TL105 2022 Slides 3 Per PG

3/30/2022
Tutorial Letter 105

2022
TAX4861/2
Define Tomorrow.
TL105 Topics
Learning Unit 7: Learning Unit 8:

‐ Capital allowances
‐ General deduction formula
‐ Recoupments
‐ Prohibited deductions Learning Unit 10:
‐ Special deductions & allowances ‐ Interest‐bearing instruments (ss 24J,
‐ Assessed losses 24O)
‐ Hybrid instruments (s 8F) - TAX4862
ONLY
‐ Foreign exchange differences (s 24I)
Learning Unit 9: ‐ Transfer pricing (s 31) - TAX4862 ONLY
‐ Trading Stock ‐ Tax morality, strategy and risk
‐ Share transactions (s 9C) management
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Framework for calculation of Taxable Income

GROSS INCOME XXX
LESS: EXEMPT INCOME (ss10 and 10A to 10C) ( XXX )

INCOME XX
LESS: DEDUCTIONS AND ALLOWANCES
(ss11 – 24P, excluding s 18A & s 20) ( XXX )
LESS: ASSESSED LOSS (ss 20 – 20B) (XXX)

XX
ADD: AMOUNTS TO BE INCLUDED IN TAXABLE INCOME, INCLUDING
XXX
TAXABLE CAPITAL GAIN (s 26A)
XX
LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (XXX)
TAXABLE INCOME XX
excess can be carried forward to following year of assessment
Remember – Check the required part of the question, to see if it

requires you to start your calculation with net profit / income
before tax . If it does, IT IS IMPERATIVE THAT YOU DO SO.
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TL105
General
Deduction
Formula &
Prohibited
deductions
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General deduction formula

The general deduction formula is contained in
s 11(a) (positive criteria) read with s 23(g) (negative
criteria):
It provides for the deduction of:
• Expenditure and losses
• Actually incurred
• During the year of assessment s 11(a)
• In the production of income
• Not of a capital nature Capital Allowances
• Expended (in full / in part) for purposes of trade.
s23(g)
General deduction formula

• Exam technique for discussion questions:
• Apply scenario to all elements of the definition
(briefly), but
• Identify & focus the discussion on the main issue(s),

e.g.
• Actually incurred
• In the production of income
• Capital vs. revenue expense
• Refer to case law (TL102)

• Describe principle in the case law
• Apply to scenario
• Conclude
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Prohibited deductions (s 23)

Section: Silke 6.5
• 23(a) – Private maintenance expenditure

• 23(b) – Domestic or private expenditure
• 23(c) – Recoverable expenditure
• 23(d) – Interest, penalties and taxes imposed by the Tax Acts
(see s 7F for deduction of interest repaid to SARS)
• 23(e) – Provisions and reserves
• 23(f) – Expenditure to produce exempt income
• 23(g) – Non-trade expenditure
• 23(h) – Notional interest
• 23(i) – Deductions claimed against RFLB & RFLWB
• 23(k) – Expenditure incurred by personal services providers
Prohibited deductions (s 23)

Silke 6.5
Section (continued):
• 23(l) – Restraint of trade
• 23(m) – Expenditure relating to employment or an office
• 23(o) – Fines and penalties / unlawful activities
• 23(q) – Expenditure in production of foreign dividends
• 23(r) – Premiums in respect of insurance policies against
illness, injury, disability, unemployment or death
• 23B – Prohibition against double deductions Silke 6.6
• 23C – Cost of assets and VAT Silke 6.9
• Excluding: 23(n), (o)(iii) & (p)
TL105
Pre-Trade expenses
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Pre-trade expenditure and losses (s 11A)

Silke 6.2.1
• Also read: Interpretation Note No. 51 (Issue 5):

• Expenditure and losses actually incurred prior to
commencement of a NEW trade; and
• Which would have been allowed i.t.o. s 11 (not s 11(x));
s 11D (excluded - syllabus) ; or s 24J. Subject to s 23H
• Deduction limited to income from that trade prior to
this deduction (cannot create or increase a loss)
• Excess cannot be set-off against income from other
trades – it is carried forward
• S 11A subject to section 23H
Apply s 23H first
(limitation on pre-paid
expenses) 10
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Example - Pre-trade expenditure and losses (s 11A)

Example 6.1 Silke
A vacant administration building was purchased on 25 January.

Transfer costs amounted to R30 000. The building was renovated at
a cost of R250 000. The renovations were completed on 1 July and
were immediately rented. The landlord’s new trade commenced on
this date (1 July).
Rental income of R50 000 and investment income (not related to the
rental trade) of R10 000 accrued to the landlord during the year of
assessment (Dec YE).
Rates and taxes (qualifying for s 11(a) deduction) in respect of the
building amounted to the following:
• 25 January to 30 June – R60 000
• 1 July to 31 December – R33 000.
What amounts will qualify for a deduction in the YOA?

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Example Solution - Pre-trade expenditure and

losses (s 11A) Example 6.1 Silke
Transfer costs R30 000

capital expenditure
Renovation costs R250 000
≠ s 11(a)
Building New Trade YE
25 Jan Pre-Trade 1 July 31 Dec
R60 000 R33 000
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Example Solution - Pre-trade expenditure and

losses (s 11A) Example 6.1 Silke
Pre-trade Rental Interest

50 000 10 000
Rates and taxes before 1 July 60 000
Rates and taxes after 1 July (33 000)
17 000
Pre‐trade expenditure deductible in current y.o.a. (17 000) (17 000)
Pre‐trade expenditure c/f to next y.o.a. 43 000
Taxable income nil 10 000
No set-off of R10 000 against the R43 000 i.t.o. s 11A(2)
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TL105
Pre-paid expenses
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Pre-paid expenditure (s 23H)

(Limitation of deductions)
Silke 6.4
• Section 23H defers the deduction of certain

expenditure, actually incurred i.t.o. ss 11(a),
11(c), 11(d) and 11A, where the goods or
services or benefits will only be received after
the end of the year of assessment
• If s 23H is applicable, then the deduction can
only be claimed to the extent that the
goods/services are supplied in the current
year of assessment
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S 23H does not apply, when:
Goods received or services rendered
within 6 months after year end?
Yes No
S 23H not applicable Aggregate of all Pre-paid

expenditure ≤ R100 000
Yes
No
Full deduction Full deduction Deduction disallowed

allowed allowed ito s 23H
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Silke 6.4
• S 23H will NOT be applicable if:

• Goods or services rendered within 6 months after year end;
Always apply the 6 months test first
OR
• Aggregate of all amounts limited by this section ≤ R100 000.

• Acquiring trading stock – consider s 23F (anti-avoidance)
• Unconditional liability to pay amount imposed by legislation
Aggregate of pre-payments
→ contra fiscum rule
• Example 6.7 in Silke.
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Example - Pre-paid expenditure (s 23H)

Full Prepaid
expense Portion
R R
Rent paid (section 11(a))
(prepaid for 4 months after YE) 330 000 x 4/12 months 110 000
Insurance (section 11(a))
Maintenance (section 11(d)

475 500
Deductible as it is < 6 months after YE
Not deductible as it is > 6 months after YE and

aggregate = R103 750, therefore > R100 000.
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Integrated Example
4862 Exam 2010 adapted
Advertising (transactions occurred in the current YOA):

• Tsonga erected a billboard (being a permanent structure) on
its property (next to the highway) at a cost of R300 000.
From 1 May, the day of completion, Tsonga has been using
the billboard to advertise its products.
• Since 1 December, a second billboard was rented at
R15 000 (excluding VAT) per month from Derby (Pty) Ltd.
On 1 December, Tsonga paid R171 000 (excluding VAT),
(being R15 000 x 95% x 12 months) as the rental contract
stipulates that the rental is reduced by 5% if paid annually in
advance. This was the only pre-payment made by Tsonga
during its year of assessment ended 31 March.
Discuss whether the advertising expenses incurred are

deductible by Tsonga in its current year of assessment.
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Integrated Example Solution

In terms of section 11(a), a deduction will be available if

expenditure or losses is actually incurred in the
production of income, provided such expenditure and
losses are not of a capital nature.
The billboard that was erected is capital in nature as it is
a permanent structure that provides an enduring benefit,
the expense is thus not deductible in terms of
section 11(a) – (Rand Mines (Mining & Services) Ltd v
Cir or BPSA (Pty) Ltd v CSARS [2007] SCA 7 (RSA)) or
New State Areas Ltd v CIR).
The billboard does not qualify for a section 11(e)
deduction, as section 11(e) specifically excludes
permanent structures.
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The rental paid for the advertising space will be allowable in terms of
section 11(a) as:
The expenditure was actually incurred as it was actually paid by
Tsonga.
To determine if the amount was incurred in the production of income,
case law needs to be explored.
The purpose of the expense is to advertise the products of the
company and to thereby increase the sale of products. The purpose
is therefore to produce income and is closely connected with the
income earned.
(Port Elizabeth Electric Tramway Co Ltd v CIR. (Also: C SARS v BP
South Africa (Pty) Ltd.))
The expenditure is not of a capital nature. Tsonga is not acquiring a
permanent structure, but is paying for the use of it.
(New State Areas Ltd v CIR).
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Although the rentals are deductible in terms of section 11(a), section

23H limits the deduction of the prepaid portion if:
The goods or services are not rendered to the company within 6

months after the end of the year of assessment – in this case it will
be rendered within 8 months after year-end
(1 April to 30 November)
The aggregate of the pre-paid amounts exceeds R100 000. In this

case (R15 000 x 8 x 95%) = R114 000, thus it exceeds R100 000.
Therefore, section 23H is applicable to the rent paid.
Only R57 000 (R15 000 x 4 x 95%) is deductible in the current year
of assessment (1 December to 31 March).
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TL105
Special deductions and allowances
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Special deductions relate to deductions that are:
• not deductible in terms of the general deduction formula; or
• are prohibited or limited; or
• additional deductions
• Provided for in specific sections of the Income Tax Act.
• Additional category of possible deductions if s 11(a) is not
available
• NB! If both section 11(a) and special deduction
apply, special deduction takes preference
• Each section has its own requirements to be met
• No double deduction allowed if also covered by the general
deduction formula (unless specifically provided for, e.g.
s 12H)
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• Interest repaid to SARS – s 7F • Future expenditure on

• Legal costs – s 11(c) contracts – s 24C
• Restraint of trade payments – • Instruments – s 24J (LU 10)
s 11 (cA) & 23(l)
• Repairs – s 11(d) • Interest incurred on acquisition
• Bad debt – s 11(i) of equity shares in operating
company – s 24O (LU 10)
• Doubtful debt allowance – s 11(j)
• Fund contributions by employers • Pension, provident & RAF
– s 11(l) contributions – s11(k) (TL 106)
• Annuities to former employees or • Repayment of employee
partners – s 11(m)
benefits – s 11(nA) & 11(nB)
• Learnership agreements (s 12H) (TL 106)
• Donations – s 18A
• Variable remuneration – s 7B
• Assessed losses – ss 20 & 20A (but accrual aspect - TL 106)
(individuals – TL106)
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Legal expenses – s 11(c)

Silke 12.3
• S 11(c) allows a deduction of legal expenses

actually incurred;
• on any claim, dispute or action at law, arising in
the course of trading;
Does not need to have been incurred in the production of income
• no deduction will be allowed for legal

expenses that are capital in nature;
• as long as the accompanying compensation
or damages are either deductible under
s 11(a) or constitute income in the
taxpayer’s hands. Example 12.9 Silke
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Example Legal expenses – s 11(c))

In the current year of assessment the following occurred:

Yum-Yum is a company that manufactures baby food. One of
Yum-Yum’s customers (a 6-month old baby) developed an
allergic reaction to their organic butternut baby food (contrary
to the results of all the previous research performed by Yum-
Yum). The baby had to be hospitalised on 15 July and Yum-
Yum paid, in terms of a court settlement, the hospital bills
amounting to R35 000, as well as the family’s legal expenses
of R5 000.
Discuss, with reference to case law and legislation,

whether the R40 000 will be deductible in the hands of
Yum-Yum for tax purposes.
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Example Solution Legal expenses – s 11(c)

The compensation paid of R35 000 will only be deductible if all the
requirements of section 11(a), read with section 23(g), are met. The
compensation must be an expenditure or loss, actually incurred, during the
year of assessment, in the production of income and not of a capital nature
and it must be laid out for the purposes of trade.
All of the requirements are met, except for “in the production of income” and
“not of a capital nature” which need to be discussed further.
To determine whether the compensation paid was in the production of
income, 2 questions must be asked:
• What action gave rise to the expenditure? The production and sale of
baby food gave rise to the expenditure.
• Is this action closely connected with the income-earning activities? (Is it a
necessary concomitant of the business?) The sale of baby food is closely
connected to the income-earning activities.
(Joffe & Co (Pty) Ltd v CIR (1946 AD) or Port Elizabeth Electric Tramway
Co Ltd v CIR (1936 CPD)
The compensation paid was therefore expenditure incurred in the
production of income.
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Example Solution Legal expenses – s 11(c)

In determining whether the expense is capital in nature, one must establish
whether it is part of
• The cost of performing the income-earning operations (which it is in
this case – being related to products sold), or
• The cost of establishing, improving or adding to the income-earning
structure.
(New State Areas Ltd v CIR (1946 AD)
The compensation is not creating an enduring benefit and is a once-off

expense, thus not of a capital nature. It was not to protect an existing asset.
Thus more closely related to the taxpayers income-earning structure than its
income-producing operations.
Since the compensation meets all the requirements of section 11(a), it will
be deductible.
The legal expenses of R5 000 will also be deductible under section 11(c),
since it is not of a capital nature (following the nature of the compensation
paid) and the compensation to which it relates is deductible under section
11(a) (section 11(c)(ii)).
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Repairs – s 11(d)
Silke 12.4
• Repairs must be distinguished from improvements as

repairs will constitute a deductible expense, while an
improvement is not deductible.
• Repair (original structure was in need of repair)
includes the following:
• Restoration by renewal
• Replacement of subsidiary part of the whole
• Identical materials need not be used
• Repair will constitute an improvement if:
• Reconstruction of the entirety or substantially the whole
• The income-earning capacity of the asset has been increased
• Interpretation Note No. 74 (Issue 2)  recouped if a
causal link between the cost of repair and the amount
received.
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Example
4862 Test 2 2014 adapted
On 15 September Reno Vate (a 40 year old female) decided to buy a small

house, renovate it and rent it out in order to earn additional income. The
purchase price was R1 250 000. The property only required limited work
before it could be leased.
The first tenant moved in on 1 January (paying a monthly rental of R8 000),

after Reno had affected the following renovations:
R
Replacement of damaged carpets with wooden floors 25 000
Installing a security system 35 000
Painting of the exterior and interior walls of the house 12 500
Landscaping the garden (the house did not have a garden 15 000
before, only grass)
Total cost 87 500
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Example Required
REQUIRED Marks
Discuss, with reference to section 11(d) and case

law, whether the renovation expenses incurred by 9
Reno Vate will be deductible for Income Tax
purposes during her current year of assessment.
You can assume that all amounts exclude VAT, unless specifically stated
otherwise.
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Example Solution
The renovation costs will only be deductible if it meets all

the requirements of section 11(d), namely that it is
 expenditure actually incurred
 during the year of assessment
 on repairs of property
 occupied for the purposes of trade, or in respect of which
income is receivable.
The expenditure was actually incurred by Reno Vate (given)
during the current year of assessment (started on 15 Sept
and was completed in Dec).
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Example Solution
The main concern is whether each cost can be classified as a repair, a

repair is a renewal of a subsidiary part, whilst an improvement will increase
the income-earning capacity of the asset (Flemming v KBI (1994))
 Replacement of damaged carpets with wooden floors – this is a

repair, since it is a renewal of a subsidiary part, although the
replacement material is not identical (CIR v African Products
Manufacturing Co Ltd (1944))
 Installing a security system – this is not a renewal of a subsidiary part,
it is a new addition and an improvement to the house.
 Painting of the exterior and interior walls of the house – classified as
a repair, since it is restored to its original condition.
 Landscaping of a garden (the house did not have a garden before,
only grass) – the garden is a new addition, will increase income-earning
capacity – not a repair (not replacing a subsidiary part), but an
improvement
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Example Solution
The replacement of the carpets and the painting of the walls might
qualify for deduction under section 11(d) but only if it is in respect of
an asset in terms of which income is receivable, although income
was not received when the repairs were done, the section only
requires that income is receivable at the time of the repairs being
done.
Conclusion:
Thus the R25 000 for the floors and the R12 500 for the painting will
be deductible under section 11(d), whilst the cost of the garden and
the security system will be classified as improvements and would be
part of the base cost of the house.
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Doubtful debt allowance – s 11(j)

Silke 12.6
Section 11(j) allows two different allowance options

based on whether a taxpayer applied IFRS 9
(Financial Instruments) to the debt or not.
ADD BACK prior
Allowance is claimed if: year allowance
• the debt is due to the taxpayer, and claimed
• it would have been allowed as a deduction under
another provision of the Act (implying that it must
have previously been included in the taxpayer’s
income)
• doubtful debts relating to an employee debt would
therefore not be allowed as a deduction as it was
never included in income
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Doubtful debt allowance – s 11(j) -IFRS

Silke 12.6
Doubtful debt allowance if the taxpayer applies IFRS 9 to

the debt (s 11(j)(i)):
The doubtful debt allowance is the sum of –

• 40% of the sum of the loss allowance relating to
impairment measured at an amount equal to the
lifetime expected credit loss in respect of debt plus
• Bad debt written off and reported in the financial
statements that was not allowed as a section 11(i) bad
debt deduction and that was included in the taxpayer’s
income in the current or any previous year, plus
• 25% of the loss allowance relating to impairment in
respect of debt other than debt that is already
included in the 40% above.
Example 12.12 Silke
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Doubtful debt allowance – s 11(j) –no

IFRS
Silke 12.6
Doubtful debt allowance if the taxpayer does

NOT applies IFRS 9 to the debt (s 11(j)(ii)):
The doubtful debt allowance is the sum of –

• 40% of debt in arrears for 120 days or more,
reduced by the value of any security available in
respect of that debt plus
• 25% of debt in arrears for 60 days or more,
reduced by the value of any security available in
respect of that debt (excluding debt to which
IFRS 9 applies or that is already included in the
40%).
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Restraint of trade payments – s 11(cA) & s 23(l)

Silke 12.2.1
• S 11(cA) allows an allowance i.r.o. a restraint of trade

payment made in the course of carrying on a trade to a
natural person (or certain labour brokers / personal
service provider) Provided it is included in income i.t.o.
par (cA) or (cB) of gross income
• The allowance is limited to the lesser of:

• The amount divided by the number of years of the restraint;
OR
• The amount divided by 3.
• S 23(l) prohibits the taxpayer from claiming a restraint

of trade payment, except as provided for in s 11(cA)
Silke Example 12.1
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Fund contributions by employers – s 11(l)

Silke 12.2.2
• Employer may deduct amounts contributed for

the benefit of the employees to all approved
retirement funds (thus, contributions to
benefit funds, i.e. medical aid funds, are no
longer deductible under s 11(l), but deductible
under s 11(a), read with s 23(g)).
• This does not refer to the amounts deducted
from employees’ remuneration and paid over to
these funds. It refers to the employer’s
contributions to these funds.
• The deduction is unlimited.
Silke Example 12.2
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Learnership Agreements - S 12H

registered Silke 12.2.8
• Employer deduction additional to salary costs (ignore

section 23B (prohibition of double deductions)
• Annual allowance
• Annually for period of agreement
< 12 months: apportion for full months
• Completion allowance
• On successful completion of learnership agreement:
• < 24 months:
• NQF 1 – 6: R40 000 / R60 000 (disabled)
• NQF 7 – 10: R20 000 / R50 000 (disabled)
• > 24 months:
• Completion allowance (above) for that year and each
consecutive 12 month period of that contract
• Thus 2 separate deductions (annual & completion
allowance)!!
A ‘learner’ can include an
apprenticeship (IN 20)
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Learnership Agreements S 12H
Type of Allowance No Disability

learner disability
NQF 1 ‐ 6 Annual R40 000 R60 000
Completion R40 000 R60 000
NQF 7 ‐ 10 Annual R20 000 R50 000
(R20 000 +
R30 000)
Completion R20 000 R50 000
(R20 000 +
R30 000
Silke Example 12.8
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Example: Learnership Agreements S 12H

Silke Example 12.8 (f)
Learner Shezi (in possession of a NQF level 8

qualification) enters into a 24-month registered
learnership agreement with his employer, Easy
Employ (Pty) Ltd on 1 January. Shezi has no
disability as defined.
Calculate the s 12H allowance(s) available to

Easy Employ (Pty) Ltd if Shezi successfully
completes the learnership agreement on
31 December, 24-months later. You can
assume that Easy Employ (Pty) Ltd has a
December year-end.
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Example Solution: Learnership Agreements S 12H

Silke Example 12.8(f)
Year 1 (month 1 – 12) Taxable Income

Section 12H(2A)(a) annual allowance (R20 000)
(R50 000 allowance if disabled (s 12H(5A))
Year 2 (month 13 – 24) Taxable Income

Section 12H(2A)(a) annual allowance (R20 000)
(R50 000 allowance if disabled (s 12H(5A))
Section 12H(4A) completion allowance of R20 000 for every full
12‐month period thus R20 000 × 2 (R40 000)
(R50 000 × 2 full 12‐month periods = R100 000 (R50 000 x 2) if
disabled (s 12H(5A))
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Allowance in respect of future expenditure

on contracts - S 24C
Silke 12.11
• Taxpayer’s income for year of assessment includes

amount received by or accrued to taxpayer i.t.o. a
contract
• Commissioner is satisfied that amount will be used to
finance future expenditure of the same contract in a
following year
• Section 24C allowance allowed:
• (Total expected expenses iro the contract)/contract price x
total income received or accrued up to date
• Less: Total actual expenditure incurred up to date
• Allowance is limited to the amount received or accrued
• Allowance to be added back in following year
• Remember to deduct actual expenditure for the year
• Interpretation Note No. 78
Silke Example 12.17
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TL105
Qualifying donations – s 18A
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GROSS INCOME XXX
LESS: EXEMPT INCOME (ss10 and 10A to 10C) ( XXX )

INCOME XX
(ss11 – 24P, excluding ss 18A & 20) ( XXX )
LESS: ASSESSED LOSS (ss 20 – 20B) (XXX)

XX
ADD: AMOUNTS INCLUDED IN TAXABLE INCOME, INCLUDING
XXX
TAXABLE CAPITAL GAIN (s 26A)
XX
LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (XXX)
TAXABLE INCOME XX
excess can be carried forward to following year of assessment
Remember – Check the required part of the question, so see if it

requires you to start your calculation with net profit / income. If it
does, IT IS IMPERATIVE THAT YOU DO SO.
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Silke 12.9
A question will refer to an “approved PBO/NPO”
Deduction available only for qualifying donations

• Qualifying donation = donations to PBO’s undertaking
certain activities as listed in PART II of the 9th
Schedule.
• Must have section 18A receipt.
• Deduction is limited to 10% of taxable income
before this deduction and excluding lump sums from
retirement funds and severance benefits.
• Donations in excess of 10% of taxable income are
rolled over and will be allowed as a deductible
donation in the following year (subject to limits).
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Silke 12.9
• If taxpayer has no taxable income or an

assessed loss, no deduction can be claimed. It
cannot create or increase an assessed loss.
• Available to natural persons, trusts, CC’s and
corporations.
Silke Example 12.15
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Example: Donations deduction – S 18A

Silke Example 12.15
adapted
Lesego (Pty) Ltd donated R250 000 to an

approved PBO and obtained a s 18A receipt
during the prior YOA and made no donations
during the current year of assessment. Lesego
(Pty) Ltd had taxable income of R1 850 000 for
the prior YOA and R2 950 000 for the current
YOA before any s 18A deduction was taken into
account.
Calculate the s 18A deduction available to
Lesego (Pty) Ltd for the prior year and
current year of assessment.
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Example Solution: Donations deduction S 18A

Silke Example 12.15
adapted
Prior year of assessment Taxable

Income
Taxable income before s 18A deduction 1 850 000

Less: Deductions ito s 18A (qualifying donations)
R250 000
10% x taxable income (sub‐total) (185 000)
10% x 1 850 000 = R185 000
Excess c/f to current year of assessment (R250k –
R185k = R65k)
Taxable income 1 665 000
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Example Solution: Donations deduction S 18A

Silke Example 12.15
adapted
Current year of assessment

Prior year of assessment
Taxable
Taxable
Income
Income
Less: Deductions ito s 18A (qualifying donations) R250 000
Less: Deductions
10% x taxable ito s 18A1 850
income (sub‐total) (qualifying
000 = donations + (185 000)
p/yr
Excessdonations
c/f to current c/f)
year of assessment (R250k – R185k = R65k)
R0 + R65
Taxable 000 = R65 000
income 1 665 000
10% x taxable income (sub‐total) (65 000)

10% x R2 950 000 = R295 000
Limited to actual qualifying donations of R65 000
Taxable income 2 885 000
52
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TL105
Assessed Losses
– s 20
https://www.freepik.com/search?format=s earch&que ry=assessed%20loss

53
53
Assessed losses - s 20
Silke 12.12
>
Allowable
deductions
and
allowances
Total
income
= carried forward to
Assessed
losses
following year
Silke Example 12.18 to 12.22
54
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Assessed losses - s 20
Silke 12.12
Companies Persons other than companies

(individuals)
Must carry on a trade Need not carry on a trade
If no trade during year – the loss can no May carry forward balance of assessed loss
longer be set off (it is forfeited) (must carry even if no trade carried on for the year
on trade for at least part of year)
Assessed loss brought forward – may Assessed loss brought forward – may be
deduct from trade income deducted from non-trade income
Assessed loss from one trade may be set Assessed loss from one trade may be set
off against taxable income from other trade off against taxable income from other trade
- except if s 20A is applicable
Loss from non-RSA trade may not be set off against taxable income from RSA
trade.
If an estate is sequestrated, assessed loss (prior to sequestration) cannot be
carried forward unless order sets sequestration aside.
55
55
TL105
Capital Allowances LU 8
56
https://www.freepik.com/search?format=search&query=construction%20vehicles
56
Capital Allowances & Recoupments

Silke 13
Capital allowance Sections

Movable assets 11(e), 12B, 12C, 12E
Immovable assets 13, 13quin, 13sex
Intellectual property and research and
11(gB), 11(gC)
development (Not part of syllabus)
11(f), 11(g) –amount will be
provided, 11(h), 12N
Leases and leasehold improvements
s 23A, 23G (Not part of the
syllabus)
Alienation, loss or destruction (“scrapping”)
11(o)
allowance
8(4)(a), 8(4)(e) – (eE), 8(4)(k), 19,

Disposals of and recoupments on assets 20B,
13(3) & par 12A of the 8th Schedule
Recoupment on Leases 8(5)

57
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Silke 13
Topic Section
Acquisition of  S 1: Definition of a connected person and
the asset depreciable asset
(Cost price)  S 23C: Reducing the cost or market value of certain
assets with input tax claimed
 Ss 11(e), 12B, 12C, 12E: Cost determinations
 S 12N: Deems the lessee to be the owner of
improvements to fixed property owned by tax
exempt entities
 S 40CA: Acquisition of asset in exchange for shares
or debt ( refer to TL107)
 S 24M: Incurral of unquantified amounts and par
39A of 8th Schedule (assets) (TAX4862)
58
58

Silke 13
Topic Section
Use of the  S 11(e): Wear-and-tear allowance (read with
asset Interpretation Note 47 / Commissioner’s public notice)
(allowances)  S 12B: Special wear-and-tear allowance (assets
used in production of renewable energy)
 S 12C: Special wear-and-tear allowance
 S 12E: Deductions in respect of a small business
corporation
 S 13: Deduction in respect of buildings used in a
manufacturing process
 S 13sex: Residential units
 S 13quin: Deduction in respect of commercial
buildings
 Ss 24I and 25D: Foreign currency transactions
59
59

Silke 13
Topic Section
Recoupment  S 8(4)(a): General recoupment provision
(disposal of  S 8(4)(k): Donation, dividend, disposal to
the asset or connected person or change of use to trading
reduction of stock
debt)  S 8(4)(e), (eA), (eB), (eC), (eD) & (eE), 13(3), par
65 and 66 of 8th Schedule: Deferred recoupments
 S 19 & Par 12A of 8th Schedule: Concession or
compromise of debt
 S 11(o): Allowance in respect of disposal of
assets (previously scrapping allowance)
 S 20B: Limitation of losses from the disposal of
certain assets (accrual of consideration)
 S 24M: Accrual of unquantified amounts and par
39A of the 8th Schedule (TAX4862)
 Eighth Schedule: CGT 60
60
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TL105
Movable Assets
61
https://www.freepik.com/search?format=search&query=types%20of%20vehicles
61
Cost or value of assets – Movable assets

Cost must exclude VAT (if the VAT was claimed as input tax) – s 23C.
Section 11(e) Section 12C Section 12B

Section 12E
Lesser of:
Cost / Value of the
• Actual cost to acquire; or
asset
• Cash cost under arm’s length transaction
INCLUDING (PLUS)
Cost of installation and erection (also shipping costs (freight and insurance),
delivery costs and import duty)
Cost of foundations and supporting structures
Moving costs
(written off over remaining period / if underlying asset is fully written off, then
write off in full in year when moving costs are incurred)
BUT EXCLUDING (MINUS)
Interest and finance charges
Section 40CA – Acquisition of assets in exchange for shares → cost of asset = market value of
shares after acquisition plus any deemed capital gain in terms of s 24BA(3)(a) or if asset for share
transaction (s 42) expenditure incurred plus s 24BA(3)(a) capital gain. –TL107
Connected persons - cost depends whether input tax could be claimed in FULL.
62
62
Movable Assets Allowances Silke Examples 13.1 - 13.4
Section 11(e) Section 12B Section 12C Section 12E

Not applicable to a small Not applicable to a small
business corporation business corporation
SBC
(SBC) (SBC)
Not applicable to (s 11(e) may be elected
(s 11(e) may NOT be (s 11(e) may NOT be
manufacturing assets for non-manufacturing
elected as a better elected if it’s a better
assets)
option) option)
Machinery used in the Machinery used in a

production of process of manufacture
All movable assets, renewable energy (bio- or similar process except
except where diesel or bio-ethanol, or for SBC
All assets of SBC
ss 12B, 12C or 12E generation of (Or machinery used for s
applies electricity) except for 11D research and
SBC development purposes –
EXCLUDED)
Assets used in the Only the manufacturing Manufacturing assets –

Mostly movable non- production of renewable assets of manufacturing new or used and brought
manufacturing assets, energy – new or used enterprises (or assets into use for the first time
including non- and brought into use for used R&D – by the taxpayer - 100%
manufacturing assets of the first time by the EXCLUDED), not assets and
manufacturing taxpayer, not assets like like the office equipment, Non-manufacturing
enterprises the office equipment, vehicles etc. assets – 50/30/20 (Sec
vehicles etc. 12E(1A))
63
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Movable Assets Allowances Silke Examples 13.1 - 13.4
Section 11(e) Section 12B Section 12C Section 12E
No apportionment (not No apportionment (not No apportionment (not

Apportion (pro-rata)
pro-rata) pro-rata) pro-rata)
Residual value – R1
Loose assets < R7 000
written off to R1 (this
small item write-off
does not apply to
assets acquired by
lessor for letting
purposes)
Assets used in generation Manufacturing assets -
of electricity from 100%
photovoltaic solar energy New / unused – Non-manufacturing
not exceeding 1 MW 40/20/20/20 assets - 50/30/20
Write-off periods – (megawatt) - 100% Used – 20/20/20/20/20
Interpretation Note No. 47 All other assets used in (New / unused for R&D
the production of purposes – 50/30/20 –
renewable energy - EXCLUDED)
50/30/20
64
Movable Assets Allowances

Does the asset
belong to a S 12E
Yes Manufacturing asset (brought into use for the
SBC? first time by the SBC) – 100%
Non-manufacturing asset – 50/30/20
Or s 11(e) if more beneficial
No
Is it a manufacturing Plant / machinery – S 12C – new/used?

asset? Yes
May NOT elect s 11(e) if its more beneficial
No
Is it used for When doing capital allowances and

production of recoupments – always check for the following
Yes S 12B
- Manufacturing asset, or used for production
renewable energy?
of renewable energy?
- Connected persons (input tax claimable?)
- New or used asset
- Replacement of one asset with another asset
No - SBC
- VAT in purchase price
- Used for part of the year (s 11(e))
Movable assets – s 11(e) – wear-and-tear allowance
65
65
Example – Movable Assets

S 12C
Used – 20/20/20/20/20
• Star Ltd acquired Machine A (a second-hand machine)

for R1 500 000 and brought it into use in its
manufacturing process on 10 January Y1. S 12C
• Star Ltd acquired a new manufacturing machine B for
R3 000 000 and brought it into use in its manufacturing
process on 15 December Y4. Star Ltd spent an
additional R50 000 on installing machine B. New – 40/20/20/20
• Star Ltd decided to move to another site and both
machines were moved on 15 July Y5 at a cost of
R10 000 for machine A and R60 000 for machine B
(both amounts not claimable under s 11(a)).
Write-off over remaining period
Calculate the allowances Star Ltd may claim under s
12C in its years of assessment ending at the end of
December Y4, Y5, Y6 and Y7 (ignore VAT).
66
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Example Solution – Movable Assets
Year ended 31 Dec Y4

Machine A:
Section 12C allowance (used – 20%)
(20% of R1 500 000) ........... (R300 000)
Machine B:
Section 12C allowance (new & unused – 40% in 1st year BIU)
(40% of (R3 000 000 + R50 000 (installation cost included))
– the allowance is granted in full even though the
machine was used for only part of the year) .... (R1 220 000)
67
67
Year ended 31 Dec Y5

Machine A:
S12C allowance (20% of R1 500 000 = R300 000, plus
Moving cost (R10 000) – deductible in full. As machine A
is written off in full in the Y5 year,
the full amount will be claimed.................(R310 000)
Machine B:
S12C allowance (R610 000 (20% of R3 050 000) plus
R20 000 (⅓ of R60 000)
Moving cost (R60 000) is deductible in equal instalments
over the remaining years over which the s 12C
allowance is to be claimed, thus 3 years))
............................. (R630 000)
68
68
Year ended 31 Dec Y6 and Y7

Machine A:
Fully written off
Machine B:
Section 12C allowance (R610 000 (20% of
R3 050 000) plus R20 000).… (R630 000)
69
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Example – Movable Assets

S12E 50/30/20%
Electra Ltd, a small business corporation, commenced trading on

1 September Y1. Its year of assessment ends on the last day of
December each year. Electra Ltd acquired non-manufacturing
machinery on 15 September Y1 for R1 000 000, which was
immediately brought into use for trade purposes. A new plant costing
R1 250 000 was purchased on 1 December Y1 and Electra Ltd
immediately brought the plant into use in its manufacturing
operations. On 29 May Y2, Electra Ltd moved to bigger premises
and incurred moving costs amounting to R50 000 in respect of the
manufacturing machinery and R30 000 in respect of the non-
manufacturing machinery. 100%
Write-off over remaining period
Calculate the allowances Electra Ltd can claim during the Y1, Y2
and Y3 years of assessment.
70
70
31 December Y1 R
Allowance in respect of non-manufacturing machinery (Year 1 = 50%)
(s 12E(1A)) [R1 000 000 x 50%]................................................(500 000)
Cost of manufacturing plant (100% deduction allowed in the first year)
(s 12E(1)) [R1 250 000 x 100%]........................................... (1 250 000)
31 December Y2
Allowance on non-manufacturing machinery acquired during Y1
(Year 2 = 30%) (s 12E(1A)) [R1 000 000 x 30%] ......................(300 000)
Deduction for moving costs:
Manufacturing plant (deduct in full as asset written-off in full)
(s 12E(3)(b)) ............................................................................. (50 000)
Non-manufacturing machinery (two years remaining that capital
deductions will be allowed) (R30 000/2) (s 12E(3)(a)) ..............(15 000)
71
71
31 December Y3
Allowance in respect of non-manufacturing machinery
acquired during Y1
(Year 3 = 20%) (s 12E(1A)) [R1 000 000 x 20%] (200 000)
Deduction for remaining moving costs incurred during Y2

on non-manufacturing machinery (remaining moving costs
written off in full as final allowance is claimed on asset in
Y3 (R30 000 – R15 000)(s 12E(3)(a)) …………....(15 000)
72
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TL105
Immovable property allowances
https://www.shareicon.net/tag/manufacturer
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http://mariafresa.net/single/2199871.html
https://www.policyholderpulse.com/category/recoupment/ 73
73
Immovable Property
Silke 13.4
Section 13
Manufacturing buildings (factory
buildings)
Section 13quin
Commercial buildings
(offices, shops etc.)
Section 13sex
Residential units
Also consider lease premium and leasehold improvements on land or to

buildings
74
74
IMMOVABLE PROPERTY ALLOWANCES

Section 13 Section 13quin Section 13sex
Manufacturing buildings (factories) Commercial buildings Residential units
(offices and shops) (Must own at least 5 units)
Erected by the taxpayer OR purchased from a person New and unused New and unused
entitled to the allowance (second hand) OR (Erected by the taxpayer OR (Erected by the taxpayer OR purchased
purchased as a new building purchased as a new building) as a new building)
Owned OR on section 12N
Owned OR on excess leasehold improvements OR Owned OR on section 12N leasehold
leasehold improvements (1 Jan
section 12N leasehold improvements (1 Jan 2013) improvements (1 Jan 2013)
2013)
Used wholly or mainly in the production of income and for purposes of trade
From 1 October 1999 (Manufacturing) From 1 April 2007 From 21 October 2008
5% on residential units
5% 5%
10% on low‐cost residential units
Calculate on COST less any deferred recoupment
and portion deductible as leasehold improvements Calculate on COST
See Silke example 13.8
Cost = cost to the taxpayer Cost = lesser of actual cost incurred or market value if purchased
Cost includes VAT (input tax not
Cost excludes
claimable)
qualifying VAT input (section 23C)
(exempt purposes)
Excluding cost of land
Cost includes all direct costs of acquisition, eg. transfer costs and subsequent cost of improvements
Cost = 100% of the cost of erection or cost of Cost = 100% of cost of erection or acquisition OR 55% of cost if part is
acquisition or cost of acquisition of improvement acquired OR 30% of cost of acquisition
75 of improvement
75
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Manufacturing buildings (factories) Commercial buildings (offices, shops) Residential units (RU)
Erected/purchased (incl 2nd Erected/purchased

hand)/ purchased new New AND Unused
Owner At least 5 units

From 1 Jan 2013 includes s12N leasehold improvements
Excess of leasehold Section 12N

improvement Leasehold improvements on exempt
institutions property (i.e. government
property)
Leasehold improvement disallowed
(s11(g))
Qualifies for an allowance i.t.o.
section 13 or 13quin
76
76
Immovable Property
Erected/purchased (incl 2nd Erected/purchased

hand)/ purchased new New AND Unused
Cost less deferred
Cost = lesser of actual cost or market value
recoupment (s 13(3))
Excluding VAT (vendor) Including VAT
less leasehold improvement
(s11(g))
excluding cost of land
100% of full cost price

Erected 100% of cost price
qualifies
Part of a building purchased/acquired 55% of cost price

NB!NB!NB!
NO apportionment
Improvements purchased/acquired 30% of cost price
Rate 5% +5% Low‐ cost RU
77
Manufacturing building allowance – s13

Silke 13.4.1
• Buildings used in process of

manufacturing or similar process – i.e.
factory buildings
• Erected by taxpayer OR purchased
from a person entitled to the
allowance OR purchased as a new
building Mainly
• Used wholly or mainly in process of manufacture = >50%
• From 1 October 1999 – rate of allowance is 5% p.a. (If
purchased, different rate might apply – same as seller)
Straight line –
NOT pro-rata
78
78
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Manufacturing building allowance – s13

Silke 13.4.1
• Cost of building = cost (including

improvements) less initial allowance
(ignore) less any deferred recoupment
(s 13(3)).
• Also applies where tenant uses
building for manufacturing – owner
qualifies for the allowance
• Land does not qualify
• Set-off recoupment (s13(3)) against cost of new
building if:
• Taxpayer opted for it
• Purchases or erects replacement building within 12 months
• Replacement building qualifies for s 13(1)
If recoupment > cost of replacement building  recoup excess
ito s 8(4)(a) 79
79
Example - Manufacturing building allowance – s13
Factory buildings:
The “old” factory building was erected at a cost of
R2 100 000. It was completed on 1 August Y1 and was
brought into use on 1 December Y1. This factory building
became too small and on 1 May Y5, Watson Ltd signed an
agreement for the acquisition of a brand new factory
building from a developer for R3 000 000. A contract for
the sale of the “old” factory building for R2 500 000 was
signed on 1 April Y5. Watson Ltd used the factory building
until 30 April Y5 but it was only vacated on 31 May Y5, the
date of registration in the name of the new owner. The new
building was brought into use on 1 June Y5. The year-end
is 31 December Y5.
Income Tax implications in Y5 (taxpayer elects any
options available to minimise tax liability)?
80
80
Example Solution - Manufacturing building

allowance – s13
Old Factory building: R R

Cost – 1 Aug Y1 2 100 000
Section 13(1) allowance Y1 to Y4
(R2 100 000 x 5% x 4 years) (420 000)
Section 13(1) R2 100 000 x 5% (Y5) (105 000) (105 000)
Tax value 1 575 000
Less: Selling price limited to cost (2 100 000)
Recoupment (deferred section 13(3)) 525 000
Capital gains tax:

Proceeds (R2 500 000 – R525 000 [recoup] 1 975 000
Less: Base cost (R 2 100 000 – R525 000 (1 575 000)
[allowances already deducted]
Capital Gain – aggregate with other CG 400 000
81
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Example Solution - Manufacturing building

allowance – s13
New Factory building: R R

Cost – 1 May Y5 3 000 000
Less: Section 13(3) deferred recoupment (525 000)
2 475 000
Section 13(1) allowance
(R2 475 000 x 5%) (123 750) (123 750)
Tax value 2 351 250
82
82
Commercial building allowance – s 13quin

Silke 13.4.5
• Buildings used for trade purposes –

i.e. offices, shops etc. – excluding
residential accommodation
• Erected OR acquired new by the
taxpayer (including improvements)
Mainly
• Used wholly or mainly to produce income in the = >50%
course of taxpayer’s trade

• Allowance is 5% p.a.
Straight line –
NOT pro-rata
Silke Example 13.12
83
83
Commercial building allowance – s 13quin

Silke 13.4.5
• Cost of building = < actual cost or

cash cost under arm’s length
transaction, including direct cost of
acquisition, improvement or erection
UNLESS a part of a building was
acquired (not erected) – then cost
will be:
• 55% of acquisition price if a part is acquired, and
• 30% of acquisition price if an improvement part is acquired.
Silke Example 13.12
84
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Example - Commercial building allowance – s 13quin
Administrative building:
The administrative building was erected at a cost
of R1 500 000 during the current year (Y1) of
assessment. The building was brought into use
on 1 December Y1.
The year-end is 31 December.
Income Tax implications?
85
85
Example Solution - Commercial building

allowance – s 13quin
Administrative building: R
Cost – Y1 1 500 000
Section 13quin allowance
5% x R1 500 000 (75 000)
Tax value 1 425 000
full allowance, even though
only used for part of year
86
86
Residential units allowance – s 13sex

Silke 13.4.3
Immovable asset Silke Section
Manufacturing buildings (factory buildings) 13.4.1 13

Commercial buildings (offices, shops etc.) 13.4.5 13quin
Residential units 13.4.3 13sex
87
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Residential units allowance – s 13sex

Silke 13.4.3
• Residential units (excluding mining)

• Erected OR acquired NEW by the
taxpayer (5 or more units) (including
improvements) in South Africa
• Used for purpose of trade
• Allowance is: Straight line –
NOT pro-rata
– 5% p.a. on residential units; or
– 10% p.a. on low-cost residential units
• the amount is limited to 55% of the acquisition price of the
residential unit or 30% of an improvement if only a part of
a building is acquired.
88
88
Residential units - Definitions

Silke 13.4.3
‘Residential unit’ is defined in s 1 as:

• a building or self-contained
apartment
• mainly used for residential
accommodation,
but excludes
a building or apartment used by a
hotel keeper in his trade.
89
89
Residential units - Definitions

Silke 13.4.3
‘‘Low-cost residential unit’ is defined in s 1 as:

• A stand alone unit (a building qualifying as a
residential unit in SA) with a cost not exceeding
R300 000 (excluding the cost of land and bulk
infrastructure) on which the owner does not charge
a monthly rental of more than 1% of that cost (plus
the proportionate cost of the land and bulk
infrastructure)
• An apartment (residential unit in a building in SA)
with a cost not exceeding R350 000 on which the
owner does not charge a monthly rental of more
than 1% of that cost
(Note: the cost on which the 1% rental limitation is
calculated is increased by 10% annually.)
90
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Example - Residential units – s 13sex

Silke Example 13.10
adapted
Flats:
On 15 January Y1, TDK (Pty) Ltd bought six
brand new flats in a residential building
(consisting of 10 units) directly from the
developer at a total cost of R650 000 (incl. VAT)
each. All of these residential units were rented
out, effective from 1 February Y1. TDK (Pty)
Ltd is a VAT vendor.
Calculate the allowances on the flats for the year
ended 31 October Y1.
91
91
Example Solution - Residential units – s 13sex
31 October Y1:
Section 13sex applicable?
• > 5 units owned and used in trade in South Africa
• Therefore s 13sex applies as a part is acquired
from a developer
• S 13sex(8)
• R650 000 x 6 units × 55% x 5%
Include VAT
• S 13sex(1) allowance = R107 250
92
92
Example - Residential units (low-cost) – s 13sex
Residential buildings:
Watson Ltd, registered vendor, owns seven flats. Two of
these flats are occupied by employees free of charge
while the other five flats are rented out for R2 500 each
per month.
Watson Ltd bought these seven flats in a newly erected
building (consisting of 20 flats) from the developer
(registered vendor) on 1 March Y1 at a total cost of
R210 000 each (excluding VAT). The flats have been
rented out immediately, i.e. as from 1 March Y1. The
year-end is 31 March.
Calculate the allowance on the flats for the year ended
31 March Y1
93
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Example Solution - Residential units (low-cost)

– s 13sex
Residential buildings (s 13sex):

Section 13sex applicable?
• At least 5 units owned in RSA
o Therefore s 13sex applies, but are they low-cost residential units?
Including VAT
Low-cost residential units?
• Cost of units R210 000 x 115/100 = R241 500 (input tax not claimable
(exempt supply) as residential dwellings); therefore less than R350 000
• 1% of cost (R241 500) = R2 415 (compare to rental)
• thus rental of 2 units to employees is less than 1% of cost
o therefore 2 units qualify as “low cost residential units”, as defined in
section 1.
Only part of building acquired therefore cost limited to 55% of cost.
94
94
Example Solution - Residential units (low-cost)

– s 13sex
Residential buildings (s 13sex): R

31 March Y1
Rent received (R2 500 x 1 month x 5) 12 500
Section 13sex – units used for employees –
R241 500 x 2 x 55% x 10% (26 565)
Section 13sex – units rented out –
R241 500 x 5 x 55% x 5% (33 206)
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TL105
Intellectual property allowances
96
https://www.freepik.com/search?format=search&query=intellectual%20property
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Intellectual property allowances

Silke 13.8.1
Intellectual property acquired / developed
Extension / renewal / RESEARCH & RESEARCH &

Obtain / Acquire
registration DEVELOPMENT (R&D) DEVELOPMENT
(excluding (R&D)
(including (scientific or technological
trademarks) – refer s11D(1))
trademarks)
S 11(gC) - is used in Capital expenses
S 11(gB) - is used in
the production of Operational (incl certain Sections 12C & 13
the production of
income capital) expenses
income
Section 11D
Brought into use 150% deduction of New or unused R&D

100% expenditure actually plant or machinery
for the first time
incurred directly and solely (50:30:20 – s12C(1)(gA)
• ≤ R5 000 –
iro R&D, in the production & 12C(1)(h))
deduct in full of income and in the
These expenses will
• > R5 000 carrying on of a trade Building used wholly or
normally not be
10% for a design deductible under s 11(a) (s11D(2)) mainly for R&D (5% -
5% for others as it is of a capital s13(1))
(patent, invention nature OR not used in Minister of Science and
or copyright) the production of Technology approval
income required (s11D(9))
• NOT pro rata
97
97
Intellectual property allowances –

obtain or acquire S 11(gC)
Silke 13.8.1
• Obtain or acquire certain intellectual

property, excluding trademarks, used in
production of income,
• Brought into use for the first time for the
purposes of trade
• Expenditure ≤ R5 000 = deduct in full in year brought
into use
• Expenditure > R5 000
– 5% per annum of cost of any invention, patent, copyright (≠
purchase trade mark)
– 10% per annum of any design/similar property
– NOT pro-rata
98
98
Intellectual property allowances –

continued
Silke 13.8.1
• Registration costs → Section 11(gB)

(include trademarks)
• Section 23I – anti-avoidance –

EXCLUDED from syllabus!
Example:
• Abs Ltd acquired the trademark for Ab-buster ™ for R4 000 on
1 June. A patent design for the Ab-solute exercise machine was
purchased on 30 September for R100 000. Abs Ltd has a
December year-end. Income Tax implications?
• No s 11(gC) deduction allowed for purchased trademark
• Patent design, s 11(gC) R100 000 x 10% = R10 000
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TL105
Leases
https://www.iconfinder.com/icons/474118/contract_document_house_lease_pen_real_estate_signature_icon#size=128 100
100
Leases
• Lease premium – allowance ito s 11(f)

Silke 13.7.1
• Leasehold improvements – allowance ito

s 11(g) Silke 13.7.2
• Relief for lessor – allowance ito s 11(h)

– Due to the fact that lease premiums paid by lessees and
leasehold improvements effected by lessees are included in
full in the gross income of the lessor at the beginning of the
lease period ito either par (g) or (h) of the definition of gross
income, relief may be granted to the lessor ito s 11(h)
(example 13.18 in Silke).
– Note that the amount of relief will be provided in a
question.
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101
Lease premium – s 11(f)

Silke 13.7.1
Definition:
• Lease premium is a consideration of the
same nature as rent passing from the
lessee to the lessor over and above or in
lieu of rental payments (CIR v Butcher
Brothers)
Lessor:
• Lease premiums included in gross income – par (g) of
gross income
102
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Lease premium – s 11(f)

Silke 13.7.1
Lessee:
• Must be incurred in the production of income or
income to be derived therefrom AND taxable in
the lessor’s hands
• Allowable deduction – s 11(f)
• Starting in year in which premium is paid
• Premium deductible in annual instalments
• Over lease period (limited to 25 years)
• INCLUDE probable extension periods
• Apportioned for part of year (pro-rata) – from date of
payment
NOTE: Lease premium vs lease rental payments in
advance (ss 11(a) & 23H) Silke Example 13.16
103
103
Leasehold improvements– s 11(g)

Silke 13.7.2
Lessor:
• Include value (as stipulated in the contract) of
leasehold improvements in Gross Income – per
par (h)
Lessee:
• Must be incurred in the production of income or income to be
derived therefrom AND taxable in the lessor’s hands
• Allowable deduction – s 11(g) (obligation ito agreement)
– Lessee may elect s13(1) instead of s11(g) as neither of the sections prescribe
a specific sequence
If NOT taxable in lessor’s hands – see s 12N

https://za.pinterest.com/pin/511017888940485608/
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Leasehold improvements– s 11(g)

Silke 13.7.2
Lessee:
• Cost as specified in contract - spread over
remaining lease period (max. 25 years)
• Remaining period = Original period minus
period from date of right of use until date of
completion of improvements plus renewal
period
• Pro-rata for part of year as from date brought into use
• Extension periods – Renewal periods are taken into
account
• Lessee may qualify for s 13 (manufacturing building)
allowance on excess (not s 13quin or s 13sex unless s 12N
applies) Silke Example 13.17
https://za.pinterest.com/pin/511017888940485608/
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Example - Leasehold improvements (s 11(g))

Factory building lease:
01/05/Y1 obtain right of use
4 months
01/09/Y1 complete improvements
01/10/Y1 improvements brought into use
31/12/Y1 year of assessment ends 3 months
15 yrs = 15 x 12
Contract period = 15 years; = 180 mths
Contract price R1 500 000

Amount actually incurred on improvements R2 000 000)
106
106
Example Solution - Leasehold improvements

(s 11(g))
Allowance (s 11(g): 3/12
R1 500 000
(180 mths – 4 mths) X 3 = R25 568 (s 11(g))
If period = 26 years in this example, then
15yrs – 4 mths = 176 mths
remaining period is limited to 25 years.
Allowance (s 13):
S 13 allowance on the excess cost not qualifying for the
s 11(g)
R2 000 000 – R1 500 000 (s 11(g)) = R 500 000
R 500 000 x 5% = R25 000 (s 13 - deduction)
107
Deductions iro improvements not

owned by taxpayer S 12N
Silke 13.7.4
Lessee:
• Lessee effects and completes
improvements to leased property.
• Uses property for production of income or
income is derived there from.
Lessor:
• Lessor: government or certain tax exempt entities.
S 12N deems lessee to be the owner of the improvements

• If s 12N is applicable → for purposes of any deduction ito s
12B, 12C, 13, 13quin & 13sex lessee is deemed to be the
owner
Silke Example 13.19
http://www.esri.com/smart-communities/pinellas-county
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TL105
Recoupments
https://www.freepik.com/search?format=search&query=recoupments 109
109
Recoupment – s 8(4)(a)
Silke 13.10.1
• General recoupment provision

• Recoupment of amounts previously
deducted ito sec 11-20, 24I & 24J
• Taxable recoupment = (Lower of Cost or
Proceeds) less Tax value
• Recoupment iro assets limited to previous allowances –
(selling amount > cost → CGT)
• Fully included in income unless special provisions of
section 8(4)(e) or 13(3) apply
• Section 24M and par 39A of 8th Schedule – Level 2 ONLY
(See later)
Silke Example 13.29 & 13.30

https://www.freepik.com/search?format=search&query=recoupments
110
110
Disposal (or donation) of an asset

Silke 13.10.1
• Allowance asset, is either disposed of (sold / distributed) or
donated (s 8(4)(k)) → the allowances that were previously
allowed as deductions against income, can be recouped (added
back to taxable income). Note that if there is a change of use and
assets are now held as trading stock, this section will also apply
• Where the selling price or market value (if donated) < tax value =
“scrapping allowance” ito s 11(o) (alienation, loss or destruction
allowance) can be claimed (election section)
– if expected useful life of asset ≤ 10 years and asset not sold to connected
person.
• All previously allowed allowances are recouped ito either s 8(4)(a)
or s 8(4)(e), (eA)-(eE) or 8(4)(k), except:
– If section 13(3) is elected (iro qualifying buildings)
• Section 8(4)(e) - deferred recoupment, if there is a replacement
asset and the taxpayer has elected that par 65 or 66 of the 8th
Schedule must apply, then s 8(4)(e) is applicable.
111
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Example - Disposal (donation) of assets
R R
Cost price (purchased after 1/10/2001) CP 100 000
Less: Wear‐and‐tear allowances w+t (80 000)
Tax value TV 20 000
Selling price SP see 
Yes recoupment ‐ s 8(4)(a) /

Is SP > TV? s 8(4)(e) / 13(3)
No scrapping ‐ s 11(o) (if elected)
Recoupment:
Is SP > CP?
(limiting recoupment to w+t
Yes ‐‐‐‐‐‐‐> recoupment = CP minus TV
previously allowed)
No ‐‐‐‐‐‐‐> recoupment = SP minus TV
112
112
Example - Disposal (donation) of assets
Recoupment Recoupment Scrapping

& Cap Gain
R R R
  
Selling Price (SP) 130 000 70 000 5 000
Lower of CP or SP 100 000 70 000 5 000

Less: TV (20 000) (20 000) (20 000)
Recoupment s8(4)(a)/
(Scrapping s11(o)) 80 000 50 000 (15 000)
Proceeds (SP less recoupment) 50 000 20 000 5 000

Less: Base cost
(CP less allow claimed) (20 000) (20 000) (5 000)
Capital gain (Proceeds – BC) 30 000 Nil Nil
113
113
Example – Allowances and Recoupments
On 1 October Y2, Fast Feathers Ltd

(December year-end) sold a manufacturing
machine to Slow Feathers (Pty) Ltd (its
100% subsidiary) for R1 500 000 (when
market value was R1 800 000). Fast
Feathers Ltd originally bought the new
machine for R3 000 000 on 1 March Y1.
Calculate all the tax implications of the sale

of the machine for Fast Feathers Limited for
the Y2 year of assessment.
114
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Example Solution– Allowances and Recoupments
Year ending 31 December Y2 - Fast Feathers Ltd

SP, R1 500 000, but sold to a connected person, it is deemed to have
been sold at MV at date of sale, R1 800 000 (1 October Y2) (s
8(4)(k)).
Recoupment in respect of sold machinery under s 8(4)(a):
• R1 800 000 (value (proceeds) in terms of s 8(4)(k))
Less:
• Tax value of R1 200 000 (R3 000 000 – R1 800 000)
• S 12C Y1: (R3 000 000 × 40% = R1 200 000
• S 12C Y2: (R3 000 000 × 20% = R 600 000 → Taxable income
R1 800 000
Recoupment of (R1 800 000 – R1 200 000)
= R600 000 → Taxable income
115
115
Example – Allowances and Recoupments
On 1 October Y2, Fast Feathers Ltd (December

year-end) sold a manufacturing machine to Slow
Feathers (Pty) Ltd (its 100% subsidiary) for
R1.5 mil (when market value was R1.8mil). Fast
Feathers Ltd originally bought the new machine
for R3 000 000 on 1 March Y1.
If the market value on 1 October Y2 was R3 200 000
Calculate all the tax implications of the sale of

the machine for Fast Feathers Limited for the Y2
year of assessment.
116
116
Example Solution– Allowances and Recoupments
Year ending 31 December Y2 – Fast Feathers Ltd

SP, R1 500 000, but sold to a connected person, it is deemed to
have been sold at MV at date of sale, R3 200 000 (1 Oct Y2)
(s 8(4)(k)).
Recoupment in respect of sold machinery under s 8(4)(a):
• Value is R3 200 000 limited to R3 000 000 (cost) less the tax
value of R1 200 000 = R1 800 000 thus limited to allowances
of R1 800 000 claimed.
Slow Feathers (Pty) Ltd
• As the machine was bought from a connected person, Slow
Feathers (Pty) Ltd can only claim the s 12C allowance of 20%
(as it is a second-hand machine).
• The 20% will be claimed on the lower of cost or cash cost in
arm’s length transaction (normal section 12C cost rules);
therefore R1 500 000.
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Recoupment – s 13(3)
Silke 13.4.1
• The annual allowance on buildings and

improvements is subject to recoupment ito
s 8(4)(a) EXCEPT if the taxpayer has
elected s 13(3) to apply.
• If elected, the recoupment is not included in taxable
income, but set off against the cost of a replacement
building, provided:
– Building purchased or erected within 12 months from date of
recoupment (event); and
– The replacement building qualifies for annual allowance under
s 13(1).
• Any excess over the cost of the replacement building is
recouped ito s 8(4)(a).
118
118
Example – Recoupment s 13(3)
As a result of an insurance claim following the destruction of

his leased premises (factory) by fire, lessee has enjoyed a
recoupment of past allowances claimed on the cost of the
destroyed building (factory) amounting to R500 000.
Tshlaene erects a further qualifying building (factory), this

recoupment is available for set-off against the cost of the
further building instead of being taxed immediately.
The cost of the newly erected building amounts to R1.6 mil.
Calculate the allowances on this building if the portion of the
cost of that building deductible under s 11(g) (obligation to
effect improvements) is R750 000.
The taxpayer will elect any option available to him to minimise his
tax liability.
119
119
Example Solution - Recoupment s 13(3)
Cost of erection of the further building (factory) R1 600 000

Portion of the cost subject to the annual allowance:
The untaxed recoupment will therefore be:

Cost of further building R1 600 000
Portion of cost deductible under s11(g) (R750 000)
R850 000
Recoupment arising from prior building (s13(3)) (R500 000)
Cost on which annual allowance is based R350 000
Annual allowance (s 13(1)) (5% of R350 000) (R17 500)
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Example Solution - Recoupment

Assume the Lessor is a municipality and erected office building
Cost of erection of the further building (offices) R1 600 000

Portion of the cost subject to the s13quin allowance if erected
on property owned by tax exempt entity (s12N):
The untaxed recoupment will therefore be:

Cost of further building R1 600 000
Portion of cost deductible under s11(g) - none (Rnil)
R1 600 000
Recoupment arising from prior building (no s13(3)) Rnil
Cost on which annual allowance is based R1 600 000
Annual allowance (s 13quin) (5% of R1 600 000) (R80 000)

Recoupment added to taxable income (8(4)(a)) R500 000
If office building is erected on leased land and s 12N is not applicable, then NO s 13quin ALLOWANCE
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Recoupment – s 8(4)(e)
Silke 13.10.3
• Capital gain is either deferred in full (non-

depreciable assets) until date of sale or
capital gain and recoupment spread over
the same period as the replacing asset is
written off (depreciable asset), if taxpayer
made election ito par 65 or 66 of the 8th
Schedule.
• Par 65 - involuntary disposal of asset other than financial
instrument (expropriation, loss or destruction) & acquire
replacement asset - defer capital gain
• Par 66 – voluntary disposal of asset subject to a deduction
ito s 11(e), 12B, 12C, 12E and proceeds are reinvested in
replacement asset(s) - defer recoupment & capital gain
NOT s13/13quin/13sex
122
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Roll-overs: Para 65/66

Involuntary disposals (Par 65) Re-investment in replacement assts
(Par 66)
If a person disposes of an asset
Involuntary disposal (operation of law, theft or Replaced asset qualified for capital allowances
destruction) & proceeds accrues to taxpayer (e.g. under ss 11(e), 11D(2), 12B, 12C, 12DA, 12E, 14,
insurance) - (Movable & immovable assets) 14bis (Movable assets)
Proceeds =/> base cost of the asset (Proceeds & base cost as defined in 8th schedule)
FULL amount =/> receipts & accruals from the disposal to be expended to
acquire one or more replacement assets
Replacement assets = assets contemplated in s 9(2)(k) or (j)

Contracts for the acquisition of the replacement asset/ assets to be concluded
within 12 months after the disposal of the asset
Replacement asset to be brought into use within three (3) years of the disposal
of the asset and that asset is not deemed to have been disposed of and
reacquired by that person
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Recoupment – s 8(4)(e)
Silke 13.10.3
• Contract for replacement asset concluded

within 12 months & asset brought into use
within 3 yrs
• If proceeds ≥ base cost and depreciable
asset:
• Capital gain per year =
X
Capital allowance in year on replacement asset
Capital Gain
Total cap allowance (cost) of replacement asset
• Recoupment per year = same % that allowance on

replacement asset is calculated at
Silke Example 13.32 – 13.34
124
124
Example - Recoupment
Silke Example 13.32
During the Y5 year of assessment, Diverse Ltd’s

manufacturing plant and machinery was destroyed in a fire.
The plant and machinery qualified for the accelerated s12C
allowance (fully written off in Y4).
The company was insured, and received an insurance
payment of R1 800 000 in the same year of assessment (Y5).
The amount was immediately used to fund the purchase of a
new, similar plant and machinery for R2 000 000. The
recoupment of allowances (under s 8(4)(a)) on the destroyed
plant amounted to R700 000. Diverse Ltd’s year of
assessment ends in December.
Calculate the allowances and recoupments with regard to the

above if the company elected the application of par 65 of the
Eighth Schedule (ignore capital gains tax and VAT).
125
125
Example Solution - recoupment

Year ending 31 December Y5
S 12C allowance on new plant and machinery
(40% × R2 000 000) ........................................ (R800 000)
Recoupment of destroyed plant and machinery – deferred in
accordance to allowance on new asset
R700 000 × R800 000/R2 000 000 (or R700 000 × 40%)
............................................................................ 280 000
Years ending 31 December Y6, Y7 and Y8

S 12C allowance on new plant and machinery purchased
Y5 (20% × R2 000 000).................................. (400 000)
Recoupment of destroyed plant and machinery – deferred in
accordance to allowance on new asset
R700 000 × R400 000/R2 000 000 (or 20% × R700 000)
......... .... 140 000
126
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Example - Recoupment
Silke Example 13.33
During the Y1 year of assessment, Brando Ltd’s manufacturing

machine A was destroyed by a fire. Manufacturing machine A
qualified for the accelerated s 12C allowance. The company was
insured at replacement value and when the insurance payment (of
R3 750 000) was received, a s 8(4)(a) recoupment of R250 000 was
made.
Brando Ltd used the insurance amount received to immediately
replace manufacturing machine A with a similar, but smaller, new
machine B at a cost of R1 750 000. The rest of the insurance
payment of R2 000 000 was used to buy a much-needed new office
block.
The company elected that the provisions of par 65 of the Eighth
Schedule be applicable to the sale.
Since s 8(4)(e) will apply and the recoupment will be deferred,
calculate the allocation of the recoupment on machine A to the
replacement assets. (Ignore capital gains.)
127
127
Example Solution - recoupment

Recoupment amounted to R250 000:
Recoupment allocated to machine B:
R250 000 × R1 750 000/R3 750 000 = .......... R116 667
(This part of the recoupment will be deferred in
accordance to the allowance on machine B, thus
40:20:20:20 over the next 4 years.)
Recoupment allocated to office building:

R250 000 × R2 000 000/R3 750 000 = .......... R133 333
(This part of the recoupment will be deferred in
accordance to the allowance on the office block
(s 13quin) at 5% over the next 20 years.)
128
128
Recoupment – Hired assets – s 8(5)

Silke 13.10.6
• When rent (or lease payments or a lease
premium) has been paid for the right of use or
occupation of movable or immovable property;
and
• the amount has been allowed as a deduction for
tax purposes; and the asset has been either:
• returned to lessor (no tax implications); OR
• acquired by taxpayer and rentals paid are taken into consideration
towards the settlement of the purchase price of the property (s 8(5)(a)) ;
OR
• acquired by taxpayer for no or inadequate consideration (s 8(5)(b));
OR
• continued to be used at no or nominal rent (s 8(5)(bA); OR
• continued to be used at rent payments > nominal rent (no deemed
recoupment).
https://www.codementor.io/freelance-jobs/html
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Recoupment – Hired assets – s 8(5)

Commencement of lease Silke 13.10.6
Rental/lease payments allowed as deductions
Termination of lease
Asset acquired by lessee or Asset not acquired but continuance

Asset returned to lessor
other person of use by lessee
Rental applied in Acquired for no or Nominal rental Rental = 10% or

No further
reduction of purchase inadequate charge (less than more of fair market
payment
price consideration 10%) value
No further normal Amount so applied Excess of market value Deemed re- No deemed
tax implications taxed as deemed over consideration taxed coupment of fair recoupment
recoupment as deemed recoupment in market value
(section 8(5)(a)) (section 8(5)(bA))
hands of person acquiring
asset (i.e. lessee or other
person) (s8(5)(b))
Deemed recoupment limited to rental

deductions allowed
130
130
Example - Hired assets – s 8(5)(bA)
Crock Earthmoving Equipment is a company

that manufactures earthmoving equipment (clas-
sified as a process of manufacture by SARS)
that is used both locally and internationally by
mining and other construction companies.
The following transaction relate to the 2022 year

of assessment ending 31 December 2022 (all
amounts exclude VAT):
131
131
Example - Hired assets – s 8(5)(bA)
Since 1 April 2019, Crock Earthmoving Equipment leased a

delivery truck (with a cost price of R780 000) from Rentals
Limited, a non-connected company, for R25 000 per month in
terms of a 3-year lease agreement. The agreement stated
that Crock Earthmoving Equipment will be permitted to
continue using the delivery truck at the end of the 3-year
period for a rental of R3 000 per month. The Commissioner
will allow Crock Earthmoving Equipment to write off the
delivery truck over 2 years (the remaining useful life from
1 April 2022), if applicable.
REQUIRED:
Calculate the Income Tax implications of the above
transaction for Crock Earthmoving Equipment (Pty) Ltd for its
2022 year of assessment.
132
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Example Solution - Hired assets (s 8(5)(bA))
Rental payments until 31 March 2022: 3 x R25 000 (75 000)

Rental payments from 1 April ‐ allowed under s 11(a)
(R3 000 x 9) (27 000)
Determination of the fair market value of the delivery truck:
Cost to Rentals Limited 780 000
Less: 20% depreciation on the reducing balance
method per full year (s 8(5)(bB)(i))
2020: (R780 000 x 20%) (156 000)
624 000
2021: (R 624 000 x 20%) (124 800)
499 200
2022: (R499 200 x 20%) (99 840)
Deemed fair market value 399 360
133
133
Example Solution - Hired assets (s 8(5)(bA))
But a s 8(5) recoupment, since the annual rental of R36 000 (R3 000
x 12) payable from 1 April 2022 is less than 10% of the fair market
value determined above (10% x R399 360 = R39 936), the rental is
deemed to be nominal and Crock Earthmoving Equipment is
deemed to have acquired the delivery truck for no consideration for
purposes of s 8(5)(bA).
The company must include in its income the lesser of the fair market
value of R399 360, or rentals previously deducted of:
R900 000 (36 x R25 000) (s 8(5)(b) read with s 8(5)(a)) 399 360
S 11(e) allowance – R399 360/2 x 9/12 (149 760)
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TL105
Alienation, loss or
destruction
allowance - s
11(o)
http://grassgreener.co.uk/bad‐hire ‐calcula tor 135
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Alienation, loss or destruction

allowance - s 11(o)
Silke 13.11
• Elected by taxpayer (but not if sold to

connected person!)
• Claim if Cost > Proceeds + Tax allowances
(i.e. if Tax value > Proceeds) AND
• Allowance on qualifying assets iro sec
11(e), 12B, 12C, 12E has been allowed
(NOT land & buildings)
• Expected useful life ≤10 years (from date of acquisition)
• If asset acquired for no consideration → no s 11(o) since no cost
(Interpretation Note No. 60 (Issue 2))
• If full consideration for disposal does not accrue in year of
assessment – disregard section 11(o) loss until full amount is
received or further receipts results in a recoupment - Section
20B(1) Silke Example 13.41 & 13.42
http://grassgreener.co.uk/bad-hire-calculator 136
136
TL105
Concession or compromise in
respect of debt
https://www.freepik.com/search?format=search&query=debt
137
137
Concession or compromise of debt –

S 19 & par 12A of the 8th Schedule S 19 - Silke 13.10.7
Par 12A -Silke 17.8.4
Definitions:
• Debt for the purposes of s 19 includes any
amount that is owed by a person but will not
include a tax debt
• Concession or compromise is any arrangement in terms of
which:
– a debt is
• cancelled or waived, or
• extinguished by
* the redemption of that debt by the debtor (or connected person), or
* a merger where the debtor acquires the claim iro that debt
– a debt owed by a company is settled (paid), directly or
indirectly
• by conversion or exchange for shares in that company, or
• by applying the proceeds of shares issued by that company (s 19(1)).
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Debt benefit in respect of a debt owed by a person

means:
• if debt is cancelled or waived → amount cancelled
or waived
• in case of redemption of debt or where debt is extinguished by way of
merger → amount by which face value of debt exceeds the
expenditure incurred to redeem the debt / acquire the claim iro of
that debt
• where shares are acquired in exchange for or as payment of debt
– person did not previously hold effective interest in debtor company → face value
of debt less market value of those shares, or
– person did previously hold effective interest in company → face value of debt
less difference between market value of shares held in company after
concession or compromise and market value of shares held in company
before concession or compromise
• Where debt is settled by applying proceeds of shares issued → face
value of debt before share issue less market value of shares.
MV of shares immediately after concession or compromise
139
139

S 19 S 19 - Silke 13.10.7
S 19 applies when:
• a debt benefit in respect of debt that is owed by a
person
• arises due to or because of a concession or compromise regarding
that debt, and
• that debt was used, either directly or indirectly, to fund any
expenditure for which a deduction or allowance was granted.
S 19 does NOT apply when the debt benefit is: The debt benefit must arise due
to commercial reasons (i.e.
• A bequest, or inability to pay).
• A donation/deemed donation subject to donations tax, or
• A taxable fringe benefit (i.e. discharge of employee debt), or Exceptions
apply
• To a dormant company in the same group of companies, or
• Share issue within same group to settle debt between group companies, or
• Iro debt owed (to the extent that debt does not represent interest incurred
by debtor) converted or exchanged for shares OR proceeds from shares
issued, used to settle debt. 140
140

(70% shareholding ito s 41)
S 19 does NOT apply when the debt benefit is:

• To a dormant company in the same group of
companies not carried on a trade in the
current or previous YOA
• This exclusion will not apply to debt:
– Used to directly or indirectly fund expenditure for an asset that was
S 19 later disposed of under the corporate roll-over relief provisions
applies (ss 42, 44, 45 or 47 – see TL107)
– incurred by the dormant company to settle, take over, refinance or
renew, directly or indirectly, any debt of another company that forms
part of the same group
141
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(70% shareholding ito s 41)
S 19 does NOT apply when the debt benefit is:

•
Share issue within same group to settle debt
between group companies
• This exclusion will not apply to debt:
– incurred when the debtor was not part of the same group
S 19 – settled or reduced by the issuing of shares in the debtor when the
applies debtor was not part of the same group
142
142

par 12A of the 8th Schedule
Par 12A applies when:
No
Is there a debt benefit?
Yes Par 12A is NOT
applicable.
Is the debt benefit specifically
excluded from the provisions of par 12A? Yes
No
What was the debt used for, i.e. what was
the purpose of the debt?
Capital assets / Tax deductible

allowance assets expenditure
Par 12A
applies 1st apply par 12A, then S 19
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143

par 12A of the 8th Schedule – revise TL104
Is there a debt benefit?

• Amount of the debt benefit = same as definition in
s 19
The debt benefit is specifically excluded from par 12A if:

• Donation (debt reduced by way of) & donations tax is payable; OR
• Bequest (debt owed by an heir to a deceased estate); OR
• Taxable fringe benefit (employee debt); OR
• Intra-group (min. 70% shareholding ito s 41) debt owed by a
dormant group company
Exceptions apply
• Liquidation, winding-up or deregistration
• Intra-group debts settled by issuing shares
• Debt substituted or converted to shares - debt that does not
consist of interest, therefore only the capital portion of the debt
144
144
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par 12A of the 8th Schedule Par 12A does apply
Par 12A -Silke 17.8.4.2

Paragraph 12A(6) exclusion will not apply if:
• Intra-group (min. 70% shareholding ito s 41) debt
& debtor = dormant: and
o Used to directly or indirectly fund expenditure for an asset that was
later disposed of under the corporate roll-over relief provisions; or
o incurred to settle, take over, refinance or renew, directly or indirectly,
any debt of another company that forms part of the same group
• Debt reduced, between connected persons, due to liquidation,
winding up or deregistration of debtor: and
o Debtor and creditor became connected persons after debt arose; or
o Transaction part of scheme to avoid tax
(Note: If steps not taken to liquidate within 36 months, or liquidation
withdrawn or debtor invalidates any step – par 12A will apply)
• Intra-group (min. 70% shareholding ito s 41) debt settled by share
issue: and
o non-member of group at time (debt incurred/shares issued)
145
145

par 12A of the 8th Schedule
DEBTOR Par 12A -Silke 17.8.4
Group of companies ito section 41 – TL107:

• At least 70% of equity shares in each controlled
group company is held (directly/indirectly) by
controlling group company or 1 or more
controlled group company, and
• The controlling group company directly holds at least 70% of the
equity shares in at least one controlled group company
• BUT excludes:
– Any company that is incorporated under the law of a country other
than RSA unless that company has its place of effective
management in the Republic;
– Any company that has its place of effective management outside the
Republic;
– PBO;
– Non-profit companies.
146
146

Par 56 of the 8th Schedule
CREDITOR Par 12A -Silke 17.8.4
• Debt is reduced and creditor disposes of asset –

= 8th Schedule applicable – calculate capital
loss.
• If debtor and creditor are connected persons, par 39 (ring-
fencing) and/or par 56 may be applicable
• Par 56 disregards capital loss unless: Loss IS taken into
– Base cost of asset reduced ito par 12A(3) account
– Capital gain included by debtor ito par 12A(4)
– Creditor proves amount included in gross income of acquirer of debt
– Amount included in gross income or income of debtor or taken into
account in balance of assessed loss
– Debtor includes capital gain in aggregate capital gain or loss
(creditor must provide proof)
• If par 56 is not applicable (capital loss not disregarded), capital
loss is ring-fenced ito par 39. Loss can only be set off against
capital gains realised with same debtor. 147
147
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Treatment of a debt benefit

Section 19 Par 12A
Tax deductible Allowance Capital asset:

Trading stock:
expenses asset: Still held during yoa
and/or trading Still held during yoa of debt benefit:
1. Reduce cost
stock already of debt benefit: 1.Reduce base cost
(s 19)
sold at time of 1.Reduce base cost (par 12A(3))
2. Excess ‐ 2.No tax effect if
debt benefit: to nil (par 12A(3))
recoup 2.Excess ‐ recoup remaining balance
under s 19(4) under s 19(6) and
1.Recoupment s 8(4)(a)
No longer held:
and s 8(4)(a) 1.Additional capital
under s 19(5)
No longer held: gain in yoa of debt
and s 8(4)(a) 1.Additional benefit (par
recoupment in 12A(4))
yoa of debt
benefit (s 19(6A)
and s 8(4)(a)) and
2.Additional capital
gain in yoa of
debt benefit (par
12A(4)) 148
148
Example – Debt benefit (s 19 & par 12A)

Scrapbook (Pty) Ltd (a VAT vendor with a December year-

end) is one of many retailers selling Snapshot’s products
locally. Scrapbook (Pty) Ltd has been experiencing serious
financial difficulty over the past few months and has
requested a concession for its debts from several of its
creditors in order to try and regain its financial stability.
On 31 December Y1 Scrapbook (Pty) Ltd’s creditor account
for Snapshot’s records amounted to R475 000, which
represented trading stock purchases made on credit during
Scrapbook (Pty) Ltd’s prior YOA. Scrapbook (Pty) Ltd has
requested a concession of this debt from Snapshot.
Scrapbook (Pty) Ltd still had R150 000 of this trading stock on
hand at the beginning of Y1 YOA (opening stock) and at the
end of the Y1 YOA (closing stock).
The request for the R475 000 debt concession was granted
on 31 December Y1.
149
149

REQUIRED
Discuss, supported by calculations and with
reference to Income Tax legislation, the normal
tax implications of the transactions for
Scrapbook (Pty) Ltd for the company’s Y1 year
of assessment.
150
150
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Section 19 Par 12A
Tax deductible Allowance Capital asset:

Trading stock:
expenses asset: Still held during yoa
and/or trading Still held during yoa of debt benefit:
1. Reduce cost
stock already of debt benefit: 1.Reduce base cost
(s 19)
sold at time of 1.Reduce base cost (par 12A(3))
debt benefit: 2. Excess ‐ 2.No tax effect if
to nil (par 12A(3))
recoup 2.Excess ‐ recoup remaining balance
under s 19(4) under s 19(6) and
1.Recoupment No longer held:
and s 8(4)(a) s 8(4)(a) 1.Additional capital
under s 19(5)
No longer held: gain in yoa of debt
and s 8(4)(a) 1.Additional benefit (par
recoupment in 12A(4))
yoa of debt
benefit (s 19(6A)
and s 8(4)(a)) and
gain in yoa of
debt benefit (par
12A(4)) 151
151
Example Solution – Debt benefit

(s 19 & par 12A) 4862 Exam 2013 adapted
Trading stock – Snapshot (Pty) Ltd

The R475 000 debt benefit will first be applied to reduce the cost of the
trading stock still on hand at the time of debt concession. The deduction
under section 22(2) for the opening stock on hand at the beginning of Y1 will
be reduced to Rnil.
R
Opening stock (s 22(2)) (150 000)
Debt concession under s 19(3) 150 000
Closing stock (s 22(1)) 0
The remaining R325 000 (R475 000 – R150 000) of the debt 325 000
benefit will be a deemed recoupment in income under s
8(4)(a) – (s 19(5))
152
152

Scrapbook (Pty) Ltd also requested and was granted a

concession on its outstanding debt from the following
creditor (an independent party)
• Photoshop Ltd for computer equipment purchased on
1 October PY (prior year) for R350 000. SARS allows
for a three year write off period on computer
equipment in terms of Interpretation Note No. 47. The
computer equipment is used for purposes of trade.
R275 000 of this debt was still outstanding on
31 December Y1.
REQUIRED
Discuss, supported by calculations and with reference to
Income Tax legislation, the normal tax implications of the
transactions for Scrapbook (Pty) Ltd for the company’s Y1
year of assessment.
153
153
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Section 19 Par 12A
Tax deductible Allowance

expenses Trading stock: asset:
and/or trading Still held during yoa
Capital asset:
stock already 1. Reduce cost of debt benefit: Still held during yoa
of debt benefit:
sold at time of (s 19) 1.Reduce base cost
debt benefit: 2. Excess ‐ to nil (par 12A(3)) 1.Reduce base cost
2.Excess ‐ recoup (par 12A(3))
recoup
under s 19(6) and 2.No tax effect if
1.Recoupment under s 19(4) remaining balance
s 8(4)(a)
under s 19(5) and s 8(4)(a)
No longer held: No longer held:
and s 8(4)(a) 1.Additional 1.Additional capital
recoupment in gain in yoa of debt
yoa of debt benefit (par
benefit (s 19(6A) 12A(4))
and s 8(4)(a)) and
gain in yoa of
debt benefit (par
12A(4)) 154
154

Computer equipment – Photoshop Ltd

The asset is still held. The R275 000 debt benefit will first be applied to
reduce the base cost of the asset in terms of par 12A
Base Cost: par 20 expenditure R 350 000
less: s 11(e) allowance PY: R350 000 / 3 x 3/12 (R29 167)
less: s 11(e) allowance Y1: R350 000 / 3 x 12/12 (R116 667)
Base cost (= Tax Value) R204 166
Debt benefit under s 19(3) ❶ (R204 166)
The base cost of the asset will therefore now be Rnil
Base cost R nil
No further allowances on the computer equipment will be allowed under s 19(7).
The remaining R70 834 (R275 000 – R204 166) will be a recoupment.
Recoupment under s 19(6) read with s 8(4)(a) ❷ R70 834
155
155

Scrapbook (Pty) Ltd also requested and was granted

concession on its outstanding debt from another creditor
(independent party) as listed below:
• Frame It (Pty) Ltd for the purchase of two small second-
hand office blocks six years ago at a total cost of R850 000
each. One of these office blocks was sold during PY for
R700 000. R630 000 of this debt was still outstanding on
31 December Y1. 50% of the debt related to the property
still held and 50% related to the property sold during PY.
No allowances could be claimed for tax purposes.
The request for the concession on its outstanding debt was
granted on 31 December Y1.
Scrapbook (Pty) Ltd had an assessed capital loss brought
forward from the PY year of assessment of R150 000.
156
156
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Section 19 Par 12A

expenses Trading stock: asset:
Capital asset:
Still held during yoa
stock already 1. Reduce cost of debt benefit:
of debt benefit:
2.Excess ‐ recoup (par 12A(3))
recoup 2.No tax effect if
under s 19(6) and
1.Recoupment under s 19(4) s 8(4)(a) remaining balance
under s 19(5) and s 8(4)(a) No longer held: No longer held:
and s 8(4)(a)) and
gain in yoa of
debt benefit (par
12A(4)) 157
157

Office blocks – Frame It (Pty) Ltd

Of the R630 000 of debt cancelled, 50% or R315 000 is attributable to the office
building still held at the date of the debt reduction.
This will be applied to reduce the base cost of the office building to R535 000
(R850 000 – R315 000) ❶ in terms of par 12A(3) of the Eighth Schedule.
The remaining R315 000 debt reduction is attributable to the office building that
was sold in the prior year for R700 000. The debt benefit of R315 000 cannot be
applied against the base cost of this other office building, since it is no longer
held during the year of assessment of the debt benefit.
Instead the capital gain or loss determined in the PY (i.e. proceeds of R700 000
less base cost of R850 000 = capital loss of R150 000) must be recalculated
taking into account the R315 000 debt benefit as if it accrued prior to the
disposal of the building, i.e. proceeds of R700 000 less base cost of R535 000
(R850 000 – R315 000) = recalculated capital gain of R165 000. The difference
between the original capital loss of R150 000 and the recalculated capital gain of
R165 000 results in an absolute difference of a R315 000 capital gain (par
12A(4)) and is subject to capital gains tax in the CY.
158
158

Example -Silke 13.38
On 1 June Y1, Nocash (Pty) Ltd owed a debt of

R500 000. Nocash (Pty) Ltd has trading stock on hand of
R430 000, on that date, purchased during the year.
Nocash (Pty) Ltd’s creditors conceded the R500 000 of
debt due by Nocash (Pty) Ltd’s inability to pay. Of the
debt owing, R430 000 stems from trading stock held and
the other R70 000 relates to trading stock previously
held and purchased in the prior period (not included in
opening stock).
Calculate the tax implications for Nocash (Pty) Ltd of the

debt benefit for the year of assessment ending on
31 December Y1.
159
159
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Section 19 Par 12A

expenses Trading stock:
asset:
Capital asset:
stock already 1. Reduce cost of debt benefit: Still held during yoa
of debt benefit:
recoup 2.Excess ‐ recoup (par 12A(3))
under s 19(6) and 2.No tax effect if
1.Recoupment under s 19(4) remaining balance
s 8(4)(a)
under s 19(5) and s 8(4)(a)
No longer held: No longer held:
and s 8(4)(a)) and
gain in yoa of
debt benefit (par
12A(4)) 160
160
Example Solution – Debt benefit (s 19 & par 12A)


The amount of the debt benefit of R500 000 will first be
applied to reduce the cost price of the trading stock still
held at the time of the debt benefit. The deduction for the
trading stock purchased under s 11(a) will be reduced to
Rnil. Therefore R430 000 of the debt benefit is applied
against the purchase price of the stock still on hand at
date of the debt benefit. The trading stock of which the
cost price was reduced to Rnil, will accordingly not have
any value for tax purposes if still on hand at year end.
Note that no reduction is made against the R70 000 of
trading stock already sold, since it is no longer part of
trading stock at the time of the debt benefit, as required
under s 19(3). Therefore, it will need to be recouped.
161
161


Purchase of trading stock (s 11(a)) (R430 000)
Debt benefit under s 19(3) R430 000
Closing stock (s 22(1)) Rnil
The remaining R70 000 of the debt benefit will be a

deemed recoupment in income under s 8(4)(a) (s 19(5)).
Recoupment (s 8(4)(a)) R70 000
162
162
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On 1 June Y1, Nofuss (Pty) Ltd borrows R1,5 mil to

acquire a new plant. Nofuss (Pty) Ltd purchased the
plant for a total cost of R1 450 000 and used the
remaining R50 000 of debt to fund tax deductible
administrative expenses. Nofuss (Pty) Ltd has claimed
allowances of R725 000 on the asset, at the stage when
Nofuss (Pty) Ltd’s creditors discharge the R1 500 000 of
debt, due to Nofuss (Pty) (Ltd)’s inability to pay. Nofuss
(Pty) (Ltd) still held the plant at the date on which the
debt was discharged (i.e. within the same year of
assessment).
Calculate the tax implications for Nofuss (Pty) (Ltd) of

the debt benefit for the year of assessment ending on
31 December Y1.
163
163


The amount of the debt benefit of R1 500 000 was used to
fund tax-deductible expenses of R50 000 and the plant of
R1 450 000. The amount of the debt benefit of R50 000 is not
in respect of trading stock or allowance assets and will
therefore be treated as a recoupment under section 19(5)
read with section 8(4)(a).
The remaining R1 450 000 will first be applied against the
base cost of the asset which will be reduced to nil; the base
cost being R1 450 000 less the allowances claimed of R725
000, thus a base cost reduction of R725 000. The remaining
debt benefit of R725 000 (R1 450 000 – R725 000) will be
recouped in income (s 19(6)).
Recoupment under s 19(5) read with s 8(4)(a) R 50 000
Recoupment under s 19(6) read with s 8(4)(a) R725 000
164
164
TL105
Unquantified Amounts –s 24M read
with par 39A of 8th Schedule – Level 2
ONLY
165
https://www.freepik.com/search?format=search&query=question%20money
165
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Incurral & accrual of amounts not

quantified - Section 24M
Level 2 only Silke 17.9.3
SELLER
• If a taxpayer sells an asset for an
unquantified amount → s 24M(1) is
applicable to the seller
– Inclusion of selling price is limited to consideration quantified
in that year
– Deduction will be limited to the quantified amount included
under s 24M.
– Excess deductions disregarded and carried forward to the
next year where process is repeated.
– Par 39A Silke 17.9.4
TL105 Example pg. 41 - 45
166
166
Incurral & accrual of amounts not

quantified - Section 24M
Level 2 only Silke 17.9.3
BUYER
• Taxpayer acquires the asset for a
consideration not yet quantified →
expenditure or base cost for the buyer is
accumulated over time
• Applicable to 3 types of assets:
– Trading stock
– Non-depreciable capital assets (read with par 39A of the 8th
Schedule)
– Depreciable assets (read with s 20B)
TL105 Example pg. 41 - 45
167
167
TL105
Trading Stock – LU 9
168
https://www.cleanpng.com/png-inventory-warehouse-waste-logistics-lean-manufactu-1420657/preview.html
168
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Trading stock - s 22
• Defined in section 1 Silke 14.1
• Know how to calculate and take into

consideration opening stock, closing
stock and the cost price of trading stock.
Silke 14.2, 14.3, 14.4
• Change of intention (s 22(3)(a)(ii)) : revenue to capital

or otherwise:
– general rule: trading stock → capital asset recoup @ MV (except if it
is a manufactured asset (par (jA) of gross income)
Silke Example 14.1 & 14.2
169
169
Trading stock - s 22(1) amendment
• Closing stock should be included at cost or an

amount as approved by Commissioner if stock
has diminished by reason of:
– damage
– deterioration
– change of fashion
– decrease in the market value; or
– for any other reason listed satisfactory to the
Commissioner (excluding financial
instruments).
• Closing stock must be included in GROSS income
170
170
• Goods taken from stock → deemed

recoupment – s 22(8): Silke 14.6
• Private or domestic consumption recoup @
cost
• Donated, disposed of < MV or in specie dividend @ MV
• Donated to PBO and s 18A is applicable - recoup @ cost
• Donated to PBO and s 18A not applicable - recoup @ MV
• Anti-avoidance – s 23F Silke 14.7
• Deemed capital receipts from disposal of shares – s 9C(5)

Silke 14.10
http://grassgreener.co.uk/bad-hire-calculator 171
171
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PART A
Standby Elec (Pty) Ltd (“Standby”) is a resident company

that specialises in the manufacturing and maintenance of
industrial generators. Standby is a VAT vendor that only
makes taxable supplies. It has a 31 December year-end
and does not qualify as a small business corporation.
The write-off period of generators under Interpretation

Note No. 47 is 15 years.
172
172
On 1 September Y1, Standby took one of its manufactured

generators from its trading stock to be used on a temporary
basis as a capital asset at its administrative office building. It
is still the intention of Standby to sell this generator. It will,
however, be sold as a used or second-hand generator. The
cost of this generator (incurred during its Y1 year of
assessment) was R1 250 000. Its market value on
1 September Y1 was R2 050 000. Its market value on
31 December Y1 was R1 750 000.
On 30 August Y2, Standby sold the generator that it had been

using in its administrative office building for R1 955 000
(including VAT).
173
173

REQUIRED
1. Calculate (supported with reference to legislation) the
effect on taxable income for Standby Elec (Pty) Ltd in
its Y1 and Y2 years of assessment.
2. Recalculate (supported with reference to legislation)

the effect on taxable income for Standby Elec (Pty)
Ltd’s Y1 and Y2 years of assessment, on the assump-
tion that it does NOT manufacture generators, but
merely buys and sells them. Round off all amounts to
the nearest Rand.
You can assume that all amounts exclude VAT, unless specifically stated
otherwise.
174
174
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Y1 year of assessment
The manufacturing costs (excluding VAT) are deductible under
s 11(a) (1 250 000)
There is no section 22(8) adjustment because the generator
will be dealt with under paragraph (jA) of the "gross income"
definition on disposal. Thus treat as trading stock until sold. -
Closing stock is added at the lesser of cost or market value
(s 22(1)) 1 250 000
Opening stock (section 22(2)) (1 250 000)
"Gross income" (section 1 paragraph (jA)) (selling price,
excluding VAT) (R1 955 000 x 100/115) 1 700 000
175
175

The acquisition costs (excluding VAT) are deductible
under section 11(a) (1 250 000)
Section 22(8) adjustment at market value 2 050 000
Section 11(e) over 15 years (2 050 000/15 x 4/12) (45 556)

Section 11(e) over 15 years (2 050 000/15 x 8/12) (91 111)
Section 11(o) is NOT applicable since the write-off
period exceeds 10 years (Tax Value = R2 050 000 –
R136 667 (R91 111 + R45 556) = R1 913 333 whilst
selling price is R1 700 000 (R1 955 000 x 100/115).
176
176

CGT:
Proceeds: Selling price is R1 700 000
(excluding VAT)
Base cost on date of sale: R2 050 000 –
R136 667 (R91 111 + R45 556) = R1 913 333
Standby will thus have a capital loss of

R213 333 (R1 700 000 – R1 913 333) that may
be deducted from aggregate capital gains
177
177
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Silke 14.7
Limitation of deduction allowed under

section 11(a) – Section 23F Deduction
limited to the
extent that
Deductions limited in the following circumstances: payment has
been received
• Applies to trading stock which was: for stock
– neither disposed of by the taxpayer nor disposed of
(s 23F(1))
– held by the taxpayer at the end of the year
• The deduction is deemed to have been incurred in the first
subsequent year in which:
– Trading stock was disposed of, or
– Value of stock is included in gross income - s 22(1) as closing
stock, or
– Trading stock was destroyed
– For some reason stock can not be disposed of/ 178held by TP
178

On 1 August Y1, Yum-Yum donated non-perishable baby food
(= trading stock that was manufactured in the PY) to the “Help
a Child-Foundation”, a public benefit organisation and
received a section 18A certificate. The cost of the stock
donated was R15 000 and the company has a mark-up
percentage of 150% on cost on all the products they sell.
Required:
Indicate what effect this would have on the taxable income for the
current year of assessment (ended 31 December Y1).
Solution:
Opening stock deducted (s 22(2)) (R15 000)
Recoupment of cost in terms of section 22(8) –
donation in terms of section 18A @ cost R15 000
Effect on taxable income Nil
179
179
Yum-Yum launched a new Yum-berry range of baby desserts

during September Y1. For the month of September, every
customer buying a tin of Yum-Yum baby food received a tin of
Yum-berry dessert as a free gift. Stock, with a cost of
R75 000, was as a result given to customers as promotional
gifts.
Solution:
No adjustment, since no recoupment under s 22(8) as applied
for purposes of trade
Alternative (OR):
Recoup at market value (s 22(8)(b)(iv)) R187 500
(R75 000 x 150% = R187 500)
Deduct promotional expenses (R187 500)
180
180
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Question 4862 Exam 2010 adapted
On 1 January Y1 Watson transferred two manufacturing

machines that were originally manufactured for resale to
their shoe manufacturing department. The machines
were brought into use in the shoe manufacturing
department on 31 January Y1. The machines were
manufactured at a cost of R75 000 each. The market
value of the machines was R90 000 each on 1 January
Y1 and the net realisable value (market value) of the
machines was R65 000 each on 31 December Y1 (year
end).
181
181
Question Solution 4862 Exam 2010 adapted
Opening stock – R75 000 x 2 – (section 22(2)(a))

(R150 000)
No recoupment in terms of section 22(8),

section 1, definition of gross income,
par (jA) applicable.
Closing stock at lesser of cost or if the

Commissioner approved the fact that the stock
had diminished in value
(R65 000 x 2) (section 22(1)(a)) R130 000
182
182
Example – Trading stock (s 22)

You have purchased trading stock at a cost of R10 000 during
the current YOA and these items are still on hand at the end
of the year. The market value of such trading stock at year
end amounts to R12 000.
Required:
i. Indicate what effect this would have on your taxable
income for the current YOA (hint: deal with sales,
purchases and trading stock). Ignore any VAT.
ii. If it is assumed that the above mentioned items are not on
hand at year-end, because they were donated to a local
church (not a PBO), indicate what effect this would have
on your taxable income. Ignore VAT.
iii. What if the donation in ii.) was to an approved PBO and a s 18A
receipt was obtained?
183
183
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Example Solution
R
(i) Sales – gross income (no receipt or accrual) -
Purchases – allowable deduction (section 11(a)) (10 000)
Add back: Closing stock (lower of cost or market value – s 22(1)) 10 000
Taxable income (no effect) -
(ii) Sales – gross income (no receipt or accrual) -

Purchases – allowable deduction (section 11(a)) (10 000)
Add back: Closing stock (none on hand) -
Deemed recoupment per s 22(8) of amount equal to market value 12 000
Taxable income (increase) 2 000
(iii) If approved PBO – deemed recoupment at cost 10 000

184
184
TL105
LEARNING
UNIT 10
• Interest-bearing
instruments (ss 24J, 24O)
• Hybrid instruments (s
8F) - TAX4862 only
• Foreign exchange (s 24I)
• International
transactions (s 31) -
TAX4862 only
• Tax morality, strategy
and risk management
185
185

GROSS INCOME XXX
LESS: EXEMPT INCOME (ss10, 10A, 10B, 10C and 12T) ( XXX )
INCOME XX
(ss11 – 17A & 21 – 24P, excluding s 18A) (note: s 11F excluded) ( XXX )
LESS: ASSESSED LOSS (ss 20 – 20A) (XXX)
XX
ADD: AMOUNTS INCLUDED IN TAXABLE INCOME (e.g. s 8(1)(a)) XXX
ADD: TAXABLE CAPITAL GAIN (s 26A) XXX
XX
LESS: s 11F PENSION, PROVIDENT & RAF contributions deduction (XXX)
LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (Remember –
(XXX)
excess can be carried forward to following year of assessment)
TAXABLE INCOME XX
Remember – Check the REQUIRED part of the question, so see if it requires you to start your
calculation with net profit / income. If it does, IT IS IMPERATIVE THAT YOU DO SO.
186
186
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Interest-bearing instruments – s 24J
• Deduction of interest:
• Deemed to be incurred ito s 24J(2) if
incurred in the production of income (and
carrying on of a trade)  must be deducted
from income from issuer/borrower
• Taxation of interest:
• Deemed to accrue ito s 24J(3) irrespective
if it is of a capital nature or not  must be
included in gross income of holder/lender
• Use a timeline for accrual periods versus year-
end (see par 10.6 in TL105 for an example)
• Yield to maturity  calculate (TAX4862 only)
187
187
Example: Yield to maturity – s 24J

(TAX4862 only)
Interest of R27 500 for the year was received by

Macaroni Limited in respect of a financial
instrument which Macaroni Limited purchased on
1 September Y1 at a discount of 6% on its face
value of R550 000. Interest is receivable six-
monthly (on 28/29 February and 31 August)
calculated on the face value at 5% per year. The
instrument will mature on 31 August Y3, when
Macaroni Limited will receive the face value plus a
premium of 10%.
Calculate the yield to maturity.
188
188
Example Solution: Yield to maturity – s 24J
Calculate as follows:
• PV = -517 000 (R550 000 - 6%)
• FV = 605 000 (R550 000 + 10%)
• N=6
• P/YR = 2 (HP)
• PMT = 13 750 ((5% x 550 000)/2)
• Comp i = 5.15242% (10.30484% / 2 HP)
Yield to maturity (YTM)
189
189
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Example (s 24J)
(TAX4861 & TAX4862)
On 1 August Y1, Construct (Pty) Ltd (‘Construct’)

entered into an instalment credit agreement for the
purchase of a new concrete mixer truck, to be used in
the company’s manufacturing process. In terms of the
agreement, 12 instalments are payable on a three
month‐basis, commencing on 31 October Y1. The
company made all payments on time as stipulated in
the agreement. The concrete mixer truck was brought
into use on 1 September Y1.
The company has a 31 December year‐end.
Instalments were calculated as follows:
190
190
Example (s 24J)
R
Cash cost (excluding VAT) 810 000
Add: VAT 121 500
931 500
Less: Deposit (192 780)
738 720
Add: Finance charges (YTM = 3.06% per 3 month-period) 155 034
Total 893 754
Instalments per three month-period 74 479

Required:
Calculate the effect on Construct’s taxable income for the Y1 y.o.a.
191
191
Solution section 24J

ICA BIU 1st pmt Yr‐end 2nd pmt
1 Aug 1 Sept 31 Oct 31 Dec 31 Jan
1st Interest (92 days)

2nd Interest
1st Pmt - Interest
R738 720 x 3.06% = R22 605
x 61/92 = R14 988
2nd Pmt - Interest

(R738 720 + R22 605 – R74 479) = R686 846
R686 846 x 3.06% = R21 017
x 61/92 = R13 936
192
192
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Solution section 24J

Section 12C deduction
 R810 000 x 40% (324 000)
Section 24J
 31 October Y1 (R738 720 x 3.06% = (14 988)
R22 605), but may only claim interest
for Sep and Oct (once asset BIU),
therefore R22 605 x 61/92)
 31 December Y1 (interest accrued)

(R738 720 + R22 605 – R74 479) (13 936)
= R686 846 x 3.06% x 61/92
193
193
Interest incurred in respect of debts used to acquire certain

shares is deemed to be in production of income s 24O
• Interest incurred to acquire shares in a local

company is usually not deductible as –
• Local dividends are exempt and therefore not in the
production of income
• INCOME = Gross income – exempt income
• S 24O provides relief if a company issues,
assumes or uses debt to acquire a controlling
interest, directly or indirectly, in an operating
company in terms of an acquisition transaction.
194
194

• An “acquisition transaction” is where:

• Equity shares are acquired
• in an operating company (on date of acquiring those
shares) and after entering into transaction
• acquiring company is a controlling group company in relation to
the company whose shares are acquired, and
• the 2 companies form part of same group of companies (as
defined in s 41(1))
OR
• in a controlling group company in relation to an operating
company (on date of acquiring those shares) that form
part of the same group of companies (as defined in s 41(1)
and after entering into transaction
• the acquiring company is a controlling group company in
relation to the acquired controlling group company, and
• the 2 companies form part of same group of companies (as
defined in s 41(1))
195
195
65
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Definitions:
Operating company:
At least 80% of the aggregate amount received
by/ accrued to the company during a year of
assessment constitutes income (gross income –
exempt income), and
• the company derived the income from a business
carried on continuously, and
• in the course of which goods or services are
provided or rendered by the company for
consideration
2022/03/30 196
196

Definitions:
The determination as to whether the equity
shares represent a qualifying interest must
be done annually on one of the following
measurement dates:
• Equity share held at year-end → determination is
done on the year-end date.
• Equity share disposed of by company →
determination is done on the date of disposal.
197
197

Note:
In terms of the definition of an “acquisition
transaction” the transaction in terms of
which the company acquires equity shares in
another company must be with a company
that does not form part of the same group of
companies as that company
198
198
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Interest on hybrid debt instruments deemed

to be dividends in specie (s 8F) (TAX4862 only)
• Hybrid debt instrument = only an instrument in terms of
which a company owes an amount to another person can
be a hybrid debt instrument. The following instruments are
classified as hybrid debt instruments:
• The company is entitled to or obliged to convert or
exchange the instrument (or part thereof) in any YOA
for shares, unless mv of shares = amount owed in
terms of instrument;
• The obligation to pay an amount so owed on a date or
dates falling in the YOA has been deferred as the
obligation is conditional upon the mv of assets of
company not < than amount of liabilities of company
(obligation to pay based on solvency of company)
• Company owes amount to connected person and has
no obligation to repay within 30 years of issue of
instrument (date liability comes into existence) unless
repayable on demand.
199
199
Interest on hybrid debt instruments deemed

to be dividends in specie (s 8F)
Company paying interest Company receiving

interest (holder)
• Interest paid deemed to • Interest received deemed to
be dividend received –
be dividend paid therefor dividend included in gross
no deduction allowed income (s 8F(2)(a))
(s 8F(2)(b)). • Dividend exemption:
(s 10(1)(k)(i))
(Note: def. of instrument –
holder is a resident company
or non-resident company if
the interest in respect of the
instrument is attributable to a
permanent establishment of
the non-resident company in
South-Africa)
200
200
Transactions
in foreign
currency
201
201
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Foreign exchange (Ss 25D & 24I)
EVERY FOREIGN
EXCHANGE TRANSACTION
UNDERLYING ASSET EXCHANGE ITEM
NON-MONETARY ITEM MONETARY ITEM
Section 25D Section 24I
202
202
Section 25D
• Section 25D is used to convert foreign currency:
• Receipts (examples: Interest received or accrued on a
foreign investment); and
• Expenses (examples: Interest paid or incurred on a foreign
loan or debt, assets or stock purchased)
• Individuals & non-trading trusts, use
• Spot rate on day foreign amount received/accrued, or
• Average exchange rate for year of assessment
• Companies and trading trusts, use
• Spot rate on day foreign amount received/accrued
(Note that par 43(1A) of 8th Schedule contradicts s 25D. Par 43(1A)
allows companies & trusts to use the average rate when disposing
of non-monetary assets in a foreign currency.)
Special rule for s 6quat foreign tax – convert at average rate
for year of assessment. 203
203
Foreign exchange (S 24I)

• Study par 15.2 (excluding 15.2.3 & 15.2.4), 15.3 and 15.4 in Silke
together with this summary
• If either trading stock or an asset is purchased in foreign currency –
convert the cost on transaction date using the spot rate (s 25D) (cost
price)
• If the purchase price is not settled in full on transaction date 
exchange item – s 24I
• If a forward exchange contract (FEC) is obtained  exchange item
• Calculate exchange differences (gains or losses) between:
• the transaction date and either translation date (end of year of
assessment) and / or realisation date (payment date); or
• the translation date and either next translation date or realisation
date
• of the exchange items by making use of the ruling rate
• In terms of section 24I(7) the exchange difference must be deferred
and taken into account in the year of assessment during which the
asset is brought into use.
Trading Stock?
204
204
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Foreign exchange
Transaction Translation Realisation

date date (YE) date
Loan,
advance or Spot rate Spot rate Spot rate
debt
Market‐related
FEC Forward rate FEC rate for Spot rate
remaining period
Goods shipped free-on-board (FOB) – transaction date = shipping date

Goods shipped on a cost-insurance-freight basis (CIF) – transaction date =
shipping date
205
205
Example
Wooden Joy (Pty) Ltd (“Wooden”) is a resident company. Wooden is a registered

VAT vendor (on invoice basis, two‐monthly tax periods ending in January, March,
etc.) and only makes taxable supplies. The company’s primary business is to
assemble and install wooden playground equipment (not classified as a process of
manufacturing) at clients’ premises. Wooden has a December year-end. Wooden
is not a small business corporation as defined.
Wooden ordered two new excavating machines from an American company for
$15 800 each on 16 September 2022. The two excavators were shipped FOB (free‐
on‐board) on 30 September 2022. The machines arrived in South Africa on
15 October 2022 and was cleared immediately. Import duties of R28 750 were
paid, as well as the correct amount of VAT. 25% of the outstanding debt was paid
to the supplier on the date of the safe arrival of the two machines in South Africa.
On 1 November 2022 the two excavators were brought into use by Wooden. On
the same day (1 November 2022), Wooden entered into a four-month FEC in
order to hedge the outstanding purchase price. The outstanding debt was settled
in full on 28 February 2023.
206
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206
Example
Transaction Date Spot rate
Date
$1 = R
16 September 2022 $1 = R15,85
30 September 2022 $1 = R15,80
25% paid 15 October 2022 $1 = R15,95
1 November 2022 $1 = R15,60
$1 = R15,90 (forward rate under
a four‐month FEC)
Year-end 31 December 2022 $1 = R16,05
$1 = R16,25 (forward rate under
a two‐month FEC)
75% paid 28 February 2023 $1 = R16,15
Binding General Ruling No. 7 allows for a four year write-off period on
these types of excavation machines.
207
207
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Example
REQUIRED Marks
Calculate all the implications on Wooden Joy (Pty) Ltd’s

taxable income regarding the acquisition and settlement of
the debt of the two excavation machines for the 2022 year of 9
assessment. Show all calculations and round off all amounts
to the nearest Rand.
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208
Import duty
Example added to cost of
assets, VAT
claimed
Rx: 25% of debt Rx: remaining 75%
Shipped Delivered & of debt
Order BIU Yr‐end Paid
FOB Pd 25%
Tx: Cost – s25D

16 Sept ‘22 30 Sept ‘22 15 Oct ‘22 1 Nov ‘22 31 Dec ‘22 28 Feb ‘23
2 x $15 800 =
$31 600 ($31 600 x 25% = $7 900) x (15.95 – 15.80) loss (S24I)
DEBT 15.85 15.80 15.95 15.60 16.05 16.15
($31 600 x 75% = $23 700) x (15.80 – 16.05) loss (S24I)
1 Nov ‘22 31 Dec ‘22 28 Feb ‘23
FEC 15.90 16.25 16.15

(2 mth FEC)
($31 600 x 75% =$R23 700) x (15.90 – 16.25) gain (S24I)

209
209
Example – foreign exchange - solution

Purchase of the two excavation machines:
2022 Cost of excavation machines:

$31 600 ($15 800 x 2 machines) x R15,80 (s 25D) = R499 280 +
R28 750 (import duties) = R528 030
Section 11(e) allowance = R528 030 / 4 years x 2/12 (22 001)
Foreign exchange differences (section 24I):
Debt:
15 October 2022
$7 900 ($31 600 x 25%) x (R15,80 – R15,95) – Loss (1 185)
31 December 2022
$23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) – Loss (5 925)
FEC:
31 December 2022
$23 700 x (R16,25 – R15,90) – Gain 8 295
210
210
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Example
USING THE SAME INFORMATION AS THE PREVIOUS EXAMPLE, JUST CHANGING THE DATE
THAT THE ASSETS WERE BROUGHT INTO USE
Wooden Joy (Pty) Ltd (“Wooden”) is a resident company. Wooden is a registered VAT
vendor (on invoice basis, two‐monthly tax periods ending in January, March, etc.) and only
makes taxable supplies. The company’s primary business is to assemble and install wooden
playground equipment (not classified as a process of manufacturing) at clients’ premises.
Wooden has a December year-end. Wooden is not a small business corporation as defined.
Wooden ordered two new excavating machines from an American company for $15 800
each on 16 September 2022 The two excavators were shipped FOB (free‐on‐board) on
30 September 2022. The machines arrived in South Africa on 15 October 2022 and was
cleared immediately. Import duties of R28 750 were paid, as well as the correct amount of
VAT. 25% of the outstanding debt was paid to the supplier on the date of the safe arrival of
the two machines in South Africa.
On 1 November 2022, Wooden entered into a four-month FEC in order to hedge the
outstanding purchase price. The two excavators were brought into use by Wooden on
1 February 2023. The outstanding debt was settled in full on 28 February 2023.
211
211
Example
Rx: 25% of debt Rx: remaining 75%
Shipped Delivered & of debt
Order Yr‐end BIU Paid
FOB Pd 25%
Tx: Cost – s25D 1 Feb ‘22

16 Sept ‘22 30 Sept ‘22 15 Oct ‘22 31 Dec ‘22 28 Feb ‘23
2 x $15 800 =
s24I(7) deferred
$31 600 ($31 600 x 25% = $7 900) x (9.95 – 9.80) loss (S24I) unrealised g/(l)
DEBT 15.85 15.80 15.95 15.60 16.05 10.15
s24I(7) deferred
($31 600 x 75% = $23 700) x (15.80 – 16.05) loss (S24I) unrealised g/(l)
1 Nov ‘22 31 Dec ‘22 28 Feb ‘23
FEC 15.90 16.25 16.15

(2 mth FEC)
s24I(7) deferred
($31 600 x 75% =$R23 700) x (15.90 – 16.25) gain (S24I) unrealised g/(l)
212
212
Solution
2022 Cost of excavation machines:
$31 600 ($15 800 x 2 machines) x R15,80 (s 25D) = R499 280 + R28 750
(import duties) = R528 030
Section 11(e) allowance cannot be claimed as the asset has not been
brought into use in 2022 yoa
Debt: 15 October 2022 (section 24I(7)
$7 900 ($31 600 x 25%) x (R15,80 – R15,95) = R1 185 loss that cannot be
claimed as the asset has not been brought into use – defer to 2023
31 December 2022 (section 24I(7))
$23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) = R5 925 loss deferred to
2023
FEC: 31 December 2022 (section 24I(7))
$23 700 x (R16,25 – R15,90) = R 8 295 gain deferred to 2023
213
213
71
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Solution
2023:
Section 11(e) allowance = R528 030/4 years x 11/12 (brought
into use on 1 February 2023) (121 007)
Debt: Deferred – 2022
15 October 2022
$7 900 ($31 600 x 25%) x (R15,80 – R15,95) = R1 185 loss (1 185)
31 December 2022
$23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) = R5 925 loss (5 925)
28 February 2023 (when realised)
$23 700 ($31 600 ‐ $7 900) x (R16.05 – R16,15) = R2 370 loss (2 370)
FEC: Deferred - 31 December 2022
$23 700 x (R16,25 – R15,90) = R 8 295 gain 8 295
28 February 2023 (when realised)
$23 700 x (R16,25 – R16.15) = R2 370 loss (2 370)
214
214
Irrecoverable debt – s24I(4)

• For years of assessment commencing on or
after 1 January 2019:
• If a debt is irrecoverable on realisation date by reason
of:
• Becoming bad, OR
• Results in a loss due to a decline in the market value of the
debt
An exchange gain previously included in income can
be deducted on realisation date and an exchange loss
previously deducted from income should be included
in income on realisation date.
• For years of assessment ending before
1 January 2019:
• If a debt became irrecoverable (reasons were not
mentioned) a gain previously included or loss previously
deducted will be reversed on the date that it became
irrecoverable
215
215
FOREX
s24I(10A)
TAX4862 ONLY
216
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3/30/2022
Section 24I(10A) - Transactions between group

companies or connected persons
• Section 24I(10A) defers unrealised exchange gains

and losses in respect of debts/loans until realised or
conditions below no longer met; if
• The lender and borrower are part of the same group of
companies; or
• The lender and borrower are connected persons
AND
• The loan is not hedged by a FEC or FCOC; &
• No part of debt/loan is current loan/asset for IFRS (note
i.t.o. SAICA syllabus no part of long term loan will be re-
classified as current liability); &
• Loan not directly/indirectly funded by independent party
217
217
Section 24I(10A) - Transactions between group

companies or connected persons
Section 24I(10A) exchange gains/losses

recognised when:
• gain/loss realised (debt/loan repaid);
• or requirements of section 24I(10A) no longer met
Exchange difference calculation:
(exchange rate last day of preceding YOA less
exchange rate on transaction date) x debt/loan
amount
218
218
Example - section 24I(10A)
On 1 January 2022 Watson (VAT vendor) purchased a new

manufacturing machine on credit for €300 000 from
Tsonga (a connected person).
On 1 February 2022 the machine was shipped (FOB).
On 1 March 2022 the machine was cleared by Customs
(customs duty value was R 3 420 000) and on 15 March
2022 the machine was brought into use by Watson.
It was agreed that Watson would pay Tsonga the full

amount of the debt on 31 December 2023. Watson did
not enter into any FEC to serve as a hedge in respect of
the debt. (Year end = 31 March )
219
219
73
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Example - section 24I(10A)
Date Spot rate

€=R
1 January 2022 €1 = R18,00
1 February 2022 (transaction) €1 = R18,05
1 March 2022 €1 = R18,14
15 March 2022 €1 = R18,25
31 March 2022 (year-end) €1 = R18,32
31 March 2023 €1 = R18,37
31 December 2023 €1 = R18,40
(payment/realisation)
Required:
Calculate all the implications on the taxable income of Watson for the 2022 and 2023
year of assessment.
220
220
Solution - section 24I(10A)
2022 - New manufacturing machine

Cost (€300 000 x R18,05) 5 415 000
Customs Duty (R3 420 000 x 10%) 342 000
VAT claimed ‐
5 757 000
Section 12C – R5 415 000 x 40% (2 166 000)
Customs duty isn’t a “cost” of the machine it is only used to
calculate the value for VAT purposes.
Foreign exchange
Debt – not realised, requirements of s24I(10A) met thus
defer to 2023
2023
Debt – not realised, requirements of s 24I(10A) not met.
Payable within 12 months = current liability)
€300 000 x (R18,05 – R18,32) – loss from 2022 (81 000)
Debt – €300 000 x (R18,32 – R18,37) – loss (15 000)
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221
Capital Gains Tax – Par 43 of 8th

Schedule (TAX4862 only)
Par 43 of 8th Schedule deals with the disposal of non-
monetary assets acquired or disposed of in foreign currency.
Par Natural persons or non‐ Determine gain/loss in foreign
43(1) trading trusts if base cost currency
and proceeds in same Gain/loss converted to RAND at:
foreign currency • Spot rate ‐date of disposal; or
• Average rate for year of disposal
Par When par 43(1) does not Determine gain/loss in RAND
43(1A) apply • Base cost ‐ spot rate date of
acquisition or average rate year of
acquisition
• Proceeds – spot rate date of
disposal or average rate year of
disposal
222
222
74
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INTERNATIONAL
TRANSACTIONS
TAX4862 ONLY
223
International transactions (s 31)

Section 31 applies to any affected transaction that leads to a tax
benefit to any party to the transaction.
20% equity or
voting rights
Affected transaction
A transaction concluded between connected persons or
associated enterprises under conditions other than arm’s
length conditions between independent persons.
Connected persons can be cross-border transactions between:

• Resident + non-resident
• 2 non-residents, one of them with permanent establishment in RSA
• 2 residents, one with permanent establishment outside RSA
• Non resident + CFC (CFC’s excluded from the syllabus)
224
224
Section 31 – Connected persons
Connected persons for section 31 refers to the definition

in section 1, with one meaningful disregard in respect
of ONLY financial assistance:
• Companies in the same group of companies but the “at least
70% of equity shares” is replaced by 50% of equity shares or
voting rights (par (d)(i)); or
• Any person (except a company) that alone or together with
connected person directly/indirectly holds at least 20% of equity
shares or voting rights (par (d)(iv)); or
• Any company that holds at least 20% of equity shares or voting
rights if no other company holds majority voting rights (par
(d)(v); or
• Other company managed or controlled by a connected person to
the company or a person connected to such connected person
(par (d)(vA));
A co. that holds 20% will qualify as a connected person for s 31
(financial assistance NOT transfer pricing) regardless of whether
another co. holds majority voting rights.
225
225
75
3/30/2022
Example: connected person S1 & S31
Foreign Co 1 Foreign Co 2
Non-resident companies
20% 80%
SA Co 3
South African company
S 1: Only Foreign Co 2 is a
connected person with SA Co 3.
S 31: Foreign Co 1 & Foreign Co 2 will

both be connected persons with SA Co 3
226
226

Section 31(2):
If an affected transaction leads to a tax benefit for any
party, calculate the taxable income of the person receiving
the benefit by applying arm’s length conditions to the
transaction
Difference in taxable income:
• If resident = company deemed distribution of asset in
specie thus dividend in specie
• If resident = other than company donation
When? last day of 6-month period following the end of the
YOA in resect of which adjustment was made.
Section 31 (5) – (7) - Excluded from the syllabus
227
227

Transfer Pricing
Are the parties a
resident and non-
Has a tax benefit
resident and Yes
arisen?
connected? Section 1
Only allow the South African company to deduct or
include amount equal to amount under arm’s length Yes
transaction ((S31(2))
Difference between actual amount charged/paid and

and adjusted amount treated as follows (S31(3)):
• Natural person – donation
• Companies – deemed distribution of asset in specie
On last day of 6‐month period following the end of the YOA
(year of assessment) in respect of which adjustment was
made.
228
228
76
3/30/2022
Example section 31
Turkey (Pty) Ltd (“Turkey”), a resident company,

sells trading stock with a cost price of R150 000 to
a non-resident connected party, Goose Plc
(“Goose”) for R180 000 when the market value of
the stock is R250 000. Goose is managed and
controlled in a country with a 15% tax rate. Turkey
has a December 2022 year-end.
229
229
Example (s 31) - Solution

Transfer Pricing
Section 31(2) adjustment: R

Gross income – proceeds from sale 180 000
Section 32(2) adjustment (R250 000 ‐ 70 000

R180 000)
Opening stock (150 000)
Taxable income 100 000
Section 31(3) deems section 31(2) adjustment to be
distribution of asset in specie thus dividend in specie and
dividends tax payable = R14 000 (R70 000 x 20%)
230
230
Section 31 – Financial assistance
• An affected transaction can also be financial

assistance provided, for example
• Low/high interest rate levied/paid on loan granted
to/by connected foreign party; or
• Excessive financial assistance provided where the
party would normally qualify for much less financial
assistance.
• Financial assistance includes debt, security or a
guarantee.
231
231
77
3/30/2022
Section 31 – Financial assistance

Are the parties
Has a tax benefit
connected? Section Yes
arisen?
1 & Section 31(4)
Only allow the South African company to deduct an amount equal

to an arm’s length rate of interest.
Only allow the deductible interest to be based on an amount that Yes
an arm’s length lender would have lent (and on the amount that the
South African company would have borrowed in the circumstances).
Difference between actual interest charged/paid and adjusted

interest treated as follows (S 31(3)):
• Natural person – donation
and • Companies – deemed distribution of asset in specie
On last day of 6‐month period following the end of the YOA (year of
assessment) in respect of which adjustment was made.
232
232
Example – Financial assistance
On 1 January 2022 Turkey (Pty) Ltd (“Turkey”), a

resident company received a loan of
R1 000 000 at 20% interest per annum from
Goose Plc (“Goose”), a non-resident company
that holds 21% of the shares in Turkey. The
other shares (79%) in Turkey are held by
Chicken (Pty) Ltd.
Turkey could only qualify for a loan of
R600 000 at 15% interest per annum at all local
banks. Turkey has a December 2022 year-end.
233
233
Example – Financial assistance -

Solution
In terms of section 1, definition of connected persons, Goose and
Turkey are not connected parties BUT section 31(4) states that for
purposes of financial assistance if a company holds at least 20%
shares in another company they will be connected persons even if
another company holds the majority voting rights. This is also
between a resident and non-resident company –thus an affected
transaction.
Interest incurred for 2022:
R1 000 000 x 20% x 365/365 (days) = R 200 000
Reasonable interest applied to a reasonable loan amount:
R600 000 x 15% = R90 000 (allowable deduction for Income Tax
purposes)
Thus excessive interest:
R200 000 – R 90 000 = R110 000 deemed dividend in specie.
234
234
78
3/30/2022
Tax morality,
strategy and
risk
management
• https://www.freepik.com/search?format=s earch&que ry=stra tegy
235
235
Tax morality, strategy and risk

management Silke 35
Study Chapter 35 in Silke (TAX4861 – Only

for reading)
The chapter includes:
• Overview
• Moral and legal responsibilities of taxpayers
• General tax risk management strategy
• Specific tax related risks
• Operation risk
• Compliance risk
• Tax uncertainty or interpretation risk
• Reputation risk
236
236
Define tomorrow.
237
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3/30/2022

Tutorial Letter 105

Learning Unit 7: Learning Unit 8:

Framework for calculation of Taxable Income

LESS: EXEMPT INCOME (ss10 and 10A to 10C) ( XXX )

LESS: ASSESSED LOSS (ss 20 – 20B) (XXX)

LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (XXX)

excess can be carried forward to following year of assessment

Remember – Check the required part of the question, to see if it

General deduction formula

General deduction formula

• Identify & focus the discussion on the main issue(s),

• Refer to case law (TL102)

Prohibited deductions (s 23)

• 23(a) – Private maintenance expenditure

Prohibited deductions (s 23)

• 23C – Cost of assets and VAT Silke 6.9

• Excluding: 23(n), (o)(iii) & (p)

Pre-trade expenditure and losses (s 11A)

• Also read: Interpretation Note No. 51 (Issue 5):

Example - Pre-trade expenditure and losses (s 11A)

A vacant administration building was purchased on 25 January.

What amounts will qualify for a deduction in the YOA?

Example Solution - Pre-trade expenditure and

Transfer costs R30 000

Building New Trade YE

25 Jan Pre-Trade 1 July 31 Dec

R60 000 R33 000

Example Solution - Pre-trade expenditure and

Pre-trade Rental Interest

No set-off of R10 000 against the R43 000 i.t.o. s 11A(2)

Pre-paid expenditure (s 23H)

• Section 23H defers the deduction of certain

Pre-paid expenditure (s 23H)

S 23H not applicable Aggregate of all Pre-paid

Full deduction Full deduction Deduction disallowed

Pre-paid expenditure (s 23H)

• S 23H will NOT be applicable if:

• Aggregate of all amounts limited by this section ≤ R100 000.

Example - Pre-paid expenditure (s 23H)

Maintenance (section 11(d)

Deductible as it is < 6 months after YE

Not deductible as it is > 6 months after YE and

Advertising (transactions occurred in the current YOA):

Discuss whether the advertising expenses incurred are

Integrated Example Solution

In terms of section 11(a), a deduction will be available if

Integrated Example Solution

Integrated Example Solution

Although the rentals are deductible in terms of section 11(a), section

The goods or services are not rendered to the company within 6

The aggregate of the pre-paid amounts exceeds R100 000. In this

Special deductions and allowances

Special deductions and allowances

• Interest repaid to SARS – s 7F • Future expenditure on

Legal expenses – s 11(c)

• S 11(c) allows a deduction of legal expenses

• no deduction will be allowed for legal

Example Legal expenses – s 11(c))

In the current year of assessment the following occurred:

Discuss, with reference to case law and legislation,

Example Solution Legal expenses – s 11(c)