Study Guide 2023

Taxation 3A
BACHELOR OF COMMERCE IN ACCOUNTING
MODULE: TAXATION 3A
MODULE CODE: TAX310
STUDY GUIDE 2023

Taxation 3A
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Taxation 3A
Table of Contents
1. About Brand ................................................................................................................................... vi

2. Our Teaching and Learning Methodology..................................................................................... vii
Icons ..................................................................................................................................... viii
3. Introduction to the Module ............................................................................................................x
Module Information ................................................................................................................x
Module Purpose ......................................................................................................................x
Outcomes ................................................................................................................................x
Assessment ............................................................................................................................ xi
Pacer ..................................................................................................................................... xii
a) Campus Activities .................................................................................................................... xii
b) Teaching and Learning Topic ............................................................................................... xii
1 .................................................................................................................................................... xii
1 .................................................................................................................................................... xii
2 .................................................................................................................................................... xii
2 .................................................................................................................................................... xii
2 .................................................................................................................................................... xii
2 .................................................................................................................................................... xii
c) Face-to-face topics .................................................................................................................. xii
d) Online topics ............................................................................................................................. xii
Planning Your Studies .......................................................................................................... xiii
4. Prescribed Reading ...................................................................................................................... xiv
Prescribed Book ................................................................................................................... xiv
Recommended Articles ........................................................................................................ xiv
Recommended Multimedia ................................................................................................. xiv
5. Module Content ........................................................................................................................... xvi
STUDY UNIT 1: SPECIAL DEDUCTIONS AND ASSESSED LOSSES ............................................ 1
5.1.1. Introduction ................................................................................................................... 2
5.1.2. Employee-related expenses .......................................................................................... 2
5.1.3. Legal Expenses (s 11(c)) ................................................................................................. 4
5.1.4. Repairs (s 11(d)) ............................................................................................................. 5
5.1.5. Bad debts (s 11(i)) .......................................................................................................... 5
5.1.6. Doubtful debt allowance (s 11(j)) ................................................................................. 5
5.1.7. Repayment of employee benefits (s 11 (nA)) ............................................................... 7
5.1.8. Venture Capital Company shares (s 12J)....................................................................... 7
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5.1.9. Donations S18 (A) .......................................................................................................... 7

5.1.10. Allowance on credit sales (debtors’ allowance) (s 24) ................................................. 7
5.1.11. Future expenditure on contracts (s 24C) ...................................................................... 8
5.1.12. Assessed losses (s 20) .................................................................................................... 8
5.1.13. Conclusion ................................................................................................................... 11
5.1.14. Revision Questions ...................................................................................................... 11
5.1.15. Self-check activity ........................................................................................................ 11
STUDY UNIT 2: VALUE ADDED TAX ..................................................................................... 14
5.2.1. INTRODUCTION ........................................................................................................... 14
5.2.2. REGISTRATION FOR VAT .............................................................................................. 15
5.2.3. BASICS OF INPUT VAT .................................................................................................. 17
5.2.4. BASICS OF OUTPUT VAT .............................................................................................. 19
5.2.5. TYPES OF SUPPLIES: ..................................................................................................... 19
5.2.6. ACCOUNTING BASIS .................................................................................................... 20
5.2.7. CALCULATION OF VAT ................................................................................................. 22
5.2.8. DEEMED SUPPLIES ....................................................................................................... 23
5.2.9. Conclusion ................................................................................................................... 25
5.2.10. Revision questions....................................................................................................... 26
STUDY UNIT 3: CAPITAL ALLOWANCES AND RECOUPEMENTS .......................................... 27
5.3.1. Introduction ................................................................................................................. 27
5.3.2. Disposal of depreciable asset ...................................................................................... 28
5.3.3. Replacement asset: Recoupment (s 8(4)(e))............................................................... 30
5.3.4. Process of manufacture............................................................................................... 30
5.3.5. Assets owned by a small business corporation (s 12e) .............................................. 30
5.3.6. Assets used in process of manufacture (section 12c)................................................. 31
5.3.7. Wear-and tear-allowances s 11(e) .............................................................................. 32
5.3.8. Leased assets ............................................................................................................... 33
5.3.9. Conclusion ................................................................................................................... 35
STUDY UNIT 4: SOLE TRADERS AND PARTNERSHIPS .......................................................... 37
5.4.1. Introduction ................................................................................................................. 37
5.4.2. Sole trader ................................................................................................................... 38
5.4.3. Partnership .................................................................................................................. 39
5.4.4. Basic calculation of a partner’s taxable income ......................................................... 40
5.4.5. Dissolution of a partnership agreement ..................................................................... 42
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5.4.6. Partnership and VAT ................................................................................................... 42

5.4.7. Conclusion ................................................................................................................... 44
STUDY UNIT 5: DONATIONS TAX......................................................................................... 45
5.5.1. Introduction ................................................................................................................. 45
5.5.2. Property and donation ................................................................................................ 46
5.5.3. Persons liable for donations tax ................................................................................. 48
5.5.4. Certain donations by a company (s57) ....................................................................... 49
5.5.5. Donations by spouses married in community of property (S57A) ............................. 50
5.5.6. Exemptions .................................................................................................................. 50
5.5.7. General exemptions for donors other than a natural persons (S 56(2)(a)) ............... 51
5.5.8. General exemptions for a natural person (s 56(2)(b))................................................ 51
5.5.9. Valuations .................................................................................................................... 51
5.5.10. Fiduciary interest ......................................................................................................... 52
5.5.11. Usufructuary interest .................................................................................................. 52
5.5.12. Valuation of limited interests: Fiduciary, usufructuary or any like interests (s
62(1)(a), (2) and (3)) .................................................................................................................... 52
5.5.13. Valuation of a donation: Bare dominium ................................................................... 53
5.5.14. Conclusion ................................................................................................................... 55
STUDY UNIT 6: TRUST INCOME ........................................................................................... 57
5.6.1. Introduction ................................................................................................................. 57
5.6.2. Categories of trusts ..................................................................................................... 58
5.6.3. Tax on trusts ................................................................................................................ 58
5.6.4. Income tax consequences of trusts............................................................................. 60
5.6.5. Conclusion ................................................................................................................... 63
STUDY UNIT 7: FOREIGN EXCHANGE .................................................................................. 64
5.7.1. Introduction ................................................................................................................. 66
5.7.2. Translation of foreign currency amounts ................................................................... 67
5.7.3. Basic operation of section 24i ..................................................................................... 67
5.7.4. Exchange difference [section 24i(1)]........................................................................... 67
5.7.5. Exchange item [section 24I(1)] .................................................................................... 68
5.7.6. Local currency and foreign currency [section 24I(1)] ................................................. 68
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5.7.7. Functional currency [section 1(1)] .............................................................................. 70

5.7.8. Transaction date [section 24I(1)] ................................................................................ 70
5.7.9. Translate [section 24I(1)] ............................................................................................ 70
5.7.10. Realised [section 24I(1)] .............................................................................................. 71
5.7.11. Ruling exchange rate [section 24I(1)] ......................................................................... 71
5.7.12. Spot rate [section 1(1)]................................................................................................ 72
5.7.13. Average exchange rate [section 1(1)] ......................................................................... 75
5.7.14. Application of section 24I(1) to (3) to specific exchange items ................................. 75
5.7.15. Debt in foreign currency incurred by or payable to a person .................................... 77
5.7.16. Transaction date and realisation date in relation to a debt denominated in foreign
currency owed by or to a person ................................................................................................ 78
5.7.17. Ruling exchange rates in relation to debt ................................................................... 78
5.7.18. Acquisition and disposal rates on acquisition and disposal of debt .......................... 85
5.7.19. A forward exchange contract ...................................................................................... 89
5.7.20. Conclusion ................................................................................................................... 94
STUDY UNIT 8: INVESTMENT AND FUNDING INSTRUMENTS............................................. 96
5.8.1. Introduction ................................................................................................................. 97
5.8.2. Debt instruments......................................................................................................... 97
5.8.3. Equity instruments ...................................................................................................... 99
5.8.4. Hybrid instruments.................................................................................................... 100
5.8.5. Derivative instruments .............................................................................................. 102
5.8.6. Conclusion ................................................................................................................. 105
5.8.7. Revision questions..................................................................................................... 105
5.8.8. Self-check activity ...................................................................................................... 105
6. References ................................................................................................................................. 105
7. Version Control .......................................................................................................................... 106
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1. ABOUT BRAND
Damelin knows that you have dreams and ambitions. You’re thinking about the future, and how the
next chapter of your life is going to play out. Living the career, you’ve always dreamed of takes some
planning and a little bit of elbow grease, but the good news is that Damelin will be there with you
every step of the way.
We’ve been helping young people to turn their dreams into reality for over 70 years, so rest assured,
you have our support.
As South Africa’s premier education institution, we’re dedicated to giving you the education
experience you need and have proven our commitment in this regard with a legacy of academic
excellence that’s produced over 500 000 world – class graduates! Damelin alumni are redefining
industry in fields ranging from Media to Accounting and Business, from Community Service to Sound
Engineering. We invite you to join this storied legacy and write your own chapter in Damelin’s history
of excellence in achievement.
A Higher Education and Training (HET) qualification provides you with the necessary step in the right
direction towards excellence in education and professional development.
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2. OUR TEACHING AND LEARNING METHODOLOGY
Damelin strives to promote a learning-centred and knowledge-based teaching and learning

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

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

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

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

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

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

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

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

Discuss the topic in your study group or online forum.
Think point
Reflect, analyse and discuss, journal or blog about the idea(s).
Video / audio
Access and watch/listen to the video/audio clip listed.
Vocabulary
Learn and apply these terms.
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Taxation 3A
3. INTRODUCTION TO THE MODULE
Welcome to Taxation 3A
Module Information
Qualification title Taxation 3A
Module Title Taxation 3A
NQF Level 7
Credits 10
Notional hours 100
Module Purpose
The purpose of this module is to introduce the theoretical and practical knowledge concerning
taxation of individual business entities (Gross Income and deductions, Capital Allowances, Value
Added Tax, Sole Traders, Partnerships, Companies, Donations Tax, Trust Income, and powers and
duties of the Commissioner for SARS).
Outcomes
At the end of this module learners should be able to:
• Establish which expenses are deductible for tax purposes;

• Able to calculate assessed loss and special allowances for suspensive sales.
• Explain how VAT system works;
• Identify when and what VAT rate is levied;
• Understand the treatment of VAT in the accounting records;
• Calculate the Input and Out VAT amounts and the reconciliation thereon;
• Distinguish between the different types of assets and the capital allowances applicable to
each.
• Determine and calculate the recoupment or allowance when a capital asset is disposed of;
• Calculate and discuss the tax consequences of leased assets;
• Calculate and discuss the capital allowances available on intellectual property and research
and development;
• Implement the calculation of the sole trader’s taxable income.
• Explain the sharing of partnership income and the allocation of specific incomes and
expenditures between partners;
• Calculation of the partner’s taxable income;
• Explain the tax consequences for partners on dissolution or termination of a partnership
agreement.
• Explain the requirements of the donations tax;
• Identify when a disposal of property is a donation;
• Calculate the donations tax payable on any donation at the applicable tax rate;
• Distinguish between the different types of trusts available;
• Calculate the taxable income of all related parties to a trust in respect of amounts earned;
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• Calculate the capital gain of all related parties to a trust resulting from a disposal of an asset
by the trust;
• Discuss how foreign currency amounts should be translated to rand for tax purposes;
• Explain and calculate the tax treatment of foreign exchange differences on transactions with
connected persons and controlled foreign companies;
• Apply the provisions of section 24I in tax calculations;
• Determine whether a financial arrangement constitutes an instrument and calculate the
interest in respect of instruments in terms of section 24J;
• Determine whether interest received by the taxpayer will be subject to tax;
• Explain and calculate the tax implications of equity instruments held by investors and those
issued by investees;
• Identify debt instruments that may constitute hybrid debt instruments.
Assessment
You will be required to complete both formative and summative assessment activities.
Formative assessment:
These are activities you will do as you make your way through the course. They are designed to help
you learn about the concepts, theories and models in this module. This could be through case studies,
practice activities, self-check activities, study group / online forum discussions and think points.
You may also be asked to blog / post your responses online.
Summative assessment:
You are required to do one test and one assignment. For online students, the tests are made up of the
revision questions at the end of each unit. A minimum of five revision questions will be selected to
contribute towards your test mark.
Mark allocation
The marks are derived as follows for this module:
Test 20%
Assignments 20%
Exam 60%
TOTAL 100%
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Taxation 3A
Pacer
The table below will give you an indication of which topics you need to include from the module
pacer.
Faculty Faculty of Commerce

Qualification
Bachelor of Accounting
Title
Module Title TAXATION 3A
Module NQF 7 Credits 10
Semester 1
Prescribed Textbook:
Title: SILKE – South African Income Tax 2023
Edition: 2023
Authors: Aletta Koekemoer (Author) , Madeleine Stiglingh (Author) , Jolanie Sune Wilcocks (Author) ,
P van der Zwan (Author) , L van Heerden (Author)
ISBN: 9781776174768
Weeks a) Campus Activities Study Textbook
2022 b) Teaching and Learning Topic Guide Chapter
Unit Number
Number
27 Feb – 3 March Student Orientation
Lectures Start 1ST Term (7 March) 1
Face-to-face topics
1
6– 10 March • Special deductions and assessed losses
Online topics 1
• Special deductions and assessed losses

Face-to-face topics 2
2 • Value Added Tax
13– 17 March Online topics 2
• Value Added Tax
Face-to-face topics 2
3 • Value Added Tax
2
20 – 24 March Online topics
• Value Added Tax
c) Face-to-face topics 3
4 • Capital Allowances & Recoupments
27 – 31 March d) Online topics 3
• Capital Allowances & Recoupments
Face-to-face topics (Assignment due 8 April) 3
5 • Capital Allowances & Recoupments
3 April– 6 April Online topics 3

• Capital Allowances & Recoupments
1st Term Ends (14 April) 4
6 Face-to-face topics
• Sole Trader & Partnerships
11 – 14 April
Online topics 4
• Sole Trader & Partnerships
17 – 21 April Midterm Break
24 – 28 April Tests Start (on 24 April)
2 May – 5 May Tests End (5 May)
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Taxation 3A
Lectures Start 2nd Term (8 May) 5

7 Face to face topics
8 – 12 May • Donations Tax
Online topics 5
• Donations Tax
Face to face topics 6
8 • Trusts
15 – 19 May Online topics 6
• Trusts
9 • Foreign Exchange
22 – 26 May Online topics 7
• Foreign Exchange
10 • Foreign Exchange
29 May – 2 June Online topics 7
• Foreign Exchange
11
• Investments & Funding Instruments
5– 9 June Online topics 8
12 • Investments & Funding Instruments
12 – 15 June Online topics 8
19 - 23 June Study Break
26 June – 7 July Final Exams
Planning Your Studies

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

1 10
2 14
3 12
4 10
5 12
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Taxation 3A
6 14
7 16
8 12
9
10
11
4. PRESCRIBED READING
Prescribed Book
§ Title: SILKE – South African Income Tax 2022
§ Edition: 2022
§ Authors: M Stiglingh, AD Koekemoer, L van Heerden, JS Wilcocks, P van der Zwan
§ ISBN: 9780639013978
Recommended Articles
• http://www.bdo.co.za/getmedia/1ed18ab6-f01e-4a62-83f2-ce1d315d8898/bdo-trust
• https://www.thesait.org.za/news/257024/What-is-interest-anyway-section-24J-and-
interest-deductions-.htm
• https://www.moneyweb.co.za/in-depth/fisa/yes-testamentary-trusts-are-still-useful/
• https://www.polity.org.za/article/an-overview-of-the-types-of-trusts-under-south-african-
law-2019-01-14
• https://www.taxtim.com/za/blog/sole-proprietor-or-company-whats-best-for-tax
Recommended Multimedia
Websites:
• www.SARS.gov.za
• https://www.findanaccountant.co.za/content_partnership-tax
• https://www.findanaccountant.co.za/content_sole-proprietor-tax
• https://www.taxtim.com/za/blog/sole-proprietor-or-company-whats-best-for-tax
• https://finugget.co.za/tax/donations-and-donations-tax-all-you-need-to-know/
• https://www.taxtim.com/za/blog/donations-tax-the-ins-and-outs-of-giving-and-receiving
• http://www.bdo.co.za/getmedia/1ed18ab6-f01e-4a62-83f2-ce1d315d8898/bdo-trust
• https://www.polity.org.za/article/an-overview-of-the-types-of-trusts-under-south-african-
law-2019-01-14
• https://www.moneyweb.co.za/in-depth/fisa/yes-testamentary-trusts-are-still-useful/
• https://www.rsm.global/southafrica/news/tax-implications-foreign-exchange-differences
• https://www.cacampus.co.za/unisa-cta-s24j-and-management-accounting/
• https://www.thesait.org.za/news/257024/What-is-interest-anyway-section-24J-and-
interest-deductions-.htm
Video / Audio
• https://www.youtube.com/watch?v=cgWRggdiKQ4
• https://www.youtube.com/watch?v=wXm0ILeEOUA
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• https://www.youtube.com/watch?v=acad-ryhdLs
• https://mayaonmoney.co.za/2019/10/tax-implications-of-helping-your-grandchild-to-save/
• https://www.youtube.com/watch?v=f__Q7r4eHGU
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5. MODULE CONTENT
You are now ready to start your module! The following diagram indicates the topics that will be
covered. These topics will guide you in achieving the outcomes and the purpose of this module.
Please make sure you complete the assessments as they are specifically designed to build you in your
learning.
Unit 1: Special Deductions and Assessed Lossed
Unit 2: VAT
Unit 3: Capital Allowances and Recoupments
Unit 4: Sole Trader and Partnerships
Unit 5: Donations Tax
Unit 6: Trust Income
Unit 7: Foreign Exchange
Unit 8: Investment and funding instruments
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STUDY UNIT 1: SPECIAL DEDUCTIONS AND ASSESSED
LOSSES
The purpose herein is to allow deductions that would not ordinarily be

available under the general deduction formula, either because they are of a
Purpose capital nature or they cannot satisfy the restrictive test that the expenditure
should be incurred in the production of income.
By the end of this unit, you will be able to:

• Explain special deductions and assessed losses.
• Identify the expenses that are deductible for tax purposes.
• Determine the wear-and-tear or depreciation capital allowances that are
deductible.
• Calculate the amounts that an employer may deduct for contributions
made to employee funds.
Learning • Calculate the amount an employer can deduct in respect of shares issued
Outcomes to employees in terms of section 8B.
• Determine which legal expenses are deductible under section 11C.
• Explain and calculate donations made to public benefit organisations and
other qualifying beneficiaries in terms of section 18A.
• Establish the amount of the obligation of future expenditure on contracts
in terms of section 24C.
• Calculate the tax implications of assessed losses section 20.
It will take you 10 hours to make your way through this unit.
Time
Important terms VCC Venture Capital Company
and definitions Assessed loss An amount by which the deductions allowed under s 11
exceeds the income from which they are deducted (s
20(2)).
x x
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5.1.1. Introduction
A taxpayer who undertakes a business operation will incur certain expenses in relation to the business.
Some of these expenses will be allowed as a deduction under the general deduction formulae (S 11(a)),
whereas other may not because they are of capital nature and or they have failed to satisfy the
restrictive test. Under the restrictive test any expenditure that becomes deductible should have been
incurred in the production of income. These expenditures that are otherwise not deductible will be
permitted in terms of a special deductions contained in the Income Tax Act 58 of 1962. Other
expenditures may not be deductible at all in the determination of income tax.
Section 11(x) also brings within the scope of section 11 all other amounts allowed to be deducted from
the income of the taxpayer in terms of any other provision in Part I of the Act, which deals with normal
tax. Section 23, on other hand, prohibits the deduction of certain expenditure and losses.
Note: As a rule, when an amount qualifies for deduction under both the general deduction formula
and a special deduction, it must be deducted only under the special deduction, even if this deduction
is more limited than the deduction that would have been allowed under the general deduction
formula.
Once you have studied this section, you should be able to explain special deductions and assessed
losses and their tax implications.
In this unit, we will cover:
• Employee-related expenses
• Legal expenses (s 11(c))
• Repairs (s 11(d))
• Bad debts (s 11(i))
• Doubtful debt allowance (s 11(j))
• Repayment of employee benefits (s 11 (nA) and 11(nB)
• Deductions in respect of the issue of Venture
• Donations to public benefit organisations and other qualifying beneficiaries (s 18A)
• Allowance for outstanding debt: Credit agreements and debtors’ allowance (s 24)
• Future expenditure on contracts (s 24C)
• Assessed losses (s 20)
5.1.2. Employee-related expenses

The Act makes provision for certain other employee-related expenses that may not necessarily be
deductible under the general deduction. In terms S11 (a) wages and salaries paid to persons working
in the tax payers’ business for the purposes of his trade are deductible as it is expenditure in the
production of income. Other employee expenses that qualify as a deduction are as follows.
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Restraint of trade payments S11 (cA)
A person usually undertakes not to exercise a trade, profession, or occupation in a specified area for
a defined period of time in return for compensation. It the ability to generate income further income
that is being sold by the employee, and this might be regarded as the sterilisation of a capital asset
and is capital in nature (Taeuber and Corssen (Pty) Ltd v SIR (1975 A)). These payments are, however,
expressly included in the determination of taxable income of certain taxpayers in certain
circumstances in terms of par (cA) or par (cB) of the definition of gross income. The employer will then
under the agreement have to pay that employee when they retire an amount of money called a
restraint of trade payment.
This is only if the employee is a natural person is or was a labour broker as defined in the Fourth
Schedule.
If the payments constitute an income in the hands of the recipient, the amount to be deducted may
not exceed for any year of assessment the lesser of,
• So much of the amount incurred as is equal to the amount divided by the number of years or
part thereof during which the restraint agreement will apply
• One third of the amount incurred
In S23(l) such a payment is prohibited but can only qualify under S 11(cA) the minimum period allowed
for this payment to be written off is three years.
Fund Contributions by employers (S11 (l))
Section 11(l) permits deductions by employers on contributions made to all approved South African
retirement funds. Thus, employers are allowed to deduct any amount contributed by them during the
year of assessment, for the benefit of or on behalf of their employees or former employees or for any
dependant or nominee of a deceased employee or former employee. The section effectively permits
employers to deduct any pension, provident or retirement annuity fund in the determination of their
taxable income. It should be noted however, that, the deductions are effectively unlimited.
It must be borne in mind that contributions to benefit funds (including medical schemes) are no longer
allowed under section 11(l), as they are only allowed under section 11(a).
Deductions of medical lump sum payments (s 12M)
Some employers, in order to attract and retain a high standard of employees, cover (either fully or
partially) medical scheme contributions of former employees after retirement. So, in the
determination of his taxable income from carrying on any trade, an employer will be allowed a
deduction of the full lump sum in accordance with the provisions of (s 12M(2)).
Shares issued by employers in terms s8B (s 11(lA)).
Section 11(A) allows for the deduction by an employer of the market value of any qualifying equity
shares granted to an employee, as contemplated in s 8B on the date that the shares are granted to an
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Taxation 3A
employee, less any consideration paid by that employee for the shares. However, the deduction is
limited to a maximum of R10 000 per employee within the applicable year of assessment.
Furthermore, section 8B stipulates the maximum value of shares issued to an employee in any five-
year period may not exceed R50 000. The employee may only deduct R10 000 per year per employee,
and any excess may be carried forward to the following year of assessment subject to the annual limit
of R10 000.
Annuities in respect of former employee’s S 11 (m)
If a company pays an annuity to a former employee or in the case of a partnership where an annuity
is paid to a former partner who has retired S11 (m) allows the company to deduct the amount of the
annuity in full on the following grounds:
▪ The employee retired because of old age, or an infirmity or ill health.

▪ Paid to a person who is dependent for his maintenance upon the former employee or partner.
If the former employee or partner is deceased, then the person must be someone who was
dependent upon the former employee or partner immediately prior to his death.
Learnership agreements (s 12H)
As from 1 October 2016 employers that offer learnership programmes have an incentive under this
section to provide regulated training to employees in order to encourage skills development. The
deduction is available when:
▪ An employer has entered into a registered learnership agreement during the year of
assessment in the course of trade
An employer is allowed a deduction of
R40 000 for an able-bodied learner who completed a qualification with an NQF level 1 up to 6 and
R20 000 for a learner who completes NQF 7 up to 10
R50 000 for every disabled learner who completes an NQF level 7 up to 10 and R60 000 for those that
complete a levels 1 up to 6
5.1.3. Legal Expenses (s 11(c))

Section 11(c) of the Income Tax Act provides for the deduction of legal expenses actually incurred
during the year in the course of or by reason of the ordinary operations undertaken by the taxpayer in
carrying on his trade. Thus, special deduction is allowed under s 11(c) for qualifying legal expenses that
would otherwise not be deductible under s 11(a). A deduction will be allowed during the year of
assessment on fees for the services of legal practitioners, expenses incurred in procuring evidence or
expert advice, court fees, witness fees and expenses, taxing fees, the fees and expenses of sheriffs or
messengers of court and other expenses of litigation that are of an essentially similar nature to any of
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Taxation 3A
these fees or expenses.

It is important to know which legal expenses are deductible and which are not. Keep the following
general rule in mind: If the expense, which caused the legal expense, is deductible, the legal expense
is also deductible and vice versa.
These legal expenses must be incurred in respect of any claim, dispute or court action arising from the
ordinary course of a taxpayer carrying on business. Any other legal expenses not related to the trade
may not be deducted.
Thus, in order, for the legal fees to be deductible theses expenses would have to be incurred in the
production of income; the causal connection with the taxpayers’ trade must be sufficient, in case the
legal expenses were incurred for a dual purpose, one deductible and the other not a reasonable
apportionment will have to be made.
5.1.4. Repairs (s 11(d))

Section 11(d) allows for a deduction from income, any expenditure actually incurred during the year
of assessment, on repairs or beetle treatment of property occupied for trade purposes or in respect
of which income is receivable. The beetle treatment will also include treatment during an initial
protective treatment or in the course of replacing infested woodwork as per SARS interpretation Note
No 74 (Issue 2) (issued on 14 December 2015. Furthermore, a deduction is allowed on expenditure
incurred for the repair of machinery, implements, utensils and other articles used for trade purposes.
5.1.5. Bad debts (s 11(i))

Most taxpayers sell goods on credit, if the debtor fails to pay the debt will be written off by the tax
payer, this section allows a tax payer to deduct from income the amount of any debts that have
become bad to the extent they have become bad during any year of assessment. This can only be
deducted if the amount was previously included in the taxpayers’ income in either the current year or
the previous year of assessment. These must be debts from trading activities not loans to workers.
5.1.6. Doubtful debt allowance (s 11(j))

Section 11 (j) provides for an allowance of the amount of debt owed to the taxpayer that is considered
doubtful. The provisions of section 11(j) of the Income Tax Act (“the Act”) allow for taxpayers to claim
tax relief in respect of doubtful debts. In its current form, and based on practice allowed by SARS, a
taxpayer could claim a 25% allowance on its doubtful debt provision, but as the allowance was at the
discretion of SARS, many taxpayers were able to motivate for a higher allowance.
However, in support of a shift towards a self-assessment income tax system, section 11 (j) was
amended for the years of assessments on or after 1 January 2019. In its amended format, it provides
more clarity on the allowances available for doubtful debts. So, there are two different allowance
options based on whether a taxpayer applied IFRS 9 to the debt in question for financial reporting
purposes, or not.
Where IFRS 9 is applied by taxpayers
Taxpayers will be able to claim a:
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▪ Deduction of 40% of the IFRS impairment at an amount equal to the lifetime expected credit
loss in respect of debts other than lease receivables (these would generally be classified as
stage 2 and stage 3 debts in terms of IFRS). Taxpayers may however obtain a directive from
SARS allowing for a deduction of up to 85% of such debts;
▪ Deduction of 40% of all debts disclosed as bad debts written off for financial reporting
purposes that have not been claimed as a bad debt under section 11(i) of the Income Tax Act,
provided that the debt has been included in the taxpayer’s income in the current or prior tax
years. Taxpayers may obtain a directive from SARS allowing for a deduction of up to 85% of
such debts; and
▪ Deduction of 25% of the remaining IFRS impairment in respect of debts other than lease
receivables.
Where IFRS 9 is not applied by taxpayers
Taxpayers will be able to claim a:
▪ Deduction of 40% of debts due to the taxpayer which are 120 days or more in arrears.
▪ Taxpayers may obtain a directive from SARS allowing for a deduction of up to 85% of such
debts; and
▪ Deduction of 25% of debts due to the taxpayer which are 60 days or more in arrears.
Example 1: Calculation of doubtful debt allowance
During the 2018 year of assessment, SARS allowed Chronicle Ltd to claim a debt allowance of 25%
of the total of list of doubtful debts. The list of doubtful debts amounted to R260 000. The
outstanding normal trade debtors amounted to R3 750 000 at 31 December 2018 and R4 200 000
at December 2019.
During the 2019 year of assessment a total impairment loss allowance (IFRS 9 loss allowance) of
R200 000 was determined by Chronicle Ltd in terms of IFRS 9. It consisted of R75 000 measured at
an amount equal to the lifetime expected credit loss and R125 000 measured at an amount equal
to the 12-month expected credit loss. Chronicle Ltd has never received any income from lease
contracts.
You are required to calculate the effect on taxable income in respect of the doubtful debt allowance
for Chronicle Ltd for the 2019 year of assessment.
Solution:
Year ended December 2019
Add back: 2018 doubtful debt allowance (R260 000 x 25%) …………R65 000
40% x R75 000 (amount equal to lifetime credit loss) plus
25% x R125 000 (amount equal to 12 month expected credit loss)
Less 2019 doubtful debt allowance (s 11(j)(i)) ……………………………… (R61 250)
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Refer to pages 321 - 324 in your prescribed textbook for a comprehensive

explanation of doubtful debt allowance.
5.1.7. Repayment of employee benefits (s 11

(nA))
An employee can get a deduction for the amount refunded to their employer according to section
11(nA) of the Income Tax Act, if the requirements are met. The refund can, however, only be deducted
from the employee’s taxable income in that year of assessment where the refund has been made. The
deduction is a gross amount (not net of tax previously paid). The deduction applies only to cash that
has been refunded, not to any other asset given to the employer. The deduction is limited to the
contractual amount that was agreed to be refunded.
5.1.8. Venture Capital Company shares (s 12J)

Section 12J contains a tax incentive to assist small and medium-sized businesses and junior mining
exploration companies in terms of equity finance. It provides for the possible deduction of the amount
invested in such enterprises through Venture Capital Companies (VCCs).
5.1.9. Donations S18 (A)

Section 18A(1) permits a deduction for bona fide donations, in cash or property in kind, made by any
taxpayer to specified beneficiaries. The donations must actually be paid or transferred during the year
assessment to qualify for possible deduction. The deduction of all qualifying donations made by the
taxpayer during the year of assessment is limited to 10% of the taxable income as calculated before
allowing any deduction under s 18A or 6quat(1C).
Remember that a donation deduction can be allowed only if it is supported by a section 18A
receipt/certificate issued by the recipient of the donation.
5.1.10. Allowance on credit sales (debtors’

allowance) (s 24)
If a taxpayer sells goods on credit the whole amount is assumed to have accrued to the taxpayer on
the day of sale excluding any fiancé charges. The tax system sought to provide relief on taxpayers on
amounts accrued but not yet received.
The taxpayer may be allowed a debtor’s allowance if there is an agreement of sale. The debtors’
allowance is usually based on the taxpayers’ gross profit excluding finance charges. This amount must
note and will not increase the assessed loss of the taxpayer therefore it must be added back to the
taxable income in the following year
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5.1.11. Future expenditure on contracts (s 24C)

Section 24C provides for the deduction for certain future expenditure that will be incurred by a
taxpayer in the performance of his obligations under a contract from which he has derived income.
Sometimes taxpayers engaged in, for example, the construction industry or manufacturing, receive an
advance payment before the commencement of the work under a contract, to enable them to finance
the acquisition of materials, equipment and other expenditure relating to the contract.
Since this advance payment is included in gross income in terms of section 1, Section 24C grants these
taxpayers and others in similar circumstances an allowance for their future expenditure against the
advance payment received. The taxpayer’s calculation should be substantiated by supporting
evidence.
A Section 24C allowances is calculated as:
▪ Cost as a percentage of contract price multiplied by Income received or accrued in advance
▪ Less actual expenditure incurred in the year
The allowance may not exceed the amount received or accrued.
5.1.12. Assessed losses (s 20)

Section 20(1) (a) of the Act allows a deduction from taxable income a balance of assessed loss that has
been carried forward from the preceding year of assessment. A taxpayer whose trade expenditure in
a particular year of assessment exceeds his trade income for that year is entitled to carry forward to
the next year of assessment that difference, provided that there is no year in between where the
taxpayer stopped trading for the entire year of assessment.
Example 2: Calculation of basic assesses loss
Pelvest Ltd had an assessed loss of R300 000 in the 2017 year of assessment, and did not carry on
trade in 2018, but recommenced trading in 2019, when it derived a taxable income of R450 000.
You are required to determine the assessed loss for Pelvet Ltd.
Solution:
2017 - Year of assessment: Assessed loss R300 000
2018 - Year of assessment: Nil assessment (there is no taxable income or assessed loss: the
assessed loss of R300 000 established in 2017 cannot be carried forward because no trade was
carried on in 2018.
2019 - Year of assessment: Taxable income R450 000
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Case study/Caselet
Apply what you have learnt to the case study presented.
Grace Peace, aged 33 years, carries on a rental butchery business. On 1
March 2019 she purchased a building that was suitable for conversion
into a butchery business. Alterations commenced immediately and
were completed on 31 May 2019. The building cost R480 000, and the
cost of the alterations amounted to R720 000. On 1 March 2019, she
borrowed R1 200 000 to finance the purchase of the building and
invested R720 000 for three months, earning interest of R14 700. She
earned a further R22 050 interest from other investments. The cost of
the alterations was settled on their completion. No option of the
R1 200 000 loan was repaid during the 2020 year of assessment.
Interest of R90 000 was incurred thereon. On 1 June 2019, she moved
her butchery business out of its previously leased premises into the
new premises.
You are required to discuss whether the interest or similar payment

made during the 2020 year of assessment as per the above given
information, is deductible in the determination of her taxable income.
Practice
Practice the skills you have learned. Please check the corresponding
page numbers and examples according to your newly prescribed text
book.
• The application of the doubtful debt formula: Example 12.12 –
page 322
• Suspensive sales: Example 12.17 – page 333
• Section 24C allowance: Example 12.18 – page 335
• Comprehensive example: Example 12.24 – page 341
Reading
Read the section(s) of the prescribed text listed. Please check the
corresponding page numbers according to your newly prescribed text
book.
• Employee-related expenses – page 301
• Repairs – page 315
• Doubtful debts – page 321
• Allowances for outstanding debt – page 331
• Assessed losses – page 336
In your groups: Discuss and evaluate the special provisions governing
the taxation of income derived under qualifying suspensive sales or
credit agreements.
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Video / audio
Access and watch/listen to the video/audio clip listed.
http://taxstudents.co.za/videos/
5.1.13. Conclusion
In this chapter certain business deductions which would not qualify for deductions in terms of Section
11(a) because they are of capital nature (patent development expenditure, and fixed assets used for
scientific research) or have not actually been incurred (provisions for doubtful debts and future
expenditure on contracts) are discussed for which special provision has been made in the act.
5.1.14. Revision Questions

Answer the compulsory revision questions below.
a) Explain the tax treatment of employee-related expenses with regards

to restraint of trade payments (s 11(cA)).
b) Briefly discuss the deductibility of legal expenses as per (s 11(c)).
c) Distinguish between repairs and renewals as defined under section.
11d. Apply the relevant case law to support your answer.
d) Discuss the extent to which assessed losses are deductible in the
determination of normal tax payable.
e) Discuss the doubtful debt allowance as per (s 11(j))
Self-check activity
Check your progress by completing the self-check activity.
5.1.15. Self-check activity

Let’s see what you have learned so far by taking this short self-assessment:
Amathala (Pty) Ltd, whose financial year end is the last day of February, entered into a contract to
build a bridge on 20 February 2016 for a contract price of R1.5 million. The quantity surveyor of
Amathala estimated that it would cost allowable deductions of R1.15 million in carrying out its
obligations. As per contract, Amathala received a payment of R850 000 on 26 February 2016. It
commenced work on the contract on 3 March 2016 and completed the work on 13 December 2016,
when the balance of R650 000 became payable by the client and it incurred the anticipated
expenditure of R1.15 million.
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Taxation 3A
• During the preceding 2 years of assessment, Amathala had an assessed loss of R120 500 in
2014 and a taxable income of R65 000 in 2015 (before taking into account the 2014 assessed loss).
• Part of the estimated expenditure of R1.15 million is payment to 3 key researchers who are to
test the suitability of a new bridge design amounting to R105 000.
• If successfully designed, Amathala would want to patent this design, but the estimated cost
of registering the patent of 34 500 through attorneys was not included in the original estimate of R1.15
million since it was conditional. The patent was successfully registered on 30 May 2016.
• Amathala entered into learnership agreements with two new employees for a period of 12
months each, from 1 January 2016. One of the employees has a disability as defined. The agreements
comply with all the necessary requirements and are registered.
Required: Determine the taxable income of Amathala (Pty) Ltd for the 2016 and 2017 year of
assessment, assuming that the above is the only income and expenses.
Question 2: Assessed Loss carried forward
Below are the income and expenditure accounts of Mloto (Pty) Ltd which derives income
from letting property
2018 2019 2020

Income 150 000 240 000 480 000
Rent receivable 150 000 240 000 480 000
Expenditure 367 900 379 600 370 900

Rates and taxes 30 000 30 000 35 000
Repairs and maintenance 22 500 75 000 28 000
Insurance 7 500 7 500 7 500
Commission on rent
14 400 18 000 36 000
collected
Alterations to property 160 000 115 000 130 000
Interest on bond 120 000 120 000 120 000
Audit fees 9 000 9 000 9 000
Water charges 4 500 5 100 5 400
Net surplus/(loss) (R217 900) (R139 600) R109 100
Required: Determine the taxable income or assessed loss of Mloto (Pty) Ltd for each year
of assessment.
Question 3
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Taxation 3A
Furniture (Pty) Ltd is a South African resident company that manufacturers living room
furniture. The following information relates to its current year of assessment ending 31
March 2017.
Taxable income for the year before the below items 1 025 000
Notes
1. The company concluded a registered learnership agreement with Mr Naidoo that has
NQF level 4 qualification on 1 October 2018. The agreement was for 6 months period
ending 31 March 2019. Mr Naidoo successfully completed the learnership on 31 March
2019 and he doesn’t have a disability as defined. Mr Naidoo is entitled to a monthly
salary of R4 000 without any benefits. Mr Naidoo’s salary has been taken into account.
2. Furniture (Pty) Ltd paid the following restraint of trade payments to 2 former
employees who wanted to start their own furniture manufacturing concern. The
agreements concluded were the following:
Mr Jennings for 2 years R200 000
Mr Green for 4.5 years R450 000
3. Furniture Ltd paid the following annuities in the current year of assessment.
Mr Smit – a retired employee R15 000
Mrs Mabula – the widow of a former employee R27 000
R42 000
Payments are made annually and commenced in December 2018
4. Furniture Ltd donated the following amounts during the current year of assessment:
Nelson Mandela Children’s fund (S18A certificate obtained) R26 000
SAICA Thuthuka programme (no S18A certificate obtained) R5 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 2018 and a warehouse was leased from 1 July 2019 for a period of 3 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 on behalf of employees amount to R240 000 for the year.
8. The company conducts qualifying research and development activities. Research and
development expenses for the year of assessment amounted to R200 000. Assets
used in research activities were purchased on 30 June 2018 at a cost of R500 000 and
brought into use on the same date (necessary approval was obtained).
9. All amounts exclude VAT, unless otherwise stated.
Required:
Calculate Furniture (Pty) Ltd.’s taxable income for the year of assessment ended 31 March
2019.
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Taxation 3A
STUDY UNIT 2: VALUE ADDED TAX
The purpose of this study unit is to introduce students to the broad issues
Purpose within the South African VAT system and the determination of VAT on various
transactions.
• Explain how the VAT system works.
• Identify when and at what rate VAT is levied.
• State when a person needs to register as a vendor.
• Explain how the zero-rating of supplies works.
Learning
• Explain the requirements for a supply to be regarded as exempt supply.
Outcomes
• Determine which legal expenses are deductible under section 11C.
• Determine the value of a supply.
• List and explain the timing rules for supplies.
• Calculate the Input and Output VAT amounts.
Time
Important terms VAT Value-Added Tax
and definitions Vendor Business that is registered for VAT and that levies VAT on
the selling price of its goods and services.
Input VAT VAT component of the payment for goods and services
supplied to the vendor.
Output VAT Tax levied by a vendor for the supply of goods and
services.
5.2.1. INTRODUCTION
Value Added Tax (VAT) is an indirect tax levied by vendors on the supply of goods and services in terms
of the Value-Added Tax Act 89 of 1991. VAT was originally at 10% but this rate was increased to 14%
from 7 April 1993 and furthermore increased to 15% in 2018. Being an Indirect tax, VAT is ultimately
paid by the final consumer.
A vendor is any 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,
a deceased or insolvent estate, a trust fund and any foreign donor project; (according to the VAT Guide
202 – 29/01/2014)
Once you have studied this section you should be able to explain how the VAT system works and
determine the amount of both output and input VAT including the reconciliation of the final VAT
amount payable or refundable.
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Taxation 3A
In this study unit, you will cover:
• Registration of VAT
• Basics of input VAT
• Types of supplies
• Accounting Basis
• Calculation of VAT
• Deemed supplies
5.2.2. REGISTRATION FOR VAT

In terms of section 23(1), a person is required to register for VAT:
• At the end of the month during which the total value of the taxable supplies for the preceding
12 months exceeded R1 million;
• at the beginning of the month, if it is expected that the total value of the taxable supplies will
exceed R1 million in the next 12 months based on written contracts or agreements; or
• at the end of the month in which the total value of the taxable supplies made by foreign
suppliers of electronic services has exceeded R50 000. It is important to note that there is no
reference to tax periods or financial years; therefore, SARS will look at any consecutive period
of 12 months. The amount of R1 million refers to the value of the taxable supplies (thus
excluding any exempt supplies) and value excludes VAT (section 23(6)). In determining
whether the value (turnover) exceeds R1 million, the following must be excluded:
1. the supplies arising out of the cessation of an enterprise, or a substantial and permanent
supplies resulting from temporary abnormal circumstances, for example when the grasslands
of a sheep farmer used for grazing, are destroyed in a fire and the farmer is therefore forced
to sell all his sheep
2. Where a person carries on two separate businesses, he is obliged to register when the joint
taxable supplies of the two businesses exceed R1 million, because the tax authorities assumes
that it is the “person” who conducts the enterprise, not the “enterprise”, that registers for
VAT. If each business is conducted in a separate company (or other legal person), each
company is required to register only when the taxable supplies of that company exceed R1
million. Reduction in the size or scale of an enterprise;
3. supplies resulting from the replacement of capital assets; and Branches or divisions within an
enterprise may register as separate vendors if each branch:
4. maintains its own independent accounting system; and
5. can be separately identified by reference to the nature of the activities carried out or the
location of the branch or division (according to the VAT Guide 202 – 29/01/2014).
6. In order to determine whether the R1 million threshold has been met, all the taxable supplies
for the different branches or divisions must be added together.
Reduction in the size or scale of an enterprise;
• supplies resulting from the replacement of capital assets; and Branches or divisions within an
enterprise may register as separate vendors if each branch:
• maintains its own independent accounting system; and
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Taxation 3A
• can be separately identified by reference to the nature of the activities carried out or the location of
the branch or division.
All the taxable supplies of all the different branches or divisions should be added together to
determine whether the R1 million-threshold has been met
Example 1:
Mrs Zulu carries on three different enterprises that only make taxable supplies. All three enterprises
are carried on in her own name.
R
Enterprise 1: Turnover of 360 000 for 12 months (excluding VAT)
Enterprise 2; Turnover of 320 000 for 12 months (excluding VAT)
Enterprise 3: Turnover of 340 000 for 12 months (excluding VAT)
Total 1 020 000
You are required to determine whether Mrs Zulu must register for VAT purposes if the above
information applies to the twelve months ending 31 December 2019.
Solution:
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 will be required.
Example 2:
Paul is a plumber and carries on business as a sole trader. His turnover (excluding VAT) for the past
twelve months ending 31 December 2019 amounted to R550 000. He is also the sole member of a
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Taxation 3A
close corporation 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 must register for VAT purposes.
Solution:
A group of companies cannot register as a vendor; each subsidiary (person) must register
separately. Transactions within the group are therefore subject to VAT (unless section 8(25) applies
– see 1.12.8).
The VAT Act provides for certain requirements that must be fulfilled before a person may register,
such as having a fixed place of residence, having a bank account and keeping proper accounting
records. The onus rests on the person to register when it becomes necessary, and this must be done
within 21 days after a person has become liable for registration (according to section 22 of the Tax
Administration Act, Sixth Schedule). A person that is required to register must fully complete a VAT
101 form, which is obtainable from SARS’ website (http://www.sars.gov.za). All required
documentation should be attached to the registration form for the application to be valid, and the
form should be submitted to the SARS branch nearest the enterprise.
A person, who applies for registration and but does not provide all particulars and documents
required by SARS, will be regarded as not having applied for registration until all the particulars and
documents have been submitted to SARS. Where a person is obliged to register and fails to do so,
SARS may register that person (section 22 of the Tax Administration Act).
Voluntary registration will result in the levying of VAT on all taxable supplies, but this will allow the
vendor to claim input tax credits in the case of goods or services that he has acquired from vendors.
It is not always beneficial for a person to register voluntarily. The nature of his clients and the goods
or services rendered will usually determine whether a specific person should register. A person may
wish to register if he is supplying mainly to vendors or if he supplies zero-rated goods (for example
farmers or exporters).
A qualifying welfare organisation, foreign donor funded project, share-block company or
municipality may register voluntarily, without any minimum taxable supply or the conducting of an
enterprise requirement.
A person may, however, register voluntarily if such as person is conducting an enterprise and if:
• the value of the taxable supplies of all his enterprises are more than R50 000 during a previous
12-month period; or
• the total value of taxable supplies of that person has not exceeded R50 000, but is be expected to
exceed that amount within twelve months from the date.
5.2.3. BASICS OF INPUT VAT

Input tax is the VAT component on the payment for goods and services purchased by the vendor for
the purpose of making taxable supplies. This input tax can be deducted from the output tax in order
to calculate the total VAT payable or refundable.
To be able to claim input VAT the vendor must have documentation relating to the transaction, which
include tax invoices, tax debit notes and tax credit notes. If a vendor uses goods or services wholly
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Taxation 3A
(100%) in the course of making taxable supplies, (standard rated or zero-rated), that vendor will be
entitled to claim the full input tax incurred when acquiring those goods or services.
If a vendor uses the goods or services wholly in the course of making exempt supplies, that vendor is
not allowed to claim any input tax. If a vendor uses the goods or services only partially in the course
of making taxable supplies, either one of the following input tax deductions can be made: the full input
tax (so-called de minimis rule) – if the taxable use is 95% or more of the total intended use; or the
portion of the input tax that relates to the taxable supplies – if the taxable use is less than 95% (the
input tax being apportioned by the vendor).
In certain situations, input tax may not be claimed by a vendor. In such cases, input tax is denied even
if the vendor has paid input tax and is going to use the goods or services wholly for the making of a
taxable supply.
Input tax is denied for the following supplies:
Entertainment
This includes meals to staff, clients and business associates, golf days and business lunches
Club membership fees and subscriptions
Motor cars
This includes a motor vehicle, station-wagon, minibus and double-cab delivery vehicle, but excludes a
single cab bakkie.
Example 3:
Input tax apportionment

Sample CC owns a three-storey building. The ground floor and first floor accommodate various
businesses while the second floor is comprised of flats rented out as residential units. SARS has
agreed to an apportionment set at 80%. The following information has been provided to you (all
amounts exclude VAT):
Receipts
▪ Commercial rental received R240 000
▪ Residential rental received R 60 000
Payments
▪ Insurance (building) R 6 500
▪ Advertising (commercial business units) R 7 850
▪ Electricity and water (building) R 22 875
Required: Calculate the VAT payable by Sample CC.
Solution:
Output tax
Commercial rental received (R240 000 x 15%) R 36 000
Residential rental received (Exempt supply) Nil
Input tax
Insurance (R6 500 x 80% x 15%) R 780
Advertising R7 850 x 15%) R 1 178
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Electricity and water (R22 875 x 80% x 15%) R 2 745
5.2.4. BASICS OF OUTPUT VAT

Output tax is the tax charged under s 7(1) (a) by a vendor for the supply of goods or services by him.
A vendor who sells trading stock or provides a service to customers must pay over to SARS the VAT he
levied on every transaction. A person registered as a VAT vendor levies VAT on all business
transactions in respect of taxable supplies. That may also include the sale of capital Assets and trading
stock.
5.2.5. TYPES OF SUPPLIES:

Taxable supplies
Standard rate (15%)
Zero rate (0%)
Exempt supplies – No output VAT is charged
General rule:
Supply of Goods or services in South Africa by a vendor in the course or furtherance of an enterprise
carried on by him.
Zero rated supplies
If a vendor sells goods or services that are classified as zero-rated supplies, that vendor will be allowed
to claim back all the input tax (at 15%) related to the goods or services. This is because zero-rated
items are classed as taxable supplies.
• Exports; direct exports – goods delivered to an export country VAT charged at 0%
• The sale of a going concern; all the requirements for the sale of a going concern must be met
for the sale to be zero-rated. The parties must agree in writing that the enterprise will be an income-
earning activity and all the assets for carrying on the enterprise are disposed of; the parties have
agreed in writing that the sale will be inclusive of VAT at 0% and finally both parties must be registered
vendors
• Other examples of zero-rated include supplies such as fuel levy goods, basic foodstuffs
including brown bread, maize meal, milk, fresh fruit and vegetables.
Exempt supplies
If a business sells goods or services that are classified as exempt supplies, it is not permitted to charge
any output tax and will also not be able to claim back any of the input tax.
• Financial services
• Not all financial services are exempt, i.e. the supply of a cheque book
• Accommodation
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Taxation 3A
• Residential accommodation is exempt, but commercial accommodation is a taxable supply.
• Commercial accommodation
• >28 days VAT = 60% x 15%
• < 28 days VAT = 15%
• Other supplies such as the transport of fare-paying passengers, the supply of qualifying
educational services by the State and the supply of childcare services.
Exempt transport services - passenger transport in SA by taxi, bus or train
Taxable transport services - passenger transport by air or sea and transportation of parcels by road,
rail or sea.
Travel by air when any leg of the ticket is outside South-Africa, is zero-rated.
5.2.6. ACCOUNTING BASIS

VAT is levied on the invoice basis or payment basis.
Invoice Basis
Under this method of accounting vendors must account for the full amount of VAT included in the
price of the goods or services supplied in the tax period in which the time of supply has occurred. This
applies to the output tax liability on cash and credit sales as well as the input tax that may be deducted
on cash and credit purchases. Vendors must therefore account for the full amount of output tax on
any supplies made in the tax period, even where payment has not yet been received from the
recipient. Similarly, the full amount of input tax may be deducted on supplies received in the tax
period, even where payment has not yet been made. A tax invoice must however be held by the
vendor deducting the input tax. Furthermore, the vendor also needs to consider if the input tax on
any particular supply is specifically denied before deducting it. According to the general time of supply
rule,
Ø Invoice basis – when the supply is the earlier of:
• The time the invoice is issued; or
• The time payment is received by the supplier
Advantages of the Invoice system Disadvantages of the Invoice system
Deduct VAT incurred on purchases before Account for VAT on sales before receiving
payment. payment from debtors.
Fewer adjustments required when reconciling for List of debtors and creditors must be retained at
income tax purposes. the end of each tax period.
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Taxation 3A
Easy to calculate and implement accounting Can lead to cash flow problems.
systems (based on invoices issued/received for
sales and purchases).
All companies and closed corporations are registered on the invoice basis.
Payment basis
The payments basis (or cash basis) uses the same time of supply rule mentioned above, but the vendor
only accounts for VAT on actual payments made and actual payments received in respect of taxable
supplies during the period. The payments basis is therefore intended to help small businesses.
Advantages of the payment basis Disadvantages of the payment basis
Suits small business Not available to everyone
Facilitates cash flow Deduct VAT only after payments made to

suppliers
Advantageous when the vendor allows lengthy More difficult to implement accounting systems
periods of credit to manage, administer and calculate accurately
(for example, reconciliation with income tax
returns and adjustments).
Source: (SARS, VAT Guide for Vendors, 2016)
• The time of supply is important for VAT purposes as it determines when the vendor is
supposed to pay the output VAT and when s/he can claim the input VAT. The general rule is
that the time of supply is the earlier date between:
• the date of the invoice; or
• the date upon which the payment of the consideration is received by the supplier.
• The value of supply
• To calculate VAT on the value of a supply (which is the selling price excluding VAT),
multiply the value by the applicable tax fraction (in this case, 15/100).
• To calculate the VAT portion of the consideration (which is the selling price including
VAT), multiply the consideration by the tax fraction (in this case, 15/115).
The value of the supply of goods or services is either:
• The amount of money if the consideration is in money
OR
• The open-market value of the consideration if the consideration is not in money

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Taxation 3A
• Before VAT is added or included.
Example 4:
A vendor registered on the payment’s 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:
(a) According to this example, the value of the supply is lower than R100 000 and the time of
supply is the date the payment is received – that is 31 March.
(b) The value of the supply is lower than R100 000 and the time of supply is the date the payment
is received – that is 29 April.
(c) As the value of the supply exceeds R100 000, the time of supply is determined by applying the
time-of-supply rules for the invoice basis and that is the earlier 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 19 July.
5.2.7. CALCULATION OF VAT

The South African Revenue Service is a central levy collection agency in SA. The body enforces tax law
compliance, steering the country towards economic and social development. SARS provides an
elaborate description regarding the calculation of value-added tax. In doing the calculation, both
output and input taxes are fundamental. In a nutshell, Value Added Tax refund or payable is computed
by deducting the input tax liability from the output tax liability. Several terms are crucial in forming a
clear understanding of VAT calculations.
Output tax is what you have collected on behalf of SARS. It encompasses the charges added to services
or products, holding it tentatively in place of SARS until its due date. On the other hand, input tax
describes the already paid fee, representing the amount that SARS owes you. For instance, a business
expense that you can hold back its valid tax invoice. VAT control denotes the summary of input and
output taxes indicating whether the business should pay VAT or is owed by SARS.
Zero-rated items bring in no tax to SARS and are therefore not subject to taxation in the country.
Examples of these products include brown bread, maize, and fruits among others which are all taxed
at a rate of 0%. Another category of items are the standard rate items that attract a constant tax rate
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Taxation 3A
of 15%. These goods represent a significant part of the economy. VAT exempted items are excluded
from both standard rate taxation and zero rate taxation. Exempted services, for example, include
childcare services.
Step 1; Calculate output tax
Step 2; Calculate input tax
Step 3; Determine whether there are any VAT adjustments that must be taken into account.
Step 4; If the input tax is 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 calculate the VAT (15%) of something that costs R25 means we need to multiply R25 by 15%. And
since we now know that 15% is just (15/100) we can multiply it by R25. Like this:
To get the total cost including VAT, we add the VAT of R3.75 to the purchase price of R25, which
gives us R28.75.
Now that you know the math to calculate VAT, let’s look at a shortcut. To get the total cost of a price
including VAT, multiply that price by 1.15. Why 1.15? 15/100 = 0.15 which you need to add to the
price (1.00). Going back to the previous example, the total cost of R25 including VAT would be: R25 x
1.15 = R28.75.
5.2.8. DEEMED SUPPLIES

In order to avoid any confusion about whether a transaction is a supply or not, and whether certain
transactions are deemed to either be a supply of goods or a supply of services or not, deemed
provisions are contained in 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.
• Ceasing to be a vendor – The value of the supply is the open-market value for transactions
with connected persons. In other cases, the lesser of the original cost price and the open-
market value.
• Indemnity payments
• Long-term insurance does not attract VAT.
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Taxation 3A
• For short-term insurance compensation, you must know how the compensation was
received and by whom, but in most cases, you will have to account for output tax.
• Where an indemnity payment relates to the total reinstatement of goods stolen or

damaged beyond economic repair AND/OR the vendor was denied an input tax credit on
its acquisition (for example, a motor car), no deemed supply will arise in the hands of the
insured. A pay-out in respect of the repair of an asset will thus give rise to a deemed supply
(an output tax), since an input tax could be claimed on the repair expenses
• Where the insurer replaces the damaged goods, the insured is not deemed to have made
a supply, as the replacement of goods does not constitute an indemnity payment. The
insurer will, however, have made a taxable supply of the replacement goods to the
insured, but for an RNil consideration. The insurer will be entitled to an input tax
deduction on the acquisition of the replacement goods (www.sars.gov.za The VAT Guide
202 – 29/01/2014).
https://briefly.co.za/20862-how-calculate-vat-south-africa.html
https://justonelap.com/money-maths-how-to-calculate-vat/
Case study/Caselet
Nuvend (Pty) Limited only recently registered as a vendor. Its sales manager ha sjust
returned from a four-day out-of-town business trip to Cape Town. He has presented
the following exspense claim for this business trip to its bookkeeper:
Claims for expenses

Description Amount
Car hire 1 368
Insurance on hired car 228
Petrol on hired car 700
Hotel accommodation 7 296
Meals and refreshments (see below) 1 596
Telephone charges 114
Note: Included in the meals and refreshments total of R1 596 (see above), is R342
spent on entertaining of a customer who is based in Cape Town.
You are required to indicate to the bookkeeper the input tax that Nuvend (Pty)
Limited may deduct, and to determine the amount of this deduction.
Practice
Practice the skills you have learned. Please check the corresponding examples and
page numbers according to your newly prescribed text book!
• VAT on importation of goods: Example 31.8 – page 1024

• Zero rate supplies: Example 31.11 – page 1033
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Taxation 3A
• Indemnity payment (comprehensive): Example 31.18 – page 1041

• Journal entries of VAT transactions: Example 31.61 – page 1091-1093
Reading
Read the section(s) of the prescribed text listed. Please check the corresponding page
numbers according to your newly prescribed text book.
• Basics of input VAT – page 1013 and page 1056

• The accounting basis – page 1015
• Output VAT: Supply of goods or services – page 1017
• Deemed supplies – page 1048
• Time of supply – page 1051
• Value of the supply –page 1053
• Adjustments: 100% non-taxable use – page 1071
Critically discuss and evaluate the impact of VAT on income tax calculations.
Video / audio
https://www.youtube.com/watch?v=tmISqhPWSnU
https://briefly.co.za/20862-how-calculate-vat-south-africa.html
https://justonelap.com/money-maths-how-to-calculate-vat
5.2.9. Conclusion
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 complicated rule-based document with many exceptions.
In respect of supplies made, great care must be taken to distinguish between the three VAT categories;
standard-rated supplies, zero-rated supplies and exempt supplies.
In respect of input tax, VAT may only be claimed if VAT was charged 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.
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Taxation 3A
5.2.10. Revision questions

Revision questions
a) Briefly explain the two rates that VAT is levied at under section
sections 7 and 11 of the VAT Act.
b) Discuss the effects of VAT on the value of certain fringe benefits
awarded to employees.
c) What is the difference between output VAT and input Vat?
d) How much will be the VAT amount on a VAT inclusive price of
R10 000?
e) What is the difference between output VAT and input Vat?

Self-check activity
a) Briefly explain how VAT Control is determined.

b) Discuss how VAT is determined on the importation of goods as
per (ss 77(1)(b) and 13).
c) Briefly discuss the deemed input tax on second hand goods.
d) Provider (Pty) Limited provides a transport facility for certain
of its employees who do not have their own transport. It
purchased a second-hand 12-seater mini-bus for R205 200
(including R26 765 VAT) for this purpose. The mini-bus was
hijacked, and stolen, while on a trip between an employee’s
home and its business premises. It has now received an
insurance award of R148 200 for its stolen mini-bus. It is unsure
whether there are resulting VAT implications.
a. You are required to inform Provider (Pty) Limited of
the VAT implications arising from the receipt of the
insurance award.
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Taxation 3A
STUDY UNIT 3: CAPITAL ALLOWANCES AND

RECOUPEMENTS
The purpose of this study unit is to determine whether certain capital assets
qualify for capital allowances and whether they can be written off for normal
Purpose tax purposes over a period of time. Furthermore, to calculate the recoupment
when a capital asset is disposed of.

• Identify when a person is a connected person for normal tax purposes.
• Distinguish between the different types of assets and the capital
allowance applicable to each.
Learning • Calculate and discuss the tax consequences of leased assets.
Outcomes • Calculate and discuss the capital allowances available on intellectual
property and research and development.
• Determine and calculate the recoupment or s 11 (o) allowance when a
capital asset is disposed of, as well as the deferral available on a
recoupment.
Time
Important terms Connected Entails relationships with the taxpayer as defined in (s 1).
and definitions persons
Depreciable An asset as defined in the Eight Schedule that qualifies for
asset a deduction or allowance based on its value, but excluding
trading stock or any debt.
Wear-and- Allowance on movable assets as result of the diminishing
tear in value of such asset during the year of assessment.
allowance
5.3.1. Introduction
In terms of section 11(a) which covers the general deduction formula, expenditure of a capital nature
is not deductible. In other words, if a tax payer buys an asset for use in his business, he will not be
allowed to deduct the cost of such an asset for tax purposes. However, the Income Tax Act 58 of 1962
(the act) provides that taxpayers are allowed to deduct the costs of a fixed assets over a period of time
in terms of specific provisions.
In this chapter, certain general concepts relating to capital allowances are discussed and the
remainder of the chapter deals with the different allowances that can be claimed on the cost of the
capital asset. 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 leased and;
• Secondly the costs incurred for assets that are owned by the taxpayer.
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Taxation 3A
The costs incurred relating 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 dependant of the type of asset used as well as the
status and nature tax payer that owns it.
Once you have studied this section, you be able to explain the tax implications of capital allowances
and recoupments in relation to leased assets, intellectual property and research and development,
including when a capital asset is disposed of.
In this study unit, we will cover:
• Disposal of depreciable asset

• Replacement asset: Recoupment (s 8(4)(e))
• Process of manufacture
• Assets owned by a small business corporation
• Assets used in the process of manufacture
• Wear-and-tear allowances s 11(e)
• Leased assets
It will take you 12 hours to make your way through this study unit.
Figure 1: Tax Implications of an asset owned by the taxpayer
Movable Assets
owned by the
taxpaer (e.g.
machinery)
Small Business Corporation Manufacturing business All other business
Manufacturing assets: New -

Manufacturing assets: 100% in Non-manufacturing assets: Other assets: section 11(e) - All assets: Section (11e) time
40:20:20:20 Used -
year 1 50:30:20 time based based
20:20:20:20:20
Source: (A student's Approach to Income Tax - Business Activities, 2017)
5.3.2. Disposal of depreciable asset

If depreciable assets (that were purchased by the taxpayer for trade purposes) are sold, damaged
beyond repair or become useless, certain allowances can be claimed or certain amounts should be
included in the taxpayer’s income.
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Taxation 3A
Example 1:
Company C purchased a new machine A from a VAT vendor for R650 000 (excluding VAT) on 1 May
2014 and brought it into use at the same date. This machine was destroyed in a fire on 1 January
2015 and Company C received an insurance pay out of R480 000 from the insurance company on1
February 2015.Machine A was replaced by machine B. Machine B was purchased second-hand on 1
February 2015 for R850 000 (excluding VAT) and brought into use on the same day.
Required: Calculate the recoupment amount that will be included in Company C‟s taxable income
for the year of assessment ending 31 March 2015, if Company C elected that paragraph 65 and par
66 of the Eighth Schedule should apply.
Solution:
Machine A
R
Cost price 650 000
Less: Section12C allowance (2015: 650 000 x 40%) (260 000)
Tax value 390 000
Indemnity payment received 480 000
Less: Tax value (390 000)
Recoupment 90 000
Taxable recoupment in 2015 – par 65 elected (20% x R90 000) 18 000
Machine B
Section 12C allowance (R850 000 x 20%) (170 000)
NB: Can you see how the recoupment amount of R90 000 is spread over the same period during
which the capital allowance on the replacement asset will be claimed. Where any new or unused
plant or machinery is acquired or improved by the taxpayer and brought into use by the taxpayer
in a manufacturing or similar process in the course of its business, such an allowance can be claimed.
The taxpayer must own these assets or have acquired these assets as purchaser in terms of an
instalment agreement. The cost to the taxpayer of the plant or machinery will be written off at:
• 40% in the year of assessment in which the asset is first brought into use; and
• 20% in each of the following three years of assessment
If proceeds on disposal > Tax Value, this is a Recoupment S8 (4) (a)

Proceeds < Tax Value, this is a Scrapping Allowance S11 (o)
Cost on which capital allowance was granted: XXX
Less: capital allowances previously granted on that asset: (XXX)
Tax Value: XXX
- If a capital allowance has not been granted then you cannot account for a recoupment or scrapping
allowance on the sale of depreciable assets.
- i.e. do not need to consider capital allowances for the purposes of CGT for non-depreciable
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Taxation 3A
5.3.3. Replacement asset: Recoupment (s

8(4)(e))
When a recoupment is calculated on a manufacturing machine and this machine is replaced by
another (new or used) manufacturing machine, then section 8(4)(e) extends a special concession to
taxpayers offers relief to the taxpayer if the taxpayer elects that paragraph 65 or 66 of the Eighth
Schedule should apply. This section provides that in certain circumstances, this recoupment will not
be included in full in the year during which the old asset is sold, but that the recoupment can be spread
over the same period over which the capital allowance on the replacement asset will be claimed. As a
result, the taxation payable on the recoupment is effectively postponed to future tax periods.
5.3.4. Process of manufacture

Since the Act, in section 12C and 12E, places emphasis on the status of the tax payer regarding
deduction of capital allowances, it is important to understand the concept of Process of manufacture.
A process of manufacture is characterised by the following:
• The end-products must be essentially different from what it was before undergoing the
process, in other words, there must be a change in the form, nature or utility of the article and
the process must be continuous (SIR v Hersamer (Pty) Ltd 29 SATC 53).
• The process need not produce the end-products as long as it contributes towards it (COT v
Processing Enterprises (Pty) Ltd 3 satc 109).
• It has also been held that a standardized product must be product must be produced on a
large scale by a continuous process using human effort and specialized equipment in an
organized manner (SIR v Safranmark (Pty)Ltd 43SATC 235)
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 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.
5.3.5. Assets owned by a small business

corporation (s 12e)
The allowances that can be claimed by a small business corporation depend on whether the asset is
used in a process of manufacture or not.
Manufacturing plant and machinery
In terms of section 12E of the act, the cost of new or used plant or machinery brought into use after 1
April 2001 for purposes of trade by a small business corporation, may be claimed in full in the year it
was brought into use. The allowance is claimed on the cost of the asset, which must be lesser of actual
cost or the market value on the date of acquisition.
Other assets
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Taxation 3A
Where any other asset not used in the process of manufacture is acquired by a small business
corporation on or after 1 April 2005 and that asset would have qualified for a deduction under section
11(e), the taxpayer can decide to either:
• deduct the amount allowable in terms of section 11(e) - time based as allowed by SARS; or
• deduct 50% of the cost of the asset in the year of assessment during which the asset was
brought into use for the first time; and
• 30% in the second year and 20% in the third year of assessment respectively
This allowance is calculated for the full year irrespective of the period it was in use during that year of
assessment (it will not be apportioned).
Example 2:
Shaggy Ltd, a small business corporation, is a manufacturer of school shoes. On 6 April 2018, 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
also purchased 4 new computers during September 2018 for use by the administrative staff. The
total cost of the 4 computers was R65 000 (excluding VAT). The computers were brought into use
on 1 October 2018.
You are required to calculate the most advantageous capital allowance for the tax payer to claim
in the 2019 year of assessment (ended on 28 February 2019).
Solution:
Manufacturing machine
Cost (excluding VAT) 150 000
Allowance (100% x R150 000) 150 000
Four computers
Cost (excluding VAT) 65 000
Allowance (50% x R65 000) 32 500
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 under section 11(e).
3.6 Assets used in a process of manufacture (Section 12C)
5.3.6. Assets used in process of manufacture

(section 12c)
Accelerated allowance for new and unused assets
Where any new or unused plant or machinery is acquired or improved by the taxpayer and brought
into use by the taxpayer in a manufacturing or similar process in the course of the taxpayer’s business,
an allowance can be claimed as follows:
• 40% in the year of assessment in which the asset is first brought into use; and
• 20% in each of the following three years of assessment
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Taxation 3A
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.
The accelerated allowance in terms of section 12C is calculated for the full year, irrespective of the
period it was in use during the year of assessment.
If the asset is used or second hand, then the allowance will be 20% per year for five years.
Allowance for used assets
This section of 12C makes a provision for a deduction with respect to assets used by manufacturers of
hotelkeepers and with respect to aircraft and ships or assets used for storage and packing of
agricultural products.
The allowance is calculated as follows:
• 20% in the year of assessment in which the asset was brought into use; and thereafter
• 20% in each of the following four years of assessment
The allowance will not be apportioned – it will be calculated for the full year.
5.3.7. Wear-and tear-allowances s 11(e)

Movable assets used by the taxpayer, which do not qualify for section 12C or 12E allowances, can still
qualify for a wear-and-tear allowance in terms of the general wear-and-tear provisions contained in
section 11(e). This allowance will be granted for movable assets (do not apply to structures of a
permanent nature) that are not used in a manufacturing or similar process. Interpretation Note No.
47 (Issue3) “Wear-and-Tear or Depreciation Allowance” was published as a general binding ruling.
However, the asset must be used for the purposes of trade. BGR No 7 provides the acceptable write-
off periods.
NB: The allowance is calculated pro-rata for the period the asset was in use during the year of
assessment - thus, it is apportioned as a deduction based on the number of months during which the
asset was used in the year of assessment.
The asset must be owned or purchased in terms of an instalment credit agreement and used by the
taxpayer for the purposes of his trade.
Examples of acceptable write-off periods in terms of the Interpretation Note No. 47

Table 1: Acceptable write-off periods according to SARS
Years
Furniture and fittings 6
Office equipment - electronic 3
Office equipment - mechanical 5
Delivery vehicles 4
Trucks (other than heavy duty) 4
Computers (other than mainframe) 3
Mainframe computers 5
Textbooks used by professional people 3
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Taxation 3A
Example 3:
Company X (a registered VAT vendor) bought one mainframe computer on 1 August 2014 for R115
000 (VAT inclusive). The company has a March year-end and BGR No 7 allows a five-year write-off
period in respect of these computers. The company also incurred R9 000 for installing the computer.
On 1 June 2015, Company X moved the mainframe computer to its new offices and incurred moving
costs of R11 000.
Required: Calculate the wear-and-tear allowance on the mainframe computers for the 2015 and
2016 years of assessment
Solution:
Year of assessment ended 31 March 2015
Cost of the mainframe computer R
Mainframe computer: R115 000 x 100/115 100 000
Plus: Installation costs: 9 000
109 000
Section 11(e) allowance: R109 000/5 years x 8/12 14 533
Year of assessment ended 31 March 2016
Section 11(e) allowance – mainframe computer: R109 000/5 21 800
Section 11(e) allowance – moving costs: R11 000 x 10/50 2 200
NOTE; the exclusion of VAT on the cost price, as Company X is a registered VAT vendor and was
entitled to claim an input tax credit on the purchase price of the mainframe computer.
Also, note the apportionment of the allowance only when the asset is brought into use in the 2015
year of assessment.
When moving costs are incurred on an asset, subject to wear and tear, the moving cost forms part
of the cost of the asset and will be written off over the remainder of the write-off period of the
asset.
Moving costs of R11 000 were incurred on 1 June 2015 for a mainframe computer purchased on 1
August 2014 (the asset will be claimed over 5 years; thus, until 31 July 2019). Therefore, from the
date at which the moving cost was incurred, only 50 months remained to write off the computer (1
June 2015 to 31 July 2019).
Therefore, the wear and tear to be claimed regarding moving costs will be 10/50 x R11 000 = R2
200. Because the moving costs were incurred after the purchase date of the asset, the allowance
on the moving costs is calculated separately, although it forms part of the cost of the asset (hence,
the deduction of a wear-and-tear allowance on the moving cost).
5.3.8. Leased assets

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Taxation 3A
A taxpayer does not always own the land or buildings from where he conducts his business activities.
He can make use of premises owned by another taxpayer and pay rental and other amounts for this
privilege.
Rent paid (section 11(a))
Rent paid is deductible in terms of section11 (a) provided all requirements of this section are met. It
is only deductible from the date on which the leased asset is brought into use for tax purposes.
Lease premiums (Section 11(f))
Many lease agreements make provision for the payment of an initial lump sum amount on signature
of the contract.
Section 11(f) makes provision for the deduction of:
• a lease premium or similar consideration;
• paid by the taxpayer for the right of use or occupation of land, buildings, plant or machinery;
and
• used or occupied for the production of income or from which income is derived
This deduction is limited to an amount for each year of assessment, arrived at by dividing the total
lease premium by the number of years for which the taxpayer is entitled to the use or occupation, but
limited to a maximum of 25years.Lease premiums paid to exempt institutions like municipalities do
not qualify for deduction, as they do not constitute income of the person to whom they are paid.
http://taxstudents.co.za/wp-content/uploads/bsk-pdf-manager/36_MODULE_4_-_CGT.PDF
https://www2.deloitte.com › content › dam › Deloitte › Documents › tax
https://www.sars.gov.za/pages/Results.aspx?sq=1&k=Recoupment%20of%20Wear%20and%20Tear%20Allowance
Practice
Practice the skills you have learned.
Please check the corresponding examples and page numbers in your newly prescribed text book.
• Wear –and-tear allowance: Example 13.1 – page 353

• Movable assets used in production of renewable energy: Example 13.2 – page 354
• Section 24 C – Example 13.3 – page 358
• Allowance on residential units: Example 13.10 – page 372
• Allowance on low-cost residential units: Example 13.11 – page 374
• Buildings in special economic zones: Example 13.13 – page 377
• Lease premiums: Example 13.6 – page 388
• Section 11D allowances and recoupments: Example 13.25 – page 410
• Capital allowances (comprehensive examples): Example 13.44 – page 452
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Taxation 3A
Reading
Read the section(s) of the prescribed text listed.
Please check the corresponding page numbers in your newly prescribe text book.
• Process of manufacture – Page 348

• Depreciable asset – page 349
• Allowances on immovable assets – page 363
• Leases – page 366
• Alienation, loss or destruction allowance – page 446
Critically discuss and evaluate the capital allowances available on intellectual property and research and
development.
Video / audio
https://www.youtube.com/watch?v=cgWRggdiKQ4
https://www.youtube.com/watch?v=wXm0ILeEOUA
https://www.youtube.com/watch?v=acad-ryhdLs
5.3.9. Conclusion
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 s 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 vehicles,
etc.) are written off over periods prescribed by SARS. These wear-and-tear allowances may only be
claimed for the period the assets were in use during that year.
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. The
Act now also makes provision for an allowance in respect of commercial or residential buildings within
an urban-development zone and buildings in special economic zones. The allowance may be claimed
in respect of erection, extensions, additions or improvements to a commercial or residential building.

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Taxation 3A
Revision questions
a) Briefly explain the provisions of section 11(e) allowances on

movable property.
b) Describe what is a depreciable asset?
c) Discuss the tax implications of leased assets.

Self-check activity
a) Discuss the applications of section 12C on movable assets.

b) Explain when will section 12DA be applicable in terms of rolling
stock and provide examples to support your answer.
c) Discuss the provisions of section 13 annual allowance on
buildings and improvements.
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Taxation 3A
STUDY UNIT 4: SOLE TRADERS AND PARTNERSHIPS
Determine the taxable income or assessed loss of sole traders and

Purpose partnerships, taking into consideration the normal tax consequences for a
partnership and its partners in terms of (s 24H).
• Describe the legal status of partnership.
• Apply the provisions of the Act that specifically applies to partners.
Learning
Outcomes
• Explain and apply how specific deductions apply to partners.
• Explain the tax consequences for partners on dissolution or termination
of a partnership agreement.
• Calculate a partner’s taxable income.
Time
General Form of partnership where all the partners manage the
partnership business and are personally liable for any obligations that
Important terms may arise.
and definitions
Limited Is a partnership in which certain partners are not involved
partnerships in the management of the business and also only liable for
the partnership debts to a limited extent. The liability of a
limited partner is usually to the partner’s capital
contribution.
Silent partner A partner who shares in the profits and losses of the
business, but who is not involved in the management of
business and whose association with the business is not
publicly known.
5.4.1. Introduction
This study unit focuses on calculating the taxable income of sole traders and partnerships. The Income
Tax Act contains certain provisions whereby income received and expenses incurred by sole trader
and partnership are deemed to be received and incurred by the individual owner (sole trader) and
individual partners (partnership) in terms of section 24H.
Once you have studied this section, you should be able to describe the legal status of a partnership,
calculate a partner’s taxable income and explain the tax consequences for partners on dissolution or
termination of a partnership agreement.
• Sole trader
• Partnership
• Basic calculation of a partner’s taxable income
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Taxation 3A
• Dissolution of a partnership agreement

• Partnership and VAT
5.4.2. Sole trader

The sole trader is not treated as a separate business individual, and therefore, there is not a separate
taxpayer. The profit from the business must be added to the person’s income from other sources to
calculate his taxable income. If the business makes a loss at the end of the year, the loss can normally
be set off against income from other sources. The profit or loss from the business must be taken into
account when calculating the limits for the pension fund contributions, the retirement annuity fund
contributions, donations and medical cost deductions.
The sole trader’s normal taxable income is calculated by adding the income from business activities
and income from other sources, and then the tax is calculated by using the Tax Table for individuals
and thereafter the rebates are deducted.
In the eyes of SARS, the individual and the business are one and the same person, so your tax return
is filed in your personal capacity and the taxable income generated by the business is included in your
personal tax return which is filed annually via an ITR12 (which is a tax return for individuals). In addition
to filing an ITR12, small business owners need to be registered as provisional taxpayers since they earn
income other than by way of a salary. If you are a salaried employee and are also running a small
business you also need to be registered for provisional tax. In summary, as a sole proprietor, one needs
to file an ITR12 annually and 2 IRP6’s (provisional tax).
Example 1:
Thando Mbatha, a 21 year old promising young entrepreneur is operating a business as a sole trader
in Johannesburg. She realised a profit of R100 000 for the year of assessment 28 February 2020
after all deductions were taken into account.
You are required to determine Thando Mbatha’s normal tax liability payable and the effective tax
rate thereon.
Solution:
Year of assessment ended 28 February 2020
Thando Mbatha’s annual taxable income R100 000

Individual tax at 18% (as per SARS tax tables) R18 000
Less: Primary rebate < 65 years (R13 500)
Normal tax payable R4 500
Calculation of effective tax rate:

Effective tax rate (R4 500/R100 000) 4.5%
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Taxation 3A
5.4.3. Partnership
Definition: The word partnership is defined in the dictionary as ‘a contractual relationship between
two or more persons carrying on a joint business venture with a view to profit, each incurring liability
for losses and the right to share profits’ (Source: Oxford Dictionary – 2016, pp 213).
There is not a separate legal entity, and therefore, there is not a separate taxpayer. Each partner must
add his portion of the business profit to his income from other sources, to calculate his taxable income.
When calculating the taxable income of the partners, it is SARS’s practice that one first determines the
taxable income of the partnership, as if it is a separate taxable entity.
Although a Partnership is not a legal entity and not registered for income tax, the Income Tax Act does
refer to partnerships in several sections. All the partners will hand in a joint return for all the partners
in respect of the business. Each partner must also hand in separate tax returns as well.
Each partner will be taxed in his/her share of the Partnership profits, so this means that each partner
is taxed individually and not the Partnership itself. Each partner is also liable for his/her own share of
normal income tax.
As we explain in our other articles, the links to which you can follow above, the partners in a
Partnership will share in the profits of the Partnership in a pre-determined ratio. The ratio will be set
out in die Partnership Agreement, or, if there is no written agreement, the partners should have
agreed upon the ratio of the profit share, each partner’s share will be in the same ratio as he/she
contributed to the Partnership.
This means that since each partner will receive income from the Partnership in the pre-determined
ratio share, each partner is also liable for the income tax in the same ratio. The income is regarded to
be received by each partner on the same date that the income accrued to the Partnership. Since there
will also be expenses in the Partnership, this will also be deemed as to have been incurred by each
partner in the same pre-determined ratio share and these expenses can be deducted in this ratio by
each partner.
Although each partner will basically receive an income from the Partnership and pay normal income
tax, each partner will not be entitled to the usual tax deductions available to employees, such as
certain “fringe benefits”. However, in terms of Section 11(k) of the Income Tax Act, a partner is
regarded as an employee and any contributions to a Pension Fund, Provident Fund, or medical scheme
that is made, can be deducted from the income of each partner.
Three types of partnerships as distinguished below:
• General/ordinary partnership: partners are liable jointly for the debts or profits of a
partnership;
• Anonymous (sleeping) partnerships: the anonymous partner is not known to the public and
is liable to the partners for pro rata share;
• Commanditarian Partnership: the partner is purely a financial participant with a restricted

liability-similar to a shareholder in a company. He shares in the profits and losses, but their
liability is restricted to their specific contribution or to an agreed amount.
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Taxation 3A
5.4.4. Basic calculation of a partner’s taxable

income
Step 1: Calculate the taxable business income of the partnership as if it is a separate taxpaying entity
(only income that is distributed in terms of the partnership ratio must be taken into account).
Step 2: Multiply the answer in step 1 above with the profit-sharing ratio as per agreement in order to
calculate each partner’s personal income.
Step 3: Determine the partner’s total income by adding together the income he personally received
from the partnership, his share of the partnership profit and all income from other sources.
Step 4: Calculate the taxable income of the partner by reducing the total income in step 3 above with
the allowable personal expenses of the partners; refer to paragraph 6.5 of the prescribed book.
Step 5: The taxable income of each of the partners in step 4 above are used to determine the tax
payable in terms of the tax tables, taking into account the rebates and the maximum annual interest
exemption for natural persons.
Example 2: Framework for calculation Partnership taxable income.
Gross income from trading R x
Interest received on credit balance of bank account......................................................... x

Dividends received by partnership.................................................................................. x
Expenses Salaries paid to employees.......................................................................... (x)
Salaries paid to partners................................................................................................... (x)
Contribution to pension fund (contributions of partners and employees) .......................... (x)
Contributions to medical scheme (contributions of partners and employees) .................... (x)
RAF contributions made on behalf of partners................................................................... (x)
Bad debt.......................................................................................................................... (x)
Life insurance premiums on the lives ofpartners............................................................... (x)
Depreciation.................................................................................................................... (x)
Interest paid in respect of partners’ capital....................................................................... (x)
Net profit Rx
STEP 1: Calculate taxable income from partnership:

Net profit as per statement of comprehensive income....................................................... Rx
Adjusted for income and expenses that are subject to special rules in the individual partners’ hands:
Less: Interest received on credit balance of bank account............................................... (x)
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Taxation 3A
Less: Dividends received by partnership......................................................................... (x)

Add: Bad debt ................................................................................................................ x
Add: Contributions to funds not deductible in terms of s11(l) ........................................... x
Add: Life insurance premiums on the lives of partners (not deductible it 11(w)) ........... x
Add: Depreciation........................................................................................................... x
Less: Wear and tear......................................................................................................... (x)
Adjusted partnership taxable income Rx
Split adjusted partnership taxable income between: Rx
Trade income from partnership (Rx – y – z) .................................................................. a
Interest received on credit balance of bank account .................................................... y
Dividends received by partnership .............................................................................. z
STEP 2: Calculate partner's pro rata taxable income from partnership

Partner's share of partnership's taxable income (Ra × profit sharing ratio) ........................ Rx
Partner's share of partnership's interest income (Ry × profit sharing ratio) ....................... x
Partner's share of partnership's dividend income (Rz × profit sharing ratio) ...................... x
STEP 3: Add partner's personal income from partnership

Salary from partnership..................................................................................................... x
Interest received from partnership ..................................................................................... x
RAF contributions made by partnership on behalf of partner..............................................x
Contributions to pension fund paid by partnership............................................................. x
Contributions to medical aid scheme paid by partnership.................................................. x
Net rental income.............................................................................................................. x
STEP 4: Claim exemptions and deductions per partner

Less: Interest exemption in terms of s 10(1) (i).................................................................. (x)
Less: Dividend exemption in terms of s 10(1) (k)............................................................... (x)
Taxable income before specific deductions....................................................................... Rx
Less: Other deductions (s 11(a) and 11(e) as well as travel cost) ...................................... (x)
Less: Bad debts (s 11(i)) .................................................................................................. (x
Less: Contributions to pension fund (s 11(k)) .................................................................... (x)
Less: Contributions to retirement annuity fund (s 11(n)) ..................................................... (x)
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Taxation 3A
Less: Donations (s 18A) …………………………………………………………………………. (x)

Taxable Income ………………………………………………………………………………… R(x)
5.4.5. Dissolution of a partnership agreement

If a partnership is dissolved during a year of assessment due to:
• The cessation of trading

• The death or retirement of a partner, or
• The admission of a new partner
Accounts will usually be updated to the date of that dissolution. Each partner’s share of profits and
losses for the period from start of the year of assessment to the date on which the dissolution took
place must be taken into account in order to determine his or her taxable income for that year of
assessment in which the dissolution took place.
There are two different types of payment to be made to former partners on dissolution:
A payment for his share of profits earned up to the date of dissolution – where a partner pays an
outgoing partner a lump sum for his share of the profits earned up to the date of dissolution, the
outgoing partner’s share of those profits well be taxable (ITC 1358 (1981)).
5.4.6. Partnership and VAT

In terms of the VAT Act, a Partnership is recognised as a person. Therefore a Partnership can register
for VAT. Thus, for income tax purposes, it is treated as a separate VAT vendor, and taxed accordingly
on VAT account.
https://www.findanaccountant.co.za/content_partnership-tax
https://www.findanaccountant.co.za/content_sole-proprietor-tax
https://www.taxtim.com/za/blog/sole-proprietor-or-company-
whats-best-for-tax
Case study/Caselet
Pule Molefe and Sizwe Khumalo are running a business as ordinary

partners since 2018. They are trying to calculate their share of profits
for the tax year 2020, and the following information is available:
• Pule Molefe resigned as a partner on 31 October 2019 so as

to focus on his career as a pastor at a local church.
• Judy Stager joined Pule Molefe as a new partner on 1
November 2019 and assumed the same profit share as Pule
Molefe.
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Taxation 3A
• The partnership’s profit after allowable deductions for the year

ended 28 February 2020 is R200 000. This figure is before
taking account of capital allowances of R25 000.
• They have always shared profits in the ratio of 60:40
respectively, and continued to do so, even after Judy Stager
became a member of the partnership.
• All of the partners are under the age of 30.
Requirement:
You are required to calculate the share of the profit and the normal tax
liability of the partnership.
Practice
examples and page numbers according to your newly prescribed text
book.
• Deemed income and expenses: Example 18.1 – page 660

• A partner and partnership’s contribution to a pension fund:
Example 18.5 – page 664
• Motor vehicle expenses: Example 18.6 – page 666
• Dissolution of a partnership: Example 18.9 – page 671
• Partnerships: Comprehensive example 18.10 – page 672
Reading
book.
• Normal tax consequences for a partnership and its partners –

page 658
• Partnership contributions to a pension fund, provident fund,
and retirement annuity fund – page 663
• Fringe benefits on partners – page 668
• Dissolution or termination of partnership agreement – page
670.
• Capital gains tax consequences on partnerships.

• The treatment of vehicle expenses for partners.
• The employment relationship between a sole trader and the
business he/she operates.
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Taxation 3A
5.4.7. Conclusion
When the tax calculation of a partner is performed, it is very important to firstly ensure that the
partnership profit available for distribution has been calculated taking the relevant tax principles and
special rules for partnerships into account. The expenses that can be claimed in the partner’s hands
must be excluded from the partnership’s calculation as well as any interest received by the partnership
in order for the partner (who is a natural person) to enjoy the interest exemption.

Revision questions
a) You are required to draft a framework for calculating a

partner’s normal tax liability.
b) Briefly explain the legal status of a partnership.
c) Briefly discuss the treatment of the accrual of partnership
income.
d) Explain how annuities to former partners or their dependents
are treated for tax purposes in terms of section 11m.

Self-check activity
a) Critically discuss and evaluate tax implications of a partner’s

contributions to a pension fund, provident fund or retirement
annuity.
b) Explain how capital allowances and recoupments of
partnerships are determined for the calculation of taxable
income.
c) Briefly explain the tax consequences of fringe benefits accrued
or received by partners.
d) Discuss the tax implications of payments made to former
partners after the dissolution of the partnership.
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Taxation 3A
STUDY UNIT 5: DONATIONS TAX
The purpose of this study unit is to determine the tax implications of various
Purpose donations effected by the taxpayer, notwithstanding the administration
thereon.
• Identify when a disposal of a property is a donation.
• Identify situations where certain transactions could be deemed as
donations.
• Explain which donations are specifically exempt from donations.
Learning • Calculate the amount of the general annual exemption from donations tax
Outcomes available.
• Calculate the donations tax payable on any donation at the applicable
rate.
• Identify the person liable for the donations tax.
• Indicate the time period in which donations tax must be paid.
Time
Important terms Fiduciary A limited interest in property. The person (fiduciary) does
and definitions interest not have full ownership of the property, but merely the
temporary possession and use of it.
Usufructuary This is the use of the fruit or income from the property.
interest
Bare This is the ownership of the property, without the benefit
dominium of the use of the fruit or income from that property.
5.5.1. Introduction
SARS defines donation as a "gratuitous disposal of property". "A donation requires an element of sheer
liberality on the part of the donor, thus highlighting the requirement that the transaction must be
gratuitous in nature."
If there is an expectation for something to be given in return, then the transaction is not a donation,
SARS highlights.
From 1 March 2018, donations tax is levied at a rate of 20% on the aggregated value of property
donated not exceeding R30 million, and at a rate of 25% on the value exceeding R30 million (section
64(1)). Take note of the following –
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Taxation 3A
• in determining the R30 million threshold, the aggregate value of property donated
commences from 1 March 2018 to date of current donation. Any donations made prior to 1
March 2018 must not be taken into account;
• the aggregate value of property to determine the R30 million threshold is calculated after
deducting any exemptions (s56);
• where the donor has exceeded the R30 million threshold, all subsequent donations will be
taxed at the rate of 25%.
Therefore, donations tax is not a tax on income, but is a tax on the transfer of wealth made by a person
who is ordinarily resident in South Africa or by a domestic company.
The fundamental aim of donation tax is to impose tax on persons who may want to donate their assets
in order to avoid normal income tax on the income derived from those assets and estate duty when
those assets are excluded from their estates.
Taxable Income for donations purposes is defined for natural persons, as the taxpayer’s taxable
income, whether derived from a trade or from a non-trading source, and after allowing all permitted
deductions, but before the donation deduction. Taxable income also excludes any retirement lump
sum benefit, retirement lump sum withdrawal benefit and severance benefit. However, it includes
taxable capital gains.
"Donations tax must be paid to SARS by the end of the month, following the month during which the
donation was made," says SARS. The person making the donation is liable for the tax. If the donor fails
to pay the tax within the set period, both the donor and the party which received the donation will be
jointly and severally liable for the tax.
Once you have studied this section, you should be able to when a disposal of property gives rise to a
donation, and to calculate the donations tax payable on any donation at the applicable tax rate.
• Property and donation

• Persons liable for donations tax
• Certain donations by a company (s 57)
• Donations by spouses married in community of property (s 57A)
• General exemptions for donors, other than natural persons
• General exemptions for natural persons
• Valuations
• Fiduciary interest
• Usufructuary interest
• Valuation of limited interests
• Valuation of a donation: Bare dominium
5.5.2. Property and donation

Donations tax is a tax levied on the net transfer of assets from one person to another at a flat rate of
20%. Therefore, donations tax is not a tax on income, but is a tax on the transfer of wealth made by a
person who is ordinarily resident in South Africa or by a domestic company.
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Taxation 3A
The fundamental aim of donation tax is to impose tax on persons who may want to donate their assets
in order to avoid normal income tax on the income derived from those assets and estate duty when
those assets are excluded from their estates.
Property and donation
a) Property
The term ‘property’ is defined as
▪ Any right in or to property

▪ Whether it is movable or immovable
▪ Whether it is corporeal or incorporeal
▪ Wherever it is situated (inside or outside South Africa)
Donations tax is also levied on intangible property such as copy rights, patents and trademarks.
b) Donation
The term donation is defined as any gratuitous disposal of property or any gratuitous waiver or
renunciation of a right. Gratuitous generally means that something of value is given without payment
or obligation, or without receiving any value in return.
Section 55 of the Act defines the donee as the beneficiary of a donation, i.e. the person receiving the
donation and includes, where property is donated to a trustee to be administered by him for the
benefit of a beneficiary, such a trustee.
Non-Residents are not liable for the tax, even if they donate South African assets. For the purposes of
donation tax, a donation is deemed to take effect on the date on which all the legal formalities for a
valid donation have been complied with. An oral donation takes effect on the date of delivery. A
promise to donate that has not yet been completed by delivery takes effect when the donor commits
the promise to writing and signs the relevant document. There must also be acceptance by the donee
for a valid donation to be constituted.
Figure 2: Framework to determine donations tax
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Taxation 3A
Donation of
property by
a resident
Specific
Deemed exemptions General
donation by a exemptions
resident
Interest-free
Calculate value or low
of property interest loans
donated to trusts
Tax @
20%
Source: (Silke: South African Income Tax, 2019)
5.5.3. Persons liable for donations tax

S59 and s60 establish that the donor is liable for donations tax within 3 months of the donation taking
effect. The effective date of donation is the earliest of the date of delivery of the property donated or
the date when a written document containing the terms of the donation is signed by both the donor
and the donee.
Some donations are tax exempt. These include donations between spouses, donations to any sphere
of government, any registered political party or any approved public benefit organisation.
A donation is tax exempt if the total value of donations per tax year does not exceed R100 000 in terms
of property donated by a natural person, or R10 000 in terms of casual gifts in the case of a taxpayer
who is not a natural person (for example companies and trusts).
Another exemption applies if the donor makes a contribution towards the maintenance of any person
such as child support. "While not limited to a specific amount, this exemption is limited to what the
Commissioner considers reasonable," SARS says.
Donations tax applies to any individual, company or trust that is a resident as defined in the Income
Tax Act. Non-residents are not liable for donations tax, says SARS.
The donee on the other hand must, however, remember to declare the amount received in his or her
Tax Return (ITR12) as an “Amount Considered Non-Taxable.” This is to ensure that you're
declaring all your income to SARS, including the non-taxable portion.
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Taxation 3A
If the donor fails to pay donations tax within the set period, then the donor and the donee will be
jointly and severally liable for this tax. This means that SARS can recover the tax from either the donor
or the donee. The donee would be entitled to recover any donations tax paid from the donor. Payment
by any one of the parties shall discharge the joint obligation.
If donations tax is paid late, interest at prescribed rates is applicable as well as penalties subject to
provisions of the Tax Administration Act.
There are 2 circumstances in which the donation will be deemed to have been made by someone
other than the donor, in which case the donations tax will be payable by this other person (S57 and
S57A).
Donations tax applies to any individual, company or trust that is a resident as defined in the Income
Tax Act. Non-residents are not liable for donations tax, says SARS.
Example 1: Calculation of donations tax
Peter has had a great year. His business is doing well and he would like to share some of his good
fortune with his friends and family. (Lucky them!)
First he gives his friend a cash cheque for R20,000. Then he decides to give his boat that's just
gathering dust at home to his son. It's valued at R50,000. Finally, he sends his niece, who's busy
planning her wedding, a gift of R40,000 to help with the expenses.
What will Peter have to pay in Donations Tax? We first need to calculate the total value of his
donations for the tax year.
Solution:
R20,000 to his friend

+ R50,000 to his son
+ R40,000 to his niece
Total donations = R110,000.
Remember that the Donations Tax threshold is R100,000, so Peter is only liable for 20% tax on the
exceeding amount, which in this case is R10,000.
Therefore, Peter will pay Donations Tax of 20% X R10,000 = R2,000.
5.5.4. Certain donations by a company (s57)

A donation by a body corporate (a company or similar institution), will be deemed to be made by a
person if that person uses the body corporate as a vehicle to make that donation.
SARS also states that if a company makes a donation to someone on the instruction of a shareholder,
this will be regarded as a constructive dividend to the shareholder; followed by a donation by that
shareholder to the third party, which will be subject to donations tax.
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Taxation 3A
5.5.5. Donations by spouses married in

community of property (S57A)
Donations made by spouses married in community of property are treated as follows:
▪ Where the property donated forms part of the joint estate, each spouse will be deemed to
have donated half the property and will pay donations tax on this half;
▪ Where the property is excluded from the joint estate, the donation will be deemed to have
been made specifically by that spouse making the donation.
5.5.6. Exemptions
Specific exemptions
In terms of the S56(1) of the Act, no donation tax is payable in respect of the following donations:
a) to or for the benefit of the spouse of the donor under a duly registered antenuptial or post-
nuptial contract or under a notarial contract entered into as contemplated in section 21 of
the Matrimonial Property Act.
b) to or for the benefit of the spouse of the donor who is not separated from him under a
judicial order or notarial deed of separation;
c) as a donatio mortis causa; This is a donation which is made in contemplation of death by the
donor
d) in terms of which the donee will not obtain any benefit thereunder until the death of the
donor;
e) which is cancelled within six months from the date upon which it took effect;
f) made by or to or for the benefit of any traditional council, traditional community or any
tribe.
g) if such property consists of any right in property situated outside the Republic and was
acquired by the donor—
– before the donor became a resident of the Republic for the first time; or
– by inheritance from a person who at the date of his death was not ordinarily resident in
the Republic or by a donation 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 funds derived by him from the disposal of any property referred to in sub-
paragraph (i) or (ii) or, if the donor disposed of such last-mentioned property and
replaced it successively with other properties (all situated outside the Republic and
acquired by the donor out of funds derived by him from the disposal of any of the said
properties), out of funds derived by him from the disposal of, or from revenue from any
of those properties; (Income Tax Act 58, 1962) or
h) as a voluntary award—
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Taxation 3A
– the value of which is required to be included in the gross income of the donee in terms
of paragraph (c), (d) or (i) of the definition of “gross income” in section 1; or
– if such property is disposed of under and in pursuance of any trust;
– if such property consists of a right (other than a fiduciary, usufructuary or other like
interest) to the use or occupation of property used for farming purposes, for no
consideration or for a consideration which is not an adequate consideration, and the
donee is a child of the donor (SARS, Income Tax Act 58, 1962);
i) on or after the seventeenth day of August 1966, by any company which is recognized as a
public company in terms of S38.
j) where such property consists of the full ownership in immovable property, if—
– such immovable property was acquired by any beneficiary entitled to any grant or
services in terms of the Land Reform Programme, as contemplated in the White Paper
on South African Land Policy, 1997; and
– the Minister of Land Affairs or a person designated by him has, on such terms and
conditions as such Minister may in consultation with the Commissioner prescribe,
approved the particular project in terms of which such immovable property is so
acquired;
k) by a company to any other company that is a resident and is a member of the same group of
companies as the company making that donation.
5.5.7. General exemptions for donors other than

a natural persons (S 56(2)(a))
S56(2)(a) exempts any casual gifts up to the value of R10 000 made by a donor (other than a natural
person) during any year of assessment. This exemption simply means that a company can make
donations of up to a maximum of R10 000 in any year of assessment without paying donations tax.
5.5.8. General exemptions for a natural person

(s 56(2)(b))
This section exempts the sum of all values of property donated up to R100 000 made by a donor who
is natural person in a year of assessment. What this means is that the first R100 000 of property
donated by an individual in each year of assessment is exempt from donations tax.
Where more than one donation is made during a year of assessment, the exemption provided in s56
(2) above is calculated according to the order in which the donations took effect.
5.5.9. Valuations
S62 determines how property donated is to be valued for donations tax purposes. Methods of
valuation differ depending on whether the donation is of a limited interest in property or the full
ownership of property.
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Taxation 3A
Limited interests in property comprise fiduciary interests, usufructuary interest and the bare
dominium.
5.5.10. Fiduciary interest

A fideicommissium or fiduciary interest is created when a person donates or leaves property to
another person (the fiduciary) on the condition that ownership will pass to a third person (the
‘fideicommissary’), on the death of the fiduciary. Therefore, while the fiduciary has the full right to
use the property any way he wishes, he is unable to dispose of the property. He may, however,
dispose of his limited interest in the property.
If the fideicommissary dies before the fiduciary then full ownership passes to the fiduciary.
5.5.11. Usufructuary interest

Full ownership of property can be split into 2 separate rights as follows:
a) The right of use of the property (called usufruct)
b) The right of ownership (called bare dominium)
The person who holds the usufruct (the ‘usufructuary’) has the right to use the property any way he
wishes and has a right to income earned from the property, however he may not dispose of the
property.
If the usufructuary dies before the bare dominium holder (right of ownership); then the usufruct
passes to the bare dominium holder, who will now have full ownership.
Bare dominium is the ownership of property which is subject to a usufructuary interest. The person
with the bare dominium has no right to use the property nor to any of the income earned from the
property until the usufructuary dies.
If the bare dominium dies before the usufructuary, the bare dominium does not pass to the
usufructuary but rather forms part of the bare dominium holder’s estate and will go to his heirs. The
bare dominium holder is entitled to dispose of the bare dominium during his lifetime should he so
wish.
5.5.12. Valuation of limited interests: Fiduciary,

usufructuary or any like interests (s 62(1)(a), (2)
and (3))
Step 1: Determine the fair market value of the property over which the interest is held
Step 2: Calculate the annual value of the interest by multiplying the fair market value by 12%
Step 3: Establish the lesser time period between:
The period over which the limited interest is to be enjoyed (life expectance of the donee or the set
period of the usufruct)
The life expectancy of the donor
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Taxation 3A
Step 4: Capitalise the annual value over the shortest period, by multiplying the present value of R1 at
12% by the annual value (The present value factors are contained in Table A (when life expectancy is
the shortest period) or Table B (when the fixed period is the shortest period).
5.5.13. Valuation of a donation: Bare dominium

This section deals with the valuation of a bare dominium. The following steps apply:
Step 1: Calculate the annual value of the interest by saying 12% x Fair market value
Step 2: Determine the period of time for which the usufructuary is to enjoy the usufruct (i.e. the
expected lifetime of the usufructuary or a lesser period if the usufruct is to be held for a lesser period).
Step 3: Multiply the annual value by the present value of R1 over the period of the usufruct.
Step 4: Deduct the amount calculated in step 3 above from the fair market value to establish the value
of the bare dominium donated.
https://www.sars.gov.za/TaxTypes/DonationsTax/Pages/default.aspx
https://finugget.co.za/tax/donations-and-donations-tax-all-you-need-
to-know/
https://www.taxtim.com/za/blog/donations-tax-the-ins-and-outs-of-
giving-and-receiving
Case study/Caselet
During the 2020 year of assessment Dam Elin, a resident of the

Republic, made the following donations:
• On 1 March 2019, R10 000 cash to a public benefit

organisation.
• On 1 May 2019, a diamond ring worth R31 200 to his wife,
Study Hard-Elin.
• On 1 July 2019, R3 000 cash as a wedding gift to Learn, his
favourite niece.
• On 1 September 2019, a bachelor flat valued at R467 000 to
his only child, Lindi, on the occasion of her attaining her
honours degree and celebrating 21 years of age.
• On 31 December 2019, cash bonuses of R20 000 each to both
his chef and his chauffeur as voluntary awards for outstanding
services rendered to Dam Elin and his family.
• On 1 February 2020, R800 000 Dam Elin Family Trust that had
been recently formed. A clause in the trust deed provides for
its capital to be invested in a rent-producing property. The
resulting net rentals must be distributed or retained as
follows:
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Taxation 3A
a) Half of the net rentals earned by the trust are to vest in Lindi
Elin. Out of these earnings, R24 000 a year is to be distributed
to Lindi (at a rate of R2 000 a month), while the balance will be
reinvested by the trustees for her benefit. All reinvested net
rentals will be distributed to Lindi when she attains the age of
30 years.
b) R6 000 a year is to be distributed to Learn. This distribution
is to take place on 1 October each year, on her birthday.
c) All or part of the remaining net rentals are to be awarded to
various public benefit organisations at the discretion of the
trustees.
During its 2020 period of assessment, rentals of R6 000 for one month
only accrued to Dam Elin Family Trust. Its trustees distributed R2 000
to Lindi and awarded R1 500 to a public benefit organisation.
You are required to:
1) State, with reasons, for each of the above donations whether

they are subject to donations tax, and if so, determine the
amount of donations tax payable.
2) Discuss how the receipts and accruals of Dam Elin Family Trust
will be subject to normal tax.
Practice
Practice the skills you have learned in your text book. Please check the
corresponding examples and page numbers according to your newly
prescribed text book.
• Valuation - Usufructuary interest: Example 26.4 and 26.5 –

pages 937 and 938
• Valuation - Bare dominium: Example 26.8 – page 940
• Donees held liable for donations tax: Example 26:13 – page 944
• Comprehensive donations tax: Example 26:14 – page 945
• Comprehensive donations tax: Example 26:15 – page 9447
Reading
book.
• Donations by spouses in married in community of property –

page 935
• Valuation: Property (ss 55(1) and 62) – page 936
• Interest free or low-interest loans to trusts or companies –
page 941
• Payment and assessment of tax (ss 59 and 60) – page 944
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Taxation 3A
Themba Lethu made an interest-free loan, which is the equivalent of

R15 000 000 to the Lethu Discretionary Trust that had been set up
offshore. No portion of the loan was repaid during the 2020 year of
assessment.
The relevant official rate of interest is 1%. This is a market-related

interest rate. Themba Lethu has donations in excess of R100 000 during
the 2020 year of assessment.
The Lethu Discretionary Trust invested the equivalent of R15 000 000
that it had received from Themba Lethu’s interest-free loan in a rent-
producing property. It earned net rentals the equivalent of R360 000
for the year to 28 February 2020.
You are required to:
1) Determine the resulting South African tax consequences.

2) Re-determine the resulting South African tax consequences
based on the assumption that rentals the equivalent of
R120 000 and not the equivalent of R360 000 accrued to the
Lethu Discretionary Trust from the rent-producing property.
Video / audio
https://mayaonmoney.co.za/2019/10/tax-implications-of-helping-
your-grandchild-to-save/
5.5.14. Conclusion
Donations tax is payable on the transfer of assets or wealth from one person to another. The donations
tax provisions are contained in ss 54 to 64 of the Income Tax Act 58 of 1962. It is important to note
that donations tax is not an income tax; it is rather tax on the transfer of wealth. This unit covers the
definitions, the persons liable for donations tax, the general and specific exemptions applicable and
the valuations of property for the purpose of calculating donations tax.

Revision questions
a) Explain the responsibilities of a donor and a donee in respect

of the payment of donation’s tax.
b) Briefly discuss how and when the payment of donations tax is
made.
c) Describe the valuation of property other than limited interests.
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Taxation 3A
d) Briefly explain the difference between usufruct and bare

dominium.

Self-check activity
a) Briefly discuss the tax consequences of donations made by

spouses married in community of property.
b) State with reasons whether a gift of a second hand vehicle
valued at R180 000 by a father to his son on his 21st birthday is
subject to donations tax.
c) Explain the tax implications of an interest-free loan granted by
the donor to his inter vivos trust.
d) What are the tax implications when a donation of a usufruct in
a property is made, with a simultaneous donation of its bare
dominium, to two different donees? Would the transactions be
treated as two separate donations?
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Taxation 3A
STUDY UNIT 6: TRUST INCOME

The purpose herein is to determine the tax consequences of trust income and
Purpose all its related parties on all transactions that took place during the year if
assessment.
• Calculate the taxable income of all related parties to a trust in respect of
amounts earned by a trust during a year of assessment.
Learning • Determine the taxable capital gain of all related partied to a trust from the
Outcomes disposal of an asset by a trust.
• Apply the provisions relating to a non-resident trust when amounts are
distributed during the current year as well as in a subsequent year of
assessment.
Time
Important terms Ordinary Trust which is not a special trust as defined and has a tax
and definitions trust rate fixed at 45%.
Special trust Trust created solely for the benefit of a person with
disability. Trust created in terms of a will of a deceased
person solely for the benefit of beneficiaries who are his
relatives.
5.6.1. Introduction
This unit covers the treatment of trusts in relation to tax and the implications to all parties involved
with the trust. A Trust, according to The Hague Convention on the Law applicable to Trusts, is defined
as ‘the legal relationship created during the lifetime of the founder (inter vivos) or on death (mortis
causal) by a person (the founder) who places assets under the control of another (the trustee) for the
benefit of a beneficiary or for a specified purpose’ (Silke: South African Income Tax, 2019).
A trust is created by a founder, sometimes called a Donor, who entrusts some or all of his or her
property to people of his choice (the trustees). The trustees hold legal title to the trust property (or
trust corpus), but they owe a fiduciary duty to the beneficiaries, who are the "beneficial" owners of
the trust property, usually specified by the Donor. (A student's Approach to Income Tax - Business
Activities, 2017).
The trust is governed by the terms of the trust document, which is usually written and occasionally set
out in deed form. It is also governed by local law.
As a point of departure, in terms of the Trust Property Control Act 57 of 1988 (hereinafter referred to
as the “Act”), all Trusts must and will have the same basic structure insofar as the parties. There would
always be:
• The Founder who creates the Trust;

• The Beneficiaries for whose benefit the Trust is created; and
• The Trustees who administer and control the Trust assets on behalf of the Beneficiaries.
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Taxation 3A
Once you have studied this section, you should be able to calculate the taxable income of all related
parties to a trust in respect of amounts earned by a trust.
• Categories of trusts
• Tax on trusts
• Income tax consequences of trusts
5.6.2. Categories of trusts

Testamentary trust (Mortis causal) – With such a trust, the testator bequeaths cash or other assets in
his will to a trustee, to administer for the benefit of the testator’s beneficiaries. This trust comes into
existence on the death of the testator, and is particularly popular when the beneficiaries are minor
children. The provisions of S7 will, therefore, not apply to this trust since the ‘donor’ is deceased.
A testamentary trust may further be both a discretionary or vested trust;
▪ Discretionary trust - Payment of income and/or capital is subject to the discretion of the
trustees and all non-allocated income is taxable in the hands of the trust. This type of trust
may thus be utilised to save on income tax by splitting incomes. Capital beneficiaries may only
be determined at a later stage.
▪ Vested trust - The income and capital beneficiaries are already determined and described.
The income is taxable in the hands of the income beneficiary, which could also be the capital
beneficiary. The capital beneficiary thus gets immediate property rights, subject to the terms
of the will or trust act
Inter vivos trust – This is a trust created during the lifetime of the founder. The founder or other
persons may sell or donate assets to the trust (subject to donations tax) (Silke: South African Income
Tax, 2019).
5.6.3. Tax on trusts

Ordinary trusts
For the purposes of tax, a trust is deemed to be a person and is taxed at a flat rate of 41% (excluding
special trusts).
Example 5.6.1: Basic calculation of trust tax liability
If a trust has a taxable income of R100 000, and included in this taxable income is interest income
of R25 000, the trust’s tax liability will be 41% of R100 000 = R41 000. 80% of all taxable capital gains
must be included in the trust’s taxable income.
Special trust
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Taxation 3A
A special trust can either be:
▪ A trust created solely for the benefit of a person who suffers from mental illness or physical
disability that prevents him from earning sufficient income for his maintenance or managing
his own financial affairs; or
▪ A trust created in terms of the will of a deceased person solely for the benefit of relatives of
the deceased person who are alive at the date of his death where the youngest of the
beneficiaries is on the last day of the year of assessment under the age of 18.
A special trust is taxed on a sliding scale as if it were a natural person, with 40% of taxable capital
gains being included (in the same way as natural persons). However, a special trust does not qualify
for interest exemption nor rebates.
NOTE: A testamentary trust is taxed on the income it retains and its beneficiaries are taxed on the
income it distributes; whereas an inter vivos trust is taxed subject to the provisions of S25B and s7.
(Income Tax Act 58, 1962)
NATURE OF INCOME DISTRIBUTED AND RECEIVED BY TRUSTS
The source and nature of the income, the method of transfer of the assets to and from the trust as
well as the status of all the relevant parties have an impact on the tax implications in respect of the
receipts or accruals of income by the trust.
Figure 3: Nature and source of Income of a trust
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Taxation 3A
Interest Trading income
Dividends Rental
Assets in the
Trust that
Asset sold,
produce
bequeathed or above income
donated to trust
(subject to CGT)
Trsutees may
distribute some or
all income to the
beneficiaries in
terms of the trust
deed
Nature and source of income to and from a trust
Subject to S25B and S7(1) to (8), Income of a trust retains its identity until it reaches the hands of the
parties in which it is taxable i.e. the beneficiaries. This was also held in Armstrong v CIR (1938AD)
where it was held that a trust is a mere conduit pipe through which the income flows, and the
income retains its identity in the hands of the beneficiaries.
For example, if a trust distributes dividend income to beneficiaries, the said beneficiaries will qualify
for s10(1)(k) exemption of dividend income. A further result of these sections is that all distributions
by a trust are deemed to consist pro rata of the different types of income earned by the trust.
5.6.4. Income tax consequences of trusts

The tax implications of trusts and various parties applicable to trusts are quite complex and the
framework below is often used to test for the application of all the specific sections and provisions.
Step 1: Compile a table that summarises the trust’s income in separate columns for the current year.
Allocate all distributions and vested rights proportionately to each type of income.
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Taxation 3A
Step 2: Calculate the taxable income of the donors by accounting for all amounts to which the
donors have a vested right; giving the donors the applicable interest and dividend exemptions.
Ensure that s7(2) to s7(8) are specifically tested.
Step 3: Calculate the taxable income of the beneficiaries – The beneficiaries will only be taxed on
amounts that appear next to their names on the table and ensure that expenditure and losses have
been correctly dealt with. Give the beneficiary the applicable interest and dividend exemption where
necessary.
Step 4: Calculate the taxable income of the trust – The most that a trust may be taxed on, is:
• The undistributed (retained) income;
– if the donor is dead; or
– if the income was derived as a consequence of a donation, settlement or other

disposition; and
• The retained income, where no one has a vested right to the income (discretionary income).
Minor children
As there is always a possibility that a person under the age of majority (18) may become entitled to a
benefit in terms of a will, a testamentary trust should be a standard provision in any will.
The Administration of Estates Act stipulates that any benefit bequeathed to someone under the age
of 18 must – in the absence of provision for a trust – go to the Guardian’s Fund. The Guardian’s Fund
administers funds paid to the Master of the High Court on behalf of minors, among others.
“Even where the deceased did not have any descendants … if all the bequests in the will should fail,
the benefits could end up with somebody who is under the age of 18, and then you want that to go
into a testamentary trust rather than into the Guardian’s Fund.”
Should the will provide for the formation of a testamentary trust for minors, and all beneficiaries are
18 or older, the provision will simply be ignored.
Although the interest paid for the benefit of minors in the Guardian’s Fund is relatively competitive,
there are various other factors to consider.
The Guardian’s Fund pays interest annually to the guardian of the beneficiary – no tax planning is
possible. The asset allocation of the fund also makes it difficult to ensure adequate capital growth to
neutralise the impact of inflation.
An overall maximum of R250 000 in capital can be withdrawn from the fund until the minor turns 18,
regardless of how much money was paid into the fund.
Example 2: Minor children
If the minor inherited R2 million that was transferred to the Guardian’s Fund, the guardian will be
entitled to the applicable interest on R2 million, but if this is not sufficient to provide for the minor,
only R250 000 in capital can be withdrawn prior to the minor’s 18th birthday. The rest (R1.75 million
in this case) will only be paid to the beneficiary when they turn 18.
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Taxation 3A
Moreover, only money can be transferred to the Guardian’s Fund. Fixed property will have to be
registered in the minor’s name and movable property will be handed to the legal guardian to be
managed for the minor’s benefit. If it becomes necessary to sell fixed property on behalf of a minor,
this can only be done in terms of a High Court order.
In contrast, if the fixed property is in a testamentary trust for the benefit of the minor, the trustees
can sell the property if it is in the best interest of the beneficiary.
With the Guardian’s Fund, there is no scope to delay the distribution of the remaining funds to a date
after the minor’s 18th birthday, as could be done in a discretionary testamentary trust, he adds.
http://www.bdo.co.za/getmedia/1ed18ab6-f01e-4a62-83f2-
ce1d315d8898/bdo-trust
https://www.polity.org.za/article/an-overview-of-the-types-of-trusts-
under-south-african-law-2019-01-14
https://www.moneyweb.co.za/in-depth/fisa/yes-testamentary-trusts-
are-still-useful/
Case study/Caselet
Palesa Morena
The trustees of Palesa Morena Trust have certain discretionary powers

including being able to change its investment decisions.
During the 2020 year of assessment, Palesa Morena Trust changed one
of its dividend-yielding share investment schemes. On the disposal of
these dividend-yielding shares, it made a capital gain of R400 000.
Nomusa Dlamini is a beneficiary of the Palesa Morena Trust. She has a

vested right to the capital gains that it makes, and she is a non-resident.
Palesa Morena, the creator of the Palesa Morena Trust is a resident of

the Republic.
The Palesa Morena Trust is an inter vivos trust. Its receipts, accruals and
capital gains are caused by a donation, a settlement or other similar
disposition made by its creator, Palesa Morena.
You are required to discuss the capital gain tax consequences of the
R400 000 capital gain made by the Palesa Morena Trust.
Practice
examples and page numbers in your newly prescribed text book.
• Income retains its identity: Example 24.1 – page 899

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Taxation 3A
• Low-interest loans Example 24.8 – page 907

• Trusts, beneficiaries and losses: Example 24.10 – page 909
• Different trust scenarios Example 24.15 – page 915
Reading
corresponding page numbers in your newly prescribed text book
• Persons liable for tax on the income earned by trust – page 900
• Retained income not vested due a stipulation or condition –
page 902.
• Amount vested that could have been revoked – page 904
• Capital gains tax consequences of trusts – page 912
• Non-resident trusts – page 919
Critically discuss and evaluate trusts as a vehicle for effective tax

planning.
Video / audio
https://www.youtube.com/watch?v=f__Q7r4eHGU
5.6.5. Conclusion
In this study unit, the tax principles of trusts were discussed. The income from a trust is usually taxed
in the hands of the person receiving the income, subject to S25B and S7. It is clear, since there are
various types and categories of trusts, that the taxation of trusts is complicated, hence a framework
was provided to help with determining the tax liability of all parties involved from the founder
(donor), trustees, and the trust to the beneficiaries.

Revision questions
a) Describe the different types of trusts.
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Taxation 3A
b) What are the tax implications of an inter vivos trust created by

means of a donation?
c) What is a vested right to income?
d) What are the tax consequences of the donation of a right to
income as per (s 7(7))?

Self-check activity
a) Briefly discuss the tax implications of income that is the subject

of a trust.
b) Briefly explain the tax effects of a contingent right in a
discretionary trust.
c) Describe the normal tax determination of a testamentary trust.
d) Discuss whether the beneficiary is subject to normal tax only
awards actually received by him or her from the trust.
STUDY UNIT 7: FOREIGN EXCHANGE
The purpose herein is to determine the tax implications of foreign exchange

Purpose transactions entered into by the taxpayer in the course of his trade over a
specific period.
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Taxation 3A

• Explain how foreign exchange currency amounts should be translated to
rand for tax purposes.
• Discuss when and how foreign exchange differences should be calculated
for tax purposes.
• Calculate the foreign exchange difference that should be included in or
Learning deducted from income.
Outcomes • Determine how foreign exchange differences should be treated when
assets are purchased.
• Explain and calculate the tax treatment of foreign exchange differences
on transactions with connected persons and controlled by foreign
companies.
• Apply the provisions of s 241I in tax calculations.
Time
Average Determined by using the closing spot rates at the end of
exchange the daily or monthly intervals during the year of
rate assessment.
Spot rate The appropriate quoted exchange rate at a specific time by
any authorised dealer in foreign exchange for the delivery
of currency.
Exchange Unit of currency acquired and not disposed of by a person.
item
A foreign currency in relation to any exchange item of a
Foreign person is any currency that is not local currency.
currency
Functional In relation to a person means the currency of the primary
currency economic environment in which that person’s business
operations are conducted. In relation to a permanent
establishment of a person means the currency of the
primary economic environment in which that permanent
Important terms establishment’s business operations are conducted.
and definitions In relation to a resident in respect of an exchange item that
Local is not attributable to a permanent establishment outside of
currency South Africa, is the South African Rand. Different rules
apply to other taxpayers also.
Unit of Any cash amount in foreign currency held by a person.
currency
Translation Restatement of an exchange item in the local currency in
date the local currency at the end of any year of assessment by
applying the ruling exchange rate to such exchange item.
Forward An agreement in terms of which a person agrees with
exchange another person to exchange an amount of currency for
contract another currency at some future date at a specified
exchange rate.
Foreign An agreement in terms of which a person acquires to the
currency right to buy from or to sell to another person a certain
option amount of a nominated foreign currency on or before a
contract future expiry date at a specified exchange rate.
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Taxation 3A
Realisation Date on which the exchange item is realised.

date
5.7.1. Introduction
Section 24I3 deals with the income tax treatment of foreign exchange gains and losses on exchange
items as well as premiums or like consideration received or paid in respect of FCOCs entered into and
any consideration paid in respect of an FCOC acquired by certain persons.
The tax treatment of transactions denominated in a foreign currency often requires a consideration
of section 24I and other provisions of the Act. This Note identifies some of the situations in which one
or more of these provisions may apply. For example, if trading stock, the purchase price of which is
denominated in USD, is purchased on credit from a supplier, the provisions of section 25D4 and section
24I are relevant. Section 24I governs the income tax treatment of foreign exchange gains and losses
on exchange items as well as premiums or like consideration received or paid in respect of FCOCs
entered into and any consideration paid in respect of an FCOC acquired by specified persons.
Although the application of the section is limited to those persons listed in section 24I(2), the ambit
of section 24I(2) is wide which results in the section being applicable to a large number of persons and
transactions. Under section 24I, exchange differences calculated for a year of assessment are generally
included in or deducted from income whether realised or not and whether of a capital or revenue
nature. The legislation was drafted in this manner in line with the view that gains and losses on foreign
exchange transactions largely represent finance charges and as a result must be brought to account
on a revenue basis for tax purposes at the end of a year of assessment even if not realised. There are
limited circumstances in which the inclusion of a foreign exchange gain or loss calculated in respect of
an exchange item in a particular year of assessment is deferred and recognised in a later year of
assessment.
Once you have studied this section, you will be able to explain and calculate the tax treatment of
foreign exchange differences.
• Translation of foreign currency amounts

• Basic operation of section 24i
• Exchange difference
• Exchange item
• Local currency and foreign currency
• Functional currency
• Transaction date
• Translate
• Realised
• Ruling exchange rate
• Spot rate
• Average exchange rate
• Application of section 24I(1)
• Debt in foreign currency incurred or payable to a person
• Transaction date and realisation date in relation to a debt denominated in foreign currency
owed by or to a person.
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Taxation 3A
• Ruling exchange rate in relation to debt

• Acquisition and disposal rates on acquisition and disposal of debt
• Forward exchange contract
5.7.2. Translation of foreign currency amounts

In order to calculate the taxable income of a person, all the income and expenditure amounts must be
in the same currency, namely the rand. If income was received in a foreign currency or an expense
was incurred in a foreign currency, such amounts should be translated into rand currency.
5.7.3. Basic operation of section 24i

Section 24I(2) identifies the persons to whom section 24I applies and section 24I(3) determines which
exchange differences (foreign exchange gains and losses) and premiums or like consideration on
FCOCs entered into or consideration on FCOCs acquired are included in or deducted from income. An
exchange difference is determined on each exchange item for the year of assessment in which such
exchange item arose, as well as every subsequent year of assessment until and including the year of
assessment in which it is realised. To calculate an exchange difference for a specific year of
assessment, a commencement date and a final date must be established in that year of assessment.
The following combinations of commencement dates and final dates are possible:
• Transaction date and realisation date.

• Transaction date and translation date (last day of the year of assessment).
• The previous translation date (last day of the previous year of assessment) and realisation date.
• The previous translation date (last day of the previous year of assessment) and the current
translation date (last day of the current year of assessment).
The exchange difference on a particular exchange item for a specific year of assessment is determined
by multiplying the foreign currency amount of the exchange item by the difference between the ruling
exchange rate on the commencement date in that year of assessment and the ruling exchange rate
on the final date in that year of assessment. An exchange difference calculated in this manner
represents the effect of the weakening or strengthening of the relevant exchange rate over the period
between the two dates and will be reflected as a foreign exchange gain or loss. This foreign exchange
gain or loss is equal to the increase or decrease in the rand value of the exchange item because of
movements in the relevant exchange rate. For example, when a person contemplated in section 24I(2)
owes an amount in a foreign currency to another person and the rand strengthens against the foreign
currency, that person will make a foreign exchange gain. Should the rand weaken against the foreign
currency; the person will incur a foreign exchange loss.
5.7.4. Exchange difference [section 24i(1)]

An exchange difference is calculated on translation date and realisation date. The term “exchange
difference” means the foreign exchange gain or foreign exchange loss on an exchange item during any
year of assessment determined by multiplying such exchange item by the difference between –
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• the ruling exchange rate on transaction date in respect of such exchange item during that year
of assessment, and –
– the ruling exchange rate on realisation date when the exchange item
is realised during that year of assessment; or
– the ruling exchange rate on translation date when the exchange item
is not realised during that year of assessment; or
• the ruling exchange rate at which such exchange item was translated at the end of the
immediately preceding year of assessment or at which it would have been translated had this
section been applicable at the end of that immediately preceding year of assessment, and –
– the ruling exchange rate on realisation date when the exchange item
is realised during that year of assessment; or
– the ruling exchange rate on translation date when the exchange item
is not realised during that year of assessment.
Example 5.7.1: Calculation of exchange difference

Company A owed a supplier $100 at year end when the ruling exchange
rate was R15: USD1. The ruling exchange rate at transaction date was
R14: USD1. The exchange difference calculated at the end of the year
of assessment on the $100 loan = the foreign currency amount of the
exchange item of $100 × (14,0000 ruling exchange rate on transaction
date – 15,0000 ruling exchange rate on realisation date) = R100 foreign
exchange loss.
5.7.5. Exchange item [section 24I(1)]

The term “exchange item” of or in relation to a person means an amount in a foreign currency –
• which constitutes any unit of currency acquired and not disposed of by that person;
• owing by or to that person on a debt incurred by or payable to such person;
• owed by or to that person on an FEC; or
• when that person has the right or contingent obligation to buy or sell that amount under an
FCOC.
5.7.6. Local currency and foreign currency

[section 24I(1)]
The term “local currency” is defined in relation to specific types of person as follows:
• Any person in respect of an exchange item which is attributable to a permanent establishment

outside the Republic – the functional currency of that permanent establishment. Under the
proviso to paragraph (a) of the definition of “local currency” any exchange item shall be deemed
not to be attributable to any such permanent establishment if the functional currency of that
permanent establishment is the currency of a country which has an official rate of inflation of
100% or more throughout the relevant year of assessment [paragraph (a) of the definition].
• Any resident other than a headquarter company in respect of an exchange item which is not
attributable to a permanent establishment outside the Republic – the currency of the Republic,
which is the rand [paragraph (b) of the definition].
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• Any person that is not a resident in respect of any exchange item which is attributable to a
permanent establishment in the Republic – the currency of the Republic, which is the rand
[paragraph (c) of the definition].
• Any headquarter company in respect of an exchange item which is not attributable to a permanent
establishment outside the Republic – the functional currency of that headquarter company
[paragraph (d) of the definition]. A headquarter company must be a resident.
• Any domestic treasury management company in respect of an exchange item which is not
attributable to a permanent establishment outside the Republic – the functional currency of that
domestic treasury management company [paragraph (e) of the definition]. A domestic treasury
management company must be incorporated or deemed to be incorporated by or under any law
in force in the Republic and have its place of effective management in the Republic.
• Any international shipping company defined in section 12Q in respect of an amount which is not
attributable to a permanent establishment outside the Republic – the functional currency of that
international shipping company [paragraph (f) of the definition]. An international shipping
company in this context must be a resident.
The term “foreign currency” in relation to any exchange item of a person means any currency which
is not local currency. Identifying local currency is therefore critical for correctly identifying exchange
items because exchange items are amounts of foreign currency.
Example 5.7.2: Identifying local currency, foreign currency and

exchange items facts:
Company A, a company incorporated and tax resident in South Africa,
operates two branches – one in South Africa and one in Country X.
During the year of assessment, Company A bought trading stock on
credit from a supplier in the USA for $100 000. At year end the full
balance of $100 000 was outstanding.
$60 000 of the balance related to trading stock which was delivered at
the branch in South Africa and $40 000 to trading stock delivered at the
branch in Country X. The branch in Country X functional currency is the
USD. South Africa does not have a tax treaty with Country X.
Solution:
Under paragraph (a) of the definition of “local currency”, the local
currency of the portion of the outstanding debt payable to the USA
supplier which is attributable to the branch in Country X is USD because
the branch’s functional currency is USD. Therefore, the debt of $40 000
is in local currency and is not an exchange item.
Under paragraph (b) of the definition of “local currency”, the local

currency of the portion of the outstanding debt payable to the USA
supplier which is attributable to the branch in South Africa is rand.
Therefore, the debt of $60 000 is in foreign currency and is an exchange
item.
Company A must calculate the exchange difference that arises in

relation to the debt of $60 000 on translation date and include it in or
deduct it from income under section 24I(3)(a) when calculating taxable
income.
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5.7.7. Functional currency [section 1(1)]

• The term “functional currency”, in relation to –
• a person, means the currency of the primary economic environment in which the business
operations of that person are conducted; and
• a permanent establishment of any person, means the currency of the primary economic
environment in which the business operations of that permanent establishment are
conducted.
The accounting treatment of foreign currency transactions is addressed in IAS 21. The term “functional
currency”, as defined in section 1(1), corresponds closely with the definition of that term in IAS 21. As
a result, IAS 21 can provide useful guidance in interpreting and applying the definition of “functional
currency” for income tax purposes.
The accounting definition of “functional currency” is as follows:
“Functional currency is the currency of the primary economic environment in which the entity
operates.” IAS 21 describes the primary economic environment in which an entity operates as
normally the one in which it primarily generates and expends cash. The functional currency will usually
be the currency in which, amongst other things, –
• sales prices of goods and services are denominated and settled; or

• costs of providing goods or services are denominated or settled.
Additional factors that may be considered include –
• the currency of financing activities (debt and equity instruments); and

• the currency in which receipts from operating activities are retained.
As a practical matter, SARS will generally accept the functional currency used by a person for financial
accounting purposes as its functional currency provided that the determination of that functional
currency is made in accordance with IAS 21. For example, if a company primarily transacts in British
pounds, its functional currency may be the British pound.
5.7.8. Transaction date [section 24I(1)]

Depending on the facts, the term “transaction date” is relevant in the determination of an exchange
difference on translation date or realisation date and is determined in relation to the following
exchange items:
• A unit of currency
• A debt owing by or to a person
• An FEC
• An FCOC
5.7.9. Translate [section 24I(1)]

The term “translate” is relevant in the determination of an exchange difference and means the
restatement of an exchange item in the local currency at the end of any year of assessment in which
an exchange item has not been realised, by applying the ruling exchange rate to such exchange item.
The end of the year of assessment is generally the last day of the year of assessment; however, if
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accounts are accepted under section 66(13A) or (13C) to a different date then, in the context of the
definition of “translate“, the “end of the year of assessment” refers to the agreed date for purposes
of exchange items covered by those accounts.
The word “translated” as used in the definitions of “exchange difference” and “ruling exchange rate”
in section 24I(1) bears a similar meaning to the definition of “translate”.
5.7.10. Realised [section 24I(1)]

An exchange difference must be determined on the date an exchange item is “realised”. The term
“realised” is defined in relation to a specific exchange item, namely:
• An FEC
• An FCOC
5.7.11. Ruling exchange rate [section 24I(1)]

The term “ruling exchange rate” is relevant in the determination of an exchange difference and is
defined in relation to a specific exchange item on a specific date, namely:
• An FEC
• An FCOC
The proviso to the definition of “ruling exchange rate” stipulates that the Commissioner may, having
regard to the particular circumstances of the case, prescribe an alternative rate to any of the
prescribed rates to be applied by a person in such particular circumstances, if that alternative rate is
used for the purposes of financial reporting pursuant to IFRS.
The following is stated in the Explanatory Memorandum on the Income Tax Bill, 1994 at page 4:
“In terms of the proposed amendment the Commissioner is authorised to approve alternative ruling
exchange rates for use instead of any one of the rates referred to in the definition of ‘ruling exchange
rate’. The amendment accommodates taxpayers who, for accounting purposes, use exchange rates
which do not agree fully with the ruling exchange rates as defined in section 24I of the principal Act,
but which are based or determined on a basis which is acceptable to the Commissioner. The
alternative ruling exchange rates must be exchange rates which are determined and applied in terms
of generally accepted accounting practice.”
The use of an alternative rate is at the discretion of the Commissioner and is not at the election of the
taxpayer. A taxpayer may submit an application requesting the Commissioner to prescribe an
alternative rate, however, the Commissioner may also mero motu exercise this discretion and apply
an alternative rate. The Commissioner will take into account the facts and circumstances of each case
and will determine whether the rates prescribed in the definition of “ruling exchange rate” in section
24I(1) are inappropriate.
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5.7.12. Spot rate [section 1(1)]

The definition of “spot rate” is relevant for the definition of “ruling exchange rate” in section 24I(1).
The term “spot rate” means the appropriate quoted exchange rate at a specific time by any authorised
dealer in foreign exchange for the delivery of currency.
An “appropriate” spot rate will depend on the facts and circumstances of a particular case. For
example, if an amount in a foreign currency is received from a debtor for a debt denominated in a
foreign currency, the foreign currency amount received must be translated to rand at the appropriate
authorised dealer buying rate of exchange. In contrast, an amount in foreign currency paid to a
creditor for a debt denominated in foreign currency must be translated to rand at the appropriate
authorised dealer selling rate of exchange.
For purposes of applying section 25D, SARS is aware that for practical reasons some persons do not
always follow a strict technical approach regarding the application of the spot rate. For example, a
person may use a closing spot rate comprising the average of the closing telegraphic transfer buying
and selling rates for the particular day when translating income and expenses instead of the buy rate
for income and the selling rate for expenditure. In other instances a person may use a single rate for
a short period such as a week to record all transactions during that period. In Interpretation Note 63it
was noted that SARS will accept the use of an approximate spot rate provided –
• it does not give rise to a result which differs materially from the result which would have been
obtained had the correct daily spot rate been applied, for example, if the particular foreign
currency in question does not fluctuate significantly over the relevant period;
• the same method is applied consistently; and
• the same approximate spot rate is used for accounting purposes.
If a person has used an approximate spot rate for the purposes of applying section 25D, that
approximate spot rate will generally be the appropriate spot rate to use at transaction date for a
directly related exchange item, for example, trading stock purchased from a foreign supplier on credit.
It is not appropriate to use an approximate spot rate on realisation date.
Example 5.7.3 – The use of spot rate facts:
Company A’s year of assessment ends on 31 May. On 15 May year 1 Company A, which exports
fruit, delivered a consignment of fruit free-on-board to the harbour. The selling price of $15
000 was payable within 30 days.
The debt was paid on 15 June year 1.
Market rates are as follows:
$/R
Date Spot rate
15 May year 1 (transaction date) 11,4300
31 May year 1 (translation date) 11,4500
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15 June year 1 (realisation date) 11,7000
Solution:
Year of assessment ending on 31 May year 1
Determination of exchange difference on translation date
The exchange difference is determined by multiplying the amount of the exchange item (debt)
by the difference between the ruling exchange rates on transaction date and translation date
as follows:
Exchange difference [$15 000 × (11,4300 – 11,4500)] 300
An exchange difference of R300 is determined on translation date which represents a foreign

exchange gain that must be included in income under section 24I(3)(a).
Determination of exchange difference on realisation date
by the difference between the ruling exchange rates on translation date and realisation date
as follows:
Exchange difference [$15 000 × (11,4500 – 11,7000)] 3 750
An exchange difference of R3 750 is determined on realisation date which represents a foreign

Notes:
(1) The amount of trading stock sold of R171 450 ($15 000 × 11,4300) must be included in
gross income and is determined under section 25D(1) by multiplying the amount of the
sale by the spot rate on the date of sale.
(2) The net amount included in taxable income of R175 500 (foreign exchange gain of R300
+ foreign exchange gain of R3 750 + gross income of R171 450) equals the amount received
of $15 000 at the spot rate on realisation date of 11,7000.
Example 5.7.4 – The use of an approximate spot rate facts:
Company A’s year of assessment ends on 31 May. On 15 May year 1 Company A, which exports
fruit, delivered a consignment of fruit free-on-board to the harbour. The selling price of $15
000 was payable within 30 days.
At the beginning of each month Company A estimates an approximate exchange rate at which
all export transactions are recorded on transaction date. The approximate spot rate meets the
requirements of Interpretation Note 63 “Rules for the Translation of Amounts Measured in
Foreign Currencies other than Exchange Differences Governed by Section 24I and the Eighth
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Schedule” and qualifies for use as the spot rate on transaction date for purposes of section
25D and section 24I.
The debt was paid on 15 June year 1.
$/R
Date Spot rate
15 May year 1 (transaction date) 11,4300
31 May year 1 (translation date) 11,4500
Approximate spot rate for the month of May year 1 as determined by Company A was 11,4000
and may be used on transaction date.
Result: Year of assessment ending on 31 May year 1
by the difference between the ruling exchange rates on transaction date (approximate spot
rate) and translation date as follows: R
Exchange difference [$15 000 × (11,4000 – 11,4500)] 750
An exchange difference of R750 is determined on translation date which represents a foreign

by the difference between the ruling exchange rates on translation date and realisation date
as follows:

Notes:
(1) The amount of trading stock sold of R171 000 ($15 000 × 11,4000) must be included in
gross income and is determined under section 25D(1) by multiplying the amount of the
sale by the approximate spot rate on the date of sale.
(2) The net amount included in taxable income of R175 500 (foreign exchange gain of R750
+ foreign exchange gain of R3 750 + gross income of R171 000) equals the amount received
of $15 000 at the spot rate on realisation date of 11,7000.
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(3) The net amount of R175 500 included in taxable income in Example 2 above, which
used the actual spot rate on transaction date, is the same as the net amount of R175 500
included in taxable income in this example which used an approximate spot rate as the
relevant spot rate on transaction date for purposes of section 25D and section 24I. This
outcome will generally prevail provided the underlying income or expenditure, as the case
may be, is taxable or qualifies for a deduction immediately or over time.
5.7.13. Average exchange rate [section 1(1)]

The term “average exchange rate” in relation to a year of assessment means the average determined
by using the closing spot rates at the end of daily or monthly intervals during that year of assessment
which must be consistently applied within that year of assessment.
This definition is relevant when translating, amongst other things, –
• expenditure or income incurred or received in any currency other than rand

in the circumstances set out in section 25D, for example, when a natural
person or non-trading trust elects to use the average exchange rate in a year
of assessment in accordance with section 25D(3); and
• the net income of a CFC from its functional currency to rand under section
9D(6).
5.7.14. Application of section 24I(1) to (3) to

specific exchange items
The definition of “exchange item” contains four separate items. The calculation of exchange
differences, which must be calculated on each exchange item, is discussed in this section of the Note
in relation to the different types of exchange item.
A unit of currency acquired and not disposed of by a person
An exchange difference in respect of a unit of foreign currency acquired and not disposed of by a
person (A) contemplated in section 24I(2) must be determined on translation date and realisation
date. For A, this includes the situation in which foreign currency is acquired and held by someone else
on A’s behalf because A is the beneficial owner of that foreign currency.
Physical notes and coins, for example, a $1 note and a 50 cent coin, are units of currency.
Transaction date and realisation date in relation to a unit of foreign currency
The transaction date for a unit of foreign currency is the date on which the amount was acquired.
A unit of foreign currency is “realised” when it is disposed of. A unit of currency will be realised when
it is, for example, –
• sold for rands;

• sold for another foreign currency, for example, when dollar notes are sold for
euro notes;
• applied to acquire an asset; or
• applied to settle a liability.
Realisation date is the date on which a unit of foreign currency is disposed of.
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Ruling exchange rate in relation to a unit of foreign currency
The ruling exchange rate in relation to a unit of foreign currency is determined as the spot rate on the
respective transaction, translation and realisation dates.
Example 5.7.5 – Exchange difference on a unit of currency determined on

translation date facts:
Individual A held foreign currency collector’s coins totalling $5 000 as trading stock at the end
of a year of assessment. Individual A acquired the necessary exchange control approval. The
coins were acquired during the same year of assessment.
$/R
Date Spot rate
Date of acquisition (transaction date) 11,6219
Last day of year of assessment (translation date) 11,9391
Solution:
The exchange difference is determined by multiplying the amount of the exchange item (units
of currency) by the difference between the ruling exchange rates on transaction date and
translation date as follows: R
An exchange difference of R1 586 is determined on translation date which represents a foreign

Note:
R58 110 ($5 000 × 11,6219) is allowed as a deduction under section 11(a) for the acquisition
of trading stock. This amount is also reflected as closing stock at the end of the year of
assessment under section 22(1) read with section 22(3)(a)(i) (see 4.13.2 for a discussion of the
cost price of trading stock).
Example 5.7.6 – Exchange difference on a unit of currency determined on

realisation date facts:
Individual A sold foreign currency collector’s coins totalling $5 000 for $5 000 with the sales price
to be settled in rand at the prevailing spot rate. Individual A had the necessary approval to hold
the coins as trading stock The acquisition and disposal of the coins took place during the same
year of assessment.
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$/R
Date Spot rate
Date of acquisition (transaction date) 11,6219
Date of disposal (realisation date) 11,9391
Solution:
The exchange difference is determined by multiplying the amount of the exchange item (units of
currency) by the difference between the ruling exchange rates on transaction date and
realisation date as follows: R

Notes:
(1) R58 110 ($5 000 × 11,6219) is allowed as a deduction under section 11(a) for
the acquisition of trading stock.
(2) Although the amount received on disposal of the coins amounts to R59 696 ($5
000 × 11,9391), only R58 110 (R59 696 – R1 586) is included in gross income, since
section 24I(6) prevents an inclusion of the exchange difference of R1 586 under any
other section.
5.7.15. Debt in foreign currency incurred by or

payable to a person
An exchange difference in respect of an amount in a foreign currency owing by or to a person on a
debt incurred by or payable to that person must be determined on translation date and realisation
date, when applicable.
Examples of debt in a foreign currency which constitute an exchange item include:
• Amounts payable on a debt granted to a person in a foreign currency.

• Amounts receivable on a debt granted by a person to another person in
foreign currency.
• Deposits in foreign bank accounts.
• Money market instruments in foreign currency.
• Bonds in foreign currency.
• Traveller’s cheques.
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5.7.16. Transaction date and realisation date in

relation to a debt denominated in foreign
currency owed by or to a person
The transaction date for an amount in foreign currency –
• on a debt owed by a person is the date on which the debt was actually
incurred; and
• on a debt owing to a person is the date on which the amount payable on the
debt accrued to the person or the date on which the debt was acquired by the
person in any other manner.
Payment includes the repayment of the debt in rands, in the same foreign currency as the foreign
currency in which the debt is denominated or in a foreign currency which differs to that in which the
debt is denominated. It also includes the payment of a debt by means of set-off, for example, an
amount of a debt owing by a debtor to a creditor is set-off by an amount owing by that creditor to
that debtor under another financial arrangement.
The settlement or disposal of a debt “in any other manner” referred to above includes, for example:
• A change in the foreign currency in which the debt is denominated.

• The waiver of a debt by the creditor.
• The prescription of a debt.
• The cession of a debt.
• The sale of a debt.
• The write-off of a debt if all the associated rights have been extinguished.
5.7.17. Ruling exchange rates in relation to debt

The ruling exchange rate in relation to a debt payable or receivable in a foreign currency is the spot
rate on the relevant transaction, translation or realisation date, unless the proviso as discussed earlier
on or the proviso to the ruling exchange rate for debt applies.
Example 5.7.7 – Exchange difference on a debt incurred facts:
Company A’s year of assessment ends on the last day of February. Company A borrowed $100
000 on 31 January year 1. The loan was repaid on 30 June year 1.
$/R
Date Spot rate
31 January year 1 (transaction date) 11,4200
28 February year 1 (translation date) 11,4500
Solution:
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Year of assessment ending on 28 February year 1
by the difference between the ruling exchange rates on transaction date and translation date
as follows:
Exchange difference [$100 000 × (11,4200 – 11,4500)] (3 000)
An exchange difference of (R3 000) is determined on translation date which represents a

foreign exchange loss that must be deducted from income under section 24I(3)(a).
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The exchange difference is determined by multiplying the amount of the exchange item
(debt) by the difference between the ruling exchange rates on translation date and
realisation date as follows:
An exchange difference of (R15 000) is determined on realisation date which represents a

Note:
The sum of the foreign exchange losses in the years of assessment ending on 28 February
year 1 and year 2 of R18 000 (R3 000 + R15 000) is equal to the difference between the rand
value of the loan on transaction date of R1 142 000($100 000 × 11,4200) and the rand value
on realisation date of R1 160 000 ($100 000 × 11,6000).
Example 5.7.8 – Exchange difference on a debt incurred that financed the

acquisition of trading stock facts:
Company A’s year of assessment ends on the last day of February. On 1 November year 1
Company A purchased trading stock of $500 000 on credit. The debt was repaid on 31 January
year 2. All the trading stock was sold for a total of R6 million before 28 February year 2.
$/R
Date Spot rate
1 November year 1 (transaction date) 11,6000
31 January year 2 (realisation date) 11,6900
28 February year 2 11,7000
Solution:
by the difference between the ruling exchange rates on transaction date and realisation date
as follows:
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NOTES:
(1) The amount of trading stock acquired of R5,8 million ($500 000 × 11,6000) is
deductible under section 11(a). The amount is determined under section 25D(1)
by multiplying the amount of the expenditure incurred by the spot rate on the date
that the expenditure is incurred.
(2) The amount received or accrued on the disposal of the trading stock of R6
million must be included in gross income.
Example 5.7.9 – Exchange difference on a debt arising from the sale of trading
stock on credit facts:
Company A sold trading stock for $500 000 on credit. The debt was settled on 31 January year
2. The trading stock was purchased at a cost of R4,5 million in September year 1.
$/R
Date Spot rate
31 January year 2 (realisation date) 11,6900
28 February year 2 11,7000
Solution:
(debt) by the difference between the ruling exchange rates on transaction date and
An exchange difference of R45 000 is determined on realisation date which represents a

foreign exchange gain that must be included in income under section 24I(3)(a).
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Notes:
(1) The purchase price of the trading stock of R4,5 million is deductible under section
11(a).
(2) The amount received or accrued on the disposal of the trading stock of R5,8 million
($500 000 × 11,6000) is determined under section 25D(1) by multiplying the $ selling price
by the spot rate on the date of the sale. This amount must be included in gross income.
Example 5.7.10 – Exchange difference on a debt incurred that financed the acquisition of a
capital asset facts:
Company A purchased a machine for $500 000 on credit. The debt was repaid on 31 March
year 2.
$/R
Date Spot rate
31 March year 2 (realisation date) 11,5000
Solution:
translation date as follows:

Note:
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The expenditure incurred on acquisition of the machine amounts to R5,8 million ($500 000 ×
11,6000) and is determined under section 25D(1) by multiplying the amount of the
expenditure incurred by the spot rate on the date that the expenditure is incurred. This is the
amount on which capital allowances may potentially be claimed.
Example 5.7.11 – Conversion of the foreign currency of a loan facts:
Company A, a resident, borrowed 500 000 franc (F). The loan was repayable on 31 October
year 2.
On 1 May year 2 Company A entered into an agreement with the lender that the loan will be
repaid in dollars on 31 October year 2. The loan was converted at the $ / F spot rate on 1
May year 2, namely, $1 / F1,2923.
F/R $/R
Date Spot rate Spot rate
1 May year 2 (conversion date) 8,6900 11,2298
31 October year 2 (realisation date) 11,4850
Solution:
The exchange difference is determined by multiplying the amount of the exchange item (debt
in franc) by the difference between the ruling exchange rates on transaction date and
Exchange difference [F500 000 × (8,5400 – 8,6300)] (45 000)

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Conversion of debt: 1 May year 2
in franc) by the difference between the ruling exchange rates on translation date and
Exchange difference [F500 000 × (8,6300 – 8,6900)] (30 000)
An exchange difference of (R30 000) is determined on conversion of the debt from franc to
dollars which represents a foreign exchange loss that must be deducted from income under
section 24I(3)(a). The conversion of the currency of the debt is a realisation of the debt in
franc and the creation of a new exchange item, namely, the debt in dollars.
Repayment of debt: 31 October year 2
The amount of the debt is restated in the new foreign currency (dollars) as follows: F500 000
/ 1,2923 = $386 907
in dollars) by the difference between the ruling exchange rates on transaction date (1 May
year 2) and realisation date as follows: R

Note:
The sum of the foreign exchange losses in the years of assessment ending on 28 February
year 2 and year 3 of R173 739 (R45 000 + R30 000 + R98 739) is equal to the difference of
R173 739 between the rand amount paid on realisation date of R4 443 627 ($386 907 ×
11,4850) and the rand amount received on transaction date of R4 270 000 (F500 000 ×
8,5400) and a rounding difference of R112.
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5.7.18. Acquisition and disposal rates on

acquisition and disposal of debt
(proviso to paragraph (a) of the definition of “ruling exchange rate”) A rate other than the spot rate
on transaction date or realisation date will be used to determine an exchange difference on debt if
any consideration –
• paid or incurred for the acquisition of debt, or
• received or accrued for the disposal of debt was determined by applying a rate other
than the spot rate on transaction date or realisation date. Under these circumstances the
acquisition rate or disposal rate so determined will be deemed to be the spot rate on
transaction date or realisation date.
A ruling exchange rate is a particular exchange rate which has been specified in section 24I for the
transaction date, translation date and realisation date. For example, in relation to a debt in foreign
currency, the spot rate is generally prescribed as the applicable exchange rate for the transaction date,
translation date and realisation date. The “spot rate” is clearly an exchange rate.
It is therefore clear that the reference to “rate” in the proviso to paragraph (a) of the definition of
“ruling exchange rate” when referring to any consideration being determined “by applying a rate other
than spot rate”, is a reference to the situation in which an exchange rate between two currencies
other than the prevailing spot rate has been applied by the parties to determine the consideration for
the particular acquisition or disposal of the debt. The parties must have agreed to a contractual
exchange rate which differs from the spot rate quoted by authorised dealers. The contractual
exchange rate is limited to an exchange rate between two currencies and would not include the extent
to which the consideration is determined by taking other factors, such as concerns regarding
recoverability or cash flow, into account.
Stated differently, for the proviso to apply, any consideration paid or incurred or received or accrued
in respect of the acquisition or disposal of a foreign currency debt must have been determined “by
applying a rate [that is, an exchange rate] other than such spot rate”. For example, the parties agree
on the first day of the month that a debt of $100 will be settled on the last day of the month by a
payment of R1 125. Alternatively, the parties agree on the first day of the month that a debt of $100
will be settled on the last day of the month by applying a rate of 11,2500 and not the prevailing spot
rate, whatever that may be, on the last day of the month when settlement occurs.
As noted above, the proviso is limited to dealing with differences which arise as a result of different
exchange rates being applied and does not deal with situations in which the parties to a transaction
agree that less than the full amount of the debt is payable on acquisition or disposal of the debt.
For example, Company Z owes Company X $100. Company X requires the cash and sells the debt of
$100 to Company Y for $75 because Company Y has concerns about the recoverability of the debt and
is prepared to pay Company X only $75. The difference of $25 ($100 – $75) has nothing to do with a
different exchange rate being applied by Company X and Company Y and, therefore, the proviso to
the ruling exchange rate for debt does not apply. In this example, the consideration between the buyer
and seller for disposal of a debt was fixed in an amount of foreign currency which is the same foreign
currency in which the debt was denominated. Accordingly, it cannot be said that any rate (being an
exchange rate) was applied in determining the consideration and the proviso does not apply.
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The disposal of a foreign currency-denominated asset, such as a debt, will often have two elements,
namely, a gain or loss as a result of the movement in exchange rates (foreign exchange transaction)
and the gain or loss on the disposal of the debt itself which, depending on the facts of a particular
case, could be of a revenue or capital nature. If both of these elements are present, the two elements
need to be identified and dealt with separately under the appropriate provisions of the Act.
For example, Company A owes Company B $100. The debt arose during the year of assessment when
the spot rate was 11,5000. Company B requires the cash and sells the debt of $100 to Company C for
$75. Company C has some concerns about the recoverability of the debt and plans to actively manage
the debt to ensure a full recovery. Company B and Company C agree that Company C will pay Company
B R844, or $75 at a rate of 11,2533, on the last date of the month for the debt of $100. The prevailing
spot rate on the last day of the month was 11,3000. From Company B’s perspective, section 24I, and
more specifically the proviso to paragraph (a) of the definition of “ruling exchange rate”, will deal with
the exchange difference which results from the movement in the exchange rate from 11,5000 to the
agreed contractual rate of 11,2533 and, assuming Company B held the debt on capital account, the
Eighth Schedule read with section 25D(1) will deal with the difference between the base cost of $100
and proceeds of $75.
If the proviso applies, as it does in the example in the preceding paragraph, it is necessary to calculate
the acquisition rate or disposal rate as appropriate. The term “acquisition rate” means “the exchange
rate in respect of an exchange item obtained by dividing the amount of the expenditure incurred for
the acquisition of such exchange item [the debt] by the foreign currency amount in respect of such
exchange item”. (Emphasis added.)
The term “disposal rate” means “the exchange rate in respect of an exchange item obtained by
dividing the amount received or accrued in respect of the disposal of such exchange item [the debt]
by the foreign currency amount received or accrued for such exchange item”. (Emphasis added.)
The calculation of the disposal rate is explained by calculating it from Company B’s perspective in the
example above. The disposal rate is calculated as follows:
• Disposal rate in respect of an exchange item being disposed of (that is, the
debt of $100) = amount received or accrued in respect of the disposal of such
exchange item (in rand, namely, R844 or $75 × 11,2533) divided by the foreign
currency amount (the consideration received or accrued of $75) in respect of the
disposal of such exchange item (being the debt $100) = 11,2533. This rate accurately
reflects the exchange rate which was applied to determine the rand amount obtained
in respect of the disposal.
• Applying the disposal rate to calculate the exchange difference on realisation

= multiply the amount of the exchange item by the difference between the ruling
exchange rates on transaction date and realisation date = $100 × (11,5000 – 11,2533
disposal rate) = R25 foreign exchange loss.
The definition of “disposal rate” uses the words “dividing … by the foreign currency amount in respect
of such exchange item” and does not use the words “dividing … by the foreign currency amount of
such exchange item”. The words “in respect of” refer to the amount of foreign currency which was
received for the disposal.
Accordingly, the denominator in the calculation of the disposal rate is the amount of foreign currency
for which the item was disposed of and not the full amount of the exchange item just before the
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transaction. This treatment ensures that when applying the disposal rate in the calculation of the
exchange difference arising on realisation, section 24I picks up and deals with only the gain or loss
which arises as a result of the movement in the exchange rates and does not deal with a gain or loss
which is attributable to other factors.
The same principles are applicable in calculating a disposal rate and an acquisition rate. In the example
above, the acquisition rate is calculated as follows from Company C’s perspective:
• Acquisition rate in respect of an exchange item acquired (that is, the debt of
$100) = expenditure incurred for the acquisition of such exchange item (in rand,
namely, R844 or $75 × 11,2533) by the foreign currency amount (the consideration
paid of $75) in respect of the acquisition of such exchange item (being the debt of
$100) = 11,2533. This rate accurately reflects the exchange rate which was applied to
determine the number of rands paid in respect of the acquisition.
• The discount of $25 ($75 – $100) at which the debt was acquired is receivable
in terms of or in respect of a financial arrangement and will form part of interest for
purposes of section 24J.
Example 5.7.12 – Acquisition and disposal of an amount in foreign currency owing to a

person on a debt payable to that person:
Company A’s business involves purchasing and recovering debts. Its year of assessment ends
on the last day of February. It purchased a debt receivable of $30 000 on 31 January year 1 for
R340 386 and sold it on 30 June year 1 for R385 846 which includes a 10% mark-up on the
purchase price.
$/R
Date Spot rate
Solution:
The acquisition rate and disposal rate of the debt are determined as follows:
Acquisition rate
Expenditure incurred (in rand) for the acquisition of the exchange item (debt) / foreign
currency amount in respect of the debt
= R340 386 / $30 000 = 11,3462
Disposal rate
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Amount received or accrued (in rand) on disposal of the exchange item (debt) / foreign
currency amount received or accrued in respect of the debt = R385 846 / ($30 000 + 10%
mark-up of $3 000) = 11,6923
receivable) by the difference between the ruling exchange rates on transaction date and
Under the proviso to paragraph (a) of the definition of “ruling exchange rate” in section
24I(1) the acquisition rate is deemed to be the spot rate on transaction date. An exchange
difference of R8 814 is determined on translation date which represents a foreign exchange
gain that must be included in income under section 24I(3)(a).
Taxable income calculation
Foreign exchange gain [section 24I(3)(a)] 8 814
Acquisition of the debt [section 11(a)] (340 386)
Closing stock [section 22(1) read with section 22(3)(a)(i)] (Note 2) 340 386
8 814
receivable) by the difference between the ruling exchange rates on translation date and
Under the proviso to paragraph (a) of the definition of “ruling exchange rate” in section
24I(1) the disposal rate is deemed to be the spot rate on realisation date. An exchange
difference of R1 569 is determined on realisation date which represents a foreign exchange
gain that must be included in income under section 24I(3)(a).
Taxable income calculation R
Gross Income 385 846
Less: Adjustment for inclusion under section 24I(3)(a) (Note 1) (10 383)
375 463
Foreign exchange gain [section 24I(3)(a)] 1 569
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Opening stock [section 22(2) read with section 22(3)(a)(i)] (Note 2) (340 386)
36 646
Notes:
(1) Under section 24I(6) the amount included in gross income must be reduced by the
amount of the foreign exchange gains of R10 383 (R8 814 + R1 569) previously included
in income. (see 4.6).
(2) Under section 22(3)(a)(i) the cost price of trading stock excludes the amount of an
exchange difference (see 4.13.2).
(3) The net inclusion in gross income of R45 460 (R8 814 + R36 646) equals the
difference between the rand amount paid on transaction date of R340 386 and the rand
amount received on realisation date of R385 846.
5.7.19. A forward exchange contract

An exchange difference in relation to an FEC entered into by a person contemplated in section 24I(2)
must be determined on translation date and realisation date.
a) Definition of “forward exchange contract” and “forward rate”
The term “forward exchange contract” means any agreement under which a person agrees with
another person to exchange an amount of currency for another currency at some future date at a
specified exchange rate. The forward rate is defined as the specified exchange rate as referred to in
the definition of “forward exchange contract”.
A person may enter into an FEC to hedge the risk of an unfavourable movement in the exchange rate
in the future on an underlying transaction. Simultaneously, the possibility of an exchange gain on a
favourable movement in the exchange rate is removed. A person may also enter into an FEC for
speculative purposes. Although an FEC may be held by a person for the purpose of resale at a profit,
it is specifically excluded from the definition of “trading stock” in section 1(1).
b) Transaction date and realisation date for a forward exchange contract
The transaction date in relation to an FEC is the date when the contract was entered into and the
realisation date is the date when payment is received or made in respect of the FEC.
c) Ruling exchange rates in relation to a forward exchange contract
The ruling exchange rates in relation to an FEC, unless the proviso as discussed previously applies, are
as follows:
• On transaction date – the forward rate under the FEC.
• On translation date in respect of an FEC which –
– is not an affected contract, the MRFR (market-related forward rate)

available for the remaining period of the FEC; or
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– is an affected contract, the forward rate under the FEC [see the
definition of “affected contract” in.
• On realisation date – the spot rate on that date (see the definition of “spot
rate”).
Under the proviso the Commissioner may, having regard to the particular circumstances of the case,
prescribe an alternative rate to any of the prescribed rates to be applied by a person in such
circumstances if the alternative rate was used for purposes of financial reporting pursuant to IFRS.
d) Determination of a market-related forward rate on translation date of a forward exchange

contract
Under paragraph (b)(ii) of the definition of “ruling exchange rate” in section 24I(1), the ruling
exchange rate in relation to an FEC, that is not an affected contract, on translation date is the MRFR
available for the remaining period of the contract.
The MRFR available for the remaining period of an FEC must be determined by obtaining from an
authorised foreign exchange dealer the closing rate on translation date for the remaining period of
the contract for the same amount of foreign currency. The MRFR is therefore the forward rate at
which another FEC for the same amount of foreign currency could be entered into on the last day of
the specific year of assessment that would expire on the same date as the original FEC.
Example 5.7.13 – Determination of exchange differences on an FEC:
Trust A entered into an FEC on 1 January year 1 under which $150 000 would be purchased
on 30 June year 1 at a forward rate of 11,5200. The MRFR on 28 February year 1 for a
similar contract was 11,5400.

$/R $/R
Date Spot rate Forward rate
1 January year 1 (transaction date) 11,4000 11,5200
28 February year 1 (translation date) 11,4500 11,5400
Solution:

(FEC) by the difference between the ruling exchange rates on transaction date (the forward
rate) and translation date (the MRFR) as follows:
R
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An exchange difference of R3 000 is determined on translation date which represents a


(FEC) by the difference between the ruling exchange rates on translation date (the MRFR)
and realisation date (the spot rate) as follows:
R
An exchange difference of R6 000 is determined on realisation date which represents a
Example 5.7.14 – Determination of exchange differences on hedging of a debt by an FEC
Company A is a resident and its year of assessment ends on the last day of February.
Company A purchased trading stock of $100 000 on 1 December year 1. The trading stock
was disposed of before the end of the year of assessment ending on 28 February year 2. The
debt was payable on 31 May year 2.
Company A entered into an FEC on 1 December year 1 under which $100 000 would be
purchased on 31 May year 2 at a forward rate of 11,4900. The MRFR on 28 February year 2
for a similar contract was 11,5100.
$/R $/R
Date Spot rate Forward rate
1 December year 1 (transaction date) 11,3700 11,4900
28 February year 2 (translation date) 11,4500 11,5100
31 May year 2 (realisation date) 11,5600
Solution:
Exchange differences are determined for each exchange item, namely, the debt and the
FEC.
Determination of exchange differences on translation date
Debt
translation date as follows:
R
FEC
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(FEC) by the difference between the ruling exchange rates on transaction date (the forward
rate) and translation date (the MRFR) as follows:
R
The exchange differences of (R8 000) loss and R2 000 gain determined on translation date
must be deducted from and included in income under section 24I(3)(a).
Income tax treatment of the acquisition and disposal of trading stock
The trading stock acquired of R1 137 000 ($100 000 × 11,3700) is deductible under section
11(a). The amount is determined under section 25D(1) by multiplying the amount of the
expenditure incurred by the spot rate on the date that the expenditure is incurred.
The amount received or accrued on disposal of the trading stock must be included in gross
income and, if it is sold in foreign currency, is determined under section 25D(1) by
multiplying the amount received or accrued in foreign currency by the spot rate on the date
of receipt or accrual.

Debt
(debt) by the difference between the ruling exchange rates on translation date and
R
FEC
(FEC) by the difference between the ruling exchange rates on translation date (the MRFR)
and realisation date (the spot rate) as follows:
R
The exchange differences of (R11 000) loss and R5 000 gain determined on realisation date
must be deducted from and included in income under section 24I(3)(a).
Note:
The sum of the net foreign exchange losses in both years of assessment of (R12 000) [(R8
000) loss + R2 000 gain + (R11 000) loss + R5 000 gain)] and the deduction under section
11(a) of R1 137 000 is equal to the rand amount paid of R1 149 000 ($100 000 × 11,4900)
under the FEC and used to purchase the trading stock.
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https://www.rsm.global/southafrica/news/tax-implications-foreign-exchange-
differences
www.SARS.gov.za
Case study/Caselet
Company A’s year of assessment ends on the last day of December. Company A lent
Company B $1 million on 1 January year 1 when the exchange rate was R8/ $1.
Company A sold the debt on 30 June year 5 for $500 000 at an agreed exchange rate
of R10/ $1. Company A therefore received R5 million. The debt was held on capital
account.
$/R
Date Spot rate
31 December year 4 (translation date) 9,0000
You are required to determine the exchange difference of the above transactions
on the realisation date.
Practice
Practice the skills you have learned in your new prescribed text book as listed below:
Please check corresponding example numbers in your new prescribed text book!
• Calculation of the foreign exchange loss acquired and realised during the
current year of assessment: Example 15.3 – page 493
• Calculation of the foreign exchange loss acquired but not realised during the
current year of assessment: Example 15.4 – page 494
• Calculation of foreign exchange loss: Application of a rate other than the spot
rate on transaction date and realisation date: Example 15.5 – page 494
• Acquisition of assets: Example 15.6 – page 496
• Comprehensive example: Example 15.9 – page 501
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Reading
Read the section(s) of the prescribed text listed. Please check corresponding page
numbers in your new prescribed text book!
• Translation of foreign currency amounts – page 483

• Specific translation rule: Exchange differences on exchange items – page 486
• Determine if the exchange differences should be deferred – page 495
• Transactions between companies forming part of the same group of
companies and between connected persons – page 498
• Cryptocurrency – page 510
Critically discuss and evaluate whether the treatment of cryptocurrency within the
South African tax regime is fair and in line with internationally accepted standard.
5.7.20. Conclusion
Section 24I(3) provides for an inclusion in or deduction from income of an exchange difference on an
exchange item as well as any premium or like consideration received by or paid by a person under an
FCOC entered into by that person or any consideration paid for an FCOC acquired by a person. Section
24I of the Income Tax Act[1] deals with gains or losses on foreign exchange transactions. This provision
requires that certain taxpayers, discussed below, include or deduct from their income the exchange
differences arising from exchange items. This entails that these exchange gains or losses be taken into
account for tax purposes, whether it has realised or not, and be taxed at the normal rate of tax at
which any other income is taxed. The concept of an exchange item is defined as foreign currency,
foreign denominated debt (for example, bonds), forward exchange contracts (FEC) and foreign
currency option contracts (FCOC). Section 24I does not deal with the foreign currency gain or loss
elements of instruments such as shares or units in collective investment portfolios.
It is important to note that the scope of section 24I does not include all taxpayers and their exchange
items. Any company that holds an exchange item is required to apply section 24I to all its exchange
items, as described above. Trading trusts are similarly required to apply section 24I to all exchange
items. Trusts that do not carry on a trade are however only subject to section 24I on currency
derivatives covered by section 24I, namely FECs and FCOCs.
Natural persons, similarly to non-trading trusts, are only required to apply section 24I to their currency
derivatives. In relation to units of foreign currency and foreign debt instruments a natural person is
only required to apply section 24I if these items are held as trading stock (in an investment context,
with a speculative intention). This means that the exchange gains a natural person make on a foreign
debt instrument, for example, a US dollar (USD) bond, will not be taxed under section 24I. It is however
important to note that this does not necessarily mean that it is not taxed at all, as this is still a capital
investment that may attract capital gains tax. As indicated earlier it also does also not mean that the
yield, in this case interest, will not be taxed. The USD interest should in principle still be taxed in South
Africa if the investor is a South African tax resident.
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It is clear that section 24I has become more and more applicable to a wide variety of taxpayers, and it
is therefore important for accountants, taxpayers and tax practitioners to consider the current and
future tax implications of unrealised and realised foreign gains or losses on taxpayers’ foreign assets
or liabilities.

Revision questions
a) What is an exchange item?

b) How would you determine the ruling exchange rates?
c) Explain what is a forward exchange contract?
d) Describe the foreign currency option contracts.
e) What is a functional currency?

Self-check activity
a) Discuss how foreign exchange transactions can be translated to

rand for tax purposes.
b) Briefly explain how foreign exchange differences are
calculated.
c) Discuss how you would determine if the exchange difference
should be deferred.
d) Explain the specific translation rule in relation to the disposal
and acquisition of assets as per paragraph 3 of the Eighth
Schedule.
e) Discuss how you would treat exchange gains and losses in
respect of a debt between companies that form part of the
same group of companies and between connected persons.
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STUDY UNIT 8: INVESTMENT AND FUNDING

INSTRUMENTS
The purpose herein is to determine the normal tax implications of financial

Purpose instruments when making investments and funding decisions.

• Determine whether a financial arrangement constitutes an instrument
and calculate the interest in respect of instruments in terms of s 24J.
• Determine whether interest received by a taxpayer will be subject to tax.
• Determine whether a taxpayer will be entitled to deduct to deduct
interest incurred.
• Establish the tax implications of equity instruments held by investors.
• Explain and calculate the tax implications of equity instruments held by
investors.
Learning • Explain and calculate the tax implications of equity instruments issued by
Outcomes investees.
• Identify equity instruments that may constitute hybrid debt instruments
or third-party-backed shares and describe the implications of this
classification of the instrument.
• Identify debt instruments that may constitute hybrid debt instruments or
bear hybrid interest and describe the implications of this classification of
the instrument or interest.
• Identify derivative instruments and determine the tax implications of
these instruments for the parties involved.
Time
Debt Normally occurs when the lender advances an amount to
instruments the borrower.
Equity Equity funding and is normally raised in the form of shares

instruments issued by a company to investors.
Hybrid The issuer of the shares is obliged to redeem the shares in

Important terms instruments whole or part in part, or the holder of the share may require
and definitions redemption of the share in whole or in part within a period
of three years from the date of issue.
Derivative This type of instruments may be held for the purposes of

instruments hedging against certain risks, such as changes in interest
rates or for speculative purposes.
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5.8.1. Introduction
In their ordinary course of business, taxpayers enter into arrangements involving financial instruments
regularly. The terms of the financial instruments are determined by the purpose for entering into such
an arrangement: Thus, a taxpayer may acquire a financial instrument as an investment; or a taxpayer
may become a party to a financial instrument to obtain external funding in the form of debt or by
issuing equity instruments.
Once you have studied this section, you should be able to determine whether a financial arrangement
constitutes an instrument and calculate the interest in respect of instruments in terms of section s
24J.
• Debt instruments
• Equity instruments
• Hybrid instruments
• Derivative instruments
5.8.2. Debt instruments

A debt instrument comes into existence when a lender advances an amount to a borrower. The
borrower is obliged to repay the amount advanced as well as a return on this amount in the form of
interest to the borrower. It is however, important to note that, the advancement of the capital amount
does not result in any tax implications for the borrower or the lender as the payment is accompanied
by an immediate right to payment (lender) or obligation to make repayment (borrower).
Section 24J regulates the timing of the accrual and incurring of interest. This provision applies to both
the lender and the borrower. Section 24J applies to any interest-bearing arrangement or debt, the
acquisition or disposal of any right to receive interest or the obligation to pay interest, and a
repurchase or resale agreement.
Yield to maturity method
Section 24J employs a method that applies a yield to maturity rate to the balance of an instrument to
determine the interest accrued or incurred in respect of that instrument for a specific period.
Application of the yield to maturity method
The following stepped approach is preferred to apply the yield to maturity method:
Step 1: Determine whether s 24J applies: It applies only to an instrument (for the issuer) or to an
income instrument (for the holder).
Step 2: Determine all amounts payable or receivable in terms of any instrument in relation to a holder
or an issuer, as the case may be, of such instrument during the term of the instrument.
Step 3: Calculate the yield to maturity, the calculation is to be done using a financial calculator, unless
the rate is given.
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Step 4: Determine the initial amount: the amount paid or received for the instrument (issue price or
transfer price).
Step 5: Calculate the accrual amount for the first accrual period: do this by using formula: A = B x C.
Step 6: Calculate the adjusted initial amount: the calculation is to be done according to the definition
of adjusted initial amount in terms of the provisions of (s 24J (1)). The amount calculated represents
C in the formula: A=B x C.
Step 7: Calculate the accrual amount for the second accrual period: do this by using the same formula
as in step 5.
Step 8: Repeat steps 6 and 7 for the rest of the accrual periods until the ned of the term of the
instrument.
Step 9: Reconciliation. The total of the accrual amounts should be equal to the total interest.
Example 1– Yield to maturity method: Basic calculation
Anja Ltd enters into an agreement on 1 January 2019 whereby it acquires an interest-bearing
instrument with a face value of R100 000 at a discount of 10%. As Anja Ltd holds the right to
payment, it is the holder of the instrument. The instrument has a maturity date of 31
December 2020, when an amount of R130 000 will be repaid. Anja Ltd’s financial year ends
on 31 December.
You are required to determine the interest accrual amount for each accrual period by
applying the yield to maturity method prescribed in s 24J.
Solution:
Step 1: Determine whether s 24J applies
The interest-bearing instrument meets the definition of an instrument. It is furthermore an

‘income instrument’ as defined, as it was acquired by the company.
Step 2: Determine the projected cash flows
The cash flows under the agreement are as follows:
Month Cash flow
1 January 2019 ………………………………………………………… (R90 000)
31 December 2020 …………………………………………………. R130 000
Interest income ………………………………………………………. R40 000_
Step 3: Calculate the yield to maturity
The yield to maturity of the instrument is 20,18504%
(Financial calculator input: PV = -R90 000; PMT = 0; FV = R130 000; n = 2)
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Step 4: Determine the initial amount
The initial amount is R90 000, i.e. the amount paid to acquire the income instrument.
Step 5: Calculate the accrual amount for the first accrual period
As the instrument does not require any payments to be made at regular intervals not exceeding
12 months, a period not exceeding 12 months must be elected by the holder as the accrual
period. For purposes of this example, it is assumed that Anja Ltd elected the accrual period to
be from 1 January to 31 December of each calendar year. This first accrual period is therefore
from 1 January 2019 to 31 December 2019.12.
Using the formula: Accrual amount (A) = yield to maturity (B) x adjusted initial amount (C)
Accrual amount = R90 000 x 0,2018504
= R18 166,54 (interest to be included in gross income (s 24J (3))
(Adjusted initial amount = R90 000 because there are no accrual amounts in respect of previous
accrual periods.)
Step 6: Calculate the adjusted initial amount
Adjusted initial amount is R90 000 + R18 166,54 -Rnil (no payments were received during this
accrual period) = R108 166,54
Step 7: Calculate the accrual amount for the second accrual period: 1 January 2020 to 31
December 2020
Using the formula: Accrual amount = yield to maturity x adjusted initial amount
Accrual amount = R108 166,54 x 0.2018504
= R21 833,46 (interest to be included in gross income (s 24J (3))
Step 8: Calculate the portion of the accrual amounts deemed to accrue in each year of
assessment.
Since the accrual periods coincide with Anja Ltd’s years of assessment (both being the calendar
year 31 January 2019 to 31 December 2019) no apportionment is necessary.
Step 9: Reconciliation – The accrual amounts for the two accrual periods (R18 166,54 and R21
833,46) total R40 000 which is the amount of interest income from the income instrument.
5.8.3. Equity instruments

The alternative to using debt to raise funding is to obtain equity funding. The fundamental difference
between debt and equity funding lies in the exposure to the risks of the funded project or entity and
the resultant returns. Pure equity funding does not require the funded entity to make any compulsory
repayments of either capital or dividends. The investor is exposed to the risk of ownership in the
funded project or entity. If this entity performs well, the investor shares in this performance in the
form of dividends. However, if the funded entity does not perform well, the investor is at risk of not
receiving any yield and possibly losing the capital invested. In the case of liquidation of a company,
equity investors rank behind creditors to participate in assets of the company.
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For tax purposes, a share is defined as any unit into which the proprietary interest in a company is
divided. This definition is wide enough to include ordinary shares, preference shares and any other
class of shares that a company may issue, so long as it represents a proprietary interest in the
company.
Thus, an equity share means any share in a company, excluding any share that, neither in respect of
dividends nor returns of capital, carries any right to participation beyond a specified amount in
distribution.
Investor perspective
The intention and purpose with which an investor acquires shares will determine the tax implications
of such shares in the hands of the person. If the investor acquires the shares for speculative purposes,
the shares may constitute trading stock and the proceeds thereon would be included in his gross
income. On the other hand, if the taxpayer may acquire shares with the intention to hold them as a
long-term investment. In the latter case, the proceeds received will be regarded as receipts of a capital
nature and will not be included in the taxpayer’s gross income as defined.
Investee perspective
From the perspective of a company that obtains funding by issuing its own shares, a share issue would
generally not have any tax implications. This is an event that gives rise to the receipt of an amount of
a capital nature and is treated as not being a disposal for capital gains tax purposes.
5.8.4. Hybrid instruments

In terms of section 8E of the Income Tax Act, 1962 (the Act), dividends received by or accrued to a
person in respect of certain shares and “equity instruments”, as defined, must be deemed in relation
to that person to be an amount of income if that share or equity instrument constitutes a “hybrid
equity instrument” at any time during that year of assessment.
The term “hybrid equity instrument” is defined in section 8E, inter alia, as:
“any share, other than an equity share, if –
• the issuer of that share is obliged to redeem that share in whole or in part; or
• that share may at the option of the holder be redeemed in whole or in part,
within a period of three years from the date of issue of that share.”
Paragraph (b) of the definition deals with shares other than those contemplated in paragraph (a) (and
thus, broadly speaking, equity shares), contains similar provisions, but with an additional requirement
should paragraph (i) or (ii) above be met.
“Date of issue” is defined in section 8E of the Act, in relation to a share in a company, as the date on
which:
• “the share is issued by the company;

• the company at any time after the share has been issued undertakes the obligation to redeem
that share in whole or in part; or
• the holder of the share at any time after the share has been issued obtains the right to require
that share to be redeemed in whole or in part, otherwise than as a result of the acquisition of
that share by that holder.”
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Taxation 3A
It is submitted that the object of paragraphs (b) and (c) is to ensure that shares, the terms of which
when issued did not result in that share qualifying as a hybrid equity instrument, will qualify as such if
there is a subsequent undertaking by the issuer to redeem, or acquisition of a right by the holder to
require the redemption of that share within a period of three years from the date of issue.
In practice, to ensure that a share does not qualify as a “hybrid equity share”, the redemption date is
typically more than three years from the date on which the share is issued by the company.
Where a share is issued with a scheduled redemption date more than three years after the date of
issue, and the term of that share is subsequently varied to extend such redemption date, the question
arises whether such variation of the terms of the share (other than a variation that introduces an
obligation or right to redeem the share as contemplated in paragraph (b) or (c) of the definition of
“date of issue”) after the date on which the share was issued will constitute a new “date of issue” for
purposes of section 8E.
By way of example, if shares are issued on 31 January 2017 and the terms provide for a scheduled
redemption date of 1 February 2020, such shares should not constitute a hybrid equity instrument as
there is no obligation or right to redeem the shares within a period of three years from the date of
issue (assuming any “redemption events” which may trigger an earlier redemption are objectively
defined and outside of the control of the issuer).
However, should the terms of the shares be varied before the redemption date, say on 20 January
2020, to extend the redemption date of the shares by one year, i.e. the shares are only redeemable
on 1 February 2021, and thus within three years from the date of change of the rights and obligations
attaching to the share, the question is whether that variation constitutes a new “date of issue”.
If the date of the variation constitutes a new date of issue, such share should constitute a hybrid equity
instrument from 20 January 2020, as the issuer would be obliged, and the holder would have a right
to require the redemption of such shares within three years from the new “date of issue”.
To constitute a new “date of issue”, the company must, after the share has been issued, undertake
the obligation to redeem that share or the holder of the share must, after the share has been issued,
obtain the right to require that share to be redeemed.
Example 2 – Hybrid equity instrument
Sunshine Ltd requires funding to purchase 26% of the equity shares of Cloud Ltd. The purchase
price of the shares is R2 500 000. Sunshine Ltd has the following options of financing the
investment in the shares of Cloud Ltd:
• Imali Ltd lends R 2 500 000 to Sunshine Ltd. The loan will bear interest at a rate of 10%
per annum. This amount is repayable after 5 years. The shares in Cloud Ltd will serve
as security for the loan.
• Imali Ltd also subscribes for preference shares issued by Sunshine Ltd for an amount
of R2 500 000. The preference shares bear cumulative preference dividends at a rate
of 8% per annum and are redeemable after 5 years. Sunshine may not sell the shares
in Cloud Ltd until all obligations in respect of the preference shares have been settled.
In both cases, Sunshine Ltd will use the dividends received from Cloud Ltd to make
repayments of capital and interest or preference dividends to Imali Ltd.
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Taxation 3A
What are the tax implications of the respective funding options for Sunshine Ltd and Imali
Ltd?
Solution:
Imali Ltd lends the funds to Sunshine Ltd:
Sunshine Ltd
The interest incurred in respect of the loan will not qualify for a deduction in terms of s 24J(2)
as it is incurred for purposes of acquiring shares that produce exempt income. The provisions
of s 24O do not apply to the interest as Sunshine Ltd does not acquire a sufficient shareholding
to become the controlling company in relation to Cloud Ltd.
Imali Sunshine
The interest received by Imali Ltd will be included in its gross income. The interest, after the
deduction of expenditure incurred to produce the income, will be subject to income tax at a
rate of 28% in the hands of Imali Ltd.
Imali Ltd subscribes for preference shares issued to it by Sunshine Ltd:
Sunshine Ltd
No deduction is available in respect of the preference dividends paid to Imali Ltd.
Imali Ltd
The dividends received by Imali Ltd will be included in its gross income (par (k) of the definition
of ‘gross income’). The dividends received will be exempt and will therefore not constitute
income (s 10(1)(k)(i)). As Imali Ltd is a resident company, the dividends paid to it by Sunshine
Ltd are exempt from dividends tax (s 64F(1)(a)). This tax treatment may be more favourable
for Imali Ltd compared to the taxable interest in the case of the loan discussed above.
5.8.5. Derivative instruments

Interest rate agreements
Section 24K regulates the accrual and incurral of amounts in respect of interest rate agreements. An
example of an interest rate agreement is a fixed-for-floating interest rate swap agreement where a
taxpayer would be liable to make payments of fixed amounts (interest determined at a fixed rate) on
a notional capital amount in exchange for the right to receive amounts determined at a variable
interest rate on the same notional capital amount. Section 24K is aimed determining the timing of the
accrual or incurral amounts in respect of interest rate agreements.
Example 3 – Interest rate swap
Follet Ltd obtains a loan on 1 October 2019 for r10m, repayable on 31 March 2020. The loan
bears interest at prime + 2%, and payable in arrears. The prime rate on 1 October 2019 was
15%. The financial director of Follet Ltd has a concern that the prime rate may increase
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Taxation 3A
dramatically over the period of the loan and he therefore arranges for the company to enter
into an interest-rate swap agreement with a bank as a hedge.
The agreement provides that the bank will pay Follet Ltd interest on a notional amount of R10
million at prime, while Follet Ltd will pay the bank interest on a notional amount of R10 million
at 15%.
The prime rate increased from 15% to 18% on 1 November 2019, and then remained
unchanged throughout the period of the loan and the interest rate agreement.
Solution:
The financial year of Follet Ltd ends on the last day of February:
On 31 March 2020, in accordance with the interest rate agreement: 127049 + 745541 Follet
Ltd receives an amount of:
(R10m x 15% x 31/366 days) + (R10 x 18% x 152/366 days) ………………………. R872 590
Less: Follet Ltd pays an amount of (R10m x 15% x 183/366 days) ……………… (R750 000)
Net receipt of Follet Ltd ……………………………………………………………………………… R122 590
Therefore, the portion of the R122 590 is to be taken into account in the calculation of the
taxable income of Follet Ltd for the year of assessment ended 29 February 2020 is R98 630,
calculated as follows:
Amount receivable by Follet Ltd:
(R10m x 15% x 31/366) + (R10m x 18% x 121/366) ………………………………………. R7222 131
Less: Amount payable by Follet Ltd (R10m x 15%x 152/366 days) ………………… (622 950)
Net accrual at 29 February 2020 …………………………………………………………………… R99 181
Thus, the balance of R23 409 will be taken into account in the 2021 year of assessment.
https://www.thesait.org.za/news/257024/What-is-interest-anyway-section-24J-and-interest-
deductions-.htm
https://www.cacampus.co.za/unisa-cta-s24j-and-management-accounting/
Case study/Caselet
Yield to maturity method: Redemption to premium
A taxpayer acquired an instrument with a face value of R1 000 000, a term of three years and
a six-monthly coupon of 6%, at a discount of R400 000 on 1 October 2019. The coupon dates,
upon which interest is receivable, are 31 March and 30 September. The financial instrument
will be redeemed at a premium of 2% on 30 September 2022. The taxpayer’s financial year
ends in February. The cash flows under the agreement are as follows:
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Taxation 3A
Month Cash flow
1-Oct-19 (R600 000)
31-Mar-20 60 000
30-Sep-20 60 000
31-Mar-21 60 000
30-Sep-21 60 000
31-Mar-22 60 000
30-Sep-22 1 080 000
Total interest deemed to be accrued R780 000
You are required to calculate the interest accruing during each of the years of assessment.
Practice
Practice the skills you have learned. Please check the corresponding examples and page numbers
according to your newly prescribed text book.
• Basic calculation of yield to maturity method: Example 16.1 – page 521

• Yield to maturity method for redemption at premium: Example 16.3 – page 523
• Limitation of interest deduction under s 23M: Example 16.7 – page 536
• Hybrid equity instruments: Example 16.15 – page 551
• Hybrid debt instruments: Example 16.17 – page 557
• Interest rate swap: Example 16.19 – page 560
• Options contracts: Example 16.20 – page 561
Reading
Read the section(s) of the prescribed text listed. Please check the corresponding page numbers
according to your newly prescribed text book.
• Timing provisions of section 24J: Yield to maturity – page 517

• Taxability of interest received or accrued: Lender perspective – page 529
• Deductibility of interest incurred: Borrower’s perspective – page 530
• Interest-free or low interest debt – page 542
• Equity instruments – page 546
• Hybrid instruments – page 547
• Derivative instruments – page 559
Discuss the determination of the actual and deemed accruals of interest including the provisions
of section 24J.
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Taxation 3A
Video / audio
https://www.cacampus.co.za/unisa-cta-s24j-and-management-accounting/
5.8.6. Conclusion
It is evident from this study unit that a taxpayer may acquire a financial instrument as an investment
either in the form of interest-bearing investment in a debt instrument that provides the taxpayer, as
a financier. On the other hand, a taxpayer may become a party to a financial instrument to obtain
funding from external sources in the form of debt or by issuing equity instruments. Thus, the tax
implications of financial instruments are of critical importance when making investment of funding
decisions.

Revision questions
a) What is a debt instrument?

b) Describe the meaning of interest as per section 24J.
c) What does the term yield to maturity mean?
d) Briefly explain hybrid instruments.
e) What is an interest rate swap?

Self-check activity
a) Discuss the common principles that apply to lenders and

borrowers in terms of section 24J(1).
b) Explain the taxability of interest received or accrued from the
lender’s perspective.
c) Explain the deductibility of interest incurred from the
borrower’s perspective.
d) Fully discuss equity instruments from a tax perspective.
e) Why would taxpayers use derivative instruments as part of
their funding and investment strategies?
6. REFERENCES
Stiglingh M, Koekemoer A, Van Heerder L, Wilcocks S, van der Zwan P; Silke: South African
Income Tax, 2019 edition; LexisNexis; 2018.
http://taxstudents.co.za/videos/ (accessed on 11 December 2019)
105
Taxation 3A
https://briefly.co.za/20862-how-calculate-vat-south-africa.html (accessed on 12 December 2019)

https://justonelap.com/money-maths-how-to-calculate-vat/ (accessed on 12 December 2019)
https://www.youtube.com/watch?v=tmISqhPWSnU (accessed on 12 December 2019)
http://taxstudents.co.za/wp-content/uploads/bsk-pdf-manager/36_MODULE_4_-_CGT.PDF
(accessed on 11 December 2019)
https://www2.deloitte.com › content › dam › Deloitte › Documents › tax (accessed on 19 December
2019)
https://www.sars.gov.za/pages/Results.aspx?sq=1&k=Recoupment%20of%20Wear%20and%20Te
ar%20Allowance (accessed on 19 December 2019)
https://www.youtube.com/watch?v=cgWRggdiKQ4 (19 December 2019)
https://www.youtube.com/watch?v=wXm0ILeEOUA (19 December 2019)
https://www.youtube.com/watch?v=acad-ryhdLs (19 December 2019)
https://www.findanaccountant.co.za/content_partnership-tax (accessed on 02 January 2020).
https://www.findanaccountant.co.za/content_sole-proprietor-tax (accessed on 02 January 2020).
https://www.taxtim.com/za/blog/sole-proprietor-or-company-whats-best-for-tax (accessed 02
January 2020).
https://www.sars.gov.za/TaxTypes/DonationsTax/Pages/default.aspx (accessed on 02January
2020).
https://finugget.co.za/tax/donations-and-donations-tax-all-you-need-to-know/ (accessed on 02
January 2020).
https://www.taxtim.com/za/blog/donations-tax-the-ins-and-outs-of-giving-and-receiving
(accessed on 02 January 2020).
https://mayaonmoney.co.za/2019/10/tax-implications-of-helping-your-grandchild-to-save/
(accessed on 02 January 2020).
http://www.bdo.co.za/getmedia/1ed18ab6-f01e-4a62-83f2-ce1d315d8898/bdo-trust (accessed
on 03 January 2020).
https://www.polity.org.za/article/an-overview-of-the-types-of-trusts-under-south-african-law-
2019-01-14 (accessed on 03 January 2020).
https://www.moneyweb.co.za/in-depth/fisa/yes-testamentary-trusts-are-still-useful/ (accessed
on 03 January 2020).
https://www.youtube.com/watch?v=f__Q7r4eHGU (accessed on 03 January 2020).
https://www.rsm.global/southafrica/news/tax-implications-foreign-exchange-differences
www.SARS.gov.za (accessed on 07 December 2019)
https://www.cacampus.co.za/unisa-cta-s24j-and-management-accounting/ (accessed on 04
January 2020)
https://www.thesait.org.za/news/257024/What-is-interest-anyway-section-24J-and-interest-
deductions-.htm (accessed on 07 December 2019)
7. VERSION CONTROL
Initials Version Date Description of

Amendments
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Taxation 3A
AGC 1.1.2019 19/06/2019 Creation of template

CVG 1.2.2019 28/05/2019 Content development
AGC 1.3.2019 6/06/2019 Formatting and T&L
CVG 1.4.2019 03/07/2019 Improving flow of
content
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Taxation 3A

BACHELOR OF COMMERCE IN ACCOUNTING

MODULE CODE: TAX310

STUDY GUIDE 2023

COPYRIGHT © EDUCOR, 2019

1. About Brand ................................................................................................................................... vi

5.1.9. Donations S18 (A) .......................................................................................................... 7

5.4.6. Partnership and VAT ................................................................................................... 42

5.7.7. Functional currency [section 1(1)] .............................................................................. 70

2. OUR TEACHING AND LEARNING METHODOLOGY

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

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

• Discrete outcomes of community service learning to cultivate discipline-appropriate

Effective teaching-learning approaches are supported by:

• Content integration that entails the construction, contextualization and application of

• Learning that involves students building knowledge by constructing meaning for

• Community service learning that leads to collaborative and mutual acquisition of

• A commitment to give effect teaching-learning in innovative ways and the fostering of

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

• Teaching and learning that reflect the reality of diversity.

Study group / Online forum discussion

3. INTRODUCTION TO THE MODULE

• Establish which expenses are deductible for tax purposes;

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

Faculty Faculty of Commerce

27 Feb – 3 March Student Orientation

Lectures Start 1ST Term (7 March) 1

• Special deductions and assessed losses

3 April– 6 April Online topics 3

24 – 28 April Tests Start (on 24 April)

2 May – 5 May Tests End (5 May)

Lectures Start 2nd Term (8 May) 5

19 - 23 June Study Break

26 June – 7 July Final Exams

Planning Your Studies

What equipment will I need? • Access to a personal computer and internet.

Unit Number Hours

Unit 1: Special Deductions and Assessed Lossed

Unit 3: Capital Allowances and Recoupments

Unit 4: Sole Trader and Partnerships

Unit 5: Donations Tax

Unit 6: Trust Income

Unit 7: Foreign Exchange

Unit 8: Investment and funding instruments

The purpose herein is to allow deductions that would not ordinarily be

By the end of this unit, you will be able to:

In this unit, we will cover:

5.1.2. Employee-related expenses

Restraint of trade payments S11 (cA)

Fund Contributions by employers (S11 (l))

Deductions of medical lump sum payments (s 12M)

Shares issued by employers in terms s8B (s 11(lA)).

Annuities in respect of former employee’s S 11 (m)

▪ The employee retired because of old age, or an infirmity or ill health.

Learnership agreements (s 12H)

An employer is allowed a deduction of

5.1.3. Legal Expenses (s 11(c))

these fees or expenses.

5.1.4. Repairs (s 11(d))

5.1.5. Bad debts (s 11(i))

5.1.6. Doubtful debt allowance (s 11(j))

Example 1: Calculation of doubtful debt allowance

Refer to pages 321 - 324 in your prescribed textbook for a comprehensive

5.1.7. Repayment of employee benefits (s 11