, therefore allow full donation (6 000)
Taxable income 135 700
Calculation of normal tax payable before rebates
Normal tax payable 24 426
Calculation of foreign taxes payable in respect of taxable
foreign income
Foreign taxes payable in respect of foreign income 3 600
Calculation of the section 6quat rebate
Amount of foreign taxes that qualifies for the rebate limited to 3 600
Taxable income derived from all foreign sources
= × Normal tax payable
Total taxable income derived from all sources
R43 095 (Note)
= × R24 426 = R7 757
R135 700
Note
R43 095 is calculated as follows: R R
Salary income nil
Dividend income nil
Interest income 45 000
Gross income and income 45 000
Less: Retirement fund contributions –
R8 000 does not relate to foreign income nil
45 000
Less: Donation (as calculated) (6 000)
Apportionment of R6 000: (R45 000 / R141 700 × R6 000) (1 905)
Foreign taxable income 43 095
continued
568
Calculation of the normal tax payable after taking rebates into account
R
Normal tax payable before rebates 24 426
Less: Primary rebate (14 958)
Less: Medical tax credit (none as she did not contribute to a medical scheme) (nil)
Less: Section 6quat rebate R3 600 is less than R7 757 (3 600)
Less: Employees’ tax (5 920)
Amount payable or (refundable) (52)
No foreign taxes will be carried forward, as the taxpayer was able to deduct the full
amount of foreign tax paid as a rebate.
Example 12.21
Mpho Zuma is 44 years old and her net normal tax payable for the current year of assess-
ment amounts to R25 250. Her employer deducted R20 000 employees’ tax from her
monthly salary. She is also registered as a provisional taxpayer and paid R8 500
provisional tax during the current year of assessment.
You are required to calculate how much Mpho still owes SARS or how much she will be
refunded for the current year of assessment.
569
Solution 12.21
R
Net normal tax payable 25 250
Less: Prepaid taxes:
Employees’ tax (20 000)
Provisional tax (8 500)
Net credit (amount due to Mpho) (3 250)
REMEMBER
• If the net amount due is negative (net credit), taxpayers are entitled to a refund of the
amount they overpaid during the year of assessment.
• If a refund is due, SARS will first refund the provisional tax paid and then the PAYE.
570
If these requirements are met, the taxpayer is prohibited from setting off the assessed
loss from that specific trade against income derived during the same year of
assessment from another trade or a non-trading activity.
Determine whether the loss from the operating of a trade is limited when
calculating the taxable income for a year of assessment
Step 1: Would the person have paid tax at the maximum marginal rate (tax-
able income (including an assessed loss and balance of assessed loss
brought forward) of R1 577 300 for the 2021 year of assessment) if they
did not have this loss?
Yes: Step 2
No: The loss can be used when calculating the taxable income for the
current year of assessment – section 20A is not applicable.
Step 2: Is the trade classified as a suspect trade by SARS (refer to 12.6.1) or did
the person make a loss from this trade in any three of the last five years
(including the current year)?
Yes: Step 3
No: The loss can be used when calculating the taxable income for the
current year of assessment.
Step 3: Does the trade qualify for the exclusion rule (refer to 12.6.2)?
Yes: Step 4
No: The loss cannot be used in the calculation of the taxable income
for the current year of assessment and must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
Step 4: Did the trade (excluding farming activities) have a loss for six of the
last ten years?
Yes: The exclusion cannot be used, therefore the loss cannot be used in
the current year’s calculation. The loss must be carried forward to
the next year of assessment where it can be set off against income
from the same trade.
No: The exclusion can be used and the loss can be set off against
income from other trades in the current year of assessment.
571
REMEMBER
• To determine whether a loss is incurred from the trade in a specific year of assessment,
the loss carried forward from the previous year is not included.
• The income from the trade includes recoupments in terms of section 8(4) and capital
gains on disposal of assets used in the trade.
• The income from different farming activities (for example livestock and plantation
farming) is added together for the purposes of these rules in order to determine farming
income.
• If a person is subject to the limitation rules or might be subject to the rules, they must
provide full details of the trade in their tax return.
• These rules are only applicable to individuals.
572
573
12.8 Summary
In this chapter the taxable income framework for individuals was discussed. This was
followed by a discussion how to calculate a taxpayer’s tax liability for the year of
assessment.
R
Gross income (as defined in section 1) xxx
Less: Exempt income (sections 10, 10A and 12T) (xxx)
Income (as defined in section 1) xxx
Less: Deductions (section 11 – but see below; subject to section 23(m) and
assessed loss (sections 20 and 20A) (xxx)
Add: Taxable portion of allowances
(section 8 - such as travel and subsistence allowances) xxx
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before donations deduction xxx
Less: Donations deduction (section 18A) (xxx)
Taxable income (as defined in section 1) xxx
continued
574
As part of the framework certain deductions are allowed for an individual. These
need to be deducted in a specific order.
Gross income
Less: Exempt income
Equals: Income
Less: Assessed loss from a previous year
Add: Other amounts included in taxable income
Add: Taxable capital gains
Less: Retirement fund contributions
Contributions to retirement fund (current year + amounts not deducted in previous years)
Deduction limited to the lesser of
• R350 000; or
• 27,5% × the higher of
– remuneration; or
– taxable income (excluding lumpsum benefits but including taxable capital gain); or
• taxable income before this deduction
575
Questions that test your knowledge on specific income and deductions for individuals
follow.
Question 12.1
Chanelle Segoa, 24 years old and not married, started work on 1 May 2020. She lives and
works in Johannesburg.
During the current year Chanelle earned a salary of R230 000 and a bonus of R6 000.
Chanelle belongs to a medical aid fund to which she contributed R5 000 for the full current
year of assessment. Her employer also contributed R5 000 for the period during which she
was employed. Chanelle also made retirement fund contributions of R3 500 for the current
year of assessment.
A few years ago, Chanelle inherited a beautiful house, situated in Cape Town, from her
grandfather. Chanelle rents out the house. During the current year of assessment, she
received rental income of R280 000 and incurred deductible rental expenses of R210 000.
Chanelle had medical expenses of R1 600, which were not covered by her medical aid
fund.
Chanelle’s employer deducted employees’ tax of R26 829 and she paid R17 200 provisional
tax for the 2021 year of assessment.
Answer 12.1
Calculation of Chanelle’s net tax liability: R
Gross income
• Salary 230 000
• Bonus 6 000
• Medical fringe benefit 5 000
• Rental received 280 000
521 000
Less: Exempt income nil
Income 521 000
Less: Expenses
• Rental costs (210 000)
• Retirement fund contributions (3 500)
Taxable income 307 500
Normal tax on taxable income
(R37 062 + (26% × (R307 500 – R205 901))) 63 478
continued
576
Less: Rebates
• Primary (14 958)
• Medical scheme fees tax credit (R319 × 12 months) (3 828)
• Additional medical expenses tax credit: 25% of:
Excess contributions (R5 000 + R4 000) – (4 × R3 828) nil
Add: Qualifying expenses 1 600
Less: 7,5% × taxable income (R307 500) (23 063)
Nil nil
Net normal tax payable 44 692
Less: Prepaid tax
• Employees’ tax (26 829)
• Provisional tax (17 200)
Net tax payable by Chanelle 663
Question 12.2
Colin Baloi is married to Rebecca (50 years old). On 15 October 2020 Colin died unexpectedly.
Rebecca provides the following information for the current year of assessment:
R
Salary from employer 835 000
Interest on savings account with local bank 19 650
Interest on a tax free investment account with a South African bank 3 000
Dividends from a South African company 12 000
Employees’ tax deducted from his salary 243 328
Colin would have been 65 years old on 20 January in the current year of assessment. Colin
and Rebecca were married out of community of property.
Answer 12.2
Calculation of Colin’s net tax due or refundable:
R R
Salary 835 000
Interest received 19 650
Interest received tax free investment 3 000
Dividends received 12 000
Gross income 869 650
Less: Exempt income
Interest exemption (above 65 years old) (R34 500 so full (19 650)
amount received can be exempted)
Tax free investment (full amount received exempt) (3 000)
Dividends exempt (12 000)
Taxable income 835 000
continued
577
Question 12.3
Nomsa Ntini, 67 years old, is married in community of property. Nomsa plans to retire
when she is 70 years old. Nomsa has three children aged 26 (married), 32 (unmarried) and
40 (married).
She provides you with the following information for the current year of assessment:
R
Income from employer
Salary 250 000
Entertainment allowance (non-pensionable) 15 000
Investment income
Gross foreign dividends (no specific exemption applies) 3 400
Foreign interest 45 000
Interest on South African savings account (not tax free investments) 13 000
Expenses
Medical aid contributions (100%) 18 000
Medical expenses (as defined in section 18) 7 000
Retirement annuity fund contributions (100%) 35 000
Donation to a university (official receipt obtained) 24 000
Pension fund contributions – current (100%) 23 000
Entertainment expenses (as defined in the Act) 3 500
Husband’s income
Old-age pension 30 000
Interest on an investment in South Africa 49 000
578
Answer 12.3
Calculation of Nomsa’s taxable income for the current year of assessment
R R
Salary 250 000
Entertainment allowance 15 000
Foreign dividends 3 400
Less: 50% married in community of property (1 700)
Less: Exemption R1 700 × 25 / 45 (944) 756
Foreign interest 45 000
Less: 50% married in community of property (22 500) 22 500
Interest on South African savings account 62 000
Less: 50% married in community of property (31 000)
Less: Interest exemption limited to interest received (31 000) nil
288 256
R
Less: Entertainment expenses nil
Less: Retirement fund contributions – R23 000 +R35 000
Limited to the lesser of
• R350 000; or
• 27,5% × the higher of
R265 000 or R288 256 therefore 27,5% × R288 256
= R79 270
• R288 256
The limitation is R79 270, therefore allow in full (58 000)
230 256
Less: Donation to university – R24 000
Limited to 10% × R230 256 = R23 026 (23 026)
Taxable income 207 230
Question 12.4
Patricia Lilly is 34 years old and unmarried. She provides you with the following
information for the current year of assessment:
1. Income and deductions related to employment
She received the following income and incurred the following expenses:
R
Salary 190 000
Bonus (non-pensionable) 13 000
Pension fund contributions 15 200
Retirement annuity fund contributions 1 400
Medical aid fund contributions – this represents 50% of the contribution 12 000
continued
579
2. Dividends received
Red Limited
This is a South African company and Patricia holds 10% of the shares.
She received dividends amounting to R4 000.
Blue Plc
This is a British company, defined as a ‘small company’. Patricia holds
8% of the shares. She received R46 900 dividends after the deduction of
R4 813 withholding tax.
3. Interest received
French savings account (this amount is before the withholding tax of R800) 8 000
South African savings account (not tax free investments) 900
4. Royalties received
Patricia designed a patent for a manufacturing process. This patent is used
in South Africa as well as in other countries. Her royalty income from the
patent was as follows:
South Africa 40 000
Other countries (before foreign tax of R34 000 was deducted) 170 000
5. Donations
Patricia made the following donations during the year:
Natal University 2 300
Public benefit organisations 500
Non-public benefit organisations 800
Where applicable, the official receipts were obtained.
6. Medical expenses
Patricia had to have cosmetic surgery during the year. The operation cost R90 567. The
medical aid paid R70 000 of this amount. Patricia has a disability as defined.
7. Retirement annuity fund contributions
Retirement annuity fund contributions amounting to R100 were not deducted in the
previous year of assessment in respect of current contributions (these have not been
included in the current year’s contributions).
Answer 12.4
Calculation of Patricia’s net normal tax payable for the current year of assessment
R
Taxable income 436 484
Net normal tax payable 33 342
580
13 Fringe benefits
Page
13.1 Introduction ......................................................................................................... 582
13.2 Classification of employment benefits ............................................................. 583
13.3 Fringe benefits in terms of the Seventh Schedule ........................................... 584
13.3.1 General .................................................................................................. 584
13.3.2 Acquisition of an asset at less than the actual value
(paragraph 5) ........................................................................................ 587
13.3.3 Right of use of an asset (excluding a motor vehicle
and accommodation) (paragraph 6).................................................. 590
13.3.4 Right of use of a motor vehicle (paragraph 7) ................................. 592
13.3.5 Meals, refreshments, and meal and refreshment vouchers
(paragraph 8) ........................................................................................ 602
13.3.6 Accommodation (paragraph 9).......................................................... 603
13.3.6.1 Residential accommodation .............................................. 603
13.3.6.2 Holiday accommodation ................................................... 606
13.3.7 Free or cheap services (paragraph 10) .............................................. 608
13.3.8 Benefits in respect of interest on debt (paragraph 11) .................... 610
13.3.9 Subsidies in respect of loans (paragraph 12) ................................... 613
13.3.10 Medical fund contributions paid on behalf of an employee
(paragraph 12A) ................................................................................... 615
13.3.11 Costs incurred for medical services (paragraph 12B) ..................... 617
581
Page
13.3.12 Benefit in respect of employer-owned insurance policies
(paragraph 12C) ................................................................................... 619
13.3.13 Payment of contribution on behalf of employee to a pension,
provident or retirement annuity fund (paragraph 12D) ................ 620
13.3.14 Payment of contribution on behalf of employee to a bargaining
council (paragraph 12E) ...................................................................... 621
13.3.15 Payment of employee’s debt or the release of the employee
from the obligation to pay a debt (paragraph 13) ........................... 621
13.4 Allowances and advances .................................................................................. 623
13.4.1 Travel allowance (section 8(1)(b)) ...................................................... 624
13.4.2 Subsistence allowance (section 8(1)(c)) ............................................. 630
13.4.3 Other allowances ................................................................................. 632
13.4.4 Employees’ tax implications regarding the receipt of
allowances ............................................................................................ 633
13.5 Exemptions from tax in an employer/employee relationship
(section 10)............................................................................................................ 633
13.5.1 Special uniforms (section 10(1)(nA)) ................................................. 633
13.5.2 Transfer costs (section 10(1)(nB)) ....................................................... 634
13.5.3 Scholarships and bursaries (section 10(1)(q) and (qB)) ................... 635
13.6 Summary .............................................................................................................. 635
13.7 Examination preparation ................................................................................... 636
13.1 Introduction
James has just started working at Botha and King (Pty) Ltd. It is his first job. In add-
ition to his salary every month, he is entitled to use one of the company’s vehicles. He
can take the vehicle home and use it over weekends for his own private purposes. On
resigning from the company, he will have to return the vehicle to the company.
On his salary slip, at the end of each month, he saw that over and above the cash
salary he receives there is an additional entry: ‘Fringe benefit – company vehicle’. He
is, therefore, taxed not only on his cash salary, but also on the value of the benefit he
receives from his employer.
There are, however, certain other benefits which employers can give to their employees
that are not taxable, for example if the employer provides meals in a canteen where
the canteen is situated on the employer’s business premises.
In this chapter, we investigate which benefits are taxable fringe benefits and how the
value of such a benefit is determined.
582
Tax statistics
According to the latest available tax statistics (Tax Statistics 2019):
The travel expenses claimed against the allowance continues to be the largest for
individuals at 24,9% of all expenses R28,5 billion..The largest fringe benefit at R110,8
billion was retirement benefits paid by employers on behalf of employees (60.3%).
583
• In addition, paragraph (i) of the gross income definition in section 1 of the Act
includes the cash equivalent of a benefit granted in respect of employment in terms
of the Seventh Schedule. The Seventh Schedule of the Act sets out when a benefit is
a taxable benefit and how the cash equivalent (the value of the taxable benefit)
should be calculated.
• Section 8 of the Act stipulates that the unexpended portion of an allowance
received must be included in the taxable income of a taxpayer. This means that a
portion of an allowance actually expended by that recipient on business must first
be excluded. There are also other exclusions that we investigate later in this chapter.
• Section 8B of the Act provides the rules relating to what should be included in
taxable income in terms of shares acquired in terms of a broad-based employee
share plan and are discussed in detail later in this chapter.
• Section 8C of the Act specifies that gains made by employees or directors of com-
panies regarding the vesting of an equity instrument must be included in their tax-
able income.
There are also sections that will allow for a deduction or exclusion of a benefit or one
of the above inclusions.
In this chapter, the various inclusions grouped under the following headings are
discussed:
• fringe benefits granted by employers in terms of the Seventh Schedule to the Act
(paragraph (i) of the definition of gross income) (refer to 13.3);
• allowances and advances granted by employers (section 8) (refer to 13.4); and
• gains made by employees or directors in respect of rights to acquire equity instru-
ments (sections 8B and 8C).
In addition, we also investigate:
• exemptions from tax in an employer/employee relationship (section 10(1)(nA) to
(nE) and (1)(q)) (refer to 13.5); and
• all the administrative provisions relating to fringe benefits that apply to all
employers (paragraphs 16–18 in the Fourth Schedule).
584
REMEMBER
continued
585
REMEMBER
• The general rule of the Seventh Schedule is that the amount to be included in gross
income is the cash equivalent of a fringe benefit. This is the value of the benefit in terms
of the Seventh Schedule less any amount paid by the employee.
586
Exceptions
There are two exceptions to the general valuation rule, namely where:
• the asset concerned is movable property (other than marketable securities or an
asset which the employer had the use of prior to acquiring ownership thereof)
acquired by the employer with the purpose of disposing of it to the employee – the
asset is valued at the cost to the employer; and
• the asset concerned is trading stock of the employer – the value to be placed on the
asset is the lesser of the cost to the employer or the market value.
Exclusions
• Where assets are presented to the employee as an award for bravery or for long
service, the value determined is reduced by the lesser of the cost to the employer of
all such assets so awarded to the relevant employee during the year of assessment,
or R5 000.
• In respect of properties bought on or after 1 March 2014, no value shall be placed
on immovable property for residential purposes acquired by an employee from an
employer or related institution if the remuneration proxy of that employee (not a
connected person) is R250 000 or less for that year of assessment and the market
value of the immovable property is R450 000 or less and the employee is not a con-
nected person in relation to the employer.
587
REMEMBER
• Long service means an initial unbroken period of service of not less than 15 years, or
any subsequent unbroken period of service of not less than 10 years.
• Awards granted for outstanding performance or for any reason other than long service
or bravery do not qualify for the R5 000 reductions in value.
• If an employee receives the first long service award after, for example, 20 years (not 15)
the following available reduction in value would only be after another 10 years – that is
to say after 30 years’ service.
• ‘Unbroken period of service’ is interpreted to mean a continuous employment with a
single employer without a lawful termination of the contract.
• Gift vouchers are seen as a form of property and therefore regarded as an asset – but a
voucher for a meal, for example, would be excluded and therefore taxable.
• Remuneration proxy is the remuneration earned by the employee in the previous year
of assessment
Example 13.1
Alida Groenewald is employed by Pharma Pills Ltd (a manufacturer of pharmaceutical
products). During the current year of assessment, she purchased pharmaceutical products
from her employer for R800. The cost price of these products was R1 700 and the market
value was R2 100.
You are required to calculate the cash equivalent of the benefit for inclusion in Alida’s
current year of assessment.
Solution 13.1
R
Value of the benefit – cost price of the asset 1 700
Less: Consideration paid by Alida (800)
Cash equivalent of the benefit 900
Because the products constitute trading stock of the employer, the cash equivalent is cal-
culated using the lesser of the cost price or market value of the asset.
Example 13.2
Manie du Plessis received an asset with a market value of R5 600 on 31 December of the
current year of assessment, after rendering 20 years’ service to ABC Ltd. The asset cost
the employer R5 200. The initial intention was not to acquire the asset to dispose of it to
the employee.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
588
Solution 13.2
R
Value of the benefit – market value of the asset at the time the employee
acquired the asset 5 600
Less: Exemption in terms of a long-service award (5 000)
Less: Consideration paid by Manie (nil)
Cash equivalent of the benefit 600
The long-service award exemption of up to R5 000 is available in respect of an initial
unbroken period of service of not less than 15 years or any subsequent unbroken period of
service of not less than ten years.
Notes
1. If the asset cost the employer R4 500, the cash equivalent of the benefit would have
been R1 100 (R5 600 – R4 500). The amount to be excluded could never exceed the cost
for the employer. For long-service awards, the amount to be excluded is therefore
always the lower of the cost for the employer or R5 000.
2. If Manie received the R5 600 in cash, the full amount must be included in his taxable
income as the exemption applies only to an asset and not to a cash award.
Example 13.3
Sarie Smit received a number of gift vouchers in recognition of 15 years’ continuous
service with her employer:
1. A voucher for dinner for two at the local gourmet restaurant to a maximum of R1 000.
Sarie’s employer is a regular visitor to the restaurant and gets 10% discount on his
meals there – he therefore only paid R900 for the voucher.
2. A gift voucher for a full-day treatment at Feather Hill Spa that cost the employer
R1 500.
3. A gift voucher for the local book and media store to the value of R2 000 (cost to the
employer as well).
Sarie had to pay R150 for each voucher.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
589
Solution 13.3
Value of the benefit
The voucher for the restaurant is a voucher for a meal and is specifically excluded from
paragraph 2(a) (long-service awards) and taxable in terms of paragraph 2(c) (meals or
refreshment). R
Cost to the employer 900
Less: Paid by Sarie (150)
Cash equivalent of the taxable benefit 750
The spa voucher and the book store voucher fall within the scope of paragraph 2(a) as
Sarie acquires them at less than actual value.
R
Cost to employer of the vouchers 3 500
Less: Long-service award reduction (cost of the assets is less than R5 000) (3 500)
Value of the taxable benefit nil
Less: Consideration paid (R150 for each voucher) (300)
Cash equivalent – cannot be less than zero nil
590
Exclusions
No value will be placed on the taxable benefit if:
• the private use is incidental to the use of the asset for the employer’s business (as
of 1 March 2018 this excludes the right of use of clothing);
• the asset is provided as an amenity to be enjoyed by the employee at their place of
work or for recreational purposes at that place or a place for recreation provided
by the employer for the use of their employees in general, for example gym facili-
ties (as of 1 March 2018 this excludes the right of use of clothing);
• the asset is any equipment or machine which the employer allows their employees in
general to use from time to time for short periods and the value of the private use
does not exceed an amount as set out in a public notice issued by the Commissioner;
• the asset consists of telephone or computer equipment which the employee uses
mainly for the purposes of the employer’s business. This includes modems on
fixed lines of all kinds, removable storage of all kinds (that is to say memory
sticks), printers, office-related software (MSOffice, operating systems, development
and management tools) and telephone line rentals and subscriptions for internet
access; or
• the asset is a book, literature, recording or a work of art.
Example 13.4
Daniel Mamabola has had the use of his employer’s cell phone for the past two years. He
must constantly be available for business purposes and the private use of the cell phone is
only incidental. The cost of the cell phone was R3 000. The market value on the date when
he acquired the use of the cell phone was R1 200.
You are required to calculate the cash equivalent of the benefit to be included in Daniel’s
taxable income.
Solution 13.4
No value is placed on this benefit, as the cell phone is used mainly for the employer’s
business.
591
Example 13.5
Ernst Gray’s employer granted him the right of use of a computer for private purposes for
five months from 1 October of the current year of assessment. On that date, the market
value of the computer was R12 000. His employer purchased the computer two years
earlier for R15 000.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 13.5
As this computer is not used for the employer’s business, the exemption does R
not apply.
15% of R12 000 (market value is lower than cost of the asset) × 5 / 12 750
Less: Consideration given for the right of use (nil)
Cash equivalent of the benefit 750
REMEMBER
• The value of the taxable benefit must be apportioned and is deemed to have accrued on
a monthly or weekly basis.
REMEMBER
• The employer is also deemed to have granted their employee the right to use a motor
vehicle if they have hired the motor vehicle under a lease and have transferred their
rights and obligations under the lease to the employee. The employee’s deemed right of
use then extends to the remainder of the lease. The rentals payable by the employee
under the lease will in time be deemed a consideration to be paid by them for the right
of use of the motor vehicle, and the ‘determined value’ of the vehicle is the retail market
value at the time when the employer first obtained the right of use of the vehicle, or the
cash value (excluding finance charges) where the lease is a financial lease.
• Where the lease is an operating lease concluded by parties who are not connected
persons and are transacting at arm’s length, the cash value is the actual cost to the
employer incurred under the operating lease as well as the cost of fuel for that vehicle if
the employer pays the fuel.
592
It is assumed that all travel is private travel and that the employer bears all costs
relating to the vehicle and the travel with it.
The value of the private use is calculated as follows:
• For each month during which the employee is entitled to use the vehicle for pri-
vate purposes, the value of the taxable benefit is 3,5% per month of the determined
value of the motor vehicle.
• Where the vehicle (at acquisition by the employer) is the subject of a maintenance
plan, the value of the taxable benefit is 3,25% per month of the determined value of
the motor vehicle.
• Where the employer holds the vehicle under an operating lease, the value of the
taxable benefit is the actual cost of the lease and the cost of fuel for the vehicle.
Value of private use (operating lease) = (monthly lease payments × number of months
used during the year of assessment) plus cost of fuel for the year
• When the employee uses the vehicle for a period shorter than a full month, the
value is reduced according to the ratio of the number of days in the period to the
number of days in the month. The purpose of the reduction is to provide for the
right of use of the motor vehicle commencing in the middle of a month. No reduc-
tion in the value determined must be made by reason of the fact that the vehicle in
question was during any period (for any reason) temporarily not used by the em-
ployee for private purposes. For example: If an employee receives the vehicle on 10
May, the calculation for May is:
593
REMEMBER
The determined value of a motor vehicle is the retail market value as determined by
Regulation R.362 excluding finance charges and interest payable (paragraph 7).
Note that the rules are different depending on when the vehicle was acquired.
The following table summarises retail market value and the respective dates which in
turn show the determined value:
594
REMEMBER
• The dealer billing price is the selling price determined by a manufacturer or importer
thereof in the Republic in respect of selling a vehicle to dealers and rental companies.
• Both the retail market value and the dealer billing price should be supplied to you in
questions and the examinations.
• The examples in this book refer to cost price of a vehicle including or excluding VAT.
You should use these values unless reference is specifically made to manufacturers,
exporters, dealers or rental companies.
Example 13.6
The employer purchased a motor vehicle for R200 000 plus R30 000 VAT plus R35 000
finance charges. The determined value will differ depending on how the vehicle is
acquired:
• If the employer purchases the vehicle, the determined value is R230 000.
• If the employer is a motor vehicle manufacturer, the determined value is the market
value of R200 000 (VAT excluded, if VAT input was claimed) or the average cost of all
their stock which is available to employees, for example R150 000.
• If the vehicle is obtained in terms of an instalment credit agreement, the determined
value is the cash value of R200 000 (add VAT if it cannot be claimed).
• If the employer leases the vehicle and obtained it at the end of the lease, the retail
market value when the employer obtained the right of use of the vehicle is the market
value, that is to say R200 000 (add VAT if it cannot be claimed).
595
REMEMBER
• Where the employer has granted an employee the right of use of a motor vehicle and a
limit was placed on the value of such vehicle by the employer, and the employee makes
a contribution towards the purchase price of a more expensive vehicle, the contribution
made by the employee must be deducted from the cost price (or cost to the employer) of
the more expensive vehicle. (For example: The employer gave a R230 000 (VAT included)
motor vehicle to Mr Ryk to use. Mr Ryk, however, wants a more expensive vehicle and
he pays R57 500 to obtain a R287 500 (VAT included) vehicle. The determined value is
R287 500 – R57 500 = R230 000.)
• The cost includes add-on items such as tow bars, smash-and-grab window tinting, air
conditioning etc., but not the cost of insurance products such as monthly vehicle track-
ing service fees.
• The value must include VAT even if it was acquired before 1 March 2011 when VAT
was specifically excluded from the determined value of the vehicle. If, however, the
employer was entitled to a deduction of VAT input tax, for example if the employer is a
car dealer, the VAT must be excluded.
• Where more than one employee has the right to a specific vehicle, they would all be
taxable in terms of this paragraph on the same vehicle.
• Where an employee obtains the use of an employer vehicle and then moves to an
associated institution and the institution provides them with the same vehicle, the
determined value is the original value to the first employer.
596
• the employee proves that accurate records for the distances travelled for private
purposes are kept and that the employee pays the full amount for fuel for private
purposes. This reduction is also calculated on assessment and is calculated on the
number of kilometres travelled for private purposes and the rate per kilometre as
announced for the use of the travel allowance (paragraph 7(8)(b)).
Example 13.7
If an employee does not receive a travel allowance but has the private use of a company
vehicle with a purchase price of R287 500 (including VAT), and the employee:
• is responsible for bearing all the costs of maintenance (R45 000) with regard to the
vehicle (the company bears all fuel expenses);
• has accurate records of distances travelled for private purposes and she travelled
25 000 km of her total 40 000 km for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 13.7
R
The private travel is taxed
The fringe benefit for the year is calculated as follows
(adjusted on assessment for private kilometres):
R287 500 × 3,5% × (25 000 km/40 000 km) × 12 months 75 469
Less: cost paid for private use (R45 000 × (25 000 km/40 000 km)) (28 125)
Taxable value 47 344
Note
Only private travel is taxed.
The full amount will be taxed monthly. No adjustment for private travel is made on a
monthly basis. The deductions and adjustment will only be made by SARS on assess-
ment as the total kilometres travelled would only be available then.
Exclusions
There is no taxable benefit
• where the vehicle is available to and is used by employees in general, the private use
of the vehicle by the employee is infrequent or merely incidental to the business use,
and the vehicle is not normally kept at or near the residence of the employee
concerned when not in use outside of business hours (for example pool vehicles); or
• when the nature of the employee’s duties are such that they are regularly required
to use the vehicle for the performance of these duties outside their normal hours of
work, the private use of the vehicle by the employee is infrequent or merely
incidental to the business use and they are not permitted to use the vehicle for pri-
vate purposes other than travelling between their places of residence and their
places of work (for example police vehicles).
597
The calculation of the taxable benefit in respect of the right of use of a motor vehicle
can be summarised as follows:
Determined value
(retail market value = cost
including VAT but
excluding finance
charges)
3,5% or 3,25%
per month of the
determined
value
On assessment
Deduction for
business use if a record is
kept of kilometres
travelled for private use
and business use
Bears all the fuel cost pro rata Bears all the maintenance costs
deduction for business use pro rata reduction for
(Kms x fuel rate per table) business use
Yes No
Taxable benefit
598
REMEMBER
• ‘Primarily for business use’ means that more than 50% of kilometres travelled must be
for business purposes.
Where the employee has the right of use of more than one vehicle, no further
reductions on assessment is available. This means that there will be no apportion-
ment of value and no claim in respect of actual expenses incurred in respect of the
licence, insurance, fuel or maintenance. The SARS EMP 10 Guide ‘Guidelines for
employers’ states that, in all cases, the fact that more than one vehicle is made availa-
ble to an employee at the same time must be reported to SARS and only in those cases
where the Commissioner so directs after application by the taxpayer, may the deter-
mined value of only one vehicle be used. Full details of the reasons why it is neces-
sary to make more than one vehicle available to the employee must be submitted
when application for such concession is made.
Example 13.8
Ronel de Witt was granted the use of a company vehicle from 1 March of the current year
of assessment. In addition, the company (her employer) bears the full cost of fuel used for
both business and private travelling, as well as the full cost of maintaining the vehicle.
The vehicle, which was purchased by the company on 30 June two years ago, cost
R278 280. The cost price included VAT amounting to R28 280 and finance charges of
R48 000. Ronel pays R200 a month to the company for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
599
Solution 13.8
R
Determined value of the vehicle
Cost price (R278 280 excluding finance charges (R48 000)) 230 280
Less: Depreciation for one period (15% on R230 280) (34 542)
Determined value 195 738
Taxable benefit:
3,5% per month of R195 738 (value of private use) 6 851
Less: Amount paid by Ronel (200)
6 651
Cash equivalent of benefit for the current year of assessment
(R6 651 × 12 months) 79 812
Why is the determined value only reduced by 15% if the vehicle has been
used by someone else for longer than a year?
Example 13.9
Assume the same facts as in Example 6.8 above, except that Ronel de Witt kept accurate
records (to the satisfaction of the Commissioner) of private kilometres travelled during
the current year of assessment. She travelled 8 000 of the total 20 000 km during the year
of assessment for private purposes.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 13.9
R
Value for private use
Taxable benefit as calculated above
3,5% per month of R195 738 6 851
R6 851 per month × 12 months 82 212
On assessment: Reduction as a result of business use
(20 000 – 8 000)
km × R82 212 (49 327)
20 000
32 885
Less: Consideration given (R200 × 12 months) (2 400)
Cash equivalent of the benefit 30 485
600
Example 13.10
Jan has the use of a company car from 1 March of the current year of assessment. His
employer purchased the vehicle on 1 March (that same day) for R345 000 (VAT included)
and he pays R200 per month for the use of the vehicle.
You are required to calculate the cash equivalent of the benefit of the company car which
has to be included in Jan’s taxable income for the year of assessment if:
1. Jan did not keep records and did not pay any costs of the vehicle himself. Also indi-
cate the amount subject to PAYE.
2. Jan did not keep records and did not pay any of the vehicle costs, what is the annual
amount on assessment?
3. Jan kept record of his business travel. 10 000 km of the total 40 000 km was for busi-
ness travel.
4. Jan records his business kilometres as in 3. above and he paid the following costs
himself:
R
Licence of the vehicle 200
Insurance 12 000
Maintenance 25 000
Fuel 26 000
5. The vehicle was purchased with a three-year/60 000 km maintenance plan; it cost
R399 000 (VAT included) and he did not keep any records or pay any expenses of the
vehicle.
REMEMBER
Solution 13.10
1. Monthly value is 3,5% × R345 000 = R12 075 less his payment of R200 = R11 875
Monthly inclusion (remuneration) for PAYE is 80% × R11 875 = R9 500
2. Annual amount on assessment is 3,5% × R345 000 × 12 months = R144 900 less
(R200 × 12 months) = R142 500
continued
601
3. Taxable amount
R R
Annual amount 3,5% × R345 000 × 12 months = 144 900
Less: Portion travelled for business purposes
R144 900× 10 000km/40 000km = (36 225)
Annual amount 108 675
Less: Paid by Jan – R200 × 12 months (2 400)
Cash equivalent of the benefit 106 275
Exclusions
No value is placed on:
• a meal or refreshment supplied by an employer to their employees in a canteen,
cafeteria or dining room operated by or on behalf of the employer and used wholly
or mainly by their employees;
• a meal or refreshment supplied by an employer to their employees on the employ-
er’s business premises;
602
Example 13.11
The partners and managers of Top Auditing Firm all eat together, free of charge, in the
auditorium every afternoon. The cost per person amounts to R35 per day for the employer.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 13.11
No value is placed on the benefit as a meal or refreshment supplied by an employer to
their employees in a canteen, cafeteria or dining room operated by or on behalf of the
employer and used wholly or mainly by their employees is excluded.
603
4. Paragraph 9(9) determines that where the employee has an interest in the accom-
modation and the accommodation has been let to the employer, the value of the
benefit is calculated according to the formula. The rental concerned is deemed
not to be received by or accrued to the employee or a connected person in rela-
tion to them. This means that the owner of the accommodation cannot deduct
any expenses, for example interest incurred, municipal rates and electricity
expenses, in terms of section 11(a).
604
The cash equivalent of the taxable benefit is the difference between the value of
the private use of the accommodation and the consideration given by the
employee (if any).
Under certain circumstances, a benefit granted by an employer under a housing
scheme constitutes a loan and the provision of a low-interest or interest-free loan
applies in terms of paragraph 10A (refer to 13.3.8).
Exclusions
• No value is placed on the accommodation benefit where the employer provides
accommodation to the employee while they are temporarily absent from their
usual place of residence in the Republic in the course of performing their duties of
employment (paragraph 9(7)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is physically present
in the Republic for a period of less than 90 days in that year (paragraph 9(7A)(b)).
• No value is placed on an accommodation benefit provided by an employer to an
employee away from their usual place of residence outside the Republic for pur-
poses of the employee performing their duties if the employee is away from their
usual place of residence for a period not exceeding two years from the date of
arrival of that employee in the Republic, but if:
– that employee was present in the Republic for a period exceeding 90 days
during the year of assessment immediately before their arrival in the Republic to
commence their duties; or
– to the extent that the cash equivalent of the value of the taxable benefit derived
from the occupation of the residential accommodation exceeds an amount of
R25 000 multiplied by the number of months during which the benefit is granted
(paragraph 9(7A)(a) and (7B)), a taxable benefit arises.
REMEMBER
• Where residential accommodation is supplied by the employer and the employee, their
spouse or minor child can (according to an agreement) obtain that accommodation in
future at an amount mentioned in the agreement, and the rental paid by the employee is
calculated as a percentage of the purchase price, then the accommodation is taxed as a
loan (refer to deemed loans paragraph 10A, Seventh Schedule and 6.3.8).
• Where more than one residential accommodation which they are entitled to occupy
from time to time while performing their duties have been made available to the
employees, the amount of the value of the unit with the highest rental value over the
full period during which the employee was entitled to occupy more than one unit must
be included in their gross income. (paragraph 9(6)).
• Where the Commissioner is satisfied that the rental value is less than the rental value
determined in accordance with the above-mentioned rules, he/she may reduce the
value to a lower amount which he/she considers fair and reasonable.
continued
605
• If an employee has a usual place of residence outside the Republic and they:
(i) are physically present in the Republic for less than 90 days in that year, no value
is to be placed on accommodation given to them; and
(ii) are performing their duties for a period not exceeding two years from date of
arrival in the Republic, no value is to be placed on the accommodation given to
them provided:
– they did not spend more than 90 days in the Republic in the year of assess-
ment immediately before they arrived here to commence the two-year period;
and
– the accommodation provided to them does not cost more than R25 000 per
month.
Exclusions
No exclusions are applicable to the holiday accommodation benefit.
606
Example 13.12
His employer granted Elmo de Bruyn, who earned remuneration of R270 000 (excluding a
housing benefit) during the previous year of assessment, the use of an unfurnished town-
house with more than four rooms, as from 1 March in the current year of assessment. The
employer owns the townhouse. The company pays all the costs of electricity, water,
sewerage and municipal rates. In addition, Elmo was given the use of a beachfront flat on
the South Coast for his 21 days’ annual holiday, at no cost. The company also owns this
block of flats. Elmo, his wife and two children made use of this benefit during December
of the current year of assessment. The company usually rents out the flat at R250 a day
per person to independent third parties.
You are required to calculate the cash equivalent of the benefit for the current year of
assessment.
Solution 13.12
Townhouse
C D 18 12
(A – B) × × = (R270 000 – R83 100) × × = R33 642
100 12 100 12
Holiday flat
R250 × 21 days × 4 = R21 000
Total benefit: R33 642 + R21 000 = R54 642
Example 13.13
During the previous year of assessment, Abraham Tayob only worked three months
(December to February) and received remuneration amounting to R100 000 in total
(excluding a housing benefit) from Barlows (Pty) Ltd. R15 200 of this remuneration repre-
sents 80% of a travel allowance. Barlows (Pty) Ltd allows Abraham to stay free of charge
in a fully furnished three-bedroom house with a separate kitchen. Barlows (Pty) Ltd owns
the house. Barlows (Pty) Ltd is also responsible for the payment of the water and electrici-
ty accounts every month. Abraham received this accommodation benefit for the whole cur-
rent year of assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Abraham’s taxable income for the current year of assessment.
607
Solution 13.13
Remuneration factor – Abraham worked three months during the preceding R
year of assessment
Remuneration proxy 100 000
Apportion in respect of number of days employed during the previous year
of assessment (R100 000 / 90 (Note) × 366) 405 556
From 1 March to 28 February of the current year of assessment
Accommodation benefit
(A – B) × C/100 × D/12
= (R405 556 – R83 100) × 19 (Note)/100 × 12 / 12
Cash equivalent of the benefit for the current year of assessment 61 267
Note
90 = December (31 days) + January (31 days) + February (29 days) ( Note that the pre-
vious year of assessment – ending 29 February 2020 – was a leap year )
C = 19 because a three-bedroom house with a separate kitchen represents at least four
rooms and because the employer supplies both furniture and power.
REMEMBER
• Where an employee resides in a house of the employer and they can obtain the house
later according to a contract and the rental is calculated as a percentage of the purchase
value, then it is not a service but a loan, except when the purchase contract was concluded
at market value (refer to paragraph 10A, Seventh Schedule and 13.3.8).
608
Exclusions
There is no taxable benefit on:
• a travel facility granted by an employer who is engaged in the business of trans-
porting passengers for reward, to enable an employee, their spouses or minor chil-
dren to travel to:
– a destination in the Republic or overland to a destination outside the Republic; or
– a destination outside the Republic if such travel was undertaken on a flight or
voyage in the ordinary course of the employer’s business and such employee,
spouse or minor child was not permitted to make a firm advance booking (for
example trips undertaken by airline staff on a standby basis);
• a transport service rendered to employees in general for the transport of such
employees from their home to the place of their employment and vice versa;
• a communication service provided to an employee if the service is mainly used for
purposes of the employer’s business (for example telephone services);
• a service rendered by an employer to their employees at their place of work for the
better performance of their duties, or as a benefit to be enjoyed by them at that
place of work, or for recreational purposes at that place or a place of recreation
provided by the employer for the use of his employees in general (for example,
provision of parking for motor vehicles at the place of work); and
• a travel facility granted by an employer to the spouse or a minor child of an
employee if:
– that employee is stationed for purposes of the business of that employer at a
specific place in the Republic further than 250 km away from their usual place of
residence in the Republic for the duration of the term of their employment;
– that employee is required to spend more than 183 days during the relevant year
of assessment at that specific place for purposes of the business of that
employer; and
– that facility is granted in respect of travel between that employee’s usual place
of residence in the Republic and that specific place where the employee is so
stationed.
Example 13.14
Every morning, Park Supermarket’s minibus picks up all the employees and drives them
to their place of employment. The cost per capita amounts to R8 per day for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.
Solution 13.14
No value is placed on this benefit, as a transport service rendered to employees in general
for the conveyance of such employees from their home to the place of their employment,
and vice versa, is excluded.
609
Example 13.15
Velvet Ltd incurred a cost of R400 000 to erect a gym at the place of employment where
employees can go and exercise during lunch and after work. The cost per capita amounts
to R180 per month for the employer.
You are required to calculate the cash equivalent of the benefit to be included in the tax-
able income for the employees.
Solution 13.15
No value is placed on this benefit, as a service rendered at the place of work for better
performance of their duties, or as a benefit to be enjoyed by them at the place of work, or
for recreational purposes at work is excluded.
610
The new repurchase rate or equivalent rate must be applied from the first day of the
month following the date on which that new repurchase rate or equivalent rate came
into operation. The repurchase rate can be found on the Reserve Bank website
www.resbank.co.za. You have to check the rates as they can change during the year
of assessment.
Exclusions
There is no taxable benefit on:
• casual loans granted by an employer to their employee if the debt or all the debts to
that employee are not more than R3 000 at a time. The loans have to be short-term
loans at irregular intervals. Not all debt will qualify for this exclusion merely because it
is less than R3 000. It is important to note that when a debt amounts to R5 000, it does
not mean that the first R3 000 will qualify for the exclusion. The exclusion will only
apply if the debt does not exceed R3 000 and not to the first R3 000 of a debt; and
• loans granted to employees to enable them to further their studies
• From 1 March 2019 no value is to be placed on interest on a loan that does not
exceed R450 000 for the purchase of immovable property for residential purposes
with a market value of R450 000 or less: Provided the employee’s remuneration
proxy does not exceed R250 000 during the year the loan was granted.
REMEMBER
• Where the employee uses a loan from an employer to produce income (as defined), the
cash equivalent of the taxable benefit is deemed to be interest actually paid by them and
allowed as a possible deduction in terms of section 11(a).
611
Example 13.16
On 1 March of the current year of assessment, Jaco de Swart’s employer granted him a
loan at a rate of 3% per annum (payable monthly), to enable him to buy a new car. The
debt amounted to R200 000 and would be repaid in full at the end of a period of five years
from the date of the agreement.
You are required to calculate the cash equivalent of the benefit to be included in Jaco’s
taxable income in respect of the current year of assessment. Assume that the official rate
of interest is 4,5% from 1 August 2020 and 4,75% before that.
Solution 13.16
R
Interest at the official rate of interest:
9 058
Less: Interest paid (3% on R200 000 for 12 months) (6 000)
Cash equivalent of the benefit 3 058
Taxable benefit for the year 3 058
Deemed loans
Paragraph 10A deems a benefit granted by an employer under a housing scheme to
constitute a loan where:
• an employee has been granted the right to occupy residential accommodation
owned by their employer or by an associated institution in relation to their
employer;
• the employee, their spouse or minor child is entitled or obliged to acquire the
house, either on termination of their service or after the expiration of a fixed period
at a price stated in such an agreement; and
• the employee is granted the right to occupy the house and as a consideration in
respect of their occupation, pays rent to the employer, which is calculated as a giv-
en percentage of the price used in the agreement above.
This scheme is identical to the granting by the employer of a low-interest housing
loan and is deemed to be treated as such. These schemes are not taxed as an accom-
modation/housing benefit (refer to 13.3.6.1).
The subsequent acquisition of the property is not treated as an asset acquired at less
than the actual value if the property is acquired at a price that is not lower than the
market value on the date on which the agreement is concluded. This means by impli-
cation that when the agreed price in terms of an agreement amounts to R500 000 and
the house is acquired at a later stage (when the market value is R800 000) for the
612
set amount (R500 000), no taxable benefit in respect of the acquisition of an asset at
less than the actual value will arise.
Example 13.17
Marlene Mills arranges for her employer to purchase a house in Groenkloof, Pretoria,
where she and her family will live. Marlene and her employer enter into an agreement in
terms of which Marlene will be entitled to acquire the property in five years’ time for
R1 750 000 (its current market value).
In terms of the agreement, Marlene is required to pay a monthly rental 0,5% of the agreed
purchase price. The agreement was entered into on 1 March of the current year of
assessment.
You are required to calculate the cash equivalent of the benefit to be included in
Marlene’s taxable income in respect of the current year of assessment. You can assume
that the official rate of interest is 7,00% for the year.
Solution 13.17
R
Interest at the official rate of interest:
7% on R1 750 000 for 12 months 122 500
Less: Rent paid
0,5% × R1 750 000 for 12 months (105 000)
Cash equivalent of the benefit 17 500
Taxable benefit for the year 17 500
613
Example 13.18
James Ndlovu was employed on 1 March of the current year of assessment with a basic
monthly salary of R8 500. He also receives a housing subsidy of R3 500 per month in terms of
his employer’s housing scheme.
You are required to calculate the cash equivalent of the housing benefit received by James
regarding the current year of assessment.
Solution 13.18
R
Taxable portion of the housing subsidy (R3 500 × 12 months) 42 000
Example 13.19
Letta Sepeng obtains a R200 000 loan from Abstec Bank on 1 March of the current year of
assessment and is required to pay interest thereon at 2%. The reason for the low interest
rate is that her employer has arranged to compensate the financial institution for the loss
of interest on the difference between 2% and the normal rate of interest charged of 12%.
Assume that the official rate of interest is 6% for the year.
You are required to calculate the cash equivalent of the subsidy received by Letta in
respect of the current year of assessment.
Solution 13.19
%
Interest paid by the employee 2
Payment by the employer 10
Interest actually received by the financial institution 12
As the interest paid by the employee and the payment made by the employer
exceed the official rate of 6%, the payment is deemed to be a subsidy subject to
tax.
R
Taxable portion of the housing subsidy (10% (12% – 2%) × R200 000) 20 000
continued
614
Note
If the official rate of interest had to change to 13%, the interest paid by the employee (2%)
together with the payment made by the employer (10%) does not exceed the amount of
interest which would have been paid had interest been charged at the official rate of
interest, and the benefit granted is taxed according to the provisions of a low or interest-
free loan:
R
Interest at the official rate (13% × R200 000) 26 000
Less: Interest payable (2% × R200 000) (4 000)
Cash equivalent of benefit 22 000
Example 13.20
A company has employed Anne Brown for several years. On 1 August of the current year
of assessment the company granted her a loan of R200 000 to enable her to buy the flat she
lives in. The company’s housing scheme provides for housing loans at an interest rate of 2%
per annum, repayment of the capital portion of the loan only becoming due when the
employee leaves the company’s employment for any reason whatsoever. During the current
year of assessment Anne earned a salary of R240 000.
You are required to calculate the cash equivalent of the benefit to be included in Anne’s
taxable income in respect of the current year of assessment. You can assume that the offi-
cial rate of interest is 7% for the year.
Solution 13.20
R
Interest at official rate:
7% on R200 000 for seven months (7 / 12) 8 167
Less: Interest payable (2% on R200 000 for seven months) (2 333)
Cash equivalent of the benefit 5 834
No subsidy has been paid by Anne’s employer in respect of the capital or interest on the
loan and therefore it is treated as a low-interest or interest-free loan and not as a housing
subsidy.
615
Exceptions
If the contribution or payment to the fund is such that an appropriate portion cannot
be attributed to the employee or their dependants for whose benefit it is made, the
amount of that contribution or payment in relation to a specific employee and their
dependants is deemed to be the total contribution or payment by the employer to the
fund in respect of all employees and their dependants divided by the number of
employees in respect of whom the contribution or payment is made.
If the apportionment of the contribution or payment among all the employees of a
fund as described in the paragraph above does not reasonably represent a fair appor-
tionment of that contribution or payment among the employees, the Commissioner
may decide (after application by the taxpayer) that such apportionment be made in
such other manner as appears fair and reasonable.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made on behalf of:
• a pensioner (persons who have retired from service due to old age, poor health or
other disability);
• the dependants of a person, after such person’s death, if such person was in the
employ of such employer on the date of death;
• the dependants of a pensioner, after such person’s death, if such person retired from
service by reason of age, poor health or other disability.
Example 13.21
Ferramax Ltd has its own medical aid fund registered in terms of the Medical Schemes Act.
For the current year of assessment, Ferramax Ltd made the following contributions to the
fund on behalf of the following employees, none of whom contributed to the fund:
R
Mario Fernando (Note 1) 24 000
Other employees and their dependants (Note 2) 3 600 000
Abel Alexander (Note 3) 33 600
continued
616
Notes
1. Mario Fernando is the managing director. He earns a salary of R680 000 a year. The
contributions were only made for the benefit of Mario as he does not have any
dependants.
2. The company employs 250 other employees. Mary Daneel is one of these other
employees. She has one dependant.
3. Abel Alexander receives a pension from the company’s pension fund, amounting to
R72 000. Abel retired due to old age in 2013.
You are required to calculate the cash equivalent for the current year of assessment of the
taxable benefits arising from the company’s contributions to the medical aid fund in
respect of all the taxpayers referred to above.
Solution 13.21
R
Mario Fernando
Total contribution by the company = fringe benefit 24 000
Mary Daneel
Mary’s taxable benefit is calculated as follows:
R3 600 000 (the total employer contributions in respect of all employees and
dependants) divided by 250 (being the number of employees)
= R14 400
This R14 400 thus represents the deemed contribution made by the company in
respect of the benefits of Mary and her one dependant
Total contribution by the company = fringe benefit 14 400
Abel Alexander
Taxable benefit (he has retired and receives a pension) nil
617
Exceptions
If the payment for the medical services, as described above, is such that an appropri-
ate portion cannot be attributed to the relevant employee and their spouse, children,
relatives and dependants, the amount of the payment in relation to the relevant
employee and their spouse, children, relatives and dependants is deemed to be an
amount equal to the total amount incurred by the employer in respect of the medical
services divided by the number of employees who are entitled to make use of those
services.
Exclusions
The benefit is not regarded as a taxable benefit if the payment by the employer is
made in respect of the following medical services:
• Medical treatment listed in a category of the prescribed minimum benefits deter-
mined by the Minister of Health in terms of the Medical Schemes Act 131 of 1998,
which is provided to the employee or their spouse or children in terms of a scheme
or programme of that employer,
– which constitutes the carrying on of the business of a medical scheme, but the
scheme is exempt from the requirement of the Medical Schemes Act; or
– which does not constitute the carrying on of the business of a medical scheme, if
that employee, their spouse and children are not beneficiaries of a registered
medical aid scheme or they are beneficiaries of such a medical aid scheme, and
the total cost of that treatment is recovered from that scheme.
• Medical services rendered or medicines supplied for purposes of complying with
any law of the Republic.
• Medical services received from an employer by:
– a person who retired from the employment of the employer as a result of super-
annuation, ill-health or other infirmity;
– the dependants of a person after that person’s death, if that person was in the
employ of that employer on the date of death;
– the dependants of a person after that person’s death, if that person retired from
the employ of that employer by reason of superannuation, ill-health or other
infirmity; or
– a person who is entitled to the secondary rebate, that is to say the person will be
65 years or older on the last day of the relevant year of assessment.
• Where the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties.
618
Example 13.22
Reubosch Ltd does not have its own medical aid fund registered in terms of the Medical
Schemes Act 131 of 1998. Reubosch Ltd has a policy in respect of which the company
pays for all medical and other related services in respect of employees, their spouses,
children and relatives. For the current year of assessment, Reubosch Ltd made the follow-
ing payments regarding medical and other related services on behalf of the following
employees, spouses, children and/or relatives. None of the employees paid anything
themselves.
R
• The company received a bill from the local hospital. The costs relate to
immunisations. All employees, their spouses, children and/or rela-
tives could obtain the immunisations. A nurse from the hospital was
available during lunchtime for a week to give the immunisation. Karen
Neveu went for the injections. In total, 800 employees went for the in-
jections. 40 000
• The company pays R500 per month to the local doctor in order for
Avashnee Moola to receive medical services. Avashnee is the widow
of Abdullah Moola, who was in the employ of the company on the
date of his death during the current year of assessment. 6 000
You are required to calculate the cash equivalent of the taxable benefits arising from the
company’s payments in respect of medical and other related services provided to
employees, their spouses, children and/or relatives for all the taxpayers referred to
above.
Solution 13.22
R
Karen Neveu
As the services are rendered by the employer to its employees in general at
their place of work for the better performance of their duties, no taxable benefit
arises. nil
Avashnee Moola
No value is placed on the amount of R500 per month paid to the local doctor in
order for Avashnee Moola to receive medical services as Avashnee is a depend-
ant of her late husband, who died while in the employ of the company. nil
619
Exclusions
No value is placed on the taxable fringe benefit obtained:
• from a contribution made by an employer to the benefit of an employee who
retired from service; or
• in respect of the dependants or nominees of a deceased member of the fund.
REMEMBER
• A defined contribution fund means the member eventually gets all contributions made
for their benefit back, plus capital growth, less the costs. A defined benefit fund means
the member would be entitled to a specific pension/retirement benefit determined not
on their contributions but on the benefit they should get. Therefore, an involved formu-
la is required to determine the employer’s specific contribution to one person’s retire-
ment benefits.
620
Example 13.23
Douggies Ltd pays the retirement annuity fund contributions amounting to R20 000 on
behalf of one of its directors, Dewald van Jaarsveld.
You are required to calculate the cash equivalent of the benefit to be included in Dewald’s
taxable income in respect of the current year of assessment.
Solution 13.23
The value of the taxable benefit in respect of the retirement annuity fund contributions is
R20 000, to be included in Dewald’s taxable income in respect of the current year of
assessment. The amount of R20 000 can qualify as a deduction in terms of section 11F
when calculating Dewald’s taxable income.
REMEMBER
This benefit does not include amounts paid by the employer as:
• medical fund contributions (paragraph 12A);
• incurral of cost relating to medical services (paragraph 12B); or
• premiums paid on employer-owned insurance policies (paragraph 12C).
621
Exclusions
No value is placed on a taxable benefit in terms of this paragraph, if the employer pays:
• subscriptions on behalf of the employee to a professional body if membership of
the body is a condition of the employee’s employment;
• insurance premiums indemnifying an employee solely against claims arising from
negligent acts or omissions on the part of the employee in rendering services to the
employer;
Example 13.24
Ine-Lize Steyn receives a study loan from her employer on 1 March of the current year of
assessment to enable her to enrol for a certificate programme at a university. At the end of
the calendar year (December), when the results were made available, Ine-Lize was
announced as being the top student of the programme. Her employer waived her debt
and she did not have to repay the loan.
You are required to discuss whether the above-mentioned will result in any cash
equivalent of the benefit to be included in Ine-lize’s taxable income in respect of the
current year of assessment.
Solution 13.24
The value of the loan will be included in Ine-Lize’s taxable income, as a taxable benefit
will arise when the employer releases the employee from an obligation to pay an amount
owing by the employee to the employer. If her employer paid her the amount owed as a
bona fide study bursary and made the bursary subject to a condition that Ine-Lize has to
repay the bursary if she abandons her studies or fails to complete them within a certain
period, no taxable benefit will arise as the bursary will qualify as being exempt income in
terms of section 10(1)(q) (refer to 13.5.3).
622
REMEMBER
• It is important to note that the cash equivalent of all the above-mentioned fringe benefits
will not only be used to calculate the annual taxable income of an employee but also
when the employer calculates employees’ tax on a monthly basis. The right of use of a
motor vehicle, however, is calculated at 80% for employees’ tax purposes, unless the
employer is satisfied that the vehicle is used 80% for business purposes. In that case,
only 20% is included.
623
R
Travel allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee
(the portion associated with private use) xxx
The portion of the travel allowance that is used to fund travelling for business
purposes needs to be calculated, as this will reduce the travel allowance to be
included in gross income.
In order to calculate the cost of travelling for business purposes, information is
required regarding the kilometres travelled during the year in total and the
kilometres travelled relating to business travelling. The cost per kilometre must also
be determined.
Cost of business travel = business kilometres × cost per kilometre
Business kilometres can only be ascertained by keeping accurate records of kilo-
metres travelled in a logbook. Travelling between the taxpayer’s place of residence
and their place of business or employment is considered to be private travelling. The
employee also needs to keep record of the total kilometres travelled during the year.
Cost per kilometre can be determined by either keeping accurate records of expenses
or using the tables or deemed cost provided in the Income Tax Act.
• Actual expenses are determined where the taxpayer keeps accurate records of
expenses incurred in order to substantiate the business use of a travel allowance.
Proof can be kept of the following expenses in order to calculate the actual cost per
kilometre:
– Where the vehicle is owned by the employee, they can claim wear and tear on
the vehicle as part of the actual expenses. This wear and tear must be
determined over a period of seven years from the date of the original
acquisition by the recipient and the cost of the vehicle for this purpose must be
limited to a maximum of R665 000.
– Where the vehicle is being leased, the total amount of payments in respect of
that lease may be claimed. The amount claimed may not exceed an amount of
the fixed cost determined by the Minister of Finance in the deemed cost table in
a year of assessment (refer to Appendix B).
– Finance charges in respect of a debt incurred regarding the purchase of that
vehicle can also be claimed but must be limited to an amount that would have
been incurred had the original debt been R665 000.
624
– All other expenses incurred in the running and maintenance of the vehicle, for
example the cost of licences, insurance, maintenance and tyres, might also be
taken into account.
Once all the actual expenses are added up, these expenses must be divided by the
total number of kilometres travelled by the taxpayer during the year of assessment to
calculate the actual cost per kilometre.
• Deemed cost per kilometre
The deemed cost per kilometre is determined by the Minister of Finance and made
available by notice in the Government Gazette. The employee can use the table if the
taxpayer did not keep an accurate record of expenses (refer to the 2021 table in
Annexure F).
In order to make use of this table, the employee must use the determined value of the
vehicle in respect of which the travel allowance was granted.
The determined value of a vehicle is:
• If the vehicle was acquired under a bona fide agreement of sale,
– the original cost price of the vehicle (including VAT but excluding finance
charges or interest payable).
• If the vehicle was acquired under a financial lease,
– the cash value of the vehicle (including VAT).
• In any other case,
– the market value of the vehicle at the time when the recipient (employee) first
obtained the vehicle or right of use thereof, plus VAT that would have been
payable on that value on that date.
By using the determined value, the employer is able to read an appropriate fixed cost,
fuel cost and maintenance cost from the table. These amounts are added together in
order to calculate a deemed cost per kilometre.
REMEMBER
• The fixed cost on the table is given in Rands and the fuel and maintenance rates are given
in cents per kilometre, so they cannot be added together. You must either convert the
fixed cost per kilometre that you calculated to cents per kilometre (by multiplying by 100)
or you must convert the fuel and maintenance rates to rand (by dividing by 100).
• The fixed cost per the table is an annual cost, so where the employee receives a travel
allowance for less than the full year during the current year of assessment, the fixed cost
must be reduced pro rata in the same proportion as the time the allowance was received.
When calculating the portion relating to business travel, an employee may use the
greater of actual expenses per kilometre or deemed cost per kilometre. Where records
have not been kept, the employee must use the deemed cost per kilometre.
625
Note that where a taxpayer receives an allowance based on the actual distance
travelled by the recipient using a motor vehicle for business purposes (therefore
excluding private travelling) or the distance is proved to the Commissioner, the
amount expended by the recipient on such business travelling is not taxed up to a
rate of 398 cents per kilometre (regardless of the value of the vehicle). No employees’
tax is deducted on such an allowance. For example: If an employee travels 5 000
business kilometres during the year of assessment, the employer can pay a
reimbursive allowance of R19 900 (5 000 business km × 398 cents) as a non-taxable
reimbursive allowance if the employee does not receive a fixed travel allowance.
Example 13.25
Yosuf Naidoo receives a travel allowance of R8 000 per month from his employer and uses
a Mercedes Benz and a Hilux bakkie interchangeably for business purposes. During the
current year, he travelled 28 000 km with the Mercedes Benz and 35 000 km with the
Hilux bakkie. Both the Mercedes Benz and the Hilux bakkie are therefore used for
business purposes interchangeably for the full 12 months.
You are required to calculate the business cost that can be claimed against Yosuf’s travel
allowance.
Solution 13.25
The taxpayer did not keep accurate records; therefore, all the travelling is deemed to be
private and he will be taxed on R8 000 x 12 for the year of assessment. He cannot deduct
any cost. If, however, he kept accurate records of business kilometres travelled and the
Commissioner is satisfied that he uses both vehicles primarily for business purposes, he
will be taxed on the allowance, but allowed to deduct the business travel.
REMEMBER
continued
626
• Where an employee is granted the use of a company vehicle in addition to the receipt of
a travel allowance in respect of the same vehicle, the deemed cost per kilometre cannot
be used in determining the business portion claimable against the travel allowance, and
the taxpayer is forced to use the actual cost per kilometre.
• Where the employee receives a travel allowance and has the use of a company car as
per paragraph 7 of the Seventh Schedule, no reduction of the travel allowance can be
calculated for business travel in terms of section 8. The full allowance is taxable.
Example 13.26
Mia Swanepoel owns a vehicle with a cost of R145 000 (including VAT) and receives a
travel allowance of R2 200 per month in respect of the whole year of assessment. Mia
travelled 29 000 km during the year of assessment and recorded her business travel as being
11 000 km.
You are required to calculate the taxable portion of the travel allowance to be included
in Mia’s taxable income.
Solution 13.26
R R
Travel allowance received: R2 200 × 12 months 26 400
Calculate the deemed costs and actual kilometres
Value of the car 145 000
Fixed cost determined from the table 55 894
Fixed cost per kilometre (R55 894 / 29 000km × 100) 192,73 cents
Fuel cost per kilometre (from the table) 118,1 cents
Maintenance cost per kilometre (from the table) 46,8 cents
Total cost per kilometre 357,63 cents
627
Example 13.27
Gordon Heuser uses his private car for business travel on behalf of his employer and for
this he receives a travel allowance of R120 000 per year. On 1 March of the previous year
of assessment, he purchased a new motor vehicle, the cost being as follows:
R
Cost price 450 000
VAT 63 000
513 000
Gordon kept accurate records of the expenses incurred in respect of the current year of
assessment:
R
Finance charges 87 210
Fuel cost 28 000
Maintenance cost 12 000
Insurance premiums and licence fees 9 600
Gordon travelled a total of 28 000 km during the current year of assessment, of which
18 000 was for private purposes.
You are required to calculate the taxable portion of the travel allowance to be included in
Gordon’s taxable income.
Solution 13.27
R R
Travel allowance received 120 000
Compare the deemed and actual costs to select the highest
Deemed cost per kilometre:
Value of the vehicle (R450 000 + R63 000) 513 000
Fixed cost determined from the table 146 753
Fixed cost per kilometre (R146 753 / 28 000 km × 100) 524, 12 cents
Fuel cost per kilometre (from the table) 169,4 cents
Maintenance cost per kilometre (from the table) 77,8 cents
Total cost per kilometre 771,32 cents
continued
628
What would the actual cost per kilometre rate be if Gordon’s vehicle had a
cost of R750 000?
Where an employee, their spouse or child owns or leases a motor vehicle, whether
directly or indirectly, by virtue of an interest in a company or trust or otherwise, and
the vehicle is let to the employer or associated institution in relation to the employer,
• the sum of the rentals paid (plus any expenditure in respect of the vehicle that was
borne by the employer) is deemed to be a travel allowance;
• the rental is deemed not to have been received by or to have accrued to the lessor
of the motor vehicle concerned; and
• the employee is deemed not to have been granted the right to use the motor
vehicle.
The employee is deemed to have received a travel allowance and therefore does not
qualify for any deductions (except for the business portion applicable to a travel
allowance).
629
R
Subsistence allowance received xxx
Less: Portion expended for business purposes (xxx)
Taxable allowance to be included in the taxable income of the employee xxx
For the purposes of determining the taxable portion of the allowance, the employee
has the option to use the following as the portion expended for business purposes:
Actual figures
The amount actually incurred in respect of accommodation, meals and other inciden-
tal costs, if proved to the Commissioner.
Deemed figures
Where the employee has not provided proof of actual expenditure, the exclusion for
each day or part of a day that the employee is away from their usual place of residence
is an amount per day in respect of meals and other incidental costs, or incidental
costs only as determined by the Commissioner, for a country or region, by way of
notice in the Government Gazette.
• Where the accommodation to which the allowance or advance relates is in the
Republic, an amount equal to:
– R139 if the allowance or advance is paid or granted to defray the cost of inci-
dental subsistence expenses only; or
– R452 if that allowance or advance is paid or granted to defray the cost of meals
and incidental subsistence expenses.
• Where the accommodation to which the allowance or advance relates is outside the
Republic, an amount per country as determined in a foreign travel subsistence
allowance schedule (refer to Annexure I). For example, in the United States of
America US$146 and in Greece €134 would be granted. The allowance is not
always given in the currency of the specific country, for example, Namibia is given
in South African R950, Kenya is given as United States $138 and for countries not
on the list one must use United States $215.
The amount in respect of travelling abroad applies only in respect of continuous
periods not exceeding six weeks spent outside the Republic.
630
REMEMBER
An employer must pay a subsistence allowance to an employee over and above the
normal remuneration payable to the employee and cannot amend the cash portion of
an employee’s salary by the amount of the subsistence allowance.
If a subsistence allowance or advance is paid to an employee during a month in
respect of a night away from their usual place of residence and that employee has not
either spent the night away or refunded that amount to the employer by the last day
of the following month, the allowance or advance is deemed to become payable to the
employee in the following month in respect of services rendered.
Example 13.28
Maria Mhlangu is obliged to spend four days away from her usual place of residence in
the Republic for business purposes. She receives an allowance of R1 600 from her
employer. Maria is able to prove that she incurred expenses of R970 on meals and inci-
dental expenditure.
You are required to calculate the taxable portion of the allowance to be included in
Maria’s taxable income.
Solution 13.28
R
Subsistence allowance received 1 600
Less: Deemed amount of R452 per day amounting to R1 808 (R452 × 4 days).
This amount is higher than the actual expenses (R970) incurred. (1 808 )
Taxable allowance to be included in the taxable income of the employee nil
631
Example 13.29
Brian Swart is sent to France by his employer to market a product for the company. He is
absent from his house for a total period of three weeks. The employer pays the actual cost
of Brian’s lodging and furthermore pays the employee an allowance of €210 per day for
meals and incidental costs.
You are required to calculate the taxable portion to be included in Brian’s taxable
income in respect of the allowance received. You can accept that the approved amount
of the subsistence allowance for visits to France is €128 per day.
Solution 13.29
The allowance is taxable as it exceeds €128 per day. For example: If the approved
amount is €217 per day, Brian cannot claim a deduction of €7 (€217 less €210) against
his taxable income, as the deduction is always limited to the allowance received. If Brian
spent seven weeks (longer than six weeks) in France, the full allowance paid by the
employer is included in Brian’s taxable income and Brian can deduct actual costs
incurred.
REMEMBER
• All the above discussions on allowances (in 13.4) refer to the calculation of the annual
taxable income and not to the monthly employees’ tax implications.
632
633
Example 13.30
XYZ Ltd transferred Anike Moody from Durban to Pretoria. Her basic salary is R8 700 per
month. XYZ Ltd paid for the transfer of her personal goods and made arrangements
for Anike and her family to stay in a hotel on their account for two months during which
Anike had to wait for the previous owners to move out of the house that she bought.
Anike puts in a claim for the following expenses to XYZ Ltd:
Amount
Description R
1 New school uniforms purchased for her two children 2 180
2 Curtains made for her new house 12 800
3 Motor vehicle registration fees 480
4 Telephone, water and electricity connections 1 500
5 Loss on sale of previous residence 20 000
6 Agent’s fee on sale of previous residence 28 895
7 Transfer duty on new residence 30 000
95 855
You are required to indicate which portion of Anike’s claim will be exempt from tax.
Solution 13.30
The benefit Anike receives due to the fact that her employer paid for the transfer of her
personal goods as well as the hotel accommodation (in respect of herself and her family)
for two months qualifies for the exemption in terms of section 10(1)(nB).
Items 1 to 4 are considered to be settling-in costs and can be paid back to Anike tax free.
Item 5 is a taxable benefit and if XYZ Ltd pays this amount to Anike, it is taxable in full.
Items 6 and 7 qualify again for the exempt relocation allowance.
REMEMBER
• XYZ Ltd could have paid Anike R8 700 (one month’s basic salary) without withholding
employees’ tax (also not taxable on assessment) in respect of settling-in expenses as per
SARS’s practice. If they chose this option, they could not refund her for items 1 to 4 and
6 and 7 again (as this must be covered from her additional one month’s basic salary).
634
Example 13.31
JD Motors Ltd granted a bursary of R18 000 to each of the two high-school children of
Marinella Davids. Marinella earns a salary of R54 000 per annum. JD Motors Ltd does not
operate a bursary scheme open to the general public.
You are required to calculate the effect of the bursaries on Marinella’s taxable income.
Solution 13.31
Marinella received the bursaries in consequence of services rendered by her, and the bursa-
ries are less than the exemption of R20 000 per relative. The bursaries are therefore not
taxable in Marinella’s hands.
Note
If one of Marinella’s children were a person with a disability (as defined in section 6B(1))
then her employer could have given her a bursary of up to R30 000 for this child and it
would have been exempt from tax.
If the child with a disability were at university Marinella could receive a bursary of up to
R90 000 for the child’s studies at university and it would have been exempt from taxation.
REMEMBER
• If Marinella’s remuneration exceeded R600 000 per annum, the bursaries (R18 000 × 2 =
R36 000) are taxable in full (even if the children were persons with disabilities).
13.6 Summary
When calculating the taxable income of an employee, certain benefits received in any
form other than a cash payment should be valued in terms of the Seventh Schedule
and included in the employee’s taxable income.
In terms of section 8 of the Act, there must be included in the taxable income of a
person any amount which has been paid or granted during that year by their princi-
pal (an employer, authority, company or body in relation to which any office is held
and an associated institution in relation to that employer) as an allowance or advance.
These allowances are reduced with the portion used for business purposes.
635
The next section contains a number of questions that can be completed to evaluate
your knowledge on fringe benefits.
Question 13.1
On 31 December of the current year of assessment, Pete Gregg was forced to retire from
Starry Jewellers (Pty) Ltd, having reached the mandatory retirement age of 65 years. Pete
joined Starry Jewellers (Pty) Ltd, a jewellery manufacturer, on 31 January (20 years ago).
Upon his retirement, he was awarded the following:
• A gold wristwatch, which cost the company R4 800 to manufacture, in appreciation of
his long service to the company. He had never received an award in respect of long-
term service. The normal wholesale price of the watch when it is sold to jewellery
retailers is R10 000. These retailers then sell their trading stock of gold watches at a
50% mark-up.
His other receipts and accruals during the current year of assessment were as follows:
• A cash salary of R18 000 a month.
• The use of a company car, which cost R246 240 (including VAT at 14%). All costs were
paid by Starry Jewellers (Pty) Ltd. On his retirement, Pete ceased to have the use of
this car.
• A ten-day holiday at a beach cottage owned by Starry Jewellers (Pty) Ltd. The accom-
modation is let to non-employees at a rate of R750 per person per day. Pete and his
wife, Tracey, invited another couple who then joined them at the beach cottage for ten
days.
• Starry Jewellers (Pty) Ltd pays Pete’s monthly home telephone account. The total
amount paid during the current year of assessment was R10 050. Pete is required to
make business calls from home from time to time.
• A loan of R120 000 at an interest rate of 1% a year granted to him on 1 March of the
current year of assessment. Pete used the loan to purchase a flat. The flat has been let
to tenants for the entire year of assessment at a monthly rental of R5 800. On retire-
ment, Pete was required to repay the loan, which he did by using the proceeds of a
mortgage bond that he had taken out on the property. Interest incurred on the mort-
gage bond for January and February of the current year of assessment amounted to
R3 000 in total.
636
Answer 13.1
Pete Gregg R
Salary (R18 000 × 10 months) 180 000
Gold wristwatch – trading stock received must be included in gross income at
lowest of cost price or market value = R4 800. As this amount < R5 000, the full
amount is exempt in terms of a long-service award exemption nil
Use of company motor vehicle R246 240 × 3,5% = R8 618,40 × 10 months 86 184
Holiday accommodation (10 days × 4 people × R750 per person per day) 30 000
Home telephone account (payment of employee’s debt) 10 050
Rental income (R5 800 × 12 months) 69 600
Low-interest loan
– R120 000 × (6% – 1%) × 5 / 12 2 550
– R120 000 × (5% – 1%) × 5 / 12 2 000
Taxable income before allowances and deductions 380 384
Allowances and deductions
Section 11(a) – interest incurred in production of rental income:
Actual amounts paid
= 1% × R120 000 × 10 / 12 = R1 000 + R3 000 + deemed interest R4 550 ( 8 550 )
Taxable income 371 834
Tax payable
On R 321 600 67 144
On R371 834 – R321 600 = R50 234 at 31% 15 573
Normal tax payable 82 717
Less: Primary rebate (14 958 )
Age rebate (over 65) (8 199 )
Final tax liability 59 560
Question 13.2
Jan and Martha Williams are married in community of property and are both 45 years old.
They do not have any children and were both employed for the full year of assessment.
Monthly amounts are applicable for a 12-month period unless stated otherwise.
Information relating to Martha
The following amounts accrued to her during the current year of assessment:
Salary R250 000
Rental R12 000
Interest R40 000
She contributed 5% of her salary to a provident fund and R5 000 to a retirement annuity
fund during the current year of assessment.
continued
637
Notes
1. Jan is required to entertain clients regularly and incurred entertainment costs of
R3 120 during the year of assessment.
2. Jan used his own vehicle while he received the travel allowance. His car had a cash
cost of R220 000 (excluding VAT at 14%). He kept a logbook and travelled 6 000 km in
total during March and April of the current year of assessment, of which 2 333 km
were for business purposes. He bore the cost of fuel and maintenance for the vehicle
but did not keep record of his expenses.
As from 1 May of the current year of assessment, Jan enjoyed the use of two company
cars:
• Martha used the one vehicle with a determined value of R160 000.
• Jan used the other vehicle. The company purchased this vehicle for R108 300
(including VAT at 14%) on 1 March three years ago. His employer pays all
maintenance and fuel for his private and business travel. He kept a detailed log-
book from 1 May of the current year of assessment, which revealed that his pri-
vate use of this company car until the end of the year of assessment amounted to
5 333 km, and his business use amounted to 6 km. The total distance travelled for
the period was 12 110 km.
3. This is the first time Jan has received any recognition for long service.
4. Jan repairs electronic equipment after hours.
5. On 30 November of the current year of assessment, Jan bought back years of pen-
sionable service for R3 000.
638
Answer 13.2
Normal tax liability of Martha Williams R
Salary 250 000
Rental R12 000 × 50% 6 000
Interest R40 000 × 50% 20 000
Dividends R4 000 × 50% (exempt) Nil
Less: Interest exemption (limited to R23 800 – therefore full amount is (20 000)
exempt)
256 000
Retirement fund contributions R
Provident fund R250 000 × 0,05 12 500
Retirement annuity fund contributions actual 5 000
17 500
Limited to lesser of
R350 000 or
27,5% of higher of
R250 000 or
R256 000
Thus 27,5% of R256 000 = R70 400;
Or R256 000
the limit is R70 400, therefore allow contributions in full (17 500)
Taxable income 238 500
Tax payable (R37 062 + ((R238 500 – R205 900) × 26%)) 45 538
Less: Primary rebate (14 958 )
Normal tax liability 30 580
Use of company vehicle R108 300 × 85% × 85% × 85% = R66 510
(Jan) (3,5% × R66 510) × 10 months ×
(5 333 km / 12 110 km) R10 251
(Martha) (3,5% × R160 000 × 10 months) R56 000 66 251
Briefcase R6 875 – R5 000 1 875
continued
639
R
Rental (wife) 50% × R12 000 6 000
Interest (wife) 50% × R40 000 20 000
Dividends 50% × R4 000 (exempt) nil
Less: Interest exemption (20 000)
Net profit from trade (R34 500 – R30 900) 3 600
continued
640
R
Donations Actual = R7 500
Limited to 10% × R408 465 thus allow in full (7 500)
Taxable income 400 965
Normal Tax (R67 144 + ((R400 965 – R321 600 ) × 31%)) 91 747
Less: Primary rebate (14 958 )
Medical scheme fees tax credit
(section 6A credit) (R319 × 2 × 12) (7 656 )
Medical cost tax credit (section 6B credit)
Medical scheme fees actually paid (R5 000 × 12 months) 60 000
Less: Medical scheme fees tax credit (R7 656 × 4) (30 624 )
Surplus contributions 29 376
Medical cost not refunded 18 500
47 876
Less: 7,5% × R400 965 (30 072)
Total 17 804
@ 25% (4 451 )
Normal tax liability 64 682
Note
Remuneration for retirement contribution:
R336 000 + R25 200 + R6 850 + [(R26 000 × 80%) + (80% × (3,5% × R66 510) × 10 months) +
(80% × (3,5% × R160 000 × 10)] + R1 875 = R454 148
It is uncertain from legislation whether the company vehicle should be adjusted for private
travel. In this calculation it was assumed not.
Question 13.3
Nandi Zulu’s remuneration package for the year of assessment was as follows:
• A cash salary of R670 000 per annum.
• A travel allowance of R80 000 per annum. Nandi drives a motor vehicle which she
acquired by way of a bequest from her grandfather’s estate. The market value of the
vehicle on the date she acquired it was R310 000 (including VAT). During the year of
assessment, Nandi spent R5 400 on fuel, R6 500 on maintenance and R12 000 on insur-
ance. She kept a record of all her actual expenditure. Nandi kept a logbook that proves
that she drove 30 500 km in total during the year of assessment; of this, 12 500 km was
for business purposes.
continued
641
• Nandi received the free use of a flat in London (United Kingdom) for her 30 days’
annual holiday. The company owns this flat. Nandi and her friend, Petrus, made use of
this benefit during December. The company usually rents the flat at a rand equivalent of
R627,50 per person per day to independent third parties.
Additional information
Nandi belongs to the Discovery Health Medical Aid Fund (the hospital plan) – her contri-
butions in respect of the year of assessment amounted to R18 000. She does not have any
dependants.
As she is still very young, Nandi feels that she does not have to provide for retirement at
this stage.
Answer 13.3
R
Taxable income 721 460
Normal tax liability 190 250
642
14 Retirement benefits
Page
14.1 Introduction............................................................................................................ 644
14.2 Lump sums ............................................................................................................. 645
14.3 Lump sums from employers (paragraphs (d) and (f) definition of
‘gross income’) ....................................................................................................... 646
14.4 Lump sum benefits from retirement funds (paragraph (e) definition
of ‘gross income’) ................................................................................................... 648
14.4.1 Retirement fund lump sum benefits
(paragraphs 2(1)(a) and 5) ....................................................................... 651
14.4.1.1 Deductions (paragraph 5) ....................................................... 652
14.4.1.2 Lump sums received from public sector pension funds
(paragraph 2A) ......................................................................... 653
14.4.1.3 Tax on retirement fund lump sum benefits .......................... 654
14.4.2 Retirement fund lump sum withdrawal benefits
(paragraphs 2(1)(b) and 6) ....................................................................... 656
14.4.2.1 Deductions ................................................................................ 657
14.4.2.2 Tax on retirement fund lump sum withdrawal benefits..... 658
14.5 Exemption of qualifying annuities (sections 10C and 11F and
paragraph 5(1)(a) or 6(1)(b)(i)) ............................................................................. 660
14.6 Other provisions .................................................................................................... 661
14.7 Summary of lump sums ....................................................................................... 661
14.8 Examination preparation ...................................................................................... 662
643
14.1 Introduction
When people become too old to work, they still need money to live on. With this in
mind, they normally contributes to a retirement fund during their working years so
that when they retire they will still receive some form of income.
Most salary packages make provision for employees to contribute to a retirement
fund. There are three basic types of retirement funds in South Africa: Pension funds,
provident funds and retirement annuity funds. For individuals who change employ-
ers before they retire, there are preservation funds that hold retirement savings until
the person retires. Pension funds and provident funds are linked to a specific
employer, and retirement annuity funds are linked to life insurance companies. The
monthly contributions that an employee makes to one of these retirement funds are
generally allowed as a deduction (subject to limitations – refer to chapter 12) for
income tax purposes. This deduction results in the contributions that are deductible
not being subject to income tax.
When persons change employment, lose their jobs (are retrenched) or retire (early or
normal retirement), the pension or provident fund to which a person belonged will
pay a lump sum to the person withdrawing or retiring from the fund. As retirement
annuity funds are not linked to employment, persons will only receive a lump sum
from a retirement annuity fund if they withdraw from the fund or when they reach
retirement age. Retirement funds will also pay out when persons die before they
retire.
A question often asked is ‘Why are senior citizens not exempt from income tax?’ It
must be kept in mind that such a measure would place an extra burden on other
people, especially young people who must finance housing and the education of their
young children. Committees that have specifically examined the taxation systems of
other countries, have determined that the best alternative is to spread the tax burden
as far as possible among all classes of taxpayers and all types of income, rather than
to levy tax at a very high rate on only a few taxpayers.
Bear in mind that interest income earned on investments remains taxable, even after
retirement. This income can be viewed in the same light as pensions. Money is saved,
invested and earns a return. Certain exemptions (such as the interest exemption) and
deductions (such as contributions to pension funds) serve to lighten the tax burden;
however, the proceeds are still subject to tax. When a person receives an amount on
retirement, resignation or withdrawal from a fund or employment, or when a person
dies and these funds pay out a lump sum, the lump sum received will be reduced by
certain allowable deductions and the taxable lump sum will be taxed in accordance
with tax tables specifically designed for lump sum benefits.
In this chapter, the taxation of the benefits received from a pension, pension preserva-
tion, provident, provident preservation, or retirement annuity fund when the person
retires or withdraws from a fund, are discussed, as well as the benefits that are
deemed to accrue to persons immediately before their deaths.
644
Tax statistics
According to the latest tax statistics available (Tax Statistics 2019) contributions to retire-
ment funds were the largest deduction at R193.5 billion. Pension, provident and retirement
annuity paid on behalf of employees was the largest fringe benefit at R110.8 billion.
Lump sums can be received from employers who are not funds or from retirement
funds to which the taxpayer belongs.
Where the lump sum is paid by the employer (that is not a fund) they are included in
gross income in terms of paragraphs (d) and (f). These lump sums might qualify as
severance benefits if specific requirements are met (refer to 14.3).
If the lump sum is from a retirement fund, the provisions of the Second Schedule
apply. Lump sums are defined in the Act in section 1 as well as in the Second Sched-
ule. The definition differentiates between a retirement fund lump sum benefit and
a retirement fund lump sum withdrawal benefit. This results in the lump sum being
defined in terms of the event which led to its receipt. Paragraph (e) of the definition
of gross income includes the net amount of both types of lump sums in gross
income.
The net amount included in gross income is the lump sum received less the allowable
deductions calculated in terms of paragraphs 5, 6 and 6A of the Second Schedule. The
functioning of the provisions of section 5 results in the lump sum benefit being taxed
according to a table that differs from the taxable income table.
It is therefore suggested that if lump sums are included in the tax calculation that the
framework is expanded to include a further two columns as shown below to keep the
amounts separate from the other amounts in the taxable income calculation.
645
1 2 3
R R R
Gross income xxx
• as defined in section 1
• specific inclusions (voluntary awards, net amount of xxx xxx
retirement fund lump sum benefit or retirement fund
withdrawal benefit) (paragraphs (d), (e), (eA) and (f))
Less: Exempt income (section 10C) (xxx)
Income (as defined in section 1) xxx
Less: Deductions section 11 – but see below; subject to
section 23(m) and assessed loss (xxx)
(sections 20 and 20A)
Add: Taxable portion of allowances (such as travel xxx
and subsistence allowances)
Taxable income before taxable capital gain xxx
Add: Taxable capital gain (section 26A) xxx
Taxable income before retirement fund deduction xxx
Less: Retirement fund deduction (section 11F) (xxx)
Taxable income before deduction of qualifying xxx
donations
Less: Deduction of qualifying donations (section 18A) (xxx)
Taxable income (as defined in section 1) xxx xxx xxx
The reasons for a person receiving lump sum payments may be manifold, but ulti-
mately they fall into one of three categories, namely:
• lump sums from employers who are not funds;
• lump sums received prior to retirement (withdrawal benefits); and
• lump sums received on retirement (retirement benefits).
646
REMEMBER
647
648
Example 14.1
Lydia Dlamini was a member of a pension fund and on her retirement the value of her
investment amounted to R1 500 000. Lydia took the maximum lump sum and the balance
was used to purchase a compulsory monthly pension with Aftreewoema Insurance Com-
pany. She will receive R5 000 a month from the fund.
You are required to determine the maximum lump sum that Lydia may take and to indi-
cate whether the R5 000 is taxable or not.
Solution 14.1
As the fund is a pension fund, Lydia may take R500 000 (R1 500 000 / 3) in the form of a
lump sum and the balance (R1 000 000) has to be used to purchase a compulsory monthly
pension. Lydia will be taxed on the R5 000 per month as it will be included in her gross
income, along with any other income that she might receive.
Example 14.2
Pieter Swanepoel was a member of a provident fund and on his retirement the value of
his investment amounted to R2 750 000.
You are required to determine the maximum lump sum that Pieter may take.
Solution 14.2
As the fund is a provident fund, Pieter may take the full R2 750 000 as a lump sum.
Where a person belongs to a retirement fund and elects to commute part of their
retirement interest to a single payment on retirement date, a lump-sum payment
arises. Retirement funds will pay lump sums when one of the following happens:
• retirement – this means that in terms of the rules of the fund, the person is entitled
to a lump sum because they have reached the normal retirement age and have
elected to retire (paragraph 2(1)(a)(i));
649
REMEMBER
650
Retire Means that the person become entitled to the annuity or lump sum benefits
contemplated in the definition of ‘retirement date’.
Retirement Is the date on which a member elects to retire and becomes entitled to an
Date annuity or a lump sum benefit or on or after attaining the normal retirement
age in terms of the rules of the fund
Normal Is the date on which a member of a pension or provident fund are entitled to
retirement retire.
age A member of a retirement annuity fund, pension preservation fund or prov-
ident preservation fund is 55 years (para (b) of the definition of ‘normal
retirement age’.
Normal retirement age is also reached where a person becomes permanently
incapable of carrying on their occupation due to sickness, accident, injury or
incapacity through infirmity of mind or body.
This means that any person receiving a retirement benefit on electing to retire on or
after normal retirement age, then the lump sum benefit will be taxed as a retirement
lump sum benefit.
651
REMEMBER
• There are differences in the tax implications when retiring from a fund or withdrawing
from a fund.
• Annuities are specifically included in gross income (refer Chapter 3).
652
Example 14.4
Joseph Black is 65 years old. On his retirement, he received a lump sum benefit of R1435 000
from the pension fund of which he had been a member for 28½ years. Joseph elected to
retired on 30 November 2020. On 214 February 2020, he had an unclaimed balance of con-
tributions of R10 000.
You are required to calculate the taxable amount of the retirement fund lump sum benefit.
Solution 14.4
R
Retirement fund lump sum benefit 935 000
Less: Allowable deductions: Contributions disallowed in the past (10 000)
Taxable income from retirement fund lump sum benefit 925 000
653
• Where the rules of the fund do not take completed years of employment into
account when determining the amount of the benefit payable:
B = the completed number of years after 1 March 1998 during which the mem-
ber had been a member of the funds;
C = the number of completed years (up to date of accrual) during which the
member had continuously been a member of a public sector fund;
D = the lump sum benefit that is payable.
Example 14.5
Charles Ngomani is 65 years old. On his retirement from a government department, he
received a lump sum benefit of R1 232 000 (based on his years of employment) from the
government pension fund he had been a member of for 28½ years, which was equivalent to
his years of employment. Charles elected to retire on 30 June 2020. He has never previously
received a lump sum benefit from a fund.
You are required to calculate how much of Charles’ lump sum will be included in his gross
income.
Solution 14.5
Use the formula (A = B / C × D):
B = 23 (completed years of service after 1 March 1998)
C = 28 (completed years of membership of the fund)
D = R232 000
A = 23 / 28 × R1 232 000 = R1 012 000
R968 000 will be included in Charles’ gross income.
REMEMBER
• The tax-free nature of public sector pre-1 March 1998 membership is preserved for
people who transferred their public sector benefits to another fund. From 1 March 2018
the tax-free nature of pre-1 March 1998 membership will be preserved for one addi-
tional transfer to another fund.
654
Step 1: Calculate the current retirement fund lump sum benefit (or severance
benefit) = amount received less any allowable deductions.
Step 3: Calculate the tax on all retirement fund lump sum benefits (Step 1 +
Step 2) per table below.
Step 4: Calculate the notional tax on the previous retirement fund lump sum
benefit (Step 2) per table below.
Step 5: Tax per Step 3 – tax per Step 4 = Tax on current retirement fund lump
sum benefit.
655
Example 14.6
Nelia Simons is 68 years old and elected to retire on 31 October 2020. The taxable portion
of the lump sum that she received from the pension fund on retirement amounted to
R975 000. Nelia’s taxable income before considering the lump sum amounted to R225 500.
You are required to calculate the tax payable by Nelia if
(a) she has never received any lump sums in the past;
(b) she received a retirement annuity fund lump sum payment of R550 000 on
1 November 2012.
Solution 14.6
R
(a) Lump sums from retirement funds are taxed separately, therefore we do
not take Nelia’s other income into account.
Taxable portion of lump sum from pension fund 975 000
Tax payable on taxable portion of lump sum
(R36 000 + (27% × (R975 000 – R700 000)) 110 250
(b) Taxable portion of all lump sums received (R975 000 + R550 000) 1 525 000
Tax payable on all lump sums received
(R130 500 + (36% × (R1 525 000 – R1 050 000))) 301 500
Less: Notional tax payable on previous lump sum
(18% × (R550 000 – R500 000)) (9 000)
Tax on current retirement fund lump sum benefit 292 500
656
The receipt of a lump sum from a fund before retirement is taxable and the amount is
included in the taxpayer’s gross income. When ascertaining the amount of the with-
drawal benefit to be included in gross income, certain deductions are allowed to
reduce the withdrawal benefit before the ‘taxable amount’ is subject to tax.
14.4.2.1 Deductions
Divorce orders and transfers between funds
Where the lump sum received is the result of a divorce order or transfer out of the
fund, the deduction allowed against the lump sum is that portion of the lump sum
that is transferred to another fund.
Amounts transferred from pension funds, pension preservation funds, provident
funds or provident preservation funds can be paid into a pension fund, pension
preservation fund, provident funds, provident preservation or retirement annuity
fund in order to get a deduction. Retirement annuity funds can only be transferred to
other retirement annuity funds to qualify for a deduction.
Other circumstances
Where the withdrawal benefit is due to another circumstance, a person is allowed to
deduct the following from the lump sum:
• Previously disallowed contributions The person’s own contributions to a pension
fund, pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund that were not previously deducted in terms of section 11F.
The disallowed contributions must relate to funds where the person is or was a
member.
• Previously taxed divorce award transfers to approved funds An amount trans-
ferred for the benefit of the person to a pension fund, pension preservation fund,
provident fund, provident preservation fund or retirement annuity fund as elected
by the person.
• Previously taxed transfers between funds An amount deemed to have accrued to
the person that was previously transferred to a fund.
• Previously taxed unclaimed benefits transferred to preservation funds An
amount that was paid or transferred to a pension preservation fund or a provident
preservation fund as an unclaimed benefit and which had been subject to tax prior
to that transfer or payment.
• Exempt portion of public sector funds (service years before 1 March 1998) The
exempt amount of a public sector fund lumpsum which relates to service years be-
fore 1 March 1998 that has been paid into a retirement fund for the person’s benefit
(public sector funds are discussed later) or transferred to another fund for the per-
son’s benefit.
The above deductions
• are allowed so long as they have not previously been allowed as a deduction in
determining the amount of the lump sum that will be subject to taxation or al-
lowed as an exemption in terms of section 10C; and
• are limited to the amount of the lump sum benefit that was received (they cannot
create a loss situation in respect of a lump sum received).
657
Example 14.3
Ansie Troulus married Mr Koos Trousku on 9 September of the current year of assess-
ment. She resigned from her employment on 31 August and received a lump sum from
the pension fund. She received all her contributions of R12 000 and interest amounting to
R3 500. On 29 February of the previous year of assessment, contributions up to R10 000
had been allowed as deductions. Ansie used all the money as a deposit on a new house.
You are required to calculate the taxable portion of the lump sum.
Solution 14.3
R
Lump sum received from pension fund (R12 000 + R3 500) 15 500
Less: Contributions not previously allowed (R12 000 – R10 000) (2 000)
Taxable portion 13 500
Where the retirement fund lump sum withdrawal benefit accrues to a person from
1 March 2011, the tax on the amount is calculated as follows:
Step 3: Calculate tax per retirement fund lump sum withdrawal table on the
total benefits (Step 1 + Step 2) per the table below.
continued
658
Step 4: Calculate tax per retirement fund lump sum withdrawal table on the
previous benefits (Step 2) per the table below .
Step 5: Tax per Step 3 – tax per Step 4 = Tax on current lump sum withdrawal
benefit.
Retirement fund lump sum withdrawal benefits will only accrue as from
1 March 2009 and will be taxed according to the following table:
Example 14.4
Lana Hip is 38 years old and resigned from her employment on 30 June 2020. She
received a lump sum from her pension fund of R80 000. She transferred R50 000 into a
pension preservation fund and used the balance to pay off her car. On 29 February 2020,
R6 000 of Lana’s contributions to the fund had not been deducted for tax purposes. Her
taxable income for the current year of assessment before the current lump sum amounted
to R134 000.
659
Solution 14.4
(a) R
Retirement fund lump sum withdrawal benefit 80 000
Less: Allowable deductions
Contributions not deducted in the past (6 000)
Amount transferred to pension preservation fund (50 000)
Taxable portion of lump sum from pension fund 24 000
Tax payable on lump sum using the retirement fund withdrawal benefit table
(R24 000 – R25 000) × 18% nil
(b) R
As the previous lump sum withdrawal benefit was received after 1 March 2009,
we will need to include the amount when calculating tax on the current lump
sum benefit.
Tax payable on lump sum using the retirement fund withdrawal benefit table:
Taxable income from current benefit 24 000
Taxable income from previous benefit 15 000
39 000
Tax per table (R39 000 – R25 000) × 18% 2 520
Less: Tax per table on previous lump sums (R15 000) (nil)
Tax payable on current lump sum 2 520
1. In (a) above why is Lana’s other income ignored when the tax is calcu-
lated?
2. In (a) above why is the R15 000 previous lump sum ignored in the
calculation?
3. In (b) above why was there no tax on the previous lump sum?
660
the lump sum received. If the unclaimed contributions exceed the lump sum, the
balance can be used to exempt any qualifying annuities received during the year of
assessment. Should the unclaimed contributions exceed the compulsory annuities received,
any balance of unclaimed contributions can be added to the current contributions to retirement
funds and be deducted in terms of section 11F (subject to the limitation) (refer to 12.3.3).
The section 10C exemption is limited to the total amount of qualifying annuities
received in a specific year of assessment.
Received
Employer Retirement fund
from
661
Received
Employer Retirement fund
from
Gross
Amount received or accrued
income
Deductions None • Contribu- • Contribu- • Contribu-
tions dis- tions dis- tions dis-
allowed allowed allowed
• Amount • Amount • Amount
transferred transferred transferred
to preserv- to preserv- • Amount A in
ation fund ation fund formula
Tax Tax Retirement Retirement Retirement Retirement
tables fund lump fund lump fund lump fund lump
with sum benefit sum with- sum benefit sum benefit
other table drawal benefit table table
taxable table
income
A number of questions follow where you can test your knowledge on retirement benefits.
Question 14.1
Dieter Wrogemann (54 years old) resigned from his employment during the current year
of assessment and immediately commenced with new employment.
Employer 1 R
Salary 400 000
Pension fund contributions 40 000
Lump sum from pension fund on resignation (Note) 1 950 000
Employer 2
Salary 750 000
Provident fund contributions 75 000
Interest received from a South African bank 9 000
Retirement annuity fund contributions 20 000
Note
Lump sum from pension fund
Dieter had never received a withdrawal benefit before. Contributions not deducted on
29 February 2020 amounted to R30 000. He decided to utilise his lump sum in the
following ways:
Transferred into a retirement annuity fund – R300 000
Transferred into his new provident fund – R1 200 000
Deposit on a new car – R100 000
Fixed deposit with bank – R150 000
662
Answer 14.1
Calculation of tax payable by Dieter:
R R
Salary (R400 000 + R750 000) 1 150 000
Lump sum from pension fund 1 950 000
Less: Deductions
Transfer to retirement annuity fund (300 000)
Transfer to provident fund (1 200 000)
Deposit on new car – not allowed nil
Fixed deposit with bank – not allowed nil
Contributions not deducted before (refer to the note) (30 000)
420 000
Interest received (R9 000 up to R23 800 is exempt) nil
1 150 000
Less: Retirement fund contributions:
R40 000 + R20 000 + R75 000 135 000
Limited to lesser of
1. R350 000 or
2. 27,5% × the higher of
Remuneration R1 150 000; or
Taxable income R1 150 000
= 27,5% × R1 150 000 = R316 250; or
3. Taxable income – R1 150 000
Therefore, limit is R316 250, allow contributions in full (135 000)
Taxable income 1 015 000
Add: Taxable income from lump sum 420 000
Total taxable income 1 435 000
Tax on taxable income ((R1 015 000 – R744 800) × 41% + R218 139) 328 921
Less: Primary rebate (14 958)
Normal tax 313 963
Tax on pension fund withdrawal benefit
Tax on R420 000
(R420 000 – R25 000) × 18% 71 100
Net normal tax payable 385 063
Note
Where the taxpayer receives a lump sum during the year, the unclaimed amount of deduc-
tions is first set off against the lump sum benefit. If there is any excess, it is used to exempt
any compulsory annuities in terms of section 10C. If there is still an excess amount, that
excess is deemed to have been contributed in the current year of assessment and deducted
in terms of section 11F (refer to chapter 12 for the discussion on the order of deductions).
663
Question 14.2
Joyce Aphane elected to retire on 31 July 2020 at the age of 66. She was employed for 30 years
and 11 months by the same firm and was a member of the firm’s pension fund for the entire
period.
Joyce received the following income during the current year of assessment:
R
Salary until retirement – R440 000 per month
Pension annuity after retirement – R28 500 per month
Gratuity from employer (non-pensionable) 155 000
Accumulated leave pay (non-pensionable) 80 000
Cash gift from colleagues on retirement 21 500
Watch from employer in recognition of 30 years’ loyal service to the firm –
cost to employer 42 250
Annuity from retirement annuity fund (Note 1) 120 600
Dividends from South African public company 4 000
Lump sum received from the pension fund of which she was a member (Note 2) 1 728 000
Joyce incurred the following expenses for the current year of assessment:
Pension fund contributions – R8 640 per month
Medical fund contributions for the entire year – R5 000 per month
Medical expenses not recovered from the fund 12 500
Notes
1. On 1 June 2006, Joyce received a lump sum of R650 000 from a retirement annuity fund.
R420 000 of the lump sum was allowed as a deduction in calculating the taxable
income. Joyce receives an annuity from this fund that amounts to R10 050 a month.
2. All of Joyce‘s contributions toward the pension fund were allowed as deductions in
terms of section 11F (with the exception of R200 500 that was not allowed as a deduc-
tion in the previous year of assessment).
664
Answer 14.2
Calculation of the tax payable by Joyce
R R
Lump sum
Salary until retirement (R40 000 × 5 months) 200 000
Pension after retirement (R28 500 × 7 months) 199 500
Gratuity from employer (retirement benefit, included in gross
income paragraph (e), but excluded from calculation of
limitations) 155 000
Accumulated leave pay (retirement benefit, included in gross
income paragraph (e), but excluded from calculation of limita-
tions) 80 000
Cash gift from colleagues on retirement nil
Watch from employer 42 250
Less: Fringe benefit exemption (limited to) (5 000)
Annuity from retirement annuity fund (R10 050 × 12 months) 120 600
Lump sum received from the pension fund (retirement bene-
fit, included in gross income paragraph (e), but excluded from
calculation of limitations) 1 728 000
Less: Unclaimed balance of deductions (200 500)
1 762 500
Dividends from South African public company – exempt nil
557 350
Less: Retirement fund contributions:
R8 640 × 5 months = R43 200
Limited to the lesser of
1. R350 000; or
2. 27,5% × the higher of
Remuneration R557 350; or
Taxable income R557 350, therefore
27,5% × R557 350 = R153 271; or
3. Taxable income – R557 350
Therefore, limit is R153 271, allow the contributions in full (43 200)
Taxable income 514 150
Add: Taxable income from lump sum 1 762 500
Total taxable income 2 276 650
continued
665
R
Tax on taxable income ((R514 150 – R445 100) × 36% + R105 429) 130 287
Less: Primary rebate (14 958)
Age rebate (8 199)
Medical fund tax credit (R319 × 12 months) (3 828)
Medical expenses tax credit
Excess medical scheme fees (R5 000 × 12 – (3 × R3 828)) × 33,3% (16 156)
Qualifying expenses (R12 500 × 33,3%) (4 163)
Normal tax 82 983
Tax on retirement fund lump sum benefit (note)
Tax on R1 762 500 (R130 500 + (36% × (R1 830 071 – R1 050 000))) 387 000
Net normal tax payable 469 983
Note
The lump sum benefit received was received before 1 October 2007 so it is not
taken into account as part of the cumulative tax calculation.
Question 14.3
Mpho Phonye is married (in community of property) to Babs who is 60 years old. Babs has
been a ‘stay at home’ wife for the 40 years that they have been married. Mpho turned
70 years old on 25 September 2020 and elected to retire at the end of September 2020. He
has worked for the same company since he was 20 years old. He supplies you with the
following information relevant to the 2021 year of assessment.
Income
Total salary received up to date of retirement 322 000
Gratuity from employer 1 25 000
Retirement fund lump sum benefit 2 2 944 000
Purchased annuity 2 75 000
War pension 8 000
Rental income 3 48 000
Dividends from a collective investment scheme in property 68 000
Expenses
Medical 4 18 000
Provident fund contributions 25 760
House purchased 3 900 000
General deductible expenses in respect of rented house 3 800
Repairs 3 15 000
Notes
1. Gratuity from employer
This is the first time ever that Mpho has received a lump sum from an employer.
2. Retirement fund lump sum benefit
This lump sum benefit was received from a provident fund. Mpho has never received
any lump sum benefits in the past. His contributions to the provident fund up to
29 February 2016 amounted to R1 436 240. In the previous year of assessment all prov-
ident fund contributions of R42 000 were deducted for income tax purposes.
Mpho used R1 700 000 from the lump sum he received to purchase an annuity. The
annuity will pay R25 000 a month for the rest of Mpho’s life, as from 1 December 2020.
continued
666
His life expectancy when he purchased the annuity was 8,94 years and his wife’s life
expectancy was 18,04 years.
3. Rental income
On 3 January 2020, Mpho purchased a second house as he had paid off the house he
lived in and he realised that he could add to his income by earning rental income. He
purchased a house for R900 000. His repayment to the bank each month from
1 February 2020 amounted to R12 750. This payment consisted of R12 000 interest and
R750 capital repayment. He incurred expenses of R10 000 to get the house into a rent-
able condition. The house was rented out from 1 May 2020.
Details of rental income and expenses after 1 May 2020: R
Rent received (1 May 2020 to 29 February 2020) 48 000
Replacement of broken geyser 5 000
Deposit paid by tenants (repayable when they move out) 4 800
March 2020 rent received during February 2020 4 800
4. Medical aid contributions
Mpho contributed R1 500 per month to a medical aid fund for the full year. His
employer contributed the same amount to the fund even after Mpho’s retirement. All
Mpho’s medical expenses were covered by the medical fund.
Answer 14.3
Calculation of the net normal tax payable by Mpho R
Taxable income – other income 316 964
Taxable income – retirement benefits 1 532 670
Total taxable income 1 849 724
Net normal tax payable 335 471
667
15 Taxation of trusts
Exempt = Taxable
Gross income – – Deductions Tax payable
income income
Adjustments
Partnerships Companies Trusts for tax
avoidance
Page
15.1 Introduction............................................................................................................ 670
15.2 The nature of a trust .............................................................................................. 670
15.3 Rate at which a trust is taxed ............................................................................... 672
15.3.1 Ordinary trusts ......................................................................................... 672
15.4 Person liable for tax on income of trust .............................................................. 673
15.4.1 Section 25B ................................................................................................ 673
15.4.2 Section 7..................................................................................................... 674
15.4.3 Meaning of ‘donation, settlement or other disposition’ ........................... 675
15.4.4 ‘By reason of’ or ‘in consequence of’ ............................................................ 675
15.5 Vested rights to income (sections 7(1) and 25B(1)) ........................................... 677
15.6 Transactions between spouses (section 7(2)) ..................................................... 678
15.6.1 Spouses married in or out of community of property ........................ 678
15.6.2 Spouses married in community of property ........................................ 678
15.6.3 Exclusions ................................................................................................. 678
15.7 Transactions between parents and children (section 7(3)) ............................... 680
15.8 Donations linked to a condition (section 7(5)) ................................................... 682
15.9 Donations between resident and non-resident (section 7(8)) .......................... 684
15.9.1 Meaning of ‘income’ ................................................................................ 686
15.10 Loans between trusts and connected persons (section 7C) ........................... 686
669
Page
15.11 Miscellaneous provisions ................................................................................... 694
15.11.1 General remarks about section 7 ..................................................... 694
15.11.2 Limitation of amount deemed to be income.................................. 695
15.11.3 Calculation of interest amount (section 7D) ................................. 697
15.12 The nature of income from a trust .................................................................... 697
15.13 Losses in a trust (section 25B(3) to 23B(6)) ....................................................... 699
15.14 Summary of income tax consequences of trusts ............................................. 701
15.15 Capital gains tax implications of trusts ............................................................ 715
15.15.1 General ................................................................................................ 715
15.15.2 The attribution rules ......................................................................... 715
15.15.2.1 Specific rules for ‘donation, settlement or other
disposition’ (paragraphs 68 to 72)................................ 715
15.15.2.2 General rules (paragraph 80) ........................................ 716
15.16 Summary .............................................................................................................. 718
15.17 Examination preparation ................................................................................... 718
15.1 Introduction
Pierre le Paulle (a French author) made the following comment:
Trusts have now pervaded all fields of social institutions in common law countries.
They are like those extraordinary drugs curing at the same time toothache, sprained
ankles and baldness, sold by peddlers on the Paris boulevards; they solve equally well
family troubles, business difficulties, religious and charitable problems. What amazes
the sceptical civilian is that they really solve them.
Trusts can have several uses especially in the milieu of estate planning. Where
simplicity, flexibility and retention of control are of paramount importance, there is
simply no form of entity that can measure up to the trust. A person may, for instance,
transfer ownership of an asset to a discretionary trust where the trustees can manage
that asset for the benefit of the beneficiaries of that trust while the asset is also
protected against creditor claims that may in future be instituted against that person
or beneficiaries. Although there are numerous credible motivations for the use of
trusts, the use of discretionary trusts for South African income tax and estate duty
savings has become under intense scrutiny in recent years, which resulted in the
introduction of certain anti-avoidance provisions, such as section 7C ( refer to 15.10)
to discourage these practices. In this chapter, we give attention to the taxation of
trusts in terms of the Income Tax Act 58 of 1962 (the Act). The general rules of
taxation discussed earlier also apply to trusts. In this chapter, however, attention is
given to the provisions of the Act that apply to trusts in particular.
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Legislation:
A ‘trust’ is defined in section 1 of the Act as:
any trust fund consisting of cash or other assets which are administered and
controlled by a person acting in a fiduciary capacity, where such person is appointed
under a deed of trust or by agreement or under the will of a deceased person.
There are always at least three parties to a trust, namely the founder, the trustee
and the beneficiary. The founder establishes the trust and hands over any property
(that may also include money) to the trustee. The trustee receives the property and
is obliged to administer these trust goods to the benefit of the beneficiary. The
beneficiary is the person for whose benefit the trust goods are administered and
applied.
A trust may be established in one of two ways: testamentary or inter vivos.
Testamentary trust (trust mortis causa): With such a trust, the testator bequeaths
cash or other assets in his or her will to a trustee, to administer for the benefit of the
testator’s beneficiaries. Such a trust comes into existence on the death of the testator.
This is particularly popular when the beneficiaries are minor children. The parent
who dies leaves possessions to a trust, and a trustee is appointed to apply and
administer these goods on behalf of and for the benefit of the children. When the
children reach a certain age, the trust may be dissolved and the remaining trust goods
may be distributed to the children, or the trust may continue to exist indefinitely,
depending on the testator’s stipulations in the will.
Inter vivos trust: An ‘inter vivos trust’ is a trust that is established while the founder
is still alive. The assets may be donated or sold to the trust and do not necessarily just
have to be donated or sold by the founder. For example, a father (founder and donor)
may establish a trust for the benefit of his children and donate R100 to the trust. The
children’s grandfather may then donate or sell further assets to the trust. The assets
vest in the trustee, who must administer the trust in accordance with the stipulations
of the trust deed. Inter vivos trusts are particularly popular in estate planning and are
used to peg the value of assets in the estate.
Example 15.1
Jan Jorris owns a block of flats with a current market value of R1,5 million. Jan Jorris’ life
expectancy is another 20 years and it is expected that the value of the block of flats could
increase to R10 million in that period. Jan is considering selling the block of flats to a
trust at the current market value. The sale will be financed by Jan by means of an
interest-free loan to the trust.
You are required to explain to Jan what the effect of the sale will be on his estate.
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Solution 15.1
Before the sale, Jan’s estate consisted of a block of flats with a market value of R1,5 million.
This block of flats is sold to the trust at market value and, after the sales transaction, it will
no longer form part of Jan’s estate. However, Jan is financing the transaction and therefore
the trust still owes him the amount of the outstanding loan account. The loan amounting to
R1,5 million is interest free. The loan is not paid back and if Jan dies in 20 years’ time, there
will still be an asset of R1,5 million (the loan) in his estate. The block of flats is now the asset
of the trust and the increase in market value from R1,5 million to R10 million takes place in
the trust. If Jan had not sold the block of flats to the trust, his estate would have consisted of
the block of flats with a market value of R10 million.
Note
While Jan is still alive the provisions of section 7 must be applied to distributions made
to beneficiaries.
Consideration must also be given to the provisions contained in section 7C that deals
with loans between trusts and connected persons (refer to 15.10).
Further to the above two types of trusts, trusts can be classified as either discretionary
trusts or bewind (vested) trusts. With a discretionary trust, no beneficiary has a
vested (unconditional) right to the income or capital of the trust and the trustees have
full discretion with regard to how much is distributed to which beneficiary. With a
bewind trust, the beneficiaries have vested (unconditional) rights to the capital and
income from the trust. In practice, a trust is not solely one of the above and could also
be a combination of these, with some beneficiaries having vested rights (refer to 15.5)
and other beneficiaries having discretionary rights.
Example 15.2
ABC Trust, a testamentary trust, has a taxable income of R100 000 for the current year of
assessment ending 28 February. Included in the R100 000 is taxable interest income of
R15 000. No beneficiary has a vested right to the income. ABC Trust is not a special trust.
You are required to calculate the tax payable by ABC Trust for the current year of
assessment.
Solution 15.2
R100 000 × 45% = R45 000. The tax liability for ABC Trust is R45 000 for the current year
of assessment. The basic interest exemption in terms of section 10(1)(i) is not available to
a trust as it is not a natural person.
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REMEMBER
• A trust is a person, but not a natural person, therefore, a trust is not entitled to the
primary, secondary or tertiary rebates for natural persons.
• A trust is not entitled to any interest exemptions in terms of section 10(1)(i).
• A company’s year of assessment ends at its financial year end but a trust’s year of
assessment always ends on the last day of February.
• Although we have calculated the tax liability of the trust, the trustee of the trust is the
representative taxpayer (person carrying the responsibility for all tax matters) of the
trust. However, the tax assessments are still done in the trust’s name.
• A personal service provider, as described in the Fourth Schedule to the Act, also
includes certain defined trusts which will also be taxed at the flat rate of 45% (refer to
chapter 11 for further information regarding personal service providers).
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accrue to the trust under paragraph 3B of the Second Schedule immediately before
termination of that trust.
Section 25B(2): This section only clarifies what is also included in the meaning of
‘vested right’ as referred to above. It stipulates that if the trustees have a discretion as
to whether income should be distributed to a beneficiary, any income distributed in
consequence of the exercise by the trustee(s) of a discretion will constitute income to
which a beneficiary has a vested right.
Section 25B(2A): This section provides that the distributed capitalised income of a
non-resident trust could, in certain instances, be taxable in the hands of a resident
beneficiary acquiring a vested right to such capital income.
Section 25B(3) to (7): These subsections regulate the deductibility and limitation of
expenses in the hands of a beneficiary (refer to 15.13 for a detailed discussion on these
subsections).
Section 25B is subject to the provisions of section 7. Therefore, the provisions of sec-
tion 7 must first be applied and if this section does not apply, the provisions of sec-
tion 25B are followed.
15.4.2 Section 7
A number of ways exist for taxpayers to legally spread their income in order to
reduce their normal tax liability. Section 7 deals with these tax avoidance arrange-
ments. Example 15.3 illustrates one of the schemes targeted by section 7 whereby an
individual attempts to reduce his normal tax payable by shifting taxable income to
his minor children.
Example 15.3
Example of a scheme to reduce tax payable
Mr Coleman, aged 50, has two sons who are both unmarried and under the age of 18
years at the end of the current year of assessment. Mr Coleman earned taxable income of
R650 000 for the current year, while his sons did not earn any taxable income for the
current year.
Mr Coleman will pay normal tax before rebates of R181 167 ((R650 000 – R584 200 × 39%)
+ R155 505). This is an average rate of tax of 27,87%.
If Mr Coleman shifts R400 000 of his taxable income to his sons so that they each receive
R200 000, what will the result on the fiscus (SARS) be?
Mr Coleman
Mr Coleman will be taxed on R250 000 (R650 000 – R400 000).
This will amount to normal tax before rebates for Mr Coleman of
(((R250 000 – R205 900) × 26%) + R37 062) = R48 528.
Each son
Each son will be taxed on R200 000.
Normal tax before rebates for each son:
R200 000 × 18% = R36 000
continued
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This amounts to an average rate of tax of 18,54% ((R48 528 + R36 000 + R36 000) /
R650 000) as opposed to the 27,87% that Mr Coleman would have had to pay if he were
taxed on the full amount.
Further to this, Mr Coleman and each son would receive a primary rebate of R14 958, so
the end result would be that the fiscus would receive R75 654 ((R48 528 – R14 958) +
(R36 000 – R14 958) + (R36 000 – R14 958)) instead of R166 209 (R181 167 – R14 958) if this
arrangement was permitted.
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money to a minor child and the child buys a business to which he contributes his skill
and labour and from which he earns an income, that income may be regarded as being
attributable to two causes, viz. the donation and the skill and labour of the child. In
such a case it may be impossible to say which part of his income was the result of the
donation and which part the result of his skill and labour and it may be that the
Commissioner would not be able to apply [the equivalent of section 7(3)].
When the income is a direct result of the original donation, the provisions of section 7
should be applicable. When the income is earned as a result of the application of the
knowledge and skills of the child, for example, it may be argued that it does not have
a direct relation to the original donation.
Example 15.4
John Dann donates R100 000 to his 17-year-old, unmarried son, Jusha. Jusha had recently
completed a course in share transactions and began to speculate with the R100 000 on the
stock exchange. For the current year of assessment he realised profits of R80 000 on the
stock exchange.
You are required to indicate in whose hands the R80 000 will be taxable.
Solution 15.4
The R80 000 is the direct result of the application of Jusha’s knowledge and skills and
therefore not necessarily earned ‘by reason of’ or ‘in consequence of’ the donation (refer
to the Widan case). Therefore, the R80 000 should be taxable in Jusha’s hands and section
7(3) should not be applicable.
Example 15.5
John Dann donates R100 000 to his only daughter, Chané, who is 16 years old and
unmarried. Chané invests the full R100 000 in the bank and, for the previous year of
assessment, earned interest amounting to R10 000 on it. She capitalised the interest and
for the current year of assessment, earned interest of R11 000. R10 000 thereof relates to
the original donation and R1 000 relates to the capitalised interest of the previous year.
You are required to determine in whose hands the interest amounting to R11 000, with
regard to the current year of assessment, will be taxable.
Solution 15.5
In terms of section 7(3), the R10 000 (R11 000 – R1 000) is definitely taxable in the hands
of John Dann. There may be arguments regarding the taxability of the R1 000, but there is
clearly a causal link between the original investment and the R1 000 interest earned, and
the fact that it is ‘income upon income’ that was earned does not necessarily mean that it
was not earned ‘by reason of’ the original donation. The minor child did not really apply
any knowledge or skill to earn the income and it still relates directly to the original
donation, and, in terms of section 7(3), should also be taxable in the hands of John Dann.
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15.6.3 Exclusions
In the examples below, the income only accrues to one spouse and is not deemed to
also be the income of the other spouse (irrespective of whether they are married in or
out of community of property):
• trade income obtained by a spouse from the carrying on of his or her own trade;
• remuneration earned by a spouse as an employee of an unrelated person;
• benefits obtained from a pension fund, pension preservation fund, provident fund,
provident preservation fund, retirement annuity fund, benefit fund or any other
similar fund;
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REMEMBER
• When one spouse receives an amount, and it is deemed taxable in the hands of the other
spouse, the other spouse is entitled to the proportional share of the permissible deduc-
tions against such income in terms of seciton 7(2B).
• It is important to note that the provisions of section 7(2) for a donation, settlement or
other disposition between spouses only apply in circumstances where the sole or main
purpose is the reduction, postponement or avoidance of any tax.
Example 15.6
Harry Baloy is married out of community of property to Sue Baloy. Sue earns no income
and Harry wants to benefit from the lower tax rate that she would pay. On 1 March,
Harry donates a block of flats to Sue. During the current year of assessment, Sue received
rental income amounting to R100 000 and she paid tax-deductible expenses amounting
to R20 000.
You are required to explain the tax consequences with regard to the current year of
assessment.
Solution 15.6
Sue Baloy received the R100 000, but in terms of section 7(2)(a), the amount will be
deemed to accrue to her husband, Harry. The amount is the direct result of a donation
that Sue received from Harry and Harry made the donation with the sole or main
purpose of reducing tax.
Harry must therefore include the amount of R100 000 in his taxable income, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).
What will the tax consequences be if Harry and Sue Baloy were
married in community of property?
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Section 7(2) may sometimes also apply if the donation, settlement or other disposition
was made to a trust or if a trust was also a party to the transaction, operation or scheme
that the donor performed with the sole purpose of avoiding or deferring any tax.
Example 15.7
Harry Baloy is married out of community of property to Sue Baloy. Sue does not earn
any income and Harry wants to benefit from the lower tax rate that she can pay. On
1 March, Harry donates a block of flats to the Baloy Trust. Sue is the only beneficiary of
the trust and she has a vested right to the income of the trust. During the current year of
assessment, the Baloy Trust received rental income amounting to R100 000 and there
were tax deductible expenses of R20 000 paid by the trust.
You are required to explain the tax consequences of the above income and expenses with
regard to the current year of assessment.
Solution 15.7
The Baloy Trust received the R100 000, but in terms of section 7(1), Sue has a vested right
to it. In terms of section 7(2)(a), the amount will be deemed to accrue to her husband,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry and Harry made the donation with the sole or main purpose of reducing tax.
Harry must therefore include in his taxable income the amount of R100 000, but in terms
of section 7(2B), he is also entitled to deduct the R20 000 expenses against this. Harry’s
taxable income for the current year will therefore increase by the amount of R80 000
(R100 000 – R20 000).
REMEMBER
• The tax consequences would have been similar if Harry and Sue Baloy had been
married in community of property. Although section 7(2A)(b) deems income derived
from the letting of fixed property to accrue to both spouses in equal shares, the pro-
visions of section 7(2)(a) will be triggered as Harry made a donation with the sole or
main purpose of reducing his tax liability. Consequently, a total amount of R80 000
(R100 000 income – R20 000 expenditure) will be included in Harry’s taxable income.
The latter represents half of the rental income that accrued to him in terms of sec-
tion 7(2A)(b) as well as his wife’s share of the rental inocme that is deemed to accrue to
him in terms of section 7(2)(a).
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For example, if a father donates an amount of money to his minor child and invests it
in a savings account at a bank, the interest that is earned on the investment is taxed in
the hands of the father, even if he uses the interest for the maintenance of the child.
A parent who conducts a business may pay a wage or salary to his or her minor child,
provided it is a bona fide payment for services rendered to the business and provided
the payment is not excessive. The payment is permitted as a deduction for business
purposes and the child is liable in his or her own right for tax on such income. Here,
there is no issue of a donation, settlement or other disposition.
Section 68 of the Act stipulates that each parent must include in his or her income tax
return any income received by or accrued to or in favour of his or her minor children,
whether directly or indirectly, from him- or herself or from his or her spouse,
together with any details that the Commissioner may require. Section 68 therefore
applies to any income which, in terms of section 7(3), is deemed to be income of the
parent.
Please note that a minor child is a child under the age of 18 who has never been
married. A divorced person or a widow/widower under the age of 18 does not
regain the status of a minor. A ‘child’ is defined in section 1 of the Act and includes
an adopted child and a stepchild. SARS accepts that an illegitimate child also falls
within the definition of ‘child’. A stepchild has been specifically included in the
definition of a ‘child’ for the purposes of section 7(3).
It is not necessary for the donation to be made directly to the child. Section 7(3) also
applies when the donation is made to a trust and the minor child is a beneficiary of
the trust.
Example 15.8
Harry Baloy wants to benefit from the lower tax rate that his unmarried daughter, Jenny,
16 years old, may pay. On 1 March, Harry donated a block of flats to the Baloy Trust.
Jenny is the only beneficiary of the trust and she has a vested right to the income of the
trust. During the current year of assessment, the Baloy Trust received net rental income
amounting to R100 000.
You are required to explain the tax consequences pertaining to the net rental income
with regard to the current year of assessment.
Solution 15.8
The Baloy Trust received the R100 000, but in terms of section 7(1), Jenny has a vested
right to it. In terms of section 7(3), the amount will be deemed to accrue to her father,
Harry. The amount is the direct result of a donation that the Baloy Trust received from
Harry. Harry must therefore add the amount of R100 000 to his taxable income.
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REMEMBER
• Section 7(3) is applicable irrespective of whether the husband or his wife made the
donation. If the wife made the donation, the income is taxed in her hands and when she
dies, in the hands of the child.
• Since this subsection only refers to a child of the donor, it does not affect a donation
made by a grandparent to his grandchild. Grandparents are therefore able to donate
assets to their minor grandchildren without them being taxed in terms of section 7(3) on
the income derived from the assets. Please note that the minor is subject to tax on the
amount received from the trust as a result of the donation made by the grandparent.
• Unlike section 7(2) that deals with transactions between spouses, none of the other
provisions in section 7 (including section 7(3)) requires that the sole or main purpose of
the transaction must be to avoid tax.
Note that a person may impose the stipulation or condition, but that the income
derived from the donation that is not distributed or vested due to the stipulation or
condition, is taxed in the hands of the donor (and not in the hands of the person who
imposed the stipulation or condition). In this manner, the trust could have been
founded for the benefit of the children, with a stipulation in the trust deed that the
income may only be distributed to the children after the occurrence of a certain event. If
a grandparent makes a donation to the trust that is subject to the same stipulations as
imposed by the parent, the donation falls within the ambit of section 7(5). The
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grandparent is then taxed on the undistributed income derived from the donation. This
undistributed income would have accrued to the beneficiaries if it had not been for the
condition in the trust deed.
Example 15.9
A grandfather donates property to a trust with his two minor unmarried grandchildren
as beneficiaries. He stipulates that each year each of them will receive a quarter of the net
rental income from the property and that each year a further quarter of the net rental
income will be accumulated for each child in the trust until the younger of the two children
turns 30 years old. If a child dies before this date, the other child will get the benefit of the
accumulated income, but only when he or she turns 30 years old. The net rental income
from the property in the current year of assessment amounts to R200 000.
You are required to discuss the tax consequences of the above-mentioned.
Solution 15.9
REMEMBER
• It has been found that, in application, section 7(1) holds more weight than (dominates)
section 7(5) – refer to ITC 1328 43 SATC 56. Thus, if the beneficiary has a vested right to
the income retained in the trust, the stipulations of section 7(5) cannot be applicable. In
the above example, there was no vested right, since the income would not accrue to the
estate of the particular child upon his or her death and therefore section 7(1) cannot
apply.
• The person making the donation, settlement or other disposition must still be alive for
income to be attributable to that person through the application of section 7(5) (or any
of the other section 7 provisions for that matter). However, if the person who imposed
the condition has died, section 7(5) will still apply with regard to any other living
donors, who will be taxed proportionally to the extent that such income can be attri-
buted to the donations made by them.
continued
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• Section 7(5) therefore applies up to and including the date of the event or stipulation, or
the date of death of the donor, whichever occurs first.
• In the case of a discretionary trust, the exercising of the trustees’ discretion is an event
or condition as intended in section 7(5).
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Example 15.10
Tom Palesky is a resident of the Republic and the father of Sharon Palesky, a major non-
resident who is the sole beneficiary of the Palesky Trust, a non-resident discretionary
trust. On 1 March 2017, Tom donated his entire interest of 60% of the equity shares in
Palesky Fashions Plc, a non-resident company, to the Palesky Trust. During the current
year of assessment, Palesky Fashions Plc declared a dividend of R100 000 to the Palesky
Trust. The dividend declared to the Palesky Trust was not funded by an amount that
constitutes income or a capital gain in the hands of Tom. Tom did not hold any voting
rights in Palesky Fashions Plc during the current year of assessment.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.
Solution 15.10
In terms of section 7(8), the foreign dividend of R100 000 will be deemed to accrue to
Tom as it resulted directly from a donation made by Tom, being a resident donor, to the
Palesky Trust, which is a non-resident.
Section 7(8) provides that the amount attributable to the resident donor must have
constituted ‘income’ in the hands of the non-resident had that person been a resident.
However, in determining such hypothetical income of the non-resident, the foreign
dividend exemption under section 10B(2)(a) of the Act must be disregarded in specific
circumstances.
In the present scenario, the foreign dividend of R100 000 would have been fully exempt
under section 10B(2)(a) in the hands of the Palesky Trust had that trust been a resident as
the trust holds at least 10% of the equity shares in Palesky Fashions Plc. However, for
purposes of section 7(8), this exemption must be disregarded, particularly since the
Palesky Trust holds more than 50% of the participation rights in Palesky Fashions Plc
and the Palesky Trust is a connected person in relation to the resident donor (being Tom)
since he is a relative of a beneficiary of the Palesky Trust.
Tom must therefore include the foreign dividend of R100 000 that accrued to the Palesky
Trust in his gross income for the current year. In terms of section 10B(3), a part of this
dividend (25 / 45) would be exempt from normal tax, provided that the foreign dividend
was not funded by or paid in the form of an annuity (refer to chapter 10). Note that Tom
would not be entitled to a full exemption under section 10B(2) for this foreign dividend.
In particular, the participation exemption under section 10B(2)(a), which requires a
minimum holding of 10% of the equity shares and voting rights in the foreign company
declaring the dividend, would not apply as Tom holds no equity shares or voting rights
in Palesky Fashions Plc.
Will the answer above differ if the Palesky Trust only held 40% of the
total participation rights in Palesky Fashions Plc?
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It is not necessary that the donation, settlement or other disposition be made directly
to a non-resident. The provisions of section 7(8) also apply if the donation was made
to a trust and a non-resident is a beneficiary of the trust. An expenditure, allowance
or loss incurred by the non-resident that would have been deductible from the
relevant income had the non-resident been a South African resident, is deductible
from the income attributable to the resident donor under section 7(8). A loss may not
be created with this deduction (section 7(8)(b)).
Example 15.11
Harry Baloy is a resident of the Republic. On 1 March 2017, Harry donated a block of
flats to the Baloy Trust, a discretionary trust that is tax resident in South Africa. Strauli, a
major non-resident, is the only beneficiary of the trust. During the current year of assess-
ment, the Baloy Trust received rental income amounting to R100 000 that was paid over
to Strauli. The rental income was received from a source outside the Republic.
You are required to explain the tax consequences of the above with regard to the current
year of assessment.
Solution 15.11
The Baloy Trust received R100 000. However, the full amount was paid to Strauli. In
terms of section 7(8), the amount will be deemed to accrue to Harry. The amount is the
direct result of a donation that the Baloy Trust received from Harry and had Strauli been
a South African resident, the R100 000 would have constituted income as defined in his
hands.
Harry must therefore include the amount of R100 000 net rental in his taxable income.
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Thirdly, if interest on the outstanding loan is either not charged at all or at a very low
interest rate, this constitutes, according to National Treasury, further tax avoidance
by the natural person. This is because such schemes are lawfully structured with the
sole or main purpose to derive a tax benefit through a reduction of the interest
receipts or accruals that would have otherwise been included in the natural person’s
gross income.
Section 7C applies where:
• a natural person provides a loan (or an advance or credit) to a trust;
• a company provides a loan to a trust at the instance of a natural person who is a
connected person to that company; or
• a natural person or a company, at the instance of a natural person who is a
connected person to that company, provides a loan to a company in which a trust
(either alone or together with a beneficiary of that trust, a spouse of such a
beneficiary or a person related to such a beneficiary or spouse within the second
degree of blood relation) directly or indirectly holds at least 20% of the equity
shares or voting rights,
provided that the trust is a connected person in relation to the natural person or the
company providing the loan or any of their connected persons. The natural person or
company does not have to provide the loan directly to the trust as section 7C also
applies in respect of indirect loans.
REMEMBER
The effect of section 7C is two-fold. Firstly, if the person that advanced the loan either
cancels or writes off the outstanding loan amount owing by the trust or company,
that person cannot claim a deduction, loss or allowance in respect of that waiver (for
example in terms of either section 11(i) (bad debts) or (j) (provision for bad debts)).
The person can also not claim a capital loss in respect of the cancellation or write-off
of the outstanding debt (for example in terms of paragraph 56 of the Eighth Schedule)
(section 7C(2)).
Secondly, if the loan is either a low-interest or an interest-free loan, the natural person
who advanced the loan or at whose instance a company advanced the loan, is
deemed to have made a donation to the trust that is subject to donations tax. The
amount of the deemed donation is calculated as the difference between the interest
calculated at the official rate and the interest that the trust or company actually paid
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(if any) (section 7C(3)). The daily simple interest method must be used in determining
the interest that would have been charged had the loan been subject to interest at the
official rate of interest (section 7D(b)).
REMEMBER
• The definition of the ‘official rate of interest’ for purposes of this calculation can be
found in section 1 of the Act. In the case of a loan denominated in South African rand,
the official rate of interest represents the sum of the South African repurchase rate
(more commonly known as the repo rate of the South African Reserve Bank) plus 1%.
For loans denominated in foreign currency, the official rate of interest represents the
equivalent of the South African repurchase rate applicable to such currency plus 1%.
• At the time of publication of this book, the official rate of interest in South Africa was
4,50% (November 2020.
The deemed donation in terms of section 7C(3) is deemed to have been made by the
person on the last day of the trust’s year of assessment and is subject to donations tax.
The rate at which donations tax is levied depends on the aggregate value of property
donated by the natural person on or after 1 March 2018 that was subject to donations
tax, including the amount of the deemed donation made under section 7C(3). The first
R30 million of the value of property donated on or after 1 March 2018 is subject to
donations tax at 20%, whereas the excess (above R30 million) is subject to donations tax
at 25% (refer chapter 16 for detail regarding donations tax).
Example 15.12
Jan Jorris sold a block of flats at its market value of R15 million to a trust on 1 March 2020.
The sale was financed by Jan by means of an interest-free loan to the trust. Jan and the
trust are connected persons. Jan did not make any donations during the 2021 year of
assessment and the aggregate value of all donations made by Jan from 1 March 2018
(including any donation resulting from the current transaction) does not exceed
R30 million.
You are required to explain to Jan what the effect of section 7C on the above information
will be, if any. You can assume that the official rate of interest is 4,5% and that the trust
made no capital repayments on the loan.
Solution 15.12
R
Jan provided a loan to the trust and he is a connected person to the trust.
The provisions of section 7C must be considered.
The loan is interest free and Jan will be deemed to have made a donation to
the trust on 28 February 2021. The amount of the deemed donation is
calculated as follows:
Interest calculated at the official rate of interest (R15 million × 4,5%) 675 000
Less: Interest incurred by the trust (nil)
Deemed donation 675 000
continued
688
Jan is a natural person and is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 16 for detail regarding donations tax). Jan
will thus be liable for donations tax on R575 000 (R675 000 – R100 000) in respect of this
deemed donation.
Jan must pay the donations tax of R115 000 (R575 000 × 20%) to SARS by 31 March 2021.
In the case where a company provides a loan to a trust or to another company at the
instance of more than one natural person who is a connected person to that company,
the deemed donation for purposes of section 7C(3) is regarded as having been made
by each of those natural persons in accordance with their respective interests in the
equity shares or voting rights of that company relative to the aggregate interests held
by such persons in that company (section 7C(4)).
Example 15.13
Thami Sebeela owns 60% of the equity shares in AA (Pty) Ltd while Mogale Lethiba owns
the remaining 40% of the equity shares. Thami and Mogale are also beneficiaries of the
BB Trust. At the instance of Thami and Mogale, AA (Pty) Ltd loans an amount, interest
free, to the BB Trust.
Does section 7C apply to the loan between AA (Pty) Ltd and the BB Trust and if yes,
what are the effects for Thami and Mogale?
Solution 15.13
Thami and Mogale are both connected persons in relation to the BB Trust (they are
beneficiaries of the trust) and AA (Pty) Ltd (they are natural persons who each hold at
least 20% of the equity shares in the company). The loan to a trust does not need to be
directly provided by the natural person. If the loan is provided to the trust by a company
(in this case AA (Pty) Ltd) at the instance of one or more natural persons who are
connected persons in relation to that company, section 7C applies.
Because the loan is provided to the trust by the company at the instance of Thami and
Mogale, they are regarded as having donated the difference between the interest
calculated at the official rate of interest and the interest incurred by the trust, in their
respective shareholding ratios.
Thami is regarded as having made a deemed donation of 60% of the difference between
the interest calculated on the loan at the official rate of interest and the interest incurred
by the trust. In turn, Mogale is regarded as having made a deemed donation of 40% of
that difference.
689
relation to the trust or the person who initially provided the loan to the relevant trust
(or company). In the absence of such a connected-person relationship, the person
acquiring the claim will only be regarded as having provided the loan to the trust or
company on the date of becoming a connected person in relation to that trust or the
person from whom the claim was acquired.
Example 15.14
Assume the same information as in Example 15.12, except that Jan transferred his claim
to the loan owing by the trust to a beneficiary of that trust, Ben Mtsweni, on
15 November 2020. Assume that no repayments had been made on the loan during the
2021 year of assessment and that the outstanding balance of the loan remained fixed at
R15 million. You can further assume that neither Jan nor Ben made any donations during
the 2021 year of assessment and that the aggregate value of all donations made by each
of them from 1 March 2018 (including any donation resulting from the current
transaction) does not exceed R30 million.
You are required to explain what the effect of section 7C on the above information will
be, if any. You can assume that the official rate of interest is 4,5%.
Solution 15.14
R
Jan is a connected person to the trust and provided an interest-free loan to that
trust during the year of assessment. Consequently, Jan will be deemed in
terms of section 7C to have made a donation to that trust on the last day of the
year of assessment (28 February 2021). The amount of the donation is
calculated as follows:
Interest calculated at the official rate of interest until the date of transferring
his claim to a loan owing by the trust (R15 million × 4,5% × 259 / 365) 478 973
Less: Interest incurred by the trust (nil)
Deemed donation 478 973
Jan is a natural person and is entitled to a R100 000 general donations tax
exemption during a year of assessment. He is therefore liable for donations
tax on R378 973 (R478 973 – R100 000) in respect of this deemed donation.
Jan must pay the donations tax of R75 795 (R378 973 × 20%) to SARS by
31 March 2021.
Further to the above, Ben will be treated under section 7C(1A) as having
provided a loan to the trust in the amount of the claim acquired to an
amount owing by that trust (that is to say R15 million). As a beneficiary, Ben
is a connected person to the trust and he is therefore deemed to have
provided the loan to the trust on the date of acquiring the claim to that loan,
namely on 15 November 2020. Consequently, Ben is deemed under section
7C(1A) to have made a donation to the trust on the last day of the year of
assessment of the trust (28 February 2021) of an amount calculated as
follows:
continued
690
Interest calculated at the official rate of interest from the date of acquiring
the claim to a loan owing by the trust (R15 million × 4,5% × 106 / 365) 196 027
Less: Interest incurred by the trust (nil)
Deemed donation 196 027
As a natural person, Ben is entitled to a R100 000 general donations tax exemption
during a year of assessment. He is therefore liable for donations tax on R96 027 (R196 027 –
R100 000) in respect of this deemed donation. Ben must pay the donations tax of
R19 205 (R96 027 × 20%) to SARS by 31 March 2021.
Example 15.15
Patrick O’Malley, a beneficiary of the ABC Trust, sold a luxury motor vehicle with a market
value of R4 million to ABC (Pty) Ltd on 1 March 2020. The sale was financed by Patrick by
means of an interest-free loan to the company. Patrick holds 15% of the equity shares in
ABC (Pty) Ltd, while the ABC Trust holds the remaining 85% equity shares.
You are required to explain to Patrick what the effect of section 7C on the above
situation will be, if any. You can assume that the official rate of interest is 4,5% and that
neither Patrick nor the ABC Trust made any donations during the 2021 year of
assessment. You can further assume that the aggregate value of all donations made by
Patrick from 1 March 2018 (including any donation resulting from the current
transaction) does not exceed R30 million. ABC (Pty) Ltd made no capital repayments on
the loan.
Solution 15.15
The interest-free loan that Patrick provided to ABC (Pty) Ltd triggers a
deemed donation under section 7C since Patrick is a connected person in
relation to the ABC Trust (as a beneficiary of the trust) and the trust holds
at least 20% of the equity shares in that company. Consequently, the
provisions of section 7C apply and Patrick is deemed to have made a
donation to the ABC Trust on 28 February 2021. The amount of the
deemed donation is calculated as follows:
continued
691
R
Interest calculated at the official rate of interest (R4 million × 4,5%) 180 000
Less: Interest incurred by the company (nil)
Deemed donation 180 000
As a natural person, Patrick is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 16 for detail regarding donations tax). He
is therefore liable for donations tax on R80 000 (R180 000 – R100 000) in respect of this
deemed donation. Patrick must pay the donations tax of R16 000 (R80 000 × 20%) to
SARS by 31 March 2021.
Will the answer above differ if the ABC Trust held only 10% of the equity
shares in ABC (Pty) Ltd?
Example 15.16
On 1 March 2020, Cecil Meyer who is a beneficiary of the ABC Trust, subscribes for
preference shares in ABC (Pty) Ltd at a total subscription price of R3 million. The ABC
Trust holds 20% of the equity shares in ABC (Pty) Ltd. During the year of assessment
ended 28 February 2021, dividends of R20 000 accrued to Cecil in respect of the
preference shares held in ABC (Pty) Ltd.
continued
692
You are required to explain to Cecil what the effect of section 7C on the above situation
will be, if any. You can assume that the official rate of interest is 4,5% and that Cecil did
not make any donations during the 2021 year of assessment. You can further assume that
the aggregate value of all donations made by Cecil from 1 March 2018 (including any
donation resulting from the current transaction) does not exceed R30 million.
Solution 15.16
R
Cecil is a connected person to the ABC Trust (as a beneficiary of the trust)
and subscribed for preference shares in ABC (Pty) Ltd, a company in
which the ABC Trust holds at least 20% of the equity shares. Conse-
quently, Cecil is deemed to have made a loan equal to the subscription
price of the shares (R3 million) to ABC (Pty) Ltd on 1 March 2020 for
purposes of section 7C. The dividends of R20 000 that accrued in respect
of the preference shares are deemed to be interest incurred by ABC (Pty)
Ltd in respect of this deemed loan. Consequently, Cecil is deemed to have
made a donation to the ABC Trust on 28 February 2021. The amount of
the deemed donation is calculated as follows:
Interest calculated at the official rate of interest (R3 million × 4,5%) 135 000
Less: Interest incurred by the company (20 000)
Deemed donation 115 000
As a natural person, Cecil is entitled to a R100 000 general donations tax exemption
during a year of assessment (refer to chapter 16 for detail regarding donations tax). He
is therefore liable for donations tax on R15 000 (R115 000 – R100 000) in respect of this
deemed donation. Cecil must pay the donations tax of R3 000 (R15 000 × 20%) to SARS
by 31 March 2021.
It is evident that the primary target of section 7C is high net worth individuals.
Where an interest-free loan is granted by a natural person to a trust or a company,
which attracts a deemed donation at the maximum rate of 4,5% on the capital
amount, this provision will only result in a donations tax liability if the loan provided
to the trust exceeds R2 222 222. This will be the effect if the taxpayer made no other
donations during the year of assessment, since the entire annual donations tax
exemption of R100 000 can be used to diminish the deemed donation of R100 000
(R2 222 222 × 4,50%) resulting from the interest-free loan.
Section 7C does not apply to all instances where loans were provided by connected
persons to trusts or to companies that are at least 20% owned by such trusts. If a loan
is provided to such a trust or company in the following circumstances, the provisions
of section 7C are not applicable (section 7C(5)):
• the loan is advanced to a trust or company that is an approved public benefit
organisation (PBO) or an approved small business funding entity;
• the loan is advanced to a trust to obtain a vested interest in the income and assets
of the trust and there are no discretionary powers in the trust (so-called ‘bewind’ or
business trusts);
693
REMEMBER
694
requirements and these subsections still apply even if the donor can prove that he
had no intention of reducing, postponing or avoiding a liability for tax.
• Subsections (2), (3) and (5) to (8) only apply if the donor is alive (even if he or she
was only alive for a portion of the year). If the donor is deceased, the income is
taxable in the hands of the beneficiary receiving it. Subsection (4) still applies if the
donor is deceased as the income is taxable either in the hands of the donor (that is
to say parent A) who made a cross donation to the child of parent B, the surviving
spouse of parent A (who is the donor if parent A is deceased) or in equal shares in
the hands of parent A and his or her spouse (if the donated amount forms part of
the communal estate).
• Subsection (9) stipulates that when an asset is disposed of at a consideration that is
less than the market value of the asset, the amount by which the market value
exceeds the consideration is deemed to be a donation for purposes of section 7.
• Subsection (10) stipulates that where a resident at any time makes a ‘donation,
settlement or other disposition’, he or she must disclose such fact in writing to the
Commissioner when submitting his or her income tax return for the said year and
at the same time supply the information that is required by the Commissioner.
• Subsection (1) dominates subsection (5). In turn, subsections (2) to (4) and (6) to (7)
dominate subsection (1). Thus, even though a child has a vested right to income
under subsection (1), the parent is taxed on such income in terms of subsection (3).
• If none of the provisions in section 7 apply, the income of a trust is taxed either in
the hands of the beneficiary (where that beneficiary has a vested right) or in the
hands of the trust (section 25B read with section 7).
Example 15.17
Shazia Tayob donates a fixed deposit of R100 000 to her minor child. During the current
year of assessment, the fixed deposit earns interest amounting to R12 000.
You are required to explain the tax consequences of the above.
Solution 15.17
Although the interest income of R12 000 accrues to Shazia’s minor child, the full amount
is included in Shazia Tayob’s income. The interest income of R12 000 will retain its
nature in Shazia’s hands and will qualify for the basic interest exemption to which
Shazia is entitled as a natural person.
695
CASE:
Commissioner for South African Revenue Services
v Woulidge 63 SATC 483
Facts: could only be applied in the real world of
commerce and economic activity where it
The taxpayer set up two similar trusts for
served considerations of public policy in
his minor children who were both in-
the protection of borrowers against ex-
come and capital beneficiaries under the
terms of the trusts. The taxpayer sold the ploitation by lenders. The result is a gra-
shares which he held in four companies tuitous disposition and that very element of
to the trusts. gratuitousness cannot be said to trigger
the working of the in duplum rule.
The purchase price was left on loan
account and although the agreement of Principle:
sale entitled the taxpayer to charge An apportionment needs to be made
interest on the loan account, he did not between the gratuitous disposition ele-
do so. Half the shares were sold and ment and the non-gratuitous disposition
from the proceeds, income was gen- element in order to determine the income
erated. SARS contended that the original to be attributable to the donor for the
sale of the shares to the trusts was a purposes of section 7. Only the interest-
simulation or, at the very least, contained free portion of the transaction will be
a considerable element of gratuitousness deemed to represent a donation, settlement
and consequently all the income received or other disposition for the purposes of
or accrued by virtue of that sale should section 7. It was confirmed that an
have been taxed in the taxpayer’s hands. interest-free loan was regarded as a
Judgment: ‘continuing donation’ for the purposes of
section 7. The principle decided in this
For section 7(3) to apply it requires a dis- case was that the in duplum rule (limi-
position made wholly or to an appreciable tation of interest up to the capital sum
extent gratuitously and out of liberality lent) does not apply in tax cases. But a
or generosity. The court ruled that there limitation must be placed on the amount
was indeed an appreciable degree of that is deemed to be income in the hands
gratuitousness as far as the forbearance of of the donor. The limitation in this case
interest was concerned, but the market- represented the market-related interest
related purchase price, the terms of the on the loan. The limitation was also applied
deed of sale and the subsequent payment cumulatively.
of that purchase price constituted due
consideration in respect of the sale itself. Remember an interest-free loan is not
Accordingly, only the forbearance of regarded as a donation for the purposes
interest was gratuitous and not the sale of section 54 and thus is not subject to
itself. It was clear that the in duplum-rule donations tax.
REMEMBER
• The interest-free portion of the transaction does in fact activate the application of
section 7, but no donations tax is payable.
• Although the Woulidge case establishes an important principle, it was specifically
applicable to the facts of that case. It was not necessary for the court to decide whether the
transaction was a sham or not, but it remains a risk in any such transaction and the
application of section 80A must also always be examined.
696
Example 15.18
The assets of the XYZ Trust consist of investments amounting to R1 million. The
investments were funded by means of an interest-free loan that Asmali Kader made to the
trust on 1 March 2017. A market-related interest rate on a similar loan is 10%. The trust
received no income before the current year of assessment. The trust’s investment income
for the current year of assessment amounts to R450 000 and the full amount was paid out
to Asmali’s minor child, Kaja.
You are required to explain the tax consequences of the above for the current year of
assessment.
Solution 15.18
The interest-free loan is deemed to be a ‘donation, settlement or other disposition’ and
it activates the application of section 7. Section 7(3) stipulates that the income
distributed to Kaja is deemed to be taxable in the hands of the parent. The R450 000 may
therefore be deemed to be taxable in the hands of Asmali, but the amount is limited
to R400 000 (R1 million at 10% interest per year for four years (2018, 2019, 2020 and
2021)). The R400 000 represents the interest saving to the trust over the four years. The
excess of R50 000 (R450 000 – R400 000) reverts to Kaja (the minor) and is taxable in his
hands.
697
CASE:
Armstrong v Commissioner for Inland Revenue
10 SATC 1
Facts: £2,469 returned by the taxpayer, disre-
Under the will of her husband, the tax- garding the allocation made to dividends
payer was entitled to receive during her which were exempt from normal income
lifetime the whole of the net income of tax.
the residue of his estate. Shortly after his
Judgment:
death, a family arrangement was entered
into, under which the taxpayer’s interest The intervention of a representative tax-
was vested in a trust. The trustees were payer (trust) to receive the dividend from
obliged to pay to the taxpayer a fixed the company for the benefit of the ulti-
amount each year. The balance of the mate beneficiary did not deprive the latter
income, after providing for expenses, was of the exemption, since the dividend did
divided between the taxpayer’s daughters. not lose its character as a dividend when
For the year of assessment, the taxpayer the trustees paid it over to the taxpayer.
returned an income of £2,469 and her
return indicated that of this sum £1,495 Principle:
was derived from dividends and £974 The ‘conduit pipe’-principle is described,
from rents and interest. The Commissioner namely that income derived by a trust
for Inland Revenue levied normal does not lose its identity when it is
income tax upon the whole amount of received by the beneficiary.
The Armstrong case established the important principle that a trust is a conduit. The
conduit principle, however, is also contained in the wording of section 25B(1) of the
Act.
The income received by the trust retains its identity until distributed to beneficiaries.
For example, if the trust receives local dividends, the dividends retain their nature in
the hands of a beneficiary with a vested right and the applicable exemption for local
dividends (section 10(1)(k)) are available to that beneficiary. Other examples include
that income of a capital nature remains capital; income from a foreign source remains
subject to the rules of determining the source of income for non-residents; foreign
dividend income is eligible for the foreign dividend exemptions in terms of section 10B;
and interest income for the exemptions referred to in section 10(1)(h) and (i).
REMEMBER
• In the Rosen case the court found that the income had to be distributed in the year in
which it was earned to retain its identity. If income is therefore distributed out of
retained income, the income will lose its identity and will be treated as capital in nature.
However, when dividend income is paid out in the form of an annuity, it retains its
nature as a dividend, but it loses the general dividend exemption in terms of sec-
tion 10(1)(k) due to the provisions of section 10(2)(b). Similarly, where foreign
dividend income is paid in the form of an annuity, it loses the complete foreign
dividend exemptions contained in section 10B(2) and the partial foreign dividend
exemption contained in section 10B(3) due to the provisions of section 10B(5).
Local interest income paid out by way of an annuity still retains the basic interest
698
REMEMBER
• Section 10B(5) reads as follows: ‘The exemptions from tax provided by subsections (2)
and (3) do not apply in respect of any portion of an annuity or extend to any payments
out of any foreign dividend received by or accrued to any person.’
• In other words: if a person receives a payment out of foreign dividends or if a foreign
dividend is paid out in the form of an annuity, it does not qualify for the participation
exemption, country-to-country exemption, CFC exemption or JSE-listed share
exemption contained within section 10B(2). Such receipts or accruals do also not qualify
for the partial exemption permitted under section 10B(3).
• The effect of both sections 10(2)(b) and 10B(5) is thus similar in that all exemptions in
respect of local and foreign dividends are lost if dividends are paid out in the form of
an annuity.
Example 15.19
Magdalena Kwaso is the only beneficiary of the Madala Trust and has a vested right to
all the income of the testamentary trust. During the current year of assessment, the trust
received rental income amounting to R100 000. Deductible expenses in the trust
amounted to R20 000 for the year. No amount was distributed to Magdalena.
You are required to explain the tax consequences for the current year of assessment.
Solution 15.19
This is a testamentary trust and therefore there can be no tax consequences for the donor.
The beneficiary is therefore taxed on all income received or to which she has a vested right.
Magdalena has a vested right to the full R100 000 income and she is entitled to claim the
R20 000 expenses as a deduction. Her taxable income is therefore R80 000 (R100 000 –
R20 000).
A beneficiary is not entitled to set off the expenditure or losses of a trust against his or
her other taxable income. Therefore, the amounts that are deemed to be deductible
are limited to the amounts of income of the trust to which a beneficiary has a vested
right, and which are subject to tax in the Republic (section 25B(4)).
The remaining expenses that are not deductible against the beneficiary’s income
received from the trust are firstly applied against the taxable income of the trust, if
that trust is subject to normal tax in South Africa. The deduction may not create an
699
assessed loss in the hands of the trust (section 25B(5)(a)). Any surplus that exceeds the
taxable income of the trust is again deemed to be an amount that is deductible by the
beneficiary in the following year of assessment. If the trust is not subject to normal
tax in South Africa, the expenses that are not deductible in the hands of the
beneficiary are merely carried forward, without being utilised by the trust, and are
deemed to be an amount that is deductible by the beneficiary in the following year
(section 25B(5)(b)). The excess expenditure or losses that are deemed to be amounts
deductible by the beneficiary in the following year is once again limited to amounts
that accrue to the beneficiary from that trust (section 25B(6).
Example 15.20
Magdalena Kwaso is the only beneficiary of the Madala Trust, a South African tax
resident trust, and has a vested right only to the gross rental income of the testamentary
trust. During the first year, the trust received rental income amounting to R100 000 and
interest income amounting to R12 000. Deductible rental expenses for the year amounted
to R120 000. No amount was paid out to Magdalena during the first year.
During the second year, the trust received rental income amounting to R80 000 and
interest income amounting to R10 000. Deductible rental expenses for the year amounted
to R75 000. An amount of R10 000 of the rental income was distributed to Magdalena
during the second year.
You are required to calculate the tax consequences of the above for the applicable years
of assessment.
Solution 15.20
R R
First year: Magdalena Kwaso
Rental income 100 000
Less: Rental expenditure (limited to the rental income) (100 000)
Taxable income – Magdalena nil
Deductible expenditure still available
Total expenditure 120 000
Less: Deducted by Magdalena (100 000)
Expenditure still available 20 000
First year: Madala Trust
Interest income 12 000
Less: Rental expenditure brought forward from Magdalena
(no deduction – not incurred in the production of
interest income) (nil)
Taxable income – Madala Trust 12 000
Deductible expenditure still available
Brought forward from Magdalena 20 000
Applied in the trust (nil)
Expenditure still available – carried forward to second year 20 000
continued
700
REMEMBER
• Only the receipts or accruals from the trust that are taxable in the Republic are used to
determine the limit for the deduction of expenses.
• A trustee remuneration paid to the beneficiary (who may also be a trustee) as well as
interest due to the beneficiary that is claimed in the trust as an expense, must be
disregarded when determining the limit for the beneficiary.
• Only tax-deductible expenses in the trust may be claimed as a deduction by the beneficiary.
701
Step 1: 1.3 Next to the name of each beneficiary, write his or her status as
cont. resident and indicate whether he or she is a minor.
1.4 Where an amount is received by reason of an annuity, write the
amount in italics so that you can remember that the annuity no
longer qualifies for the general dividend exemption in terms of
section 10(1)(k) nor the interest exemption in terms of sec-
tion 10(1)(h), nor the total foreign dividend exemptions in terms
of section 10B(2), nor the partial foreign dividend exemption in
terms of section 10B(3).
1.5 In the heading of each income column, write the name of the
person responsible for the income as a consequence of a donation,
settlement or other disposition.
1.6 Round off amounts to the nearest rand.
1.7 You should then refer to the table when calculating the income in
a person’s tax calculation, and then cross out the relevant amount
in that table, so that in the end you can see if you have dealt with
all the relevant amounts.
702
REMEMBER
• If the donor dies during the year of assessment, section 7 applies only to the period the
donor was alive. After that person’s death there is no donor that can be taxed, therefore
only the beneficiary (if the beneficiary has a vested right) or the trust can be taxed.
703
REMEMBER
Example 15.21
According to the last testament of the late Duncan McLoid, a testamentary trust was
established and on the date of his death, all his assets were transferred to this trust.
His will stipulates that the income derived from the assets should be divided as follows:
• 40% of the gross rentals to my only daughter, Mary;
• the remainder of gross rentals to my only son, James;
• notwithstanding the above, the trustee shall in each year apply 331/3% of the gross interest on
investment towards the maintenance, education and welfare of my son and daughter in such
proportions as he in his sole discretion shall think fit.
Subject to the above, all other income shall be set aside and accumulated for the future benefit of
any children of my son, James.
The trustee provided the following account:
Income statement
R R
Bequests of rent Income
Mary 244 000 Rent 610 000
James 366 000 Interest on investment 450 000
Trustee remuneration
On rent 30 000
On interest 22 500
Discretionary payments
Mary (only interest) 60 000
James (only interest) 90 000
Net surplus 247 500
1 060 000 1 060 000
Neither Mary nor James received any other income and they are both under the age of 65
at the end of the current year of assessment. All persons are South African residents, as
defined. All marriages, where applicable, are outside of community of property.
You are required to calculate the taxable income of all the relevant parties for the current
year of assessment.
704
Solution 15.21
STEP 1: Compile a table that allocates the different incomes and distributions
Rent Interest Total
R R R
Income of trust (Note 5) 610 000 450 000 1 060 000
Less: Distributions and vested rights
Mary (resident) (244 000) (60 000) (304 000)
James (resident) (366 000) (90 000) (456 000)
Undistributed income nil 300 000 300 000
STEP 2: Calculate the taxable income of the donor (not applicable as he is deceased)
STEP 3: Calculate the taxable income of the beneficiaries
(Remember to cross each amount off in the table as you include it in the taxable income
of the beneficiary.)
Mary R
Rent from the trust (vested payment) 244 000
Interest from the trust (discretionary payment) (Note 2) 60 000
Total 304 000
Less: Basic interest exemption (23 800)
Income 280 200
Less: Trustee remuneration (Note 1)
(R30 000 × R244 000 / R610 000) + (R22 500 × R60 000 / R450 000) (15 000)
Taxable income 265 200
James
Rent from the trust (vested payment) 366 000
Interest from the trust (discretionary payment) (Note 2) 90 000
Total 456 000
Less: Basic interest exemption (23 800)
Income 432 200
Less: Trustee remuneration (Note 1)
(R30 000 × R366 000 / R610 000) + (R22 500 × R90 000 / R450 000) (22 500)
Taxable income 409 700
STEP 4: Calculate the taxable income of the trust
Trust
Interest on investment (Note 3) 300 000
Less: Trustee remuneration (Note 1) (R22 500 × R300 000 / R450 000) (15 000)
Taxable income (Note 4) 285 000
Notes
1. Beneficiaries are liable for tax on any part of the income of a trust to which they are
entitled (section 25B(1)). Each is entitled to the basic interest exemption as provided
for in section 10(1)(i). The portion of trustee remuneration that is attributable to the
income distributed to the beneficiary is deductible in terms of section 25B(3) in the
hands of the beneficiary.
continued
705
1
2. In terms of the will, the trustee is obliged to pay 33 /3% of the interest on the invest-
ment for the maintenance of the two children in such proportions as he thinks fit.
These discretionary payments are taxed in the hands of the beneficiaries (section 25B(2))
after deducting the trustee’s remuneration (section 25B(3)).
3. The right to the remainder of the income vests in undetermined heirs, that is to say
James’ future children. As no beneficiary is entitled to this income yet, it is taxable in
the hands of the trust (section 25B(1)).
4. The taxable income of a trust is determined in the ordinary way. The expenditure
incurred in the production of income is allowed. Therefore, the remaining trustee’s
remuneration is deductible from the interest on the investment. The trust is not
entitled to the section 10(1)(i) basic interest exemption, which is available only to a
natural person. It is also not entitled to the primary, secondary or tertiary rebates for
the same reason.
5. The beneficiaries are entitled to the gross amounts of interest and rentals, therefore,
the trustees’ remuneration is excluded from the table compiled in Step 1.
Example 15.22
Below is the income statement of an inter vivos trust created by Zelda Smith who donated
all the assets to the trust. In terms of the trust deed, Xavier Smith is entitled to an annuity
of R240 000 and Yolandi Smith is entitled to 50% of the net income remaining after
payment of the annuity. The balance of the receipts and accruals shall be paid out to
Xavier upon Yolandi’s death. Should Xavier die before Yolandi, the balance of the
receipts and accruals of the trust will be paid to Yolandi. Xavier and Yolandi are both
majors and residents of South Africa. All taxpayers are younger than 65 years of age.
Income statement of trust
R R
Trustee’s remuneration 48 000 Rent 480 000
Property expenses Interest 320 000
(allowable) 164 000 Dividends from South
Property expenses African companies which qualify
(disallowed alterations) 108 000 for the section 10(1)(k) exemption 160 000
Annuity to Xavier 240 000
Share of net income Yolandi
(50% of R400 000) 200 000
Surplus accumulated 200 000
960 000 960 000
You are required to calculate the taxable income of all the relevant parties for the current
year of assessment.
706
Solution 15.22
STEP 1: Compile a table that allocates the different incomes and distributions
Divi-
Total Rent Interest dends
R R R R
Amount 960 000 480 000 320 000 160 000
Less: Trustee remuneration (48 000) (24 000) (16 000) (8 000)
(Note 1) (Note 2) (Note 3) (Note 4)
912 000 456 000 304 000 152 000
Less: Property expenses
(allowable) (164 000) (164 000) nil nil
748 000 292 000 304 000 152 000
Less: Property expenses
(disallowable) (Note 5) (108 000) (108 000) nil nil
640 000 184 000 304 000 152 000
Less: Annuity Xavier (240 000) (69 000) (114 000) (57 000)
(Note 8) (Note 9) (Note 10)
400 000 115 000 190 000 95 000
Less: Award Yolandi (200 000) (57 500) (95 000) (47 500)
(Note 11) (Note 12) (Note 13)
Accumulated in trust 200 000 57 500 95 000 47 500
continued
707
Yolandi R
R200 000 award made up of: Rent 57 500
Interest 95 000
Dividends 47 500
Less: Dividends (exempt in terms of section 10(1)(k)) (47 500)
Basic interest exemption (23 800)
Taxable income 128 700
STEP 4: Calculate the taxable income of the trust
Trust
Disallowed property expenses (Note 5) 108 000
Disallowed trustee remuneration (Note 5) 8 000
Taxable income 116 000
Notes
1. The beneficiaries are entitled to the net amounts of rent, interest and dividends and
therefore the trustees’ remuneration is included in the table compiled in Step 1 (this
is in contrast to the scenario in Example 15.21).
2. (R480 000 / R960 000) × R48 000
3. (R320 000 / R960 000) × R48 000
4. (R160 000 / R960 000) × R48 000
5. When, in terms of the trust deed, the beneficiaries are entitled to the net income only,
it is submitted that the trust is liable for tax on inadmissible expenditure. Therefore,
the trust will be liable for tax on the inadmissible property expenses of R108 000 and
on the portion of trustee remuneration that is attributable to local dividends since
section 23(f) prohibits a deduction for expenditure incurred in the production of
exempt income. SARS follows this procedure in practice.
6. Because the donation made by Zelda is subject to a stipulation or condition that
neither party will receive the income retained by the trust until the death of the other
party, section 7(5) deems the income retained in the trust to be Zelda’s income.
7. The annuity of R240 000 falls into gross income (section 1) and consists of R69 000
rent, R114 000 interest and R57 000 dividends. The income retains its nature through
the trust. It should be noted that the provisions of section 10(2)(b) will be applicable
resulting in Xavier not being entitled to the section 10(1)(k) exemption since he
receives the dividend income by way of an annuity. However, he will still qualify for
the interest exemption in terms of section 10(1)(i).
8. (R184 000 / R640 000) × R240 000
9. (R304 000 / R640 000) × R240 000
10. (R152 000 / R640 000) × R240 000
11. (R115 000 / R400 000) × R200 000
12. (R190 000 / R400 000) × R200 000
13. (R95 000 / R400 000) × R200 000
continued
708
Example 15.23
During his lifetime, James Joyce created a trust for the benefit of the following benefi-
ciaries:
• his son, Marcus Joyce, who is 32 years old, resides permanently in Australia and
operates his business there;
• his son, Karl Joyce, who is 25 years old and lives in the Republic;
• his unmarried daughter, Gillian Joyce, who is 15 years old and lives in the Republic; and
• his mother, Mrs Caroline Joyce (60 years old), who is a widow and lives in the Republic.
James Joyce also lives in South Africa and donated the following assets to the trust:
• shares in South African companies; and
• the use of a large office building in Johannesburg for a period of ten years. At the end
of the ten-year period, Mr Joyce will regain the full right of ownership of the prop-
erty. The office building was erected before 2007.
Mrs Caroline Joyce, 60 years old and grandmother of the children, also donated certain
assets to the trust:
• a block of flats in Pretoria that she inherited from her deceased husband; and
• a patent that her deceased husband developed that is used by a manufacturing com-
pany in the Republic.
The following clauses, among others, appear in the trust deed:
(i) An annuity of R1 000 per month is payable to Mrs Caroline Joyce for the rest of
her life.
(ii) After deduction of the trustee remuneration and the annuity to Mrs Caroline
Joyce, one-third of the net income of the trust is payable to Marcus and one-third
to Karl.
(iii) The trustee may distribute as much of the remaining third to Gillian for her
education as is necessary according to his discretion. The rest of the income must
be left in the trust until Gillian turns 25, when the balance must be paid out to her
and she must share in the income with her brothers on an equal basis. If Gillian
should die before the age of 25, the unpaid balance will be distributed to her
brothers.
(iv) Mr Joyce reserved the right to transfer Gillian’s right to her share of the trust
income in equal parts to her brothers if she were to marry before the age of
25 years.
continued
709
(v) The trustees’ remuneration amounts to 5% of the net income of the trust, before the
deduction of any distributions to the beneficiaries. The trustees are all independent
third parties.
(vi) All distributions of income are paid proportionately from all sources of income.
(vii) All income received by the trust was received from a source within the Republic.
The trustee compiled the following income and expenditure account for the current year
ending on 28 February:
R R
Local dividends received 18 600
Net rental on office building in Johannesburg 186 900
Royalties 33 000
Local interest (there is no causal link with any donation,
settlement or other disposition) 4 500
Net rental on block of flats in Pretoria 360 000
603 000
Less: Trustees’ remuneration (30 150)
572 850
Less: Annuity paid to Mrs Joyce
(R1 000 × 12 months) (12 000)
560 850
Less: Distribution to Marcus (R560 850 × 1 / 3) 186 950
Distribution to Karl (R560 850 × 1 / 3) 186 950
Distribution to Gillian 60 000 (433 900)
126 950
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.
710
Solution 15.23
STEP 1: Compile a table that allocates the different incomes and distributions.
Letting Letting
Dividends Royalties Interest Total
of office of flats
Non-
Donor James James Caroline Caroline
donation
R R R R R R
Net income 18 600 186 900 33 000 4 500 360 000 603 000
Less: Expenses
Trustee
remuneration (930) (9 345) (1 650) (225) (18 000) (30 150)
Net income after
trustee remuneration 17 670 177 555 31 350 4 275 342 000 572 850
Less: Distributions and
vested rights (13 755) (138 206) (24 402) (3 328) (266 209) (445 900)
Caroline (annuity
– resident) (Note 1) 370 3 719 657 90 7 164 12 000
Distributions: Marcus
(non-resident) 5 767 57 945 10 231 1 395 111 612 186 950
Karl (resident) 5 767 57 945 10 231 1 395 111 612 186 950
Gillian (minor/
resident) 1 851 18 597 3 283 448 35 821 60 000
Undistributed
income 3 915 39 349 6 948 947 75 791 126 950
continued
711
continued
712
continued
713
714
15.15.1 General
The general provisions with regard to capital gains tax are discussed in chapter 9.
Capital gains tax is contained in the Eighth Schedule to the Act and only the specific
aspects that relate to trusts are discussed here.
A ‘trust’ is deemed to be a person other than a natural person and when the total
capital gain or loss is calculated, trusts (other than paragraph (a) special trusts) are not
entitled to the annual exclusion of R40 000. The inclusion rate for a taxable capital gain for
trusts (other than special trusts) is 80% of the net capital gain for that year of assess-
ment. A trust therefore pays capital gains tax at an effective rate of 36% (80% × 45%).
The disposal of an asset by a trust, for example by vesting it in a beneficiary, is subject
to the general principles applicable to disposals, base cost and proceeds, as well as the
general anti-avoidance stipulations and the loss limitation rules. For example, the
disposal of an asset to a beneficiary for consideration which is not at arm’s-length is
subject to the same rules applicable to connected persons in paragraph 38 of the
Eighth Schedule, while the disposal of an asset by a trust could also trigger the loss
limitation rules under paragraph 39 of the Eighth Schedule.
A capital gain resulting from the disposal of an asset by a trust is taxable either in the
hands of the trust, the beneficiary or, where an attribution rule is applicable, the
person who made the donation, settlement or other disposition to the trust.
715
for capital gains tax in terms of the Eighth Schedule to the Act. Paragraph 73
stipulates that the amount of income in terms of section 7 together with the amount of
‘capital gains’ that are attributed to a person in terms of the Eighth Schedule may not
exceed the amount of the benefit. ‘Benefit’ from the ‘donation, settlement or other
disposition’ means the amount that the person to whom the donation, settlement or
other disposition was made, benefited due to the fact that it was made for no or
inadequate consideration, including consideration in the form of interest.
Example 15.24
Abrie Verhoef (a resident of the Republic) sold a block of flats to a trust. The selling price
of R1 000 000 was still outstanding and interest was levied at 5%. A market-related
interest rate is deemed to be 15%. During the current year of assessment, rental income
amounting to R60 000 was earned. One of the flats in the block was sold to a third party
and a capital gain of R89 000 was realised by the trust. The trust is a discretionary trust
and no portion of the income or capital gain was paid out to any beneficiary. Abrie is still
alive.
You are required to calculate the taxable income of all the relevant parties with regard to
the current year of assessment.
Solution 15.24
In terms of section 7(5), the part of the rental income that can be attributed to the dona-
tion, settlement or other disposition (the low-interest loan) is taxable in the hands of
Abrie. R40 000 (((15% – 5%) / 15%) × R60 000) of the total rental income of R60 000 is
therefore taxable in the hands of Abrie.
In terms of paragraph 70, R59 333 (((15% – 5%) / 15%) × R89 000) of the total capital gain
of R89 000 will be attributed to Abrie. However, the amount to be attributed to Abrie in
total in terms of both section 7(5) and paragraph 70 must be limited to R100 000. The
benefit that Abrie gives to the trust is the forfeited interest of 10% (15% – 5%), which
amounts to R100 000 (R1 000 000 × 10%) for the year.
R40 000 has already been taxed in Abrie’s hands in terms of section 7(5) and therefore the
entire R59 333 of the capital gain can also be attributed to Abrie in terms of paragraph 70.
The Act does not prescribe a specific order for the application and limitation of the
different sections. The limitation might thus apply proportionally as well. The trust will
be taxed on the R20 000 rental income (R60 000 – R40 000 (taxed in the hands of the
donor)) to which the provisions of section 7(5) do not apply as well as the R29 667 capital
gain (R89 000 – R59 333 (taxed in the hands of the donor)) to which the provisions of
paragraph 70 do not apply.
In circumstances where a natural person provides a loan to a trust and the parties are
connected persons, regard must also be given to the provisions of section 7C (refer to
15.10).
716
Although paragraph 70 (equivalent to section 7(5)) is excluded, the effect is not differ-
ent. The wording in the Eighth Schedule is only clearer and, where it had to be
determined by case law that section 7(1) was stronger than section 7(5), it is clear in
the Eighth Schedule that paragraph 70 (equivalent to section 7(5)) is not applicable
when vesting occurs in a South African resident (equivalent to section 7(1)).
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust and not necessarily
the person in whose hands the profit finally ends up.
Exceptions to the rule are the attribution rules in paragraphs 68 to 71 (excluding
paragraph 70) as well as the following provisions:
• the capital gain determined with the vesting of an asset in a resident beneficiary is
brought into account in the hands of such beneficiary, unless the beneficiary is an
approved public benefit organisation, a tax exempt entity as contemplated in
paragraph 62(a) to (e) or an employee in which a section 8C equity instrument is
vested (refer to chapter 13 for further details regarding section 8C). This is the case
when the trust realised a capital gain (or would have realised a capital gain had
that trust been a resident), because a trust asset was transferred to a beneficiary
who is a resident (paragraph 80(1));
• when an asset is not transferred to a resident beneficiary, but the trust realises a
capital gain, for example by disposing of an asset to an independent third party,
such a capital gain, or an amount derived from that capital gain, is disregarded by
the trust and included in the hands of a resident beneficiary of that trust who has a
vested right to that amount or acquires a vested right to such an amount
(paragraph 80(2)). However, if the beneficiary is an approved public benefit
organisation or a tax exempt entity contemplated in paragraph 62(a) to (e), the
capital gain is taxed in the hands of the trust.
• in some instances, an amount that that is derived by a resident beneficiary, other
than an approved public benefit organisation or a tax exempt person contemplated
in paragraph 62(a) to (e), through vesting from a non-resident trust must be taken
into account by that beneficiary as a capital gain in determining the aggregate
capital gain or loss for the year of assessment. This is the case if that amount was
derived directly or indirectly from that non-resident trust or another non-resident
trust in respect of the disposal of an asset during the same year of assessment,
provided that the amount would have constituted a capital gain had the trust that
disposed of the asset been a resident (paragraph 80(2A)).
When the trust realises a capital gain and does not distribute it, and no beneficiary
who is a South African resident has a vested right thereto, it is taxable either in the
hands of the donor in terms of paragraph 70 or in the hands of the trust.
There are no attribution rules with regard to capital losses in a trust and only the trust
can bring such losses into account.
717
REMEMBER
15.16 Summary
In this chapter, a detailed explanation is given of the tax principles of trusts. The
income from a trust is usually taxed in the hands of the person receiving the income,
unless sections 25B and 7 deem it to be taxable in the hands of another person.
The general rule is that the capital gain is brought into account for the purposes of
determining the total capital gain or total capital loss of the trust. Exceptions to the
rule are the attribution rules in paragraphs 68 to 72 as well as when an asset or capital
gain vests in or is distributed to a beneficiary who is a resident.
It is clear that the taxation of trusts is complicated and a taxpayer’s tax risk is very
high if trusts are used without tax experts being consulted.
The next section contains a number of practical questions that the student may use to
test his or knowledge of the taxation of trusts.
Question 15.1
The Nightingale Trust is a non-resident discretionary trust with a February year end. The
trust was established in die United States in 2012 by way of a donation of $100 by a non-
resident who has since passed away. The trust has two beneficiaries, namely Mr X (a South
African resident) and Mr Y (a non-resident). Neither of the beneficiaries have a vested
right to any of the income or capital of the foreign trust.
On 1 March 2020, Mr X granted an interest-free loan (denominated in US dollar) to the
foreign trust. The trust used the entire loan to finance the purchase of a block of flats situated
in the United States.
During the 2021 year of assessment, the trust received rental income from the letting of this
block of flats (assume such rental income is from a source outside the Republic). The trust
had no other receipts or accruals for 2021. The trust distributed 50% of the rental income
earned during 2021 to Mr Y, while retaining the other 50% of the rental income in the
foreign trust.
718
Answer 15.1
Mr X
• Section 7(8) of the Act applies to attribute the rental income received by or accrued to
the Nightingale Trust from the letting of the block of flats to Mr X to the extent that such
income is attributable to a donation, settlement or other disposition (such as the
interest-free loan) provided by Mr X to the trust.
• The rental income attributable to Mr X in terms of section 7(8) is limited to the amount
of gratuitousness (refer to the Woulidge case). In the case of an interest-free loan, the
amount of gratuitousness would be the shortfall in the market-related interest not
charged on the loan.
• If the rental income earned by the Nightingale Trust during the year exceeds the
maximum amount attributable to Mr X, it must be considered whether such an excess is
taxable in the hands of a beneficiary who obtained a vested right to such income
(through a distribution made by the trustees) or in the trust itself (where the rental
income is retained in the trust).
• Section 7C applies further to trigger a deemed donation in the hands of Mr X since he is
a natural person who provided an interest-free loan to a trust in relation to which he is a
connected person (being a beneficiary of that trust). Provided that none of the
exclusions listed in section 7C(5) applies, the shortfall in interest between the ‘official
rate of interest’ and the interest actually charged (being nil) would be deemed to be a
donation made by Mr X to the trust. Since the loan to the trust is denominated in US
dollar, the official rate of interest is the US equivalent of the South African repurchase
rate plus 1%.
• The donation is deemed to take place on 28 February 2021 (being the last day of the year
of assessment of the trust). As a natural person, Mr X is eligible for an annual donations
tax exemption of R100 000, which can be utilised against this donation. The excess is
subject to donations tax, which is levied at a rate of 20% on the first R30 million of the
value of the deemed donation, whereas the value above R30 million is subject to
donations tax at 25%. Mr X must settle the donations tax by 31 March 2021.
Mr Y
• Mr Y is not subject to South African income tax on rental income that accrued to him
through the distribution made by the Nightingale Trust. As a non-resident, Mr Y is only
subject to South African income tax in respect of receipts and accruals from a South
African source and the rental income is not from a South African source. Consequently,
any portion of the rental income that is not attributable to Mr X under section 7 (in
consequence of exceeding the amount of gratuitousness) is not subject to tax in the
hands of Mr Y.
The Nightingale Trust
As a non-resident, the trust is only subject to South African income tax on receipts and
accruals from a South African source. The rental income retained in the trust is therefore not
subject to South African income tax in the hands of the trust as it is not from a South African
source. In a similar vein, any portion of the rental income that is not attributable to Mr X
under section 7 is not taxed in the hands of the foreign trust.
719
Question 15.2
In 2006, Abel Aarons (currently 66 years of age) created a trust (not a collective investment
scheme) for the benefit of his three unmarried children. On 28 February of the current year
of assessment, Barry was 27 years old. He lives and works in Durban. Cecile was 22 years
old and a full-time student. Danie was a 17-year-old scholar. The assets of the trust were
donated by Abel to the trust.
The trustees are independent third parties and the provisions of the trust deed include the
following:
(1) Each child will be paid R6 000 a month for their maintenance.
(2) R30 000 a year will be paid to the Society for the Prevention of Cruelty to Animals
(SPCA), a registered public benefit organisation, and the trust will retain the relevant
section 18A certificates to be issued in its name.
(3) The balance of the receipts and accruals may be dealt with at the discretion of the
trustees. When Danie turns 25, the trust will be dissolved and the balance in the trust
will be paid out in equal shares to the three children.
The receipts, accruals and payments for the current year of assessment were as follows:
Receipts and accruals R
Dividends on shares from companies in the Republic 100 000
Local interest 150 000
Rentals 50 000
300 000
Payments
Distributions to children in terms of (1) above – R72 000 per child; and
Lump sum of R18 000 each to Barry and Cecile.
Summary of distributions Total Dividends Interest Rent
R R R R
Barry – annuity 72 000 24 000 36 000 12 000
Cecile – annuity 72 000 24 000 36 000 12 000
Danie – annuity (minor) 72 000 24 000 36 000 12 000
SPCA – annuity 30 000 10 000 15 000 5 000
Barry – distribution 18 000 6 000 9 000 3 000
Cecile – distribution 18 000 6 000 9 000 3 000
Retained in the trust 18 000 6 000 9 000 3 000
300 000 100 000 150 000 50 000
720
Answer 15.2
(1) Barry
R
Taxable income 60 200
Cecile
Taxable income 60 200
Danie
Because he is still a minor, his income will be taxed in his father’s hands
in terms of section 7(3) who donated the assets (Note 2)
Abel
Taxable income 49 500
(2) Trust
Taxable income 10 800
Normal tax on R10 800 × 45% (Note 3) 4 860
Question 15.3
All ages given are as at the end of the current year of assessment.
On 1 March of the previous year, Edward Scott (62 years old) decided to create a trust to
the benefit of his three children, namely:
Erica – 16 years old and unmarried.
Karen – 17 years old and married.
Ryan – 23 years old and unmarried. He lives in Italy and he was only in the Republic for
30 days during the current year of assessment.
Edward donated an office block (costing R600 000 in 1982) with a market value of
R1 200 000 to the trust on 1 March of the previous year. The trust earns rental income from
this building.
Cameron (66 years old), Edward’s older brother, donated a farm to the trust. He also
donated an investment portfolio consisting of shares in listed companies, which earns local
dividends, and a fixed deposit, which earns local interest income. The portfolio cost him
R600 000 and presently has a market value of R800 000. All donations by Cameron to the
trust were made on 1 March of the previous year.
The trust deed stipulates the following:
1. The trust is to remain in existence until Erica turns 25, at which time the farm income
will revert to Cameron. All other assets will be sold and their proceeds split equally
among the beneficiaries who are still alive.
2. The rental income retained in the trust must be credited to Karen’s account annually.
Whenever the trust comes to an end, the accumulated rental balance must be paid out to
Karen or her estate if she is deceased, whichever occurs first.
3. Karen is to receive an annuity of R10 000 per annum. This annuity must be paid solely
from income from the share portfolio and fixed deposit.
continued
721
continued
722
Edward
Distributions – Rental – Erica (section 7(3)) 11 200
– Ryan (section 7(8)) 5 600
Taxable income 16 800
Cameron R
Distributions – Farming income – Ryan (section 7(8) 3 100
723
16 Donations tax
Page
16.1 Introduction ......................................................................................................... 726
16.2 Levying of donations tax (sections 54 and 58)................................................. 726
16.3 Rate at which tax is levied (section 64) ............................................................. 727
16.4 Persons liable for payment (sections 55 and 59) ............................................. 727
16.4.1 Property deemed to be donated by another person ............................ 728
16.4.1.1 Spouses married in community of property
(section 57A).............................................................................. 728
16.4.1.2 Donation by companies or other entities on the
instruction of another (section 57).......................................... 728
16.4.2 Recoupment of donations tax paid (section 59) ................................... 728
16.5 Period in which payment must occur (section 60) .......................................... 728
16.6 Calculation of donations tax .............................................................................. 729
16.7 Specific exemptions (section 56) ........................................................................ 731
16.8 General exemptions (section 56(2)) ................................................................... 733
16.9 Value: Property other than limited interests (section 62) .............................. 735
16.10 Value: Limited interests (section 62) ................................................................. 736
16.10.1 Fiduciary right and usufruct .................................................................. 736
16.10.2 Annuities ................................................................................................... 738
16.10.3 Bare dominium ........................................................................................... 739
16.11 Summary .............................................................................................................. 741
16.12 Examination preparation ................................................................................... 742
725
16.1 Introduction
When a donation is made, the amount donated may in certain circumstance be de-
ducted when calculating taxable income. This deduction is regulated by section 18A
of the Income Tax Act 58 of 1962 (the Act) (refer to chapter 12), which provides for the
deduction of donations to certain public benefit organisations. This deduction must
not in any manner be confused with the concept of ‘donations tax’.
Donations tax is a separate tax and bears no relation to the normal tax calculation or
the deduction of certain donations to benefit organisations. Donations tax is also
regulated by the Act and is contained in Part V of the Act from sections 54 to 64. It is,
therefore, important that the transactions that are subject to donations tax be identi-
fied, and that a separate calculation be performed for them. Donations tax is only
applicable to residents of the Republic.
Donations tax is a form of capital transfer tax. It is not a tax that is levied on income,
but on the transfer of capital (assets/property). In South Africa, we have two forms of
capital transfer tax, namely donations tax and estate duty. When a person dies, estate
duty is payable on the net value of the property in that person’s estate. Persons
would therefore be able to prevent an estate duty liability accruing if they donated all
their property to someone else before the date of their death. The purpose of dona-
tions tax is to prevent this avoidance practice. For example, should an individual
know that they are to die the following day and they donate some of their assets
before their death, donations tax would be payable on it. Both donations tax and
estate duty are levied at the same rate.
Tax statistics
During the 2019 fiscal year R604 million was collected as donations tax.
726
REMEMBER
727
Legislation:
Section 1: Interpretation
‘spouse’, in relation to any person, means a person who is the partner of such person—
(a) in a marriage or customary union recognised in terms of the laws of the Republic;
(b) in a union recognised as a marriage in accordance with the tenets of any religion; or
(c) in a same-sex or heterosexual union which the Commissioner is satisfied is intended
to be permanent,
and ‘married’, ‘husband’ or ‘wife’ shall be construed accordingly: Provided that a mar-
riage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the
contrary, be deemed to be a marriage or union without community of property;
REMEMBER
• The person who gives the instruction to donate must be a resident although the entity
does not have to be a resident. Donations tax is only levied on South African residents.
728
A donation is deemed to have been made on the date upon which all the legal
requirements for a valid donation have been met. A verbal donation comes into effect
on the date of delivery of the property and a written donation on the date of the
contract.
The payment must be accompanied by a return in the form prescribed by the Com-
missioner.
REMEMBER
• Donations tax is payable per donation. It is not calculated for a year of assessment or tax
period.
Step 4: Determine the value of the donation (refer to 16.9 and 16.10). Reduce
the value with any consideration paid.
Step 5: Reduce the value by the balance of the general exemption applicable to
the person (refer to 16.8).
Step 6: Adjust the balance of the general exemption still available for the year
of assessment. The answer may not be negative and is limited to nil. If
the beginning of a new year of assessment commences, the full general
exemption applies again.
Step 7: Multiply the answer in Step 5 by the donations tax rate (20%/25%).
729
Example 16.1
Silo Zilkaatz is a resident of the Republic and owns all the shares in ABC (Pty) Ltd. The
issued share capital of ABC (Pty) Ltd consists of ten shares of R1 each. ABC (Pty) Ltd
owns a fixed property with a market value of R1 000 000 as well as a positive bank bal-
ance of R10. The market value of the company is R1 000 010. It was decided that the com-
pany would issue an additional ten ordinary shares of R1 each to Silo’s son, Tobia. Tobia
received the shares and paid R10 for them. No other disposals, either by Silo or ABC (Pty)
Ltd, were made during that year of assessment.
You are required to discuss and calculate the donations tax effects of the above transac-
tions.
Solution 16.1
Although the disposal was made by ABC (Pty) Ltd, it is deemed as having been made by
Silo Zilkaats. Silo is the sole shareholder and therefore controls the company. Any deci-
sion of the company is actually made by Silo, and the disposition was made on Silo’s
instruction. Silo is therefore the donor and he is a resident of the Republic.
A disposal of property has definitely taken place, but whether it is a donation still has
to be determined. The nominal value of the shares issued to Tobia is R10 and he paid
R10. It was thus not a gratuitous disposition. Silo and Tobia are connected persons and the
application of section 58(1) must be examined.
R
The market value of the company before the disposal 1 000 010
The cash paid for the additional shares 10
The total market value of the company 1 000 020
In this example, how can there be a donation if he paid for the shares?
730
Example 16.2
Suppose Margaret Mtombe must undergo a life-threatening operation. She promises her
eldest daughter that she may have her wedding ring should she die during this operation.
If Margaret survives the operation, she will retain her wedding ring and no donations tax
is payable. The donation is a donatio mortis causa and therefore exempt. If Margaret should
die during the operation, there is still no donations tax payable, but the wedding ring will
then form part of the property that is included for estate duty purposes (refer to 17.4.3).
• Donations from which the donee receives no benefit before the death of the donor
(section 56(1)(d)).
This donation does not occur specifically with death in mind, but takes place if
Margaret Mtombe should tell her daughter that she could have her wedding ring
the day she died – whenever that may be.
REMEMBER
• A donation to a trust where the beneficiaries only benefit from the donation upon the death
of the donor, does not qualify for this exemption.
• A donation that is cancelled within six months of the date upon which it took effect
(section 56(1)(e)).
• Any donation made by or to a traditional council, community or a tribe referred to
in section (10)(1)(t)(vii) (section 56(1)(f)).
• Donations that consist of a right to property located outside the Republic, if the
donor obtained the property:
– before the donor became a resident of the Republic for the first time; or
– by bequest/inheritance from someone who was not ordinarily resident in the
Republic at the date of their death; or
731
732
REMEMBER
• It is important that these exemptions are not confused with the qualifying donations in
section 18A. These exemptions are the donations on which no donations tax is payable,
while the section 18A type of donations determine which are deductible for income tax
purposes.
Although some donations that are deductible in terms of section 18A are also exempt
from donations tax, all donations that are exempt from payment of donations tax are
not necessarily deductible for income tax purposes.
733
The first R10 000 of incidental donations is exempt. Should a large donation of,
say, R60 000 be made, it might not be considered an incidental donation and the
R10 000 exemption might not apply.
Persons other than natural persons include companies, close corporations and trusts
(section 56(2)(a)).
The above exemptions are usually applied to the donations in the sequence in which
the donations take place. If a donor has made more than one donation on the same date,
it is deemed for the purposes of donations tax that the donations were made:
• in the sequence that the donor prefers; or
• in the sequence that the Commissioner determines should the donor fail to make a
choice within 14 days after they have been informed by the Commissioner to do so.
Example 16.3
Margaret Madela made the following donations during the current year of assessment:
3 March – R23 000 to her brother
15 July – R75 000 to her granddaughter on her 21st birthday
5 January – R8 000 to her brother
31 January – R5 000 to her 19-year-old son to assist him with his study fees
You are required to calculate the donations tax liability of Margaret Madela for each of
the above donations.
Solution 16.3
3 March
The donation is for R23 000. No specific exemption is applicable. Margaret is a natural
person and may therefore apply the R100 000 annual general exemption to this donation.
This R23 000 donation is therefore exempt and the balance of the annual general exemption
that can still be used in the future is R77 000 (R100 000 – R23 000).
15 July
The donation is for R75 000. No specific exemption is available. The full R75 000 is exempt
because the balance of the annual general exemption can be used. The remaining balance
of the annual general exemption after this donation is R2 000 (R77 000 – R75 000).
5 January
The donation is for R8 000. No specific exemption is available. R2 000 is exempt because
the balance of the annual general exemption can be used. The remaining balance of the
donation attracts donations tax of R1 200 (20% × (R8 000 – R2 000)).
31 January
The donation is R5 000. This is for the bona fide maintenance of her son and
therefore qualifies for a specific exemption and the full amount is exempt from
donations tax.
continued
734
Why did they not deduct the R100 000 general deductions from the
donation in January – the 1st of January is a new year?
REMEMBER
• Donations tax is calculated per donation and paid over to SARS. There is no annual
calculation for the year of assessment.
• The general exemption however is linked to a year of assessment. If the full exemption
is not used in the year of assessment, it falls away and no portion thereof can be carried
forward to the following year.
REMEMBER
735
Section 58(2) provides for a possible deemed donation where section 8C (taxation of
directors and employees on vesting of equity instruments) is applicable. The main
purpose of section 8C is to defer the taxation of restricted equity instruments until a
later date so that the full level of gain on the instrument is properly taxed at ordinary
rates. Hence, taxpayers in these circumstances have a strong incentive to artificially
trigger ordinary rates of tax at an early date before the appreciation of the equity
instrument is fully realised. One potential way of avoiding section 8C is to sell
restricted equity instruments at an early date either in a non-arm’s length transaction
or to connected persons (section 8C(5)). Section 58(2) counteracts these avoidance
schemes by deeming the restricted instrument to be donated at the time that it is
deemed to vest for purposes of section 8C. The value for donations tax is the fair
market value of that instrument at that time, reduced with an amount of
consideration in respect of that transaction.
Usufruct
A usufruct is created when a beneficiary becomes the rightful owner of the benefits
of the fruit, income or usufruct of a concern, but acquires no claim to the right of
ownership as such. For example, Abel bequeaths his farm to his son, Benso, subject to
a usufruct in favour of Abel’s wife, Violet. At Abel’s death, the farm is transferred to
Benso and the title deed states that Violet has a usufruct on the farm. Violet is known
as the usufructuary and Benso the bare dominium holder.
A usufruct is attached to the person of the usufructuary and cannot be transferred to
someone else. The usufructuary may transfer their right to enjoyment of the matter to
someone else, but that does not mean that this person becomes the new usufructuary.
736
Step 1: Calculate the fair market value of the property subject to the limited
interest.
Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.
Step 3: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy Table A (refer to Appendix C).
The next birthday and gender of the donor are used to read the life
expectancy from the table.
Step 6: Multiply the answer in Step 2 by the answer in Step 5 to obtain the
value for donations tax purposes.
REMEMBER
• Should the property consist of books, paintings, statues and other objects of art, the
annual value (amount in Step 2) is the average net receipts during the three preceding
years of assessment of the person who was entitled to the right of enjoyment thereof
(before the donation became effective).
737
Example 16.4
On 30 June of the current year of assessment, Mr Johan Olufsen donated the usufruct of a
block of flats that he owned to his father, Kristen Olufsen. The fair market value of the
block of flats on this date was R1 000 000. Mr Kristen Olufsen is currently 60 years old
and Mr Johan Olufsen 34 years old.
You are required to calculate the value of the usufruct for donations tax purposes.
Solution 16.4
R
Value of the full ownership of the property 1 000 000
Annual value (R1 000 000 × 12%) 120 000
Johan’s (donor) life expectancy is 33,94 years. This is based on his age on his
next birthday (35) and obtained from Table A in Appendix C. The expectancy
in the male column is used.
Kristen’s (donee) life expectancy is 14,01 years. On his next birthday he will
be 61 years old, obtained from the male column.
The shorter period of donor’s life expectancy and donee’s life expectancy is
obviously 14,01 years. The applicable discounting factor per Table A is 6,63010.
Value for donations tax purposes (R120 000 × 6,63010) 795 612
16.10.2 Annuities
There is no definition for an annuity, but in ITC 761 10 SATC 103 it was determined
that the following elements need to be present before there can be an annuity:
• it must be an annual payment;
• the payment must be repetitive in nature; and
• someone must have the obligation of making the payment.
738
Step 1: Calculate the annual value of the annuity. (Amounts that are payable
monthly must be multiplied by 12 and amounts that are payable six-
monthly (bi-annually) must be multiplied by two to obtain the annual
value. An amount that is payable annually is not adjusted and is used
just like that as the annual value.)
Step 2: Determine the life expectancy of the donor (the life expectancy is
obtained from the life expectancy table (Table A) (refer to Appendix
C). The next birthday and gender of the donor are used to read from
the table.
Step 3: Determine the life expectancy of the donee or if the annuity is obtained
for a fixed shorter period, such shorter period.
Step 5: Multiply the answer of Step 1 by the answer of Step 4 to calculate the
value for donations tax purposes.
Example 16.5
On 1 May of the current year of assessment, Mr James Barker donated a life annuity of
R10 000 (per annum) to Craig Barker, a cousin of James Barker. James Barker is 39 years
old and Craig Barker is 21 years old.
You are required to calculate the value of the usufruct for donations tax purposes.
Solution 16.5
Annuity per annum R10 000
Life expectancy of James Barker (donor); next birthday 40 29,54 years
Life expectancy of Craig Barker (donee); next birthday 22 45,65 years
The shortest period is 29,54 years and the applicable discounting rate
is 8,04030.
Value of annuity for donations tax purposes (R10 000 × 8,04030) R80 403
739
Step 1: Calculate the fair market value of the property that is subject to the
limited interest.
Step 2: Calculate the annual value of the right by multiplying the fair market
value by 12%.
Step 3: Determine the life expectancy of the usufructuary or if the right is held
for a shorter period, such period. Select the shortest period. (The life
expectancy of the donor is thus irrelevant for the purpose of this calcu-
lation.)
Step 4: Obtain the applicable discounting rate for the period in Step 3 per
Table A or if it is a fixed period, use Table B.
Step 6: Reduce the fair market value (Step 1) by the answer as per Step 5 to
calculate the value of the bare dominium for donations tax purposes
(Step 1 minus Step 5).
Example 16.6
On 1 June of the current year of assessment, Mr Zückerman donated the usufruct of an
office building to his son, Abraham. On the same date, he donated the bare dominium to
his brother, Solomon. The fair market value of the property on that date amounted to
R3 000 000. The ages of these persons on the date of the donation are as follows:
Mr Zückerman: 49
Abraham: 18
Solomon: 57
You are required to calculate the value of both the usufruct and the bare dominium for
donations tax purposes.
Solution 16.6
Usufruct R
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Mr Zückerman (donor) is 21,47; next birthday 50
Life expectancy of Abraham (usufructuary) is 48.31; next birthday 19
21,47 is the shorter period. Applicable discounting rate is 7,60201
Value of usufruct for donations tax purposes (R360 000 × 7,60201) 2 736 724
continued
740
Bare dominium
Fair market value 3 000 000
Annual value (R3 000 000 × 12%) 360 000
Life expectancy of Abraham (usufructuary) is 48,31; next birthday 19
Discounting rate is 8,29841
Therefore, R360 000 × 8,29841 2 987 428
Value of the bare dominium for donations tax purposes
(R3 000 000 – R2 987 428) 12 572
Note
The total value of the donation of the usufruct and bare dominium on the property
amounts to R2 736 724 + R12 572 = R2 749 296. Donations tax may therefore be reduced if
the property is divided into a usufruct and bare dominium. However, there is a saving
only if the person who was given the usufruct is younger than the donor.
REMEMBER
• Should the Commissioner be of the opinion that any of the properties in the calculation
of the limited interests cannot reasonably expect to produce an annual yield of 12%, the
annual yield is an amount determined by the Commissioner.
• Any discretionary decision of the Commissioner in terms of the sections that apply to
donations tax is subject to objection and appeal.
• Should the determination of the life expectancy of a person (excluding a natural person)
be made, it is taken over a period of 50 years (for example in the case of a trust or a
company).
• In the case of a natural person, the life expectancy is based on their age on their next
birthday (after the date on which the donation became effective).
• When the donee has paid any consideration for the obtaining of the limited right, this
consideration is deducted to determine the value on which the donations tax is payable.
16.11 Summary
In this chapter, a short summary of the principles of donations tax are given. A tax-
payer may donate property in an attempt to decrease their normal tax burden or to
reduce their estate that will eventually be subject to estate duty. Donations tax there-
fore limits the benefits that a taxpayer may obtain from these tax evasion practices.
Although the donations tax calculation is done separately, a donation may have
donations tax effects as well as other tax effects:
• Donations of property could result in capital gains tax. When an asset is donated, it
is deemed that the person disposed of the asset at market value for capital gains
tax purposes.
741
• Income resulting from amounts donated could activate the provisions of section 7
of the Act and the income may then be taxed in the donor’s hands, although they
did not receive the income themselves (sections 7(1) to 7(10)).
• Donations of assets on which wear and tear have been claimed may result in a
recoupment of the wear-and-tear allowances.
The next section contains a number of questions that can be completed to evaluate
your knowledge on donations tax.
Question 16.1
During the current year of assessment (ending 28 February 2021), Brummer Meyer entered
into the following transactions:
1 March 2020: In terms of a judicial divorce order, he gave his ex-wife, Renchia, the
lifetime use of the family residence, which had cost Brummer R41 000 in
1976 and which is now valued at R780 000. He gave his son, Breyten, the
bare dominium in this family residence, subject to Renchia’s use of it.
15 March 2020: In terms of his contract with his housekeeper, Heidi, he gave her a lump
sum of R20 000 when she retired on this date.
23 March 2020: He gave his daughter, Ronè, an annuity of R15 000 per year for ten
years.
1 May 2020: He donated R45 000 to a registered political party. He also gave his
94-year-old mother R12 000 to enable her to pay for her arrear flat rent-
al, which she can no longer afford.
1 July 2020: Brummer waived a debt owed to him by his son, Billy, to whom he lent
R30 000. Billy borrowed this R30 000 on 1 July four years ago at an interest
rate of 20% per year (simple interest). The capital amount plus interest was
payable to Brummer on 1 July of the current year of assessment.
Dates of birth of the Meyer family:
Brummer – 24 March 1950 Ronè – 7 December 1981
Renchia – 21 April 1954 Billy – 11 February 1984
Breyten – 1 October 1979
742
Answer 16.1
Donations tax payable by Brummer Meyer
Exempt Taxed Donations
Date Donee Amount
portion portion tax at 20%
R R R R
01/03 Usufruct to Renchia
(Note 1) nil nil nil nil
Bare dominium to
Breyten
(Note 2) 162 340 100 000 62 340 12 468
15/03 Lump sum to Heidi
(Note 3) nil nil nil nil
23/03 Annuity to Roné
(Note 4) 79 616 nil 79 616 15 923
01/05 Political party
(Note 5) nil nil nil nil
Rental paid on behalf
of his mother
(Note 6) nil nil nil nil
01/07 Waiving of capital
amount of Billy’s debt 30 000 nil 30 000 6 000
Waive of interest
portion of Billy’s debt
(Note 7) 24 000 nil 24 000 4 800
Notes
1. The usufruct was granted in terms of a judicial divorce order and Brummer therefore
did not have any choice in it being given. The transaction could thus not be regarded
as a donation.
2. Bare dominium
Annual value R780 000 × 12% = R93 600
Age of the usufructuary (Renchia) on her next birthday (21 April 2020) is 66 years.
The present value factor as per Table A (refer to Appendix C) is 6,59893.
Thus: R93 600 × 6,72393 = R629 360
Bare dominium 150 640
Market value of house 780 000
Less: Calculated value (629 360)
3. The lump sum represents remuneration in the hands of Heidi and is therefore exempt
from donations tax (section 56(k)(i)).
4. Annuity
Annual value R15 000
On Roné’s next birthday (7 December 2020) she turns 40 and her life expectancy is
another 35,48 years. The period of ten years of the annuity is shorter, but Brummer (the
donor), who would be 71 on his next birthday (the next day), has a life expectancy less
than ten years and Table A (refer to Appendix C) is used to obtain a present value fac-
tor of 5,30775.
continued
743
Question 16.2
Gere Richard was born in England and is currently 50 years of age. He has been a resident
in the Republic for the past 11 years.
Gere Richard made the following donations during the current year of assessment (ending
28 February 2021):
1. On 1 April he donated his house with 15 bedrooms, situated in England, to Cosby Bill,
who was 40 years old. Gere Richard purchased this house 16 years ago at a cost of
R500 000. The market value at the date of the donation amounted to R900 000.
2. On 30 June, he sold his total rights in a recording of ‘Women are Pretty’ to a local
record company, in which he also has an interest, for R3 500 000. The accountant
estimated the market value of these rights on the transaction date at R5 000 000. SARS
accepted the accountant’s valuation as reasonable.
3. On 1 August, he gave Roberts Julia his three Picasso paintings. The market value
amounted to R1 880 000. The paintings were valued at R700 000 ten years ago.
4. Three years ago he inherited his mother’s piano in terms of her will. His mother had
been a resident of England. On 1 September, when he donated the piano to Wonder
Stevie for his 45th birthday, the market value amounted to R390 000. The piano was
never brought to the Republic.
5. On 27 November, he donated R1 000 000 to the Government for purposes of the National
Development Programme (NDP).
6. On 30 January, he donated the usufruct of his Gauteng home to his friend, Fraizer
Brandon, who turned 39 on this date. The bare dominium was donated on the same date
to Nelson Leslie, currently 36 years old. The fair market value of the house amounted
to R4 800 000 on 30 January.
Gere Richard makes the following donation during the following year of assessment (end-
ing 28 February 2022):
7. On 7 March he donates the usufruct of his holiday home in Durban to Slater Christian
for a ten-year period. On 7 March the fair market value of the house amounted to
R1 250 000. Slater Christian is currently 33 years old. Gere Richard will turn 51 on
10 March.
744
Answer 16.2
Donations tax payable on each of the donations
Exempt Taxed Donations
Date Donee Amount
portion portion tax at 20%
R R R R
01/04 Cosby Bill
(Note 1) 900 000 900 000 nil nil
30/06 Record company
(Note 2) 1 500 000 100 000 1 400 000 280 000
01/08 Roberts Julia 1 880 000 nil 1 880 000 376 000
01/09 Wonder Stevie
(Note 3) 390 000 390 000 nil nil
27/11 NDP
(Note 4) 1 000 000 1 000 000 nil nil
30/01 Fraizer Brandon 4 341 387 nil 4 341 387 868 277
Nelson Leslie
(Note 5) 168 787 nil 168 787 33 757
07/03 Slater Christian
(Note 6) 847 530 100 000 747 530 149 506
Notes
1. Exempt in terms of section 56(1)(g)(i) – immovable property situated outside the
Republic, purchased before the donor became a resident of the Republic.
2. Market value less proceeds = R5 000 000 – R3 500 000 = R1 500 000.
Deemed donation in terms of section 58(1) – inadequate consideration received.
R100 000 is exempt in terms of section 56(2)(b).
3. Exempt in terms of section 56(1)(g)(ii) – donor acquired property by inheritance from a
non-resident at the date of the non-resident’s death. Property situated outside the Republic.
4. Exempt in terms of section 56(1)(h) – donation to local government.
5. Usufruct
Annual value R4 800 000 × 12% = R576 000.
Gere Richard’s life expectancy (based on age of 51 on next birthday) is another
20,72 years.
Fraizer Brandon’s life expectancy (based on age of 40 on next birthday) is another
29,54 years.
Use the shorter life expectancy of 20,72, which has a present value factor of 7,53713.
Thus: R576 000 × 7,53713 = R4 341 387.
Bare dominium
Annual value R4 800 000 × 12% = R576 000
Life expectancy of usufructuary (Fraizer Brandon) is another 29,54 years, which has a
present value factor of 8,04030.
continued
745
Question 16.3
Sarie Swart is 56 years old on 14 May 2020. She is an accountant with her own accounting
firm. She decided to do some estate planning to limit the estate duty when she dies. She
made the following donations during June of the current year of assessment:
1. R10 000 to each of the four article clerks in her firm.
2. R30 000 to her housekeeper to upgrade her house.
3. A new jeep worth R400 000 to her son.
4. R40 000 to her husband to buy a new hunting rifle.
5. The usufruct of a holiday home in Greece, which she inherited from her maternal
grandfather, a Greek resident. She donated the usufruct to her son who is 36 years old
on the date of donation. The rand equivalent of the house on the date of donation is
R1 200 000.
6. R25 000 to her favourite political party.
7. Pocket money of R24 000 to her daughter for the second semester at university.
8. Her collection of Pierneef paintings, valued at R5 000 000, to the local university gallery.
Answer 16.3
Donations tax @ 20% payable by Sarie R1 060 000
746
17 Estate duty
Page
17.1 Introduction ....................................................................................................... 748
17.2 Calculation of estate duty ................................................................................ 749
17.2.1 Ordinary residents ............................................................................ 749
17.2.2 Non-residents .................................................................................... 749
17.2.3 Systematic calculation of estate duty .............................................. 750
17.3 Property (Step 1) (section 3) ............................................................................. 751
17.3.1 General definition of property (section 3(2)) ................................. 751
17.3.1.1 Valuation of property as per general definition
(section 5(1)) ..................................................................... 752
17.3.2 Limited interests and annuities included as property
(section 3(2)) ....................................................................................... 753
17.3.2.1 Valuation of limited interests (section 5(1)(b)) ............ 754
17.3.2.2 Valuation of annuities (section 5(1)(c) and (d)) ........... 758
17.4 Deemed property (Step 2) (section 3(3)) ........................................................ 761
17.4.1 Domestic insurance policies on the life of the deceased
(section 3(3)(a))................................................................................... 762
17.4.2 Any property donated under a donatio mortis causa or in
terms whereby the donee receives no benefit until the death
of the donor (section 3(3)(b)) ............................................................ 764
17.4.3 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 3(3)(cA)) ...................................... 765
17.4.4 Property that the deceased was, immediately prior to
their death, competent to dispose of for their own benefit
or for the benefit of their estate (section 3(3)(d)) ........................... 766
17.4.5 Contributions to retirement funds (section 3(3)(e) ........................ 767
17.4.6 General ................................................................................................ 767
747
Page
17.5 Deductions (Step 3) (section 4) ........................................................................ 768
17.5.1 Funeral and death-bed expenses (section 4(a)) ............................. 768
17.5.2 Debts due to persons ordinarily resident within the Republic
(section 4(b)) ....................................................................................... 768
17.5.3 All allowable costs in the administration and liquidation
of the estate (section 4(c)) ................................................................. 768
17.5.4 Sundry expenditure incurred in meeting the requirements
of the Master or the Commissioner of SARS (section 4(d)) .......... 768
17.5.5 Certain foreign assets and rights thereto (section 4(e)) ................ 768
17.5.6 Any debt due by the deceased to persons ordinarily resident
outside the Republic (section 4(f)) ................................................... 769
17.5.7 Deductions of certain limited interests (section 4(g)) ................... 770
17.5.8 Bequests to public benefit organisations (section 4(h)) ................ 770
17.5.9 Improvements made by the beneficiary (section 4(i)) .................. 770
17.5.10 Improvements made to property by a holder of a limited
interest (section 4(j)) .......................................................................... 771
17.5.11 Claim against the spouse under section 3 of the Matrimonial
Property Act 88 of 1984 (section 4(lA)) ........................................... 772
17.5.12 Limited interest and annuity charged against property
created by a predeceased spouse (section 4(m)) ............................ 772
17.5.13 Books, pictures, statuary and other objects of art
(section 4(o)) ....................................................................................... 773
17.5.14 Deemed property taken into account in valuing unlisted
shares (section 4(p)) ........................................................................... 773
17.5.15 Property accruing to the surviving spouse (section 4(q)) ............ 774
17.6 Section 4A abatement (Step 4) ......................................................................... 774
17.7 Deduction of foreign death duty (Step 7) (section 16) ................................. 775
17.8 Deduction of transfer duty (Step 7) (section 16) ........................................... 775
17.9 Persons liable for payment of estate duty (Step 8) (section 13) .................. 776
17.10 Assessment......................................................................................................... 777
17.11 Marriage in community of property .............................................................. 778
17.12 Summary ............................................................................................................ 780
17.13 Examination preparation ................................................................................. 780
17.1 Introduction
John’s father died last year. He bequeathed all his assets to John’s mother. Unfortu-
nately, there were also a lot of liabilities (debts, like clothing accounts, cell phone
accounts etc.) still to be paid on date of death. All the available cash was used to settle
these liabilities.
748
After the executor prepared the accounts for the Master, the estate duty liability was
calculated to be R130 000. As the cash was depleted, some of the assets in the estate
needed to be sold in order to raise cash for the estate duty liability.
Estate duty is one of the most significant taxes on wealth currently charged in South
Africa. The purpose of estate duty is to tax the transfer of wealth from one person to
another in the event of death. The Estate Duty Act 45 of 1955 came into operation on
1 April 1955 and replaced the Death Duties Act 29 of 1922. The Estate Duty Act is
administered by the Commissioner of the South African Revenue Service (SARS)
whose office is responsible for the collection of estate duty. The Estate Duty Act is the
statute that creates the obligation to pay estate duty and deals with the adminis-
tration of the collection process.
Every executor or administrator of a deceased estate is compelled to compute the
estate duty liability in the estate they are administering. It is also the responsibility of
this executor or administrator to pay this duty to the Commissioner.
The estate duty addendum is a subsection of the liquidation and distribution account
for a deceased estate in terms of the Administration of Estates Act 66 of 1965.
Tax statistics
The estate duty collected during the 2018/2019 year of assessment amounted to
R2.069 billion according to Tax Statistics 2019. It was only 0.003536% of total income.
17.2.2 Non-residents
Estate duty is also payable on assets physically located in the Republic irrespective
of where the owner was residing at the date of their death. Double-tax agreements
749
are entered into with certain other countries to prevent the same property being
dutiable twice. The agreement with the country where the non-resident lives must be
consulted in order to determine if estate duty can be levied in South Africa.
Calculation of the amount of estate duty that the estate is liable for
Step 1: R
Determine the value of property (section 3(2))
(refer to 17.3). xxxx
Step 8: Determine whether any persons are liable for the estate
duty and recover the duty from them (refer to 17.10). (xxxx)
Amount of estate duty due by the estate xxxx
750
Example 17.1
Ernst Dlamini, ordinarily resident in the Republic, died on 25 March. Information relating
to his estate is as follows:
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Deemed property in the Republic 200 000
Allowable deductions 150 000
Section 4A abatement 3 500 000
You are required to calculate the estate duty on the dutiable amount of Ernst’s estate.
Solution 17.1
R
Property in the Republic 2 400 000
Property in the United Kingdom 1 400 000
Value of property 3 800 000
Deemed property in the Republic 200 000
Gross value of estate (R3 800 000 + R200 000) 4 000 000
Allowable deductions (150 000)
Net value of estate (R4 000 000 – R150 000) 3 850 000
Section 4A abatement (3 500 000)
Dutiable amount of the estate (R3 850 000 – R3 500 000) 350 000
Estate duty payable (R350 000 × 20%) 70 000
REMEMBER
• When ordinarily resident in the Republic, estate duty is levied on all the person’s assets at
date of death. Where the assets of such a person are located is irrelevant. Both the
assets located in the Republic and United Kingdom could attract estate duty in South Africa.
751
This definition effectively includes every item of goods the deceased possessed, or in
which they had an interest.
For example, the following items are included in property:
• cash investments;
• shares in listed and unlisted companies;
• fixed property;
• motor vehicles; and
• furniture and household effects.
This definition refers to all assets of a person but excludes the following for persons
not ordinarily resident in the Republic at date of death:
• a right in immovable property situated outside the Republic;
• a right in movable property physically situated outside the Republic;
• a debt which is only recoverable or enforceable outside the Republic;
• goodwill, licence, patent, design, trademark, copyright or similar right registered or
enforceable only outside the Republic, or only attaching to a business outside the
Republic;
• stocks and shares held in a body corporate which is not a company;
• stocks or shares held in a company where change of ownership is not required to
be registered in the Republic; and
• rights to income produced by or proceeds derived from the assets as discussed in
the previous four bullets: and
for persons ordinarily resident in the Republic at date of death, the following is
excluded from property:
• a benefit (a lumpsum) which is due and payable by or in consequence of member-
ship or past membership of a pension, pension preservation fund, provident, prov-
ident preservation fund or retirement annuity fund as defined, on or as a result of
the death of the deceased.
The result of the above-mentioned exclusions is that a person not ordinarily resident
in the Republic must only include movable and immovable fixed property located in
the Republic in their estate at the date of their death.
For example, if a person who ordinarily resides in Spain owns property in both Spain
and in the Republic at the date of their death, only the fixed property in the Republic
attracts estate duty in the Republic.
Once it has been established that an item must be included in property, the value of
these items needs to be calculated. Section 5 of the Estate Duty Act sets out these
valuation rules.
752
in the course of liquidating the estate including property on which bona fide farm-
ing operations were conducted. For example, farming property sold for R800 000 in
the course of liquidating the estate is included in the estate at R800 000 and not at
the fair market value reduced by 30%.
Assets not sold
• The value of a property for estate duty purposes is the fair market value of the
property at date of death in terms of section 5(1)(g). ‘Fair market value’ means the
price that could be obtained upon a sale of the property between a willing buyer
and a willing seller dealing at arm’s length in an open market.
• In respect of land owned on which bona fide farming operations were conducted,
the property may be valued at the market value reduced by 30% (section 1).
Special rules whether sold or unsold
• Shares in unlisted (private) companies, members’ interests in close corporations
and debentures held in private companies must be valued at fair market value irre-
spective of the amount realised when these shares or interests are sold (sec-
tion 5(1)(f)bis). The valuer must ignore a restriction contained in the memorandum
and articles of the company, or founding statement and association agreement of a
close corporation, which may reduce the value of the share or interest. A special
right conferred on the deceased by virtue of their shareholding must be taken into
account. If an unlisted company owns bona fide farming property, the underlying
property may be valued at its fair market value reduced by 30% when the shares
are valued (section 5(1A)).
• If a condition has been imposed on the property, which reduces the value of the
property at or after the moment of death (for example, a usufruct granted over the
property according to the deceased’s will), the property is valued as though the
condition has not been imposed (section 5(4)).
Where the Commissioner is not satisfied with the fair market value of a property
reflected in the estate duty return, they might adjust the fair market value for the
purpose of calculating estate duty.
Legislation:
Section 3(2)
(a) any fiduciary, usufructuary or other like interest in property (including a right to an
annuity charged upon any property) held by the deceased immediately prior to his death;
(b) any right to an annuity (other than a right to an annuity charged upon any property)
enjoyed by the deceased immediately prior to his death which accrued to some other
person on the death of the deceased.
753
Full ownership has two components, namely a usufruct and a bare dominium. For
example, a property generating rental income: the right to receive the rental income
belongs to the owner of the usufruct, while the person in who’s name the property is
registered is the bare dominium holder (he is not entitled to any rent received while
the usufruct holder is still alive). Although the limited interest (for example usufruc-
tuary) terminates upon death, the benefit then accrues to someone else. The value
that needs to be included in the deceased’s estate is therefore the value of the benefit
that will now be enjoyed by the new person entitled to the right.
To establish a value of a fiduciary, usufructuary or other like interest in property, a
valuation method is applied in terms of section 5(1)(b) of the Estate Duty Act that
expresses the value of the interest as a lump sum.
Included in property, in terms of section 3(2)(a) and (b), is:
• limited interests, for example fiduciary, usufructuary or other like interest in prop-
erty (refer to explanations in 16.10 and for valuation refer to 17.3.2.1);
• right to an annuity charged against property (refer to 17.3.2.2); and
• right to an annuity not charged against property (refer to 17.3.2.2).
17.3.2.1 Valuation of limited interests (section 5(1)(b))
Step 1: Calculate the fair market value of the property to which the limited
interest is attached.
Step 2: Establish the annual value of the right by multiplying the fair market
value of the property by 12% (the Commissioner may allow a lower
percentage to arrive at the annual value if the annual yield of the asset
is less than 12%).
Step 3: Calculate the life expectancy of the person to whom the benefit is
being transferred. The age at their next birthday is used. (This infor-
mation is taken from the life expectancy table (Table A) issued in
terms of the Estate Duty Act – refer to Appendix C for a copy of such
table. If the person to whom the benefit is being transferred is not a
natural person, a life expectancy of 50 years should be used.)
Step 4: Determine the period for which the beneficiary is entitled to hold the
limited right.
Step 5: Calculate the present value of the annual value over the shorter
period of your answer in Step 3 or Step 4, using a discount rate of 12%
per annum. (The rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act, that provides the
present value of R1 per annum capitalised at 12% over the expectation
of a person’s life (or Table B issued in terms of the Estate Duty Act, that
provides the present value of R1 per annum capitalised at 12% over
fixed periods). Refer to Appendix D for a copy of such table.)
754
By following the above steps, the value of a usufruct in a fixed property could be
calculated. To be able to calculate the bare dominium in terms of section 5(1)(f), the
value of the usufruct must be subtracted from the market value of the asset at the
date of death of the deceased.
Example 17.2
Simon Mamabolo, ordinarily resident in the Republic, died on 2 September during the
current year of assessment. Simon held a fiduciary right over property immediately prior
to his death. This fiduciary right must be transferred to his sister, Elsie, aged 47 at date of
Simon’s death. The property was worth R1 000 000 at the time of Simon’s death.
You are required to calculate the value of the fiduciary right to be included in Simon’s
estate.
Solution 17.2
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R120 000.
The life expectancy of the fideicommissary (Elsie) according to Table A (Elsie will be
48 years old when she celebrates her next birthday, resulting in a life expectancy of
28,41 years).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Elsie is entitled to the benefit for the rest of her life:
28,41 years.
The present value of the limited interest to be included in Simon’s estate:
R120 000 × 8,000 26 (Table A) = R960 031.
Example 17.3
Johannes van Zyl, ordinarily resident in the Republic, died on 25 May. Johannes held a
usufructuary right over property immediately prior to his death. The usufruct passes to
his brother, Gert, aged 34 at the date of Johannes’ death, for a period of 20 years where-
after it will go to Johannes’ sister. The property is worth R1 000 000 at the time of Johan-
nes’ death.
You are required to calculate the estate duty on the dutiable amount of Johannes’ estate.
Solution 17.3
The fair market value of the property: R1 000 000.
The annual value of the right: R1 000 000 × 12% = R120 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 33,94 years (Gert will be 35 years old when he celebrates his next birthday).
continued
755
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Gert will be entitled to the benefit for the next
20 years. Shorter period of the two: 20 years.
The present value of the limited interest to be included in Johannes’ estate: R120 000 ×
7,469 4 (Table B) = R896 328.
If Gert had been entitled to the benefit for the rest of his life and not a fixed
period of 20 years, how much would have been included in Johannes’
estate?
In addition to the above, there are two provisos that apply in valuing a usufruct,
namely:
First proviso
If the bare dominium holder paid a consideration for the bare dominium from the
creator of the usufruct (the original owner) and the full right to enjoyment then ac-
crues to this bare dominium holder, the value to be included in the estate of the usu-
fructuary must be reduced, for example where a man (original owner) bequests a
farm to his son (who pays a bequest price) subject to his wife having the right of use
of the farm, that is to say the usufruct.
The value of the reduction is the cost of the bare dominium, when it was originally
acquired, plus interest at 6% per annum from date of acquisition to date of death of the
usufructuary. The Estate Duty Act is not clear on whether this interest should be
calculated as being compound or simple interest. It would be more beneficial for the
deceased to use compound interest, as this will provide a bigger deduction.
Two steps are, therefore, added to the above steps to calculate the value of a limited
interest for estate duty purposes if the bare dominium holder paid for the bare
dominium.
Step 6: Determine the cost of the bare dominium when it was originally
acquired plus interest at 6% per annum from date of acquisition to
date of death of the usufructuary.
Example 17.4
Phineas Kumalo sold the bare dominium of his farm, Devon, to David Kruger (aged 20 on
date of transaction) for an amount of R500 000 on 26 February 20 years ago, but reserves
the usufruct over the farm for himself. Phineas died on 26 February of the current year at
the age of 69. The fair market value of Devon on 26 February of the current year is
R850 000.
You are required to determine the value of the usufruct to be included in Phineas’ estate.
756
Solution 17.4
The fair market value of the property: R850 000.
The annual value of the right: R850 000 × 12% = R102 000.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 28,69 years (David will be 41 years old when he celebrates his next birthday).
Compare the answer in life expectancy of the beneficiary with the period that the benefi-
ciary is entitled to hold the limited right: David will be entitled to the benefit for the rest
of his life (28,69 years).
The present value of the annual value to be included in Phineas’ estate:
R102 000 × 8,010 67 = R817 088.
As the bare dominium holder paid for the bare dominium the following applies:
Determine the cost of the bare dominium when it was originally acquired plus interest at
6% per annum from date of acquisition to date of death of the usufructuary:
R500 000 × 1,0620 = R1 603 568.
The present value of the limited interest to be included in Phineas’ estate:
R817 088 – R1 603 568 = Rnil. The value cannot be negative, therefore, it is limited to Rnil.
Second proviso
On the death of the usufructuary, the value placed on the usufruct passing to the bare
dominium holder, which now gives them full ownership, cannot be more than the
market value of property at date of death less the value of the bare dominium when it
was first created.
This is only applicable when the usufruct and the bare dominium were created in the
same disposition.
Therefore, another four steps are added to the above steps to calculate the value of a
limited interest for estate duty purposes, if the usufruct passes to the bare dominium
holder.
Step 9: Calculate the value of the bare dominium when it was first created
(market value on the date it was first created less the answer of Steps 1
to 5), with the exception that the age of the usufructuary on the date
these limited interests were first created should now be used in calcu-
lating Step 3.
Step 10: Reduce the value calculated in Step 8 with the value calculated in
Step 9.
Step 11: The value to be included as property must be the lowest value of the
answers found in Steps 5, 7 or 10.
757
Example 17.5
On 3 January (ten years ago), the grandfather of Saartjie and Danie van der Walt
bequeathed his farm to his two grandchildren. Saartjie was 19 years old and Danie 16 on
the date of their grandfather’s death. Saartjie received the usufructuary interest and Danie
the bare dominium. The value of the property was R250 000 on date of acquisition of these
limited rights. Saartjie’s usufruct ceases on 3 January of the current year due to her sud-
den death in a motor vehicle accident. Danie acquires full ownership on this date. The fair
market value of the property on the day of Saartjie’s death is R380 000.
You are required to determine the value of the usufruct to be included in Saartjie’s estate.
Solution 17.5
The fair market value of the property: R380 000.
The annual value of the right: R380 000 × 12% = R45 600.
The life expectancy of the person to whom the benefit is being transferred according to
Table A is 41,20 years (Danie will be 27 years old when he celebrates his next birthday).
Compare the answer in life expectancy of beneficiary with the period that the beneficiary
is entitled to hold the limited right: Danie will be entitled to the benefit for the rest of his
life (41,20 years).
The present value of the annual value to be included in Saartjie’s estate: R45 600 × 8,25516
= R376 435.
As the value of the usufruct passes to the bare dominium holder and the usufruct, and the
bare dominium was created at the same time, apply the following:
The market value of the property at date of death: R380 000.
The value of the bare dominium when it was first created: market value at date when the
bare dominium was acquired less the value of the usufruct therein = R250 000 – (R250 000
× 12% × 8,31584 (Saartjie’s life expectancy was 54,41 years as her next birthday would
have been her 20th)) = R525.
Reduce market value of the property at date of death with value of the bare dominium
when it was first created: R380 000 – R525 = R379 475.
The present value of the limited interest to be included in Saartjie’s estate must be the
lowest value of the present value of the annual value = R376 435, or amount calculated
above = R379 475. An amount of R376 435 should therefore be included.
758
Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred – if the annuity ceases, the owner of the property;
otherwise the person to whom it is transferred (this information is
taken from the life expectancy table (Table A) issued in terms of the
Estate Duty Act). If the person to whom the benefit is being trans-
ferred is not a natural person, a life expectancy of 50 years should be
used.
Step 3: Determine the period that the beneficiary is entitled to hold the lim-
ited right for. (If the annuity ceases, this step will not be applicable.)
Step 4: Calculate the present value of the annual amount over the shorter
period of your answer in Step 2 or Step 3 using a discount rate of 12%
per annum (the rate to be used is also provided in the life expectancy
table (Table A) issued in terms of the Estate Duty Act that provides
the present value of R1 per annum capitalised at 12% over the expec-
tation of a person’s life, or Table B issued in terms of the Estate Duty
Act that provides the present value of R1 per annum capitalised at
12% over fixed periods).
Example 17.6
Christine Rappard was entitled to an annuity of R5 000 per month from the income of
property held in a trust. On her death her daughter, Elsa, aged 31, is entitled to receive
the annuity.
You are required to determine the value of the annuity to be included in Christine’s
estate.
759
Solution 17.6
The annual amount of the annuity: R5 000 × 12 months = R60 000.
The life expectancy of the person to whom the benefit is being transferred (Elsa) accord-
ing to Table A is 42,96 years (Elsa will be 32 years old on her next birthday).
Compare the life expectancy of Elsa with the period that the beneficiary is entitled to hold
the limited right: Elsa will be entitled to the benefit for the rest of her life (42,96 years).
The present value of the annuity charged against property to be included in Christine’s
estate: R60 000 × 8,269 30 (Table A) = R496 158.
If the annuity Christine received from the income of property held in the
trust ceased on the date of her death, how much would have been included
in her estate?
Step 2: Calculate the life expectancy of the person to whom the benefit is
being transferred (this information is taken from the life expectancy
table (Table A) issued in terms of the Estate Duty Act). If the person to
whom the benefit is being transferred is not a natural person, a life
expectancy of 50 years should be used.
continued
760
Step 3: Compare the answer in Step 2 with the period the beneficiary is
entitled to hold the limited right.
Step 4: Calculate the present value of the annual value over the shorter period
of your answer in Step 2 or Step 3 using a discount rate of 12% per
annum (the rate to be used is also provided in the life expectancy table
(Table A) issued in terms of the Estate Duty Act that provides the pre-
sent value of R1 per annum capitalised at 12% over the expectation of
a person’s life; or Table B, issued in terms of the Estate Duty Act, that
provides the present value of R1 per annum capitalised at 12% over
fixed periods).
Example 17.7
Ernst Grobbelaar died on 1 November of the current year of assessment. In terms of an
annuity contract he is entitled to an annuity of R6 000 per annum for a period of 60 years.
Ernst only received the annuity for five years before his death. In terms of Ernst’s will,
this annuity must accrue for the remaining period (55 years) to his son Ivan (16 years).
You are required to determine the value of the annuity to be included in Ernst’s estate.
Solution 17.7
The annual amount of the annuity is R6 000 (already an annual value).
The life expectancy of the person to whom the benefit is being transferred (Ivan) accord-
ing to Table A is 50,12 years (Ivan will be 17 years old on his next birthday).
Compare life expectancy of Ivan with the period that the beneficiary is entitled to hold the
limited right: Ivan will be entitled to the benefit for a period of 55 years.
Use the shorter of the two periods above: Therefore, 50,12 years.
The present value of the annuity not charged against property to be included in Ernst’s
estate: R6 000 × 8,304 89 (Table A) = R49 829.
761
• a claim against the spouse under section 3 of the Matrimonial Property Act 88 of
1984 (section 3(3)(cA)); and
• property of which the deceased was, immediately prior to their death, competent
to dispose of for their own benefit or for the benefit of their estate (section 3(3)(d)).
x Contributions to retirement funds allowed as a deduction when determining the
retirement lumpsum benefit (section 3(3)(e)).
762
Example 17.8
Jan Matla had a policy taken out by his wife, Linda (to whom he was married out of
community of property), on his life. Their antenuptial contract did not mention anything
regarding this policy. Linda was the sole beneficiary under the policy and had paid all the
premiums. Jan Matla died and the policy paid out an amount of R1 million. The pre-
miums (including interest at 6%) paid by Linda amounted to R380 000.
You are required to determine the value of the insurance policy to be included in Jan’s
estate.
763
Solution 17.8
R
Proceeds of the policy (Note) 1 000 000
Less: Premiums plus interest (paid by Linda) (380 000)
Value of insurance policy 620 000
Note
The policy is not excluded, as it was not in terms of an antenuptial or postnuptial con-
tract.
REMEMBER
• This amount is an allowable deduction under section 4(q) as property accruing to the
surviving spouse (refer to 17.4.15).
• Section 5(1)(d)bis determines that if the annuity received from the domestic insurance
policy on the life of the deceased ceases to be payable within five years after the death
of the deceased because:
– of the death of the annuitant within that period; or
– where the annuitant is the widow of the deceased, because of the remarriage within
that period,
the value of the annuity in the re-assessed estate of the predeceased shall be deemed to
be an amount equal to the lesser of:
– the aggregate of the amounts that accrued to the annuitant in respect of the annuity
and any amounts that accrued to the person or the person’s estate upon or as a result
of the termination of the annuity; or
– the capitalised value of the annuity.
764
Example 17.9
On 10 March five years ago, Simon and Martha Mhlari were married out of community of
property under the accrual system. Simon died on 12 May during the current year. The
following information relates to their estates:
1. The values of the estates as stipulated in their antenuptial contract were converted to
rand using the inflation rate reflected in the consumer price index:
(a) Simon R250 000 (rand value in the current year)
(b) Martha R550 000 (rand value in the current year)
2. The values of their estates on the day of Simon’s death:
(a) Simon R550 000
(b) Martha R1 750 000
3. A bequest of R250 000 to Martha on 28 March in the current year from the estate of her
late father is included in the value of her estate on the day of Simon’s death (12 May)
but her father’s will stipulated that it is free of the communal estate.
You are required to calculate the amount to be included in Simon’s estate in respect of the
Matrimonial Property Act.
765
Solution 17.9
Simon Martha
R R
End value of the estate 550 000 1 750 000
Less: Amounts excluded (250 000)
550 000 1 500 000
Less: Commencement value (250 000) (550 000)
Accrual 300 000 950 000
Difference in accrual (R950 000 – R300 000) 650 000
Accrual to be included in Simon’s estate (R650 000 / 2) 325 000
Example 17.10
Johannes Labuschagne died on 30 September of the current year and was the only trustee
and beneficiary of the JL Trust. There was only one asset in the JL Trust, namely a farm
(on which bona fide farming was being carried on) with an open-market value of
R920 000 on the date of Johannes’ death.
You are required to determine the value of the property that has to be included in Johan-
nes’ estate (if any).
Solution 17.10
As Johannes was the only trustee and beneficiary of the JL Trust, he was competent to
dispose of the farm for his own benefit immediately prior to his death. The farm in the
trust, therefore, has to be included in Johannes’ estate in terms of section 3(3)(d) at
R644 000 (being the fair market value, that is to say the market value (R920 000) reduced
by 30%).
766
REMEMBER
• If the deceased was a sole trustee but not a beneficiary (they also had no rights to
change the beneficiary) of a trust, the property will not form part of their estate as they
could not dispose of it for their own benefit. The deceased could thus exercise control
over property without attracting this provision.
In the situation where a deceased was entitled to receive the profits from a trust in
terms of section 3(3)(d), the inclusion is the annual value of such profits capitalised at
12% over the life expectancy (from Table A) of the deceased immediately prior to the
date of their death (section 5(1)(f)ter).
Example 17.11
Petro van Jaarsveld died on 30 November of the current year of assessment at the age of
47 and was the only trustee and beneficiary of the PVJ Trust. The PVJ Trust was a busi-
ness trust from which Petro received profits amounting to R20 000 per year.
You are required to determine the value of the asset (if any) that has to be included in
Petro’s estate.
Solution 17.11
As Petro was the only trustee and beneficiary of the PVJ Trust, she was competent to dis-
pose of the business for her own benefit immediately prior to her death. The profits that
are distributed to Petro each year have to be included in her estate as deemed property in
terms of section 3(3)(d). The profits will be capitalised at a rate of 12% per year over
Petro’s life expectancy immediately prior to the date of her death. Her life expectancy on
the day immediately prior to her death in terms of the life expectancy table (Table A) was
28,41 years (as she would have been 48 years old on her next birthday).
The current value of the annual value that has to be included in Petro’s estate:
R20 000 × 8,000 26 = R160 005,20.
17.4.6 General
The annual value of the right of enjoyment of property, which is subject to a fiduci-
ary, usufructuary or other interest consisting of books, pictures, statuary or objects of
art, shall be deemed to be the average net receipts (if any) derived by the person
entitled to such right of enjoyment of such property during the three years immedi-
ately preceding the date of death of the deceased.
767
768
deducted, namely the total value of a right in or to property situated outside the
Republic and acquired by the deceased
• before they became ordinarily resident in the Republic for the first time;
• after they became ordinarily resident for the first time by way of donation or
inheritance if at the date of the donation the donor was a person (other than a
company) not ordinarily resident in the Republic; or
• out of profits or proceeds of any of the above-mentioned property.
This does not only apply to immovable property but also to movable property.
Example 17.12
Gert Geringer (the deceased) was ordinarily resident in the Republic all his life. Gert owes
persons not ordinarily resident in the Republic debts amounting to R1 500 000.
At date of death, Gert owned property in the United Kingdom of R1 150 000, inherited
from his uncle who is not ordinarily resident in the Republic.
You are required to determine the net value of the above two items in Gert’s estate.
Solution 17.12
R
United Kingdom property 1 150 000
Less: Property inherited from a person not ordinarily
resident in the Republic (1 150 000)
Less: Foreign debt (R1 500 000 – R1 150 000) (350 000)
(350 000)
REMEMBER
• The only portion of the R1 500 000 expenditure that will be allowed as a deduction is
the portion of R350 000 (the amount by which the foreign debt exceeds the foreign
property not included in the estate: R1 500 000 – R1 150 000) if this debt is settled from
other property in the estate.
769
770
Example 17.13
Madie du Toit effected improvements amounting to R20 000 to property owned by her
father, Nico. These improvements were done during Nico’s lifetime and with his consent.
The market value of this property (a house) is R1 150 000 at the date of Nico’s death. The
improvements made by Madie increased the value of the house by R12 000.
Nico’s will stipulates that the property will be transferred to Madie.
You are required to determine the net value to be included in Nico’s estate.
Solution 17.13
R
Market value of property on date of death 1 150 000
Less: The value by which the property has been enhanced due to the
improvements made by the beneficiary (12 000)
Net value to be included in Nico’s estate 1 138 000
REMEMBER
• The expenditure must have been incurred during the lifetime of the deceased and with
their consent before a deduction can be claimed.
Example 17.14
Carl Lubbe donated a bare dominium over property to Julia Mhlangu (39 years old at next
birthday) who effected improvements at a cost of R50 000. He kept the usufruct for him-
self. Upon Carl’s death, the market value of the property is R250 000 without taking the
improvements into account. If the improvements made by Julia are taken into account,
the market value of the property is R400 000. The usufruct goes to the holder of the bare
dominium.
You are required to determine the net value of the limited interest to be included in
Carl’s estate.
771
Solution 17.14
R
Calculate the value of the limited interest to be included in the estate using
the market value on date of death: the value of the limited interest based on
the market value of R400 000 (R400 000 × 12% × 8,19866 (Julia’s factor)). 393 536
Recalculate the value of the limited interest using the market value of the
property ignoring the improvements effected: the value of the limited interest
based on the market value of R250 000 (R250 000 × 12% × 8, 19866) 245 960
The deduction allowed against the value of the limited interest (147 576)
The net value of the limited interest in Carl’s estate. 245 950
REMEMBER
• If the spouses were married in community of property, only 50% of the value of the
limited interest is deductible as only half of the interest formed part of the estate of the
predeceased spouse.
772
REMEMBER
• The lending period should have started before date of death of the deceased for this
deduction to take effect.
Example 17.15
Marie Botha owned 100% of the shares of Stay Trim (Pty) Ltd. The company took out a
life insurance policy on her life that will pay out an amount of R300 000 on Marie’s death.
The policy does not qualify for an exemption in terms of section 3(3)(a). Upon Marie’s
death, the value of her shares in the company will be enhanced with the value of the life
insurance policy by R210 000 (the value of the policy less income tax thereon). The value
placed on her shares in Stay Trim (Pty) Ltd (by an independent valuer) is R985 000.
You are required to determine the net value to be included in Marie’s estate in respect of
the above-mentioned transaction.
773
Solution 17.15
R
Value of unlisted shares 985 000
Value of deemed property – life insurance policy 300 000
Less: Value of deemed property taken into account in valuing the
unlisted share (210 000)
Net property to be included in Marie’s estate 1 075 000
REMEMBER
• The abatement can never be more than the net value of the estate.
• If both spouses die simultaneously, for example in a car accident, the person whose
estate has the lowest net value is deemed to have passed away first.
• If the predeceased person (first dying) had more than one spouse and they inherited,
the abatement used to reduce the net value of the estate must be shared pro rata.
• If the deceased had more than one predeceased spouses, the reduction is limited to the
current value of the abatement (which is R3 500 000).
774
Example 17.16
Magie passed away two years after her husband, Petrus Baloy. Petrus left R600 000 cash
to his only son. Magie was the only heir to the rest of Petrus’ estate. The net value of
Petrus’ estate (before Magie’s inheritance) was R4 500 000. Magie’s assets on date of her
death was R6 500 000.
You are required to determine the estate duty payable by Petrus’ and Magie’s estates.
Solution 17.16
R
Petrus
Value of the estate (given) 4 500 000
Less: Section 4(q) deduction (surviving spouse) (3 900 000)
NET VALUE OF THE ESTATE 600 000
Less: Section 4A abatement (Note) (600 000)
TAXABLE VALUE OF THE ESTATE nil
Magie
NET VALUE OF ESTATE (GIVEN) 6 500 000
Less: Section 4A abatement (Note) (6 400 000)
TAXABLE VALUE OF THE ESTATE 100 000
Note
Each estate qualifies for a R3 500 000 section 4A abatement. The value of the abatement is,
however, limited to the net value of the estate, therefore the value of the abatement in Petrus’
estate is R600 000. As Magie was Petrus’ spouse, her estate qualifies for twice the value of the
abatement less the amount used by Petrus. Her estate qualifies for a total abatement of
(R3 500 000 plus [R3 500 000 minus R600 000]) = R6 400 000.
775
person who is responsible for payment of the transfer duty on property received from
the deceased during their lifetime, is also liable for any estate duty attributable to that
property in circumstances where the property is included in the estate. The rebate is
equal to the transfer duty paid at the time of transfer. This rebate will not be claimed
very often.
REMEMBER
• The property received by the legatee should be identical to the property that formed
part of the dutiable amount in the deceased’s estate before the legatee becomes liable
for a portion of the estate duty. This means that if the market value of a farm is included
in the estate of the deceased, and the deceased’s will determines that the usufruct and
bare dominium of the farm are bequeathed to two different legatees, the legatees cannot
be held responsible for the estate duty in terms of section 13. The reason is that the usu-
fruct and bare dominium did not form two separate assets in the deceased’s estate.
The portion of the estate duty recoverable from the beneficiary is the value of the
benefit in proportion to the net value of the estate multiplied by the estate duty payable.
In all other scenarios, the executor is responsible for the payment of estate duty and
the duty cannot be recovered from the beneficiary.
776
Example 17.17
The value of Altie Pieters’ estate on date of death:
R
Fixed property 4 325 000
Value of insurance policy payable to Gert 80 000
GROSS VALUE OF ESTATE 4 405 000
Less: Liabilities not relating to the insurance policy (220 000)
NET VALUE OF ESTATE 4 185 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 685 000
Estate duty at 20% 137 000
You are required to determine the apportionment of the estate duty to the various benefi-
ciaries in Altie’s estate.
Solution 17.17
The liability of R137 000 can be apportioned as follows:
Gert is liable for estate duty amounting to:
The value of the benefit in proportion to the net value of the estate multiplied by the
estate duty
= R80 000/R4 185 000 × R137 000 = R2 619
The estate is liable for estate duty on the fixed property net of deductions:
(R4 325 000 – R220 000)/R4 185 000 × R137 000 = R134 381
The portion attributable to Gert plus the estate’s portion equals the total estate duty calcu-
lated: R2 619 + 134 381 = R137 000.
17.10 Assessment
The executor has to submit a return on the prescribed form with the taxable amount
to the Master of the High Court.
The Commissioner shall assess the estate duty payable and issue a notice of assess-
ment to the executor of the estate. If a notice of assessment had not been issued in
time, it is deemed that the notice was issued on the date the estate became distribut-
able or in cases where the value of the estate is less than the prescribed amount in
section 18(3) of the Administration of Estates Act, the date the death notice is given to
the Master.
The Commissioner may declare a person to be the agent of another person. The agent
may be required to make a payment of the estate duty or interest in respect of the
other person. The Commissioner must have the same remedies against all property of
any kind vested in or under the control or management of an agent or trustee as the
777
Commissioner would have against the property of an person liable to pay a duty or
interest and in such a full and ample manner.
The duty payable must be paid on such date and at such place as the Commissioner
prescribes in the notice of assessment.
SARS has issued a quick guide on estate duty and the following principles are guide-
lines from this guide. Estate duty is due within one year of the date of death or
30 days from the date of assessment, if an assessment is issued within one year of
date of death. After this date interest is charged on the outstanding amount (Tax
Administration Act: section 187).
If the executor does not pay the tax within the set time, a senior officer of SARS may
rule that the interest is not payable if the late payment is due to:
• natural or human-made disasters;
• a civil disturbance or disruption in services; or
• serious illness or accident.
Payment of estate duty may be tendered to any branch office to SARS without formal
documentation (such as an assessment). It is, however, necessary to reflect the Mas-
ter’s number, date of death and identity number of the deceased.
The Commissioner has the power to raise an additional assessment if they are satis-
fied that any amounts have not been assessed that should have been.
If additional assets are found within five years of completion of the estate and a
supplementary liquidation and distribution account is prepared, the notice of assess-
ment is deemed to have been issued on the date the supplementary liquidation and
distribution account became distributable.
If additional assets are found after five years of completion of the estate and a sup-
plementary liquidation and distribution account is prepared, it is deemed that these
assets are the only asset of the estate and that the death of the deceased occurred on
the date on which the additional property is shown in the supplementary liquidation
and distribution account.
If the executor or another person is not satisfied with the assessment raised by the
Commissioner, they may object and appeal against that assessment under the same
provisions as determined in the Act.
778
A fiduciary or usufructuary interest held by the deceased does not form part of the
joint estate as it is purely a personal right. It will only be added to the estate of the
deceased after the half of the joint estate has been calculated. A right to an annuity
held by the deceased, however, falls into the joint estate, unless it was expressly
excluded from the joint estate by the creator of the right.
Liabilities that arise only after the death of the deceased 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.
Example 17.18
Rajan was married in community of property to Tasnim. At the date of Rajan’s death, the
executor in the couple’s joint estate found the following:
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
Liabilities (including funeral costs of R10 000) 100 000
Rajan was also the holder of a usufruct over a farm. The usufruct was valued at R150 000.
The usufruct now accrued to Tasnim.
You are required to determine the estate duty payable into Rajan’s estate.
Solution 17.18
R
Residence 4 850 000
Furniture and household effects 1 650 000
Fixed deposit 400 000
6 900 000
Less: Liabilities (excluding funeral costs of R10 000) (90 000)
6 810 000
Less: One half (due to marriage in community of property) (3 405 000)
Value of Rajan’s half of the joint estate 3 405 000
Add: Value of the usufruct 150 000
GROSS VALUE OF ESTATE 3 555 000
Less: Funeral costs (10 000)
NET VALUE OF ESTATE 3 545 000
Less: Abatement (3 500 000)
DUTIABLE AMOUNT OF ESTATE 45 000
Estate duty at 20% 9 000
779
17.12 Summary
When calculating the estate duty on death, one first needs to ascertain whether the
deceased was a person ordinarily resident in the Republic or not. The property and
deemed property of the deceased must be valued and added together to determine
the gross estate. The allowable deductions will reduce the gross estate to the net
estate. Every individual in the Republic is entitled to a R3 500 000 abatement. Estate
duty is then levied at 20% on the dutiable amount of the deceased’s estate.
The next section contains a number of questions that can be completed to evaluate
your knowledge on estate duty.
Question 17.1
Sean Ferreira, ordinarily resident in the Republic, dies on 25 May of the current year of
assessment. His wife died two years before, leaving him with their two sons, Neil and Lee.
No estate duty was payable on her estate as her net value of the estate was R500 000.
Information relating to Sean’s estate is as follows:
R
1. Residence in Mooikloof – valuation 6 000 000
The residence is bequeathed to Neil Ferreira, Sean’s son. Two years
before his father’s death, with his father’s written approval, Neil
effected improvements to the residence at a cost of R20 000. These
improvements increased the value of the residence by R50 000 at the
date of death of the deceased.
2. At the date of his death, Sean owned a squash court complex in
respect of which he had donated the usufruct to his sons, Neil (50%)
and Lee (50%), on 1 January of the previous year, at which date the
complex was worth R200 000. At the date of Sean’s death, the market
value was R250 000. This is the only donation Sean made during his
life.
3. Furniture and private property – valuation 950 000
4. The farm ‘Dumela’ in the Brits district
• Market value 500 000
5. On Sean’s death, his cousin, Steve, was paid out R800 000 on a life
policy taken out on Sean’s life by Steve. Steve had taken out the pol-
icy to enable him, in the event of Sean’s death, to purchase Sean’s
shares in a private company they jointly owned. This had been
agreed upon between Sean and Steve and the company was respon-
sible for the payment of the premiums.
6. Auditor’s valuation of Sean’s interest in above-mentioned company 600 000
The interest was sold for R500 000 to Steve in terms of an agreement
between the deceased and Steve.
continued
780
R
7. Proceeds from selling of fixed property in Sydney (Australia) 1 505 000
Sean obtained this property as a donation from his aunt 30 years ago.
She is an Australian resident.
8. Water and electricity due to the City Council of Sydney on the proper-
ty in Sydney (refer to Note 7 above) 40 000
9. At the date of his death, Sean controlled the profits of a trust. He had
the right to decide what should happen to the profits and was also
entitled to dispose of them. This right is deemed to be property in
terms of section 3(3)(d) of the Estate Duty Act. The Commissioner has
determined the annual value of such profits at R1 000.
10. 15 years prior to his death, Sean received a Lamborghini as a donation
from his uncle. At that date, the car was worth R110 000. His uncle
died a week after his generous gesture and Sean paid the donations
tax of R20 000 in respect of the donation. At the date of Sean’s death,
the car was worth R70 000.
11. Bank overdraft – bank in South Africa 129 733
12. Outstanding income tax due by Sean as calculated by the executor 7 225
13. Executor’s remuneration and masters fees 287 700
Answer 17.1
R R
Residence – Mooikloof 5 950 000
Market value 6 000 000
Less: Value of improvements by beneficiary (50 000)
Bare dominium – squash court complex
Fair market value 250 000
Less: ½ usufruct over Neil’s life (age next birthday = 28) that
is to say ½ × 12% of R250 000 × 8,246 77 and (123 702)
Less: ½ usufruct over Lee’s life (age next birthday = 29) that
is to say ½ × 12% of R250 000 × 8,237 37 (123 561) 2 737
Furniture and private property 950 000
Dumela – market value reduced by 30% 350 000
Proceeds of life policy (exempt in terms of section 3(3)(a)) nil
continued
781
R R
Shares in private company
Valued by an independent valuer 600 000
Property in Sydney 1 505 000 1 505 000
Water and electricity – not deductible as the applicable
property is exempt nil
Profits of a trust of which the deceased was, immediately prior
to his death, competent to dispose of
Valued over life expectancy of Sean at date of death (age next
birthday = 68) R1 000 × 5,734 03 5 734
Lamborghini (Note) 70 000
Gross value of estate 9 433 471
Bank overdraft (129 733)
South African Revenue Services (SARS) (7 225)
Executors remuneration and masters fees (287 700)
Less: Value of the Sydney property as was received by
means of a donation from a non-South African
resident (section 4(e)) (1 505 000)
Net value of estate 7 503 813
Less: Abatement (6 500 000)
Dutiable estate (Note) 1 003 813
Estate duty payable at 20% 200 763
Note
• As Sean’s wife died two years before, Sean qualifies for an additional section 4A rebate.
The rebate in his estate will be (R3 500 000 plus (R3 500 000 minus R500 000)) = R6 500 000.
• Although Sean paid the donations tax on the Lamborghini, there is no section in the
Estate Duty Act that allows for it as a deduction in the estate.
Question 17.2
Nina Malan, ordinarily resident in the Republic, died on 3 December of the current year of
assessment at the age of 48. She is survived by her husband, Jess (51), and son, Jo (23).
At the date of her death, the following information pertains:
1. A residence in Johannesburg valued at R12 500 000.
2. Property in Cape Town sold for an amount of R20 000 000.
3. An insurance policy taken out on her life by Jess (to whom she was married out of
community of property). Their prenuptial contract did not include this policy. Jess was
the sole beneficiary in this policy and paid all the premiums. The policy paid out
R2 000 000. The premiums paid by Jess (plus interest at 6%) amount to R380 000.
4. Nina inherited a farm from her mother ten years before her death. The farm had to be
sold to cover her credit card debt amounting to R295 759, as well as the executor’s remu-
neration of R280 000 and masters fees of R7 000. The executor sold the farm for
R5 000 000. The fair market value of the farm was R6 000 000 on 3 December.
continued
782
Answer 17.2
R
Total estate duty payable 6 604
310
Question 17.3
Colin Black was born in Australia on 5 September 1955. He emigrated to South Africa on
17 November 1980 and has been a permanent resident of the Republic ever since. Colin
was one of two members of B-Tyred CC, a business that manufactures and sells motor
vehicle tyres. He had a 45% interest in the CC.
Colin died on 18 August of the current year of assessment after a short illness. He was
married in community of property to Sabrina Black (born Winkly, date of birth 6 April
1957).
The executor of Colin’s estate collected the following information after Colin’s death:
• A local life insurance policy on Colin’s life paid out R250 000 on 1 September. The
executor collected the proceeds on behalf of the estate. Premiums plus interest at 6% per
annum amounted to R55 000.
• A further local life insurance policy on Colin’s life paid R500 000 to Sam Connely,
Colin’s co-member in B-Tyred CC, on 29 August. Sam took out the policy to enable him
to buy Colin’s 45% share in the business in case of Colin’s death.
• An auditor valued B-Tyred CC’s members’ interest at R1,5 million on 18 August. In
terms of an agreement between the two members, Colin’s interest was sold to Sam for
R350 000.
• Colin was the fiduciary owner of a flat in Cape Town, which was valued at R2 000 000
at the time of his death. At his death, the property must be transferred to Heinrich, the
fideicommissary, a male person who was 45 years and 1 month old at the date of Colin’s
death.
• Colin owned 200 000 shares in NASSAN Ltd. The closing price of the shares on the JSE
Securities Exchange on 18 August was R22,50 per share. The executor sold the shares at
R27,10 per share on 26 August.
• Colin owned a residence in Pretoria, with a market value of R1,1 million on 18 August.
continued
783
Answer 17.3
R R
Local life insurance policy 1 250 000
Local life insurance policy 2 – not part of deemed property as
the policy was taken out by a person who holds shares or a
like interest in a company of which the deceased also held a
like interest nil
Colin’s interest in B-Tyred CC – valued by independent
valuer: R1 500 000 × 45% 675 000
Shares in NASSAN Ltd sold at 200 000 × R27,10 5 420 000
Residence in Pretoria 1 100 000
Cash at bank 2 821 000
Gross value of estate 10 266 000
Less: Debt – income tax liability (465 606)
Less: Debt – administration costs and other costs (excluding
funeral costs) (368 000) (833 606)
9 432 394
Less: One half of the estate (due to marriage in community
of property) (4 716 197)
4 716 197
Less: Funeral costs (15 000)
4 701 197
Less: Deduction in respect of bequest to wife (section 4(q))
(R1 100 000 × 50%) (550 000)
4 151 197
Value of the fiduciary right (Note) 1 876 618
Net value of estate 6 027 815
continued
784
R
Less: Abatement (3 500 000)
Dutiable estate 2 527 815
Estate duty payable at 20% 505 563
Note
The value of the fiduciary right:
Value of the property 2 000 000
Annual value at 12% 240 000
Heinrich’s age next birthday: 46
Factor: 7,819 24
R240 000 × 7,819 24 1 876 618
785
Appendices
APPENDIX A
2021 tax rates
(i) Persons (other than companies and trusts)
Taxable income Rates of tax
Not exceeding R205 900 ................................................ 18% of taxable income
Exceeding R205 900 but not exceeding R321 600 ...... R37 062 plus 26% of amount by which
taxable income exceeds R205 900
Exceeding R321 600 but not exceeding R445 100 ...... R67 144 plus 31% of amount by which
taxable income exceeds R321 600
Exceeding R445 100 but not exceeding R584 200 ...... R105 429 plus 36% of amount by which taxable
income exceeds R445 100
Exceeding R584 200 but not exceeding R744 800 ...... R155 505 plus 39% of amount by which taxable
income exceeds R584 200
Exceeding R744 800 but not exceeding R1 577 300 ... R218 139 plus 41% of amount by which taxable
income exceeds R744 800
Exceeds R1 577 300 ......................................................... R559 464 plus 45% of amount by which taxable
income exceeds R1 577 300
787
788
Appendices
APPENDIX B
Life expectancy and present value tables (Table A)
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
0 64,74 72,36 8,327 91 8,331 05 0
1 65,37 72,74 8,328 28 8,331 14 1
2 64,50 71,87 8,327 76 8,330 91 2
3 63,57 70,93 8,327 14 8,330 64 3
4 62,63 69,97 8,326 44 8,330 33 4
5 61,69 69,02 8,325 67 8,329 99 5
6 60,74 68,06 8,324 80 8,329 61 6
7 59,78 67,09 8,323 81 8,329 18 7
8 58,81 66,11 8,322 71 8,328 69 8
9 57,83 65,14 8,321 46 8,328 15 9
10 56,85 64,15 8,320 07 8,327 53 10
11 55,86 63,16 8,318 49 8,326 84 11
12 54,87 62,18 8,316 73 8,326 08 12
13 53,90 61,19 8,314 80 8,325 22 13
14 52,93 60,21 8,312 65 8,324 27 14
15 51,98 59,23 8,310 29 8,323 20 15
16 51,04 58,26 8,307 70 8,322 03 16
17 50,12 57,29 8,304 89 8,320 71 17
18 49,21 56,33 8,301 80 8,319 26 18
19 48,31 55,37 8,298 41 8,317 64 19
20 47,42 54,41 8,294 71 8,315 84 20
21 46,53 53,45 8,290 61 8,313 83 21
22 45,65 52,50 8,286 13 8,311 61 22
23 44,77 51,54 8,281 17 8,309 12 23
24 43,88 50,58 8,275 64 8,306 33 24
25 43,00 49,63 8,269 59 8,303 26 25
26 42,10 48,67 8,262 74 8,299 81 26
27 41,20 47,71 8,255 16 8,295 95 27
28 40,30 46,76 8,246 77 8,291 71 28
29 39,39 45,81 8,237 37 8,286 97 29
30 38,48 44,86 8,226 94 8,281 70 30
31 37,57 43,91 8,215 38 8,275 83 31
32 36,66 42,96 8,202 57 8,269 30 32
33 35,75 42,02 8,188 36 8,262 10 33
34 34,84 41,07 8,172 62 8,254 00 34
35 33,94 40,13 8,155 36 8,245 09 35
36 33,05 39,19 8,136 47 8,235 17 36
37 32,16 38,26 8,115 58 8,224 26 37
continued
789
APPENDIX B
Life expectancy and present value tables (Table A) (continued)
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
38 31,28 37,32 8,092 74 8,211 99 38
39 30,41 36,40 8,067 81 8,198 66 39
40 29,54 35,48 8,040 30 8,183 86 40
41 28,69 34,57 8,010 67 8,167 62 41
42 27,85 33,67 7,978 44 8,149 83 42
43 27,02 32,77 7,943 44 8,130 12 43
44 26,20 31,89 7,905 47 8,108 81 44
45 25,38 31,01 7,863 80 8,085 27 45
46 24,58 30,14 7,819 24 8,059 56 46
47 23,79 29,27 7,771 09 8,031 19 47
48 23,00 28,41 7,718 43 8,000 26 48
49 22,23 27,55 7,662 36 7,966 17 49
50 21,47 26,71 7,602 01 7,929 50 50
51 20,72 25,88 7,537 13 7,889 67 51
52 19,98 25,06 7,467 48 7,846 46 52
53 19,26 24,25 7,393 87 7,799 65 53
54 18,56 23,44 7,316 31 7,748 34 54
55 17,86 22,65 7,232 34 7,693 55 55
56 17,18 21,86 7,144 14 7,633 63 56
57 16,52 21,08 7,051 78 7,568 96 57
58 15,86 20,31 6,952 25 7,499 27 58
59 15,23 19,54 6,850 04 7,423 21 59
60 14,61 18,78 6,742 06 7,341 35 60
61 14,01 18,04 6,630 10 7,254 57 61
62 13,42 17,30 6,512 32 7,160 20 62
63 12,86 16,58 6,393 01 7,060 46 63
64 12,31 15,88 6,268 22 6,955 37 64
65 11,77 15,18 6,137 89 6,841 61 65
66 11,26 14,51 6,007 26 6,723 93 66
67 10,76 13,85 5,871 65 6,598 93 67
68 10,28 13,20 5,734 03 6,466 35 68
69 9,81 12,57 5,591 82 6,328 18 69
70 9,37 11,96 5,451 65 6,184 66 70
71 8,94 11,37 5,307 75 6,036 07 71
72 8,54 10,80 5,167 44 5,882 78 72
73 8,15 10,24 5,024 37 5,722 22 73
continued
790
Appendices
APPENDIX B
Life expectancy and present value tables (Table A) (continued)
Present value of R1
Age Expectation of life Age
per annum for life
Male Female Male Female
74 7,77 9,70 4,878 76 5,557 43 74
75 7,41 9,18 4,734 90 5,388 93 75
76 7,07 8,68 4,593 54 5,217 27 76
77 6,73 8,21 4,446 63 5,046 79 77
78 6,41 7,75 4,303 09 4,870 92 78
79 6,10 7,31 4,158 98 4,693 89 79
80 5,82 6,89 4,024 40 4,516 47 80
81 5,55 6,50 3,890 51 4,343 99 81
82 5,31 6,13 3,768 02 4,173 15 82
83 5,09 5,78 3,652 76 4,004 82 83
84 4,89 5,45 3,545 46 3,839 88 84
85 4,72 5,14 3,452 32 3,679 21 85
86 4,57 4,85 3,368 64 3,523 71 86
87 4,45 4,58 3,300 66 3,374 26 87
88 4,36 4,33 3,249 07 3,231 75 88
89 4,32 4,11 3,225 97 3,102 96 89
90 4,30 3,92 3,214 38 2,989 12 90
The above tables have been extracted from Government Notice R1942 dated 23 Sep-
tember 1977.
791
APPENDIX C
Annuity table (Table B)
Present value of R1 per annum capitalised at 12% over fixed periods
Year Amount Year Amount Year Amount Year Amount Year Amount
1 0,892 9 21 7,562 0 41 8,253 4 61 8,325 0 81 8,332 5
2 1,690 0 22 7,644 6 42 8,261 9 62 8,325 9 82 8,332 6
3 2,401 8 23 7,718 4 43 8,260 8 63 8,326 7 83 8,332 6
4 3,037 4 24 7,784 3 44 8,276 4 64 8,327 4 84 8,332 7
5 3,604 8 25 7,843 1 45 8,282 5 65 8,328 1 85 8,332 8
6 4,111 4 26 7,895 7 46 8,288 0 66 8,328 6 86 8,332 8
7 4,563 8 27 7,942 6 47 8,292 8 67 8,329 1 87 8,332 9
8 4,967 6 28 7,984 4 48 8,297 2 68 8,239 6 88 8,333 0
9 5,328 2 29 8,021 8 49 8,301 0 69 8,330 0 89 8,333 0
10 5,650 2 30 8,055 2 50 8,304 5 70 8,330 3 90 8,333 0
11 5,937 7 31 8,085 0 51 8,307 6 71 8,330 7 91 8,333 1
12 6,194 4 32 8,111 6 52 8,310 4 72 8,331 0 92 8,333 1
13 6,423 6 33 8,135 4 53 8,312 8 73 8,331 2 93 8,333 1
14 6,628 2 34 8,156 6 54 8,315 0 74 8,331 4 94 8,333 1
15 6,810 9 35 8,175 5 55 8,317 0 75 8,331 6 95 8,333 2
16 6,974 0 36 8,192 4 56 8,318 7 76 8,331 8 96 8,333 2
17 7,119 6 37 8,207 5 57 8,320 3 77 8,332 0 97 8,333 2
18 7,249 7 38 8,221 0 58 8,321 7 78 8,332 1 98 8,333 2
19 7,365 8 39 8,233 0 59 8,322 9 79 8,332 3 99 8,333 2
20 7,469 4 40 8,243 8 60 8,324 0 80 8,332 4 100 8,333 2
792
Appendices
APPENDIX D
Write-off periods based on Interpretation Note No. 47
Period of write-off
Item
(Number of years)
Adding machines 6
Air conditioners
Window type 6
Mobile 5
Room unit 10
Air conditioning assets (excluding pipes, ducting and vents):
Air handling units 20
Cooling towers 15
Condensing sets 15
Chillers:
Absorption type 25
Centrifugal 20
Aircraft: Light passenger/commercial/helicopters 4
Arc welding equipment 6
Artefacts 25
Balers 6
Battery chargers 5
Bicycles 4
Boilers 4
Bulldozers 3
Bumping flaking 4
Carports 5
Cash registers 5
Cell phone antennae 6
Cell phone masts 10
Cellular telephones 2
Cheque writing machines 6
Cinema equipment 5
Cold drink dispensers 6
Communication systems 5
Compressors 4
Computers
Mainframe 5
Personal 3
Computers software (main frames)
Purchased 3
Self developed 1
Computers software (personal computers) 2
Concrete mixers (portable) 4
Concrete transit mixers 3
Containers (large metal type used for transport freight) 10
Crop sprayers 6
Curtains 5
Debarking equipment 4
Delivery vehicles 4
Demountable partitions 6
Dental and doctors’ equipment 5
Dictaphones 3
Drilling equipment (water) 5
Drills 6
continued
793
Period of write-off
Item
(Number of years)
Electric saws 6
Electrostatic copiers 6
Engraving equipment 5
Escalators 20
Excavators 4
Fax machines 3
Fertiliser spreaders 6
Firearms 6
Fire extinguishers (loose units) 5
Fire detection systems 3
Fishing vessels 12
Fitted carpets 6
Food bins 4
Food-conveying systems 4
Fork-lift trucks 4
Front-end loaders 4
Furniture and fittings 6
Gantry cranes 6
Garden irrigation equipment (movable) 5
Gas cutting equipment 6
Gas heaters and cookers 6
Gearboxes 4
Gear shapers 6
Generators (portable) 5
Generators (standby) 15
Graders 4
Grinding machines 6
Guillotines 6
Gymnasium equipment
Cardiovascular equipment 2
Health testing equipment 5
Weights and strength equipment 4
Spinning equipment 1
Other 10
Hairdressers’ equipment 5
Harvesters 6
Heat dryers 6
Heating equipment 6
Hot water systems 5
Incubators 6
Ironing and pressing equipment 6
Kitchen equipment 6
Knitting machines 6
Laboratory research equipment 5
Lathes 6
Laundromat equipment 5
Law reports: Sets (legal practitioners) 5
Lift installations (goods/passengers) 12
Medical theatre equipment 6
Milling machines 6
Mobile caravans 5
Mobile cranes 4
Mobile refrigeration units 4
continued
794
Appendices
Period of write-off
Item
(Number of years)
Motors 4
Motorcycles 4
Motorised chain saws 4
Motorised concrete mixers 3
Motor mowers 5
Musical instruments 5
Navigation systems 10
Neon signs and advertising boards 10
Office equipment – electronic 3
Office equipment – mechanical 5
Oxygen concentrators 3
Ovens and heating devices 6
Ovens for heating food 6
Packaging and related equipment 4
Paintings (valuable) 25
Pallets 4
Passenger cars 5
Patterns, tooling and dies 3
Pellet mills 4
Perforating equipment 6
Photocopying equipment 5
Photographic equipment 6
Planers 6
Pleasure craft etc. 12
Ploughs 6
Portable safes 25
Power tools (hand-operated) 5
Power supply 5
Public address systems 5
Pumps 4
Race horses 4
Radar systems 5
Radio communication equipment 5
Refrigerated milk tankers 4
Refrigeration equipment 6
Refrigerators 6
Runway lights 5
Sanders 6
Scales 5
Security systems (removable) 5
Seed separators 6
Sewing machines 6
Shakers 4
Shop fittings 6
Solar energy units 5
Special patterns and tooling 2
Spin dryers 6
Spot welding equipment 6
Staff training equipment 5
Surge bins 4
Surveyors
Instruments 10
Field equipment 5
continued
795
Period of write-off
Item
(Number of years)
Tape-recorders 5
Telephone equipment 5
Television and advertising films 4
Television sets, video machines and decoders 6
Textbooks 3
Tractors 4
Trailers 5
Traxcavators 4
Trolleys 3
Trucks (heavy duty) 3
Trucks (other) 4
Truck mounted cranes 4
Typewriters 6
Vending machines (including video game machines) 6
Video cassettes 2
Warehouse racking 10
Washing-machines 5
Water distillation and purification plant 12
Water tankers 4
Water tanks 6
Weighbridges (movable parts) 10
Wire line rods 1
Workshop equipment 5
X-ray equipment 5
796
Appendices
APPENDIX E
Table of interest rates contained in the Income Tax Act, 1962
Fringe benefit low interest loans – paragraph (a) of the definition of ‘official rate of in-
terest’ in paragraph 1 of the Seventh Schedule to the Act
Date from Date to Rate
1.08.2017 31.03.2018 7.75%
1.04.2018 30.11.2018 7.50%
1.12.2018 31.07.2019 7.75%
1.08.2019 31 January 2020 76.50%
1.02.2020 31.03.2020 7.25%
1.04.2020 30.04.2020 6.25%
1.05.2020 31.05.2020 5,25%
1.06.2020 31.07.2020 4.75%
From 1.08.2020 Until change in the repo rate 4.50%
Interest payable by taxpayers on an amount of tax which is not paid on the date pre-
scribed for payment – paragraph (b) of the definition of ‘prescribed rate’ in section 1 of the
Act
Date from Date to Rate
01.11.2017 30.06.2018 10.25%
01.07.2018 28.02.2019 10.00%
03.03.2019 31.10.2019 10.25%
01.11.2019 30.04.2020 10.00%
01.05.2020 30.06.2020 9.75%
01.07.2020 31.08.2020 7.75%
01.09.2020 31.10.2020 7.25%
01.11.2020 Until change in PFMA* rate 7.00%
* Public Finance Management Act 1 of 1999
797
Interest payable to taxpayers on credit amounts under section 89quat(4) of the Act –
paragraph (a) of the definition of ‘prescribed rate’
Date from Date to Rate
01.11.2017 30.06.2018 6.25%
01.07.2018 28.02.2019 6.00%
01.03.2019 31.10.2019 6.25%
01.11.2019 30.04.2020 6.00%
01.05.2020 30.06.2020 5.75%
01.07.2020 31.08.2020 3.75%
01.09.2020 31.10.2020 3.25%
01.11.2020 Until change in PFMA* rate 3.00%
* Public Finance Management Act 1 of 1999
798
Appendices
APPENDIX F
Employee-owned vehicles (section 8(1))
Scale of values
Value of the vehicle (including VAT) Fixed cost Fuel cost Maintenance
cost
Simplified method:
Where the amount of the allowance is based on the actual distance travelled by the
receiver (employee) and no other compensation is received (except for parking and
toll fees), a rate per kilometre of 398 cents can be used at the option of the employee.
799
APPENDIX G
Master’s fees applicable to estates from 1 January 2018 (Government Gazette No
41 224)
Total value according to executor’s or curator’s account Master’s Fees
Under R250 000 Nil
Between R250 000 and R399 999 R600
From R400 000 with each increase of a full R100 000 Add R200
To a maximum of R7 000
On an estate of R3 600 000 and more
800