TL105 2022 Slides 4 Per PG

3/30/2022
Tutorial Letter 105 TL105 Topics

2022
TAX4861/2
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
Define Tomorrow.
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Framework for calculation of Taxable Income
GROSS INCOME XXX
LESS: EXEMPT INCOME (ss10 and 10A to 10C)

INCOME
LESS: DEDUCTIONS AND ALLOWANCES
( XXX )
XX TL105
(ss11 – 24P, excluding s 18A & s 20) ( XXX )
LESS: ASSESSED LOSS (ss 20 – 20B) (XXX)
ADD: AMOUNTS TO BE INCLUDED IN TAXABLE INCOME, INCLUDING

XX
XXX
General
TAXABLE CAPITAL GAIN (s 26A)
XX Deduction
Formula &
LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (XXX)
TAXABLE INCOME XX
excess can be carried forward to following year of assessment

Prohibited
Remember – Check the required part of the question, to see if it
requires you to start your calculation with net profit / income deductions
before tax . If it does, IT IS IMPERATIVE THAT YOU DO SO.
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General deduction formula General deduction formula

The general deduction formula is contained in • Exam technique for discussion questions:
• Apply scenario to all elements of the definition
s 11(a) (positive criteria) read with s 23(g) (negative (briefly), but
criteria):
It provides for the deduction of: • Identify & focus the discussion on the main issue(s),
e.g.
• Expenditure and losses • Actually incurred
• In the production of income
• Actually incurred • Capital vs. revenue expense
• During the year of assessment s 11(a)
• Refer to case law (TL102)
• In the production of income • Describe principle in the case law
• Not of a capital nature Capital Allowances • Apply to scenario
• Expended (in full / in part) for purposes of trade. • Conclude

s23(g)
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Prohibited deductions (s 23) Prohibited deductions (s 23)

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

• 23(b) – Domestic or private expenditure • 23(l) – Restraint of trade
• 23(c) – Recoverable expenditure • 23(m) – Expenditure relating to employment or an office
• 23(d) – Interest, penalties and taxes imposed by the Tax Acts • 23(o) – Fines and penalties / unlawful activities
(see s 7F for deduction of interest repaid to SARS)
• 23(q) – Expenditure in production of foreign dividends
• 23(e) – Provisions and reserves
• 23(r) – Premiums in respect of insurance policies against
• 23(f) – Expenditure to produce exempt income
illness, injury, disability, unemployment or death
• 23(g) – Non-trade expenditure
• 23B – Prohibition against double deductions Silke 6.6
• 23(h) – Notional interest
• 23(i) – Deductions claimed against RFLB & RFLWB • 23C – Cost of assets and VAT Silke 6.9
• 23(k) – Expenditure incurred by personal services providers • Excluding: 23(n), (o)(iii) & (p)
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Pre-trade expenditure and losses (s 11A)

TL105 Silke 6.2.1
Pre-Trade expenses • 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
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Example - Pre-trade expenditure and losses (s 11A) Example Solution - Pre-trade expenditure and
Example 6.1 Silke
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 Transfer costs R30 000
capital expenditure
a cost of R250 000. The renovations were completed on 1 July and Renovation costs R250 000
were immediately rented. The landlord’s new trade commenced on ≠ s 11(a)
this date (1 July).
Building New Trade YE
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
25 Jan Pre-Trade 1 July 31 Dec
assessment (Dec YE).
Rates and taxes (qualifying for s 11(a) deduction) in respect of the
building amounted to the following: R60 000 R33 000
• 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
TL105
Pre-paid expenses
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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Pre-paid expenditure (s 23H) Pre-paid expenditure (s 23H)

(Limitation of deductions) (Limitation of deductions)
Silke 6.4
• Section 23H defers the deduction of certain S 23H does not apply, when:
expenditure, actually incurred i.t.o. ss 11(a), Goods received or services rendered
11(c), 11(d) and 11A, where the goods or within 6 months after year end?
services or benefits will only be received after Yes No
the end of the year of assessment
• If s 23H is applicable, then the deduction can S 23H not applicable Aggregate of all Pre-paid
only be claimed to the extent that the expenditure ≤ R100 000
Yes
goods/services are supplied in the current No
year of assessment
Full deduction Full deduction Deduction disallowed
allowed allowed ito s 23H
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Pre-paid expenditure (s 23H)

(Limitation of deductions) Example - Pre-paid expenditure (s 23H)
Silke 6.4
Full Prepaid
• S 23H will NOT be applicable if: expense Portion
• Goods or services rendered within 6 months after year end; R R
Always apply the 6 months test first Rent paid (section 11(a))
OR (prepaid for 4 months after YE) 330 000 x 4/12 months 110 000
Insurance (section 11(a))
• Aggregate of all amounts limited by this section ≤ R100 000. (prepaid for 8 months after YE) 105 000 x 8/12 months 70 000
• Acquiring trading stock – consider s 23F (anti-avoidance)
• Unconditional liability to pay amount imposed by legislation Maintenance (section 11(d)
(prepaid for 10 months after YE) 40 500 x 10/12 months 33 750
Aggregate of pre-payments
→ contra fiscum rule 475 500
• Example 6.7 in Silke.
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 Integrated Example Solution

4862 Exam 2010 adapted 4862 Exam 2010 adapted
Advertising (transactions occurred in the current YOA): In terms of section 11(a), a deduction will be available if
• Tsonga erected a billboard (being a permanent structure) on expenditure or losses is actually incurred in the
its property (next to the highway) at a cost of R300 000. production of income, provided such expenditure and
From 1 May, the day of completion, Tsonga has been using losses are not of a capital nature.
the billboard to advertise its products. The billboard that was erected is capital in nature as it is
• Since 1 December, a second billboard was rented at a permanent structure that provides an enduring benefit,
R15 000 (excluding VAT) per month from Derby (Pty) Ltd. the expense is thus not deductible in terms of
On 1 December, Tsonga paid R171 000 (excluding VAT), section 11(a) – (Rand Mines (Mining & Services) Ltd v
(being R15 000 x 95% x 12 months) as the rental contract Cir or BPSA (Pty) Ltd v CSARS [2007] SCA 7 (RSA)) or
stipulates that the rental is reduced by 5% if paid annually in New State Areas Ltd v CIR).
advance. This was the only pre-payment made by Tsonga
during its year of assessment ended 31 March. The billboard does not qualify for a section 11(e)
deduction, as section 11(e) specifically excludes
permanent structures.
Discuss whether the advertising expenses incurred are
deductible by Tsonga in its current year of assessment.
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Integrated Example Solution Integrated Example Solution

The rental paid for the advertising space will be allowable in terms of Although the rentals are deductible in terms of section 11(a), section
section 11(a) as: 23H limits the deduction of the prepaid portion if:
The expenditure was actually incurred as it was actually paid by
Tsonga.
To determine if the amount was incurred in the production of income, The goods or services are not rendered to the company within 6
case law needs to be explored. months after the end of the year of assessment – in this case it will
be rendered within 8 months after year-end
The purpose of the expense is to advertise the products of the
company and to thereby increase the sale of products. The purpose (1 April to 30 November)
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 The aggregate of the pre-paid amounts exceeds R100 000. In this
South Africa (Pty) Ltd.)) case (R15 000 x 8 x 95%) = R114 000, thus it exceeds R100 000.
The expenditure is not of a capital nature. Tsonga is not acquiring a Therefore, section 23H is applicable to the rent paid.
permanent structure, but is paying for the use of it.
Only R57 000 (R15 000 x 4 x 95%) is deductible in the current year
(New State Areas Ltd v CIR). of assessment (1 December to 31 March).
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Special deductions and allowances

TL105
Special deductions and allowances 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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Special deductions and allowances Legal expenses – s 11(c)

Silke 12.3
• Interest repaid to SARS – s 7F • Future expenditure on • S 11(c) allows a deduction of legal expenses
• Legal costs – s 11(c) contracts – s 24C actually incurred;
• Restraint of trade payments – • Instruments – s 24J (LU 10)
s 11 (cA) & 23(l) • on any claim, dispute or action at law, arising in
• Repairs – s 11(d) • Interest incurred on acquisition the course of trading;
• Bad debt – s 11(i) of equity shares in operating
company – s 24O (LU 10) Does not need to have been incurred in the production of income
• Doubtful debt allowance – s 11(j)
• Fund contributions by employers • Pension, provident & RAF • no deduction will be allowed for legal
– s 11(l) contributions – s11(k) (TL 106)
expenses that are capital in nature;
• Annuities to former employees or • Repayment of employee
partners – s 11(m) • as long as the accompanying compensation
benefits – s 11(nA) & 11(nB)
• Learnership agreements (s 12H) (TL 106)
• Donations – s 18A
or damages are either deductible under
• Assessed losses – ss 20 & 20A
• Variable remuneration – s 7B s 11(a) or constitute income in the
(but accrual aspect - TL 106)
(individuals – TL106) taxpayer’s hands. Example 12.9 Silke
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Example Legal expenses – s 11(c)) Example Solution Legal expenses – s 11(c)

4862 Exam 2009 adapted
The compensation paid of R35 000 will only be deductible if all the
In the current year of assessment the following occurred: requirements of section 11(a), read with section 23(g), are met. The
compensation must be an expenditure or loss, actually incurred, during the
Yum-Yum is a company that manufactures baby food. One of 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.
Yum-Yum’s customers (a 6-month old baby) developed an
allergic reaction to their organic butternut baby food (contrary 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 the results of all the previous research performed by Yum-
To determine whether the compensation paid was in the production of
Yum). The baby had to be hospitalised on 15 July and Yum- income, 2 questions must be asked:
Yum paid, in terms of a court settlement, the hospital bills
• What action gave rise to the expenditure? The production and sale of
amounting to R35 000, as well as the family’s legal expenses baby food gave rise to the expenditure.
of R5 000. • 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.
Discuss, with reference to case law and legislation, (Joffe & Co (Pty) Ltd v CIR (1946 AD) or Port Elizabeth Electric Tramway
whether the R40 000 will be deductible in the hands of Co Ltd v CIR (1936 CPD)
Yum-Yum for tax purposes. The compensation paid was therefore expenditure incurred in the
production of income.
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Example Solution Legal expenses – s 11(c) Repairs – s 11(d)

4862 Exam 2009 adapted Silke 12.4
In determining whether the expense is capital in nature, one must establish
whether it is part of • Repairs must be distinguished from improvements as
• The cost of performing the income-earning operations (which it is in
this case – being related to products sold), or
repairs will constitute a deductible expense, while an
improvement is not deductible.
• The cost of establishing, improving or adding to the income-earning
structure. • Repair (original structure was in need of repair)
(New State Areas Ltd v CIR (1946 AD) includes the following:
• Restoration by renewal
The compensation is not creating an enduring benefit and is a once-off • Replacement of subsidiary part of the whole
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 • Identical materials need not be used
income-producing operations.
• Repair will constitute an improvement if:
Since the compensation meets all the requirements of section 11(a), it will • Reconstruction of the entirety or substantially the whole
be deductible. • The income-earning capacity of the asset has been increased
The legal expenses of R5 000 will also be deductible under section 11(c), • Interpretation Note No. 74 (Issue 2)  recouped if a
since it is not of a capital nature (following the nature of the compensation causal link between the cost of repair and the amount
paid) and the compensation to which it relates is deductible under section
11(a) (section 11(c)(ii)). received.
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Example Example Required

4862 Test 2 2014 adapted 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 REQUIRED Marks
purchase price was R1 250 000. The property only required limited work
before it could be leased.
Discuss, with reference to section 11(d) and case
The first tenant moved in on 1 January (paying a monthly rental of R8 000), law, whether the renovation expenses incurred by
after Reno had affected the following renovations: 9
Reno Vate will be deductible for Income Tax
R purposes during her current year of assessment.
Replacement of damaged carpets with wooden floors 25 000
Installing a security system 35 000
You can assume that all amounts exclude VAT, unless specifically stated
Painting of the exterior and interior walls of the house 12 500 otherwise.
Landscaping the garden (the house did not have a garden 15 000
before, only grass)
Total cost 87 500
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Example Solution Example Solution

The renovation costs will only be deductible if it meets all 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 requirements of section 11(d), namely that it is the income-earning capacity of the asset (Flemming v KBI (1994))
 expenditure actually incurred
 during the year of assessment  Replacement of damaged carpets with wooden floors – this is a
repair, since it is a renewal of a subsidiary part, although the
 on repairs of property replacement material is not identical (CIR v African Products
 occupied for the purposes of trade, or in respect of which Manufacturing Co Ltd (1944))
income is receivable.  Installing a security system – this is not a renewal of a subsidiary part,
it is a new addition and an improvement to the house.
The expenditure was actually incurred by Reno Vate (given)  Painting of the exterior and interior walls of the house – classified as
during the current year of assessment (started on 15 Sept a repair, since it is restored to its original condition.
and was completed in Dec).  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 Doubtful debt allowance – s 11(j)

4862 Test 2 2014 adapted
Silke 12.6
The replacement of the carpets and the painting of the walls might
Section 11(j) allows two different allowance options
qualify for deduction under section 11(d) but only if it is in respect of based on whether a taxpayer applied IFRS 9
an asset in terms of which income is receivable, although income (Financial Instruments) to the debt or not.
was not received when the repairs were done, the section only ADD BACK prior
requires that income is receivable at the time of the repairs being Allowance is claimed if: year allowance
done. claimed
• the debt is due to the taxpayer, and
Conclusion: • it would have been allowed as a deduction under
Thus the R25 000 for the floors and the R12 500 for the painting will
another provision of the Act (implying that it must
have previously been included in the taxpayer’s
be deductible under section 11(d), whilst the cost of the garden and
income)
the security system will be classified as improvements and would be
part of the base cost of the house. • 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) –no

Doubtful debt allowance – s 11(j) -IFRS
IFRS
Silke 12.6 Silke 12.6
Doubtful debt allowance if the taxpayer applies IFRS 9 to Doubtful debt allowance if the taxpayer does
the debt (s 11(j)(i)): NOT applies IFRS 9 to the debt (s 11(j)(ii)):
The doubtful debt allowance is the sum of – 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 • 40% of debt in arrears for 120 days or more,
lifetime expected credit loss in respect of debt plus reduced by the value of any security available in
• Bad debt written off and reported in the financial respect of that debt plus
statements that was not allowed as a section 11(i) bad • 25% of debt in arrears for 60 days or more,
debt deduction and that was included in the taxpayer’s reduced by the value of any security available in
income in the current or any previous year, plus respect of that debt (excluding debt to which
• 25% of the loss allowance relating to impairment in IFRS 9 applies or that is already included in the
respect of debt other than debt that is already 40%).
included in the 40% above.
Example 12.12 Silke
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Restraint of trade payments – s 11(cA) & s 23(l) Fund contributions by employers – s 11(l)
Silke 12.2.1 Silke 12.2.2
• 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 • Employer may deduct amounts contributed for
natural person (or certain labour brokers / personal the benefit of the employees to all approved
service provider) Provided it is included in income i.t.o.
par (cA) or (cB) of gross income
retirement funds (thus, contributions to
benefit funds, i.e. medical aid funds, are no
• The allowance is limited to the lesser of: longer deductible under s 11(l), but deductible
• The amount divided by the number of years of the restraint; under s 11(a), read with s 23(g)).
OR • This does not refer to the amounts deducted
• The amount divided by 3. from employees’ remuneration and paid over to
these funds. It refers to the employer’s
• S 23(l) prohibits the taxpayer from claiming a restraint contributions to these funds.
of trade payment, except as provided for in s 11(cA)
• The deduction is unlimited.
Silke Example 12.1 Silke Example 12.2
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Learnership Agreements - S 12H Learnership Agreements S 12H

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

section 23B (prohibition of double deductions) Type of Allowance No Disability
• Annual allowance learner disability
• Annually for period of agreement
NQF 1 ‐ 6 Annual R40 000 R60 000
< 12 months: apportion for full months
• Completion allowance Completion R40 000 R60 000
• On successful completion of learnership agreement:
• < 24 months: NQF 7 ‐ 10 Annual R20 000 R50 000
• NQF 1 – 6: R40 000 / R60 000 (disabled) (R20 000 +
• NQF 7 – 10: R20 000 / R50 000 (disabled)
• > 24 months: R30 000)
• Completion allowance (above) for that year and each Completion R20 000 R50 000
consecutive 12 month period of that contract
• Thus 2 separate deductions (annual & completion (R20 000 +
allowance)!! R30 000
A ‘learner’ can include an
Silke Example 12.8
apprenticeship (IN 20)
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Example: Learnership Agreements S 12H Example Solution: Learnership Agreements S 12H

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

qualification) enters into a 24-month registered Year 1 (month 1 – 12) Taxable Income
learnership agreement with his employer, Easy Section 12H(2A)(a) annual allowance (R20 000)
Employ (Pty) Ltd on 1 January. Shezi has no (R50 000 allowance if disabled (s 12H(5A))
disability as defined.
Year 2 (month 13 – 24) Taxable Income
Calculate the s 12H allowance(s) available to Section 12H(2A)(a) annual allowance (R20 000)
Easy Employ (Pty) Ltd if Shezi successfully (R50 000 allowance if disabled (s 12H(5A))
completes the learnership agreement on Section 12H(4A) completion allowance of R20 000 for every full
31 December, 24-months later. You can 12‐month period thus R20 000 × 2 (R40 000)
assume that Easy Employ (Pty) Ltd has a (R50 000 × 2 full 12‐month periods = R100 000 (R50 000 x 2) if
disabled (s 12H(5A))
December year-end.
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Allowance in respect of future expenditure

on contracts - S 24C
TL105
Silke 12.11
Qualifying donations – s 18A
• 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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Framework for calculation of Taxable Income Qualifying donations – s 18A

Silke 12.9
GROSS INCOME XXX A question will refer to an “approved PBO/NPO”
LESS: EXEMPT INCOME (ss10 and 10A to 10C) ( XXX )
Deduction available only for qualifying donations
INCOME XX
LESS: DEDUCTIONS AND ALLOWANCES • Qualifying donation = donations to PBO’s undertaking
(ss11 – 24P, excluding ss 18A & 20) ( XXX )
LESS: ASSESSED LOSS (ss 20 – 20B) (XXX)

certain activities as listed in PART II of the 9th
XX Schedule.
ADD: AMOUNTS INCLUDED IN TAXABLE INCOME, INCLUDING
TAXABLE CAPITAL GAIN (s 26A)
XXX • Must have section 18A receipt.
XX
• Deduction is limited to 10% of taxable income
LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (XXX)
before this deduction and excluding lump sums from
TAXABLE INCOME XX
retirement funds and severance benefits.
excess can be carried forward to following year of assessment
• Donations in excess of 10% of taxable income are
Remember – Check the required part of the question, so see if it rolled over and will be allowed as a deductible
requires you to start your calculation with net profit / income. If it donation in the following year (subject to limits).
does, IT IS IMPERATIVE THAT YOU DO SO.
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Qualifying donations – s 18A Example: Donations deduction – S 18A

Silke 12.9 Silke Example 12.15
adapted
• If taxpayer has no taxable income or an Lesego (Pty) Ltd donated R250 000 to an
assessed loss, no deduction can be claimed. It
cannot create or increase an assessed loss. approved PBO and obtained a s 18A receipt
during the prior YOA and made no donations
• Available to natural persons, trusts, CC’s and
corporations. during the current year of assessment. Lesego
(Pty) Ltd had taxable income of R1 850 000 for
Silke Example 12.15
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 Example Solution: Donations deduction S 18A
adapted adapted
Prior year of assessment Taxable Current year of assessment

Prior year of assessment
Taxable
Taxable
Income Income
Income
Taxable income before s 18A deduction 1 850 000
Taxable income before s 18A deduction 1 850 000 Taxable income before s 18A deduction 2 950 000
Less: Deductions ito s 18A (qualifying donations) R250 000
Less: Deductions ito s 18A (qualifying donations) Less:

10% Deductions
x taxable ito s 18A1 850
income (sub‐total) (qualifying
000 = donations + (185 000)
R250 000 p/yr donations
Excess c/f to current c/f)
year of assessment (R250k – R185k = R65k)
R0 + R65
Taxable 000 = R65
income 000 1 665 000
10% x taxable income (sub‐total) (185 000)
10% x taxable income (sub‐total) (65 000)
10% x 1 850 000 = R185 000
10% x R2 950 000 = R295 000
Excess c/f to current year of assessment (R250k –
R185k = R65k) Limited to actual qualifying donations of R65 000
Taxable income 1 665 000 Taxable income 2 885 000

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Assessed losses - s 20
Silke 12.12
TL105
Assessed Losses
>
Allowable
– s 20
deductions
and
allowances
Total
income
= Assessed
losses
carried forward to
following year
Silke Example 12.18 to 12.22
https://www.freepik.com/search?format=search&query=assessed%20loss
53
54
53 54
Assessed losses - s 20
Silke 12.12
TL105
Capital Allowances LU 8
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 56
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55 56
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Capital Allowances & Recoupments Capital Allowances & Recoupments

Silke 13 Silke 13
Capital allowance Sections
Topic Section
Movable assets 11(e), 12B, 12C, 12E Acquisition of  S 1: Definition of a connected person and
Immovable assets 13, 13quin, 13sex the asset depreciable asset
Intellectual property and research and (Cost price)  S 23C: Reducing the cost or market value of certain
11(gB), 11(gC) assets with input tax claimed
development (Not part of syllabus)
11(f), 11(g) –amount will be  Ss 11(e), 12B, 12C, 12E: Cost determinations
provided, 11(h), 12N  S 12N: Deems the lessee to be the owner of
Leases and leasehold improvements improvements to fixed property owned by tax
s 23A, 23G (Not part of the
syllabus) exempt entities
Alienation, loss or destruction (“scrapping”)  S 40CA: Acquisition of asset in exchange for shares
11(o) or debt ( refer to TL107)
allowance
 S 24M: Incurral of unquantified amounts and par
8(4)(a), 8(4)(e) – (eE), 8(4)(k), 19, 39A of 8th Schedule (assets) (TAX4862)
Disposals of and recoupments on assets 20B,
13(3) & par 12A of the 8th Schedule
Recoupment on Leases 8(5)

57 58
57 58
Capital Allowances & Recoupments Capital Allowances & Recoupments

Silke 13 Silke 13
Topic Section Topic Section

Use of the  S 11(e): Wear-and-tear allowance (read with Recoupment  S 8(4)(a): General recoupment provision
asset Interpretation Note 47 / Commissioner’s public notice) (disposal of  S 8(4)(k): Donation, dividend, disposal to
(allowances)  S 12B: Special wear-and-tear allowance (assets the asset or connected person or change of use to trading
reduction of stock
used in production of renewable energy)
debt)  S 8(4)(e), (eA), (eB), (eC), (eD) & (eE), 13(3), par
 S 12C: Special wear-and-tear allowance
65 and 66 of 8th Schedule: Deferred recoupments
 S 12E: Deductions in respect of a small business
 S 19 & Par 12A of 8th Schedule: Concession or
corporation
compromise of debt
 S 13: Deduction in respect of buildings used in a
 S 11(o): Allowance in respect of disposal of
manufacturing process
assets (previously scrapping allowance)
 S 13sex: Residential units
 S 20B: Limitation of losses from the disposal of
 S 13quin: Deduction in respect of commercial certain assets (accrual of consideration)
buildings
 S 24M: Accrual of unquantified amounts and par
 Ss 24I and 25D: Foreign currency transactions 39A of the 8th Schedule (TAX4862)
59  Eighth Schedule: CGT 60
59 60
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TL105 Cost or value of assets – Movable assets

Movable Assets Cost must exclude VAT (if the VAT was claimed as input tax) – s 23C.
Section 11(e) Section 12B Section 12C 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.
61 62
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61 62
Movable Assets Allowances Silke Examples 13.1 - 13.4 Movable Assets Allowances Silke Examples 13.1 - 13.4

Not applicable to a small Not applicable to a small
business corporation business corporation
SBC
(SBC) (SBC) No apportionment (not No apportionment (not No apportionment (not
Not applicable to (s 11(e) may be elected
(s 11(e) may NOT be (s 11(e) may NOT be Apportion (pro-rata)
manufacturing assets for non-manufacturing pro-rata) pro-rata) pro-rata)
elected as a better elected if it’s a better
assets)
option) option)
Residual value – R1
Loose assets < R7 000
Machinery used in the Machinery used in a
written off to R1 (this
production of process of manufacture
small item write-off
All movable assets, renewable energy (bio- or similar process except
does not apply to
except where diesel or bio-ethanol, or for SBC
All assets of SBC assets acquired by
ss 12B, 12C or 12E generation of (Or machinery used for s
lessor for letting
applies electricity) except for 11D research and
purposes)
SBC development purposes –
Assets used in generation Manufacturing assets -
EXCLUDED)
of electricity from 100%
Assets used in the photovoltaic solar energy New / unused – Non-manufacturing
Only the manufacturing Manufacturing assets –
production of renewable not exceeding 1 MW 40/20/20/20 assets - 50/30/20
Mostly movable non- assets of manufacturing new or used and brought
energy – new or used Write-off periods – (megawatt) - 100% Used – 20/20/20/20/20
manufacturing assets, enterprises (or assets into use for the first time
and brought into use for Interpretation Note No. 47 All other assets used in (New / unused for R&D
including non- used R&D – by the taxpayer - 100%
the first time by the the production of purposes – 50/30/20 –
manufacturing assets of EXCLUDED), not assets and
taxpayer, not assets like renewable energy - EXCLUDED)
manufacturing like the office equipment, Non-manufacturing
the office equipment, 50/30/20
enterprises vehicles etc. assets – 50/30/20 (Sec
vehicles etc. 12E(1A))
63 64
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Movable Assets Allowances

Does the asset
belong to a S 12E
Example – Movable Assets
Yes Manufacturing asset (brought into use for the S 12C
SBC? first time by the SBC) – 100% Used – 20/20/20/20/20
Non-manufacturing asset – 50/30/20
Or s 11(e) if more beneficial • Star Ltd acquired Machine A (a second-hand machine)
No 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
Is it a manufacturing
asset? Yes Plant / machinery – S 12C – new/used? R3 000 000 and brought it into use in its manufacturing
May NOT elect s 11(e) if its more beneficial
process on 15 December Y4. Star Ltd spent an
additional R50 000 on installing machine B. New – 40/20/20/20
No • 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
Is it used for When doing capital allowances and (both amounts not claimable under s 11(a)).
production of recoupments – always check for the following
Yes S 12B Write-off over remaining period
- Manufacturing asset, or used for production
renewable energy?
of renewable energy?
- Connected persons (input tax claimable?) Calculate the allowances Star Ltd may claim under s
- New or used asset
- Replacement of one asset with another asset
12C in its years of assessment ending at the end of
No - SBC December Y4, Y5, Y6 and Y7 (ignore VAT).
- VAT in purchase price
- Used for part of the year (s 11(e))
Movable assets – s 11(e) – wear-and-tear allowance
65 66
65 66
Example Solution – Movable Assets Example Solution – Movable Assets
Year ended 31 Dec Y4 Year ended 31 Dec Y5

Machine A: Machine A:
Section 12C allowance (used – 20%) S12C allowance (20% of R1 500 000 = R300 000, plus
(20% of R1 500 000) ........... (R300 000) Moving cost (R10 000) – deductible in full. As machine A
is written off in full in the Y5 year,
Machine B: the full amount will be claimed.................(R310 000)
Section 12C allowance (new & unused – 40% in 1st year BIU) Machine B:
(40% of (R3 000 000 + R50 000 (installation cost included)) S12C allowance (R610 000 (20% of R3 050 000) plus
– the allowance is granted in full even though the R20 000 (⅓ of R60 000)
machine was used for only part of the year) .... (R1 220 000) 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)
67 68
67 68
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Example Solution – Movable Assets Example – Movable Assets

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

Year ended 31 Dec Y6 and Y7 1 September Y1. Its year of assessment ends on the last day of
Machine A: December each year. Electra Ltd acquired non-manufacturing
machinery on 15 September Y1 for R1 000 000, which was
Fully written off 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
Machine B: operations. On 29 May Y2, Electra Ltd moved to bigger premises
and incurred moving costs amounting to R50 000 in respect of the
Section 12C allowance (R610 000 (20% of manufacturing machinery and R30 000 in respect of the non-
R3 050 000) plus R20 000).… (R630 000) manufacturing machinery.
Write-off over remaining period
100%
Calculate the allowances Electra Ltd can claim during the Y1, Y2
and Y3 years of assessment.
69 70
69 70
Example Solution – Movable Assets Example Solution – Movable Assets
31 December Y1 R 31 December Y3
Allowance in respect of non-manufacturing machinery (Year 1 = 50%)
(s 12E(1A)) [R1 000 000 x 50%]................................................(500 000)
Allowance in respect of non-manufacturing machinery
Cost of manufacturing plant (100% deduction allowed in the first year) acquired during Y1
(s 12E(1)) [R1 250 000 x 100%]........................................... (1 250 000) (Year 3 = 20%) (s 12E(1A)) [R1 000 000 x 20%] (200 000)
31 December Y2
Allowance on non-manufacturing machinery acquired during Y1
Deduction for remaining moving costs incurred during Y2
(Year 2 = 30%) (s 12E(1A)) [R1 000 000 x 30%] ......................(300 000) on non-manufacturing machinery (remaining moving costs
Deduction for moving costs: written off in full as final allowance is claimed on asset in
Manufacturing plant (deduct in full as asset written-off in full) Y3 (R30 000 – R15 000)(s 12E(3)(a)) …………....(15 000)
(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 72
71 72
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TL105 Immovable Property

Silke 13.4
Immovable property allowances 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

https://www.shareicon.net/tag/manufacturer
https://www.iconfinder.com/icons/395060/city_homes_houses_property_real_estate_residence_village_icon#size=128 buildings
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https://www.policyholderpulse.com/category/recoupment/ 73 74
73 74
IMMOVABLE PROPERTY ALLOWANCES Manufacturing buildings (factories)

Commercial buildings (offices, shops) Residential units (RU)
Section 13 Section 13quin Section 13sex

Manufacturing buildings (factories) Commercial buildings Residential units Section 13 Section 13quin Section 13sex
(offices and shops) (Must own at least 5 units)
Erected by the taxpayer OR purchased from a person New and unused New and unused Erected/purchased (incl 2nd Erected/purchased
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) hand)/ purchased new New AND Unused
Owned OR on section 12N
Owned OR on excess leasehold improvements OR Owned OR on section 12N leasehold
section 12N leasehold improvements (1 Jan 2013)
leasehold improvements (1 Jan
improvements (1 Jan 2013)
Owner At least 5 units
2013)
Used wholly or mainly in the production of income and for purposes of trade From 1 Jan 2013 includes s12N leasehold improvements
From 1 October 1999 (Manufacturing) From 1 April 2007 From 21 October 2008
Excess of leasehold Section 12N
5% on residential units
5% 5% improvement Leasehold improvements on exempt
10% on low‐cost residential units
Calculate on COST less any deferred recoupment institutions property (i.e. government
and portion deductible as leasehold improvements Calculate on COST property)
See Silke example 13.8
Leasehold improvement disallowed
Cost = cost to the taxpayer Cost = lesser of actual cost incurred or market value if purchased
(s11(g))
Cost includes VAT (input tax not Qualifies for an allowance i.t.o.
Cost excludes
claimable)
qualifying VAT input (section 23C)
(exempt purposes)
section 13 or 13quin
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 76
acquisition or cost of acquisition of improvement acquired OR 30% of cost of acquisition
75 of improvement
75 76
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Immovable Property
Manufacturing building allowance – s13
Section 13 Section 13quin Section 13sex Silke 13.4.1
Erected/purchased (incl 2nd Erected/purchased • Buildings used in process of

hand)/ purchased new New AND Unused manufacturing or similar process – i.e.
Cost less deferred factory buildings
Cost = lesser of actual cost or market value
recoupment (s 13(3))
Excluding VAT (vendor) Including VAT • Erected by taxpayer OR purchased
less leasehold improvement from a person entitled to the
(s11(g)) allowance OR purchased as a new
excluding cost of land
building
Mainly
• Used wholly or mainly in process of manufacture = >50%
100% of full cost price
Erected 100% of cost price
qualifies • From 1 October 1999 – rate of allowance is 5% p.a. (If
purchased, different rate might apply – same as seller)
Part of a building purchased/acquired 55% of cost price
NB!NB!NB!
NO apportionment
Improvements purchased/acquired 30% of cost price Straight line –
NOT pro-rata
Rate 5% +5% Low‐ cost RU 78
77 78
Manufacturing building allowance – s13 Example - Manufacturing building allowance – s13

Silke 13.4.1
• Cost of building = cost (including Factory buildings:

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

allowance – s13 allowance – s13
Old Factory building: R R New Factory building: R R

Cost – 1 Aug Y1 2 100 000 Cost – 1 May Y5 3 000 000
Section 13(1) allowance Y1 to Y4 Less: Section 13(3) deferred recoupment (525 000)
(R2 100 000 x 5% x 4 years) (420 000)
2 475 000
Section 13(1) R2 100 000 x 5% (Y5) (105 000) (105 000)
Section 13(1) allowance
Tax value 1 575 000
(R2 475 000 x 5%) (123 750) (123 750)
Less: Selling price limited to cost (2 100 000)
Tax value 2 351 250
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 82
81 82
Commercial building allowance – s 13quin Commercial building allowance – s 13quin

• Buildings used for trade purposes – • Cost of building = < actual cost or
i.e. offices, shops etc. – excluding cash cost under arm’s length
residential accommodation transaction, including direct cost of
• Erected OR acquired new by the acquisition, improvement or erection
taxpayer (including improvements) UNLESS a part of a building was
Mainly acquired (not erected) – then cost
• Used wholly or mainly to produce income in the = >50%
will be:
course of taxpayer’s trade • 55% of acquisition price if a part is acquired, and
• Allowance is 5% p.a. • 30% of acquisition price if an improvement part is acquired.
Straight line –
NOT pro-rata
83 84
83 84
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Example - Commercial building allowance – s 13quin Example Solution - Commercial building

allowance – s 13quin
Administrative building: Administrative building: R

The administrative building was erected at a cost Cost – Y1 1 500 000
of R1 500 000 during the current year (Y1) of Section 13quin allowance
5% x R1 500 000 (75 000)
assessment. The building was brought into use
on 1 December Y1. Tax value 1 425 000
full allowance, even though
The year-end is 31 December. only used for part of year
Income Tax implications?
85 86
85 86
Residential units allowance – s 13sex Residential units allowance – s 13sex

• 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
Immovable asset Silke Section • Allowance is: Straight line –
NOT pro-rata
Manufacturing buildings (factory buildings) 13.4.1 13 – 5% p.a. on residential units; or
– 10% p.a. on low-cost residential units
Commercial buildings (offices, shops etc.) 13.4.5 13quin
Residential units 13.4.3 13sex • 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.
87 88
87 88
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Residential units - Definitions Residential units - Definitions

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

• A stand alone unit (a building qualifying as a
• a building or self-contained residential unit in SA) with a cost not exceeding
apartment R300 000 (excluding the cost of land and bulk
infrastructure) on which the owner does not charge
• mainly used for residential
a monthly rental of more than 1% of that cost (plus
accommodation, the proportionate cost of the land and bulk
but excludes infrastructure)
• An apartment (residential unit in a building in SA)
a building or apartment used by a with a cost not exceeding R350 000 on which the
hotel keeper in his trade. 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.)
89 90
89 90
Example - Residential units – s 13sex Example Solution - Residential units – s 13sex

Silke Example 13.10
adapted
Flats: 31 October Y1:
On 15 January Y1, TDK (Pty) Ltd bought six Section 13sex applicable?
brand new flats in a residential building • > 5 units owned and used in trade in South Africa
(consisting of 10 units) directly from the • Therefore s 13sex applies as a part is acquired
from a developer
developer at a total cost of R650 000 (incl. VAT) • S 13sex(8)
• R650 000 x 6 units × 55% x 5%
each. All of these residential units were rented
Include VAT
out, effective from 1 February Y1. TDK (Pty)
Ltd is a VAT vendor. • S 13sex(1) allowance = R107 250
Calculate the allowances on the flats for the year

ended 31 October Y1.
91 92
91 92
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Example - Residential units (low-cost) – s 13sex Example Solution - Residential units (low-cost)
– s 13sex
Residential buildings: Residential buildings (s 13sex):

Watson Ltd, registered vendor, owns seven flats. Two of Section 13sex applicable?
• At least 5 units owned in RSA
these flats are occupied by employees free of charge o Therefore s 13sex applies, but are they low-cost residential units?
while the other five flats are rented out for R2 500 each
per month. Including VAT
Low-cost residential units?
Watson Ltd bought these seven flats in a newly erected • Cost of units R210 000 x 115/100 = R241 500 (input tax not claimable
building (consisting of 20 flats) from the developer (exempt supply) as residential dwellings); therefore less than R350 000
(registered vendor) on 1 March Y1 at a total cost of • 1% of cost (R241 500) = R2 415 (compare to rental)
R210 000 each (excluding VAT). The flats have been • 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
rented out immediately, i.e. as from 1 March Y1. The section 1.
year-end is 31 March. Only part of building acquired therefore cost limited to 55% of cost.
Calculate the allowance on the flats for the year ended
31 March Y1
93 94
93 94
Example Solution - Residential units (low-cost) TL105

– s 13sex
Intellectual property allowances
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)
95 96
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95 96
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Intellectual property allowances Intellectual property allowances –

obtain or acquire S 11(gC)
Intellectual property acquired / developed

• Obtain or acquire certain intellectual
property, excluding trademarks, used in
Obtain / Acquire
Extension / renewal /
registration
RESEARCH &
DEVELOPMENT (R&D)
RESEARCH &
DEVELOPMENT
production of income,
(excluding (R&D)
(including
trademarks)
trademarks)
(scientific or technological
– refer s11D(1)) • Brought into use for the first time for the
S 11(gC) - is used in Capital expenses
the production of
S 11(gB) - is used in
the production of Operational (incl certain Sections 12C & 13 purposes of trade
income capital) expenses
income
Section 11D • Expenditure ≤ R5 000 = deduct in full in year brought
New or unused R&D
into use
Brought into use 150% deduction of
100%
for the first time expenditure actually
incurred directly and solely
plant or machinery
(50:30:20 – s12C(1)(gA) • Expenditure > R5 000
• ≤ R5 000 –
iro R&D, in the production & 12C(1)(h))
deduct in full
These expenses will of income and in the – 5% per annum of cost of any invention, patent, copyright (≠
• > R5 000
10% for a design
normally not be carrying on of a trade
(s11D(2))
Building used wholly or
mainly for R&D (5% -
purchase trade mark)
deductible under s 11(a)
5% for others as it is of a capital s13(1)) – 10% per annum of any design/similar property
(patent, invention nature OR not used in Minister of Science and
or copyright) the production of Technology approval – NOT pro-rata
income required (s11D(9))
• NOT pro rata
97 98
97 98
Intellectual property allowances – TL105

continued
Silke 13.8.1
Leases
• 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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99 100
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Leases Lease premium – s 11(f)

Silke 13.7.1
• Lease premium – allowance ito s 11(f) Definition:

Silke 13.7.1 • Lease premium is a consideration of the
• Leasehold improvements – allowance ito same nature as rent passing from the
s 11(g) Silke 13.7.2 lessee to the lessor over and above or in
• Relief for lessor – allowance ito s 11(h) lieu of rental payments (CIR v Butcher
Brothers)
– Due to the fact that lease premiums paid by lessees and
leasehold improvements effected by lessees are included in Lessor:
full in the gross income of the lessor at the beginning of the • Lease premiums included in gross income – par (g) of
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)
gross income
(example 13.18 in Silke).
– Note that the amount of relief will be provided in a
question.
101 102
101 102
Lease premium – s 11(f) Leasehold improvements– s 11(g)

Lessee: Lessor:
• Must be incurred in the production of income or • Include value (as stipulated in the contract) of
income to be derived therefrom AND taxable in leasehold improvements in Gross Income – per
the lessor’s hands par (h)
• Allowable deduction – s 11(f)
• Starting in year in which premium is paid
Lessee:
• Premium deductible in annual instalments
• Must be incurred in the production of income or income to be
• Over lease period (limited to 25 years) derived therefrom AND taxable in the lessor’s hands
• INCLUDE probable extension periods • Allowable deduction – s 11(g) (obligation ito agreement)
• Apportioned for part of year (pro-rata) – from date of – Lessee may elect s13(1) instead of s11(g) as neither of the sections prescribe
payment a specific sequence
NOTE: Lease premium vs lease rental payments in If NOT taxable in lessor’s hands – see s 12N
advance (ss 11(a) & 23H) Silke Example 13.16
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103 104
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Leasehold improvements– s 11(g) Example - Leasehold improvements (s 11(g))

Silke 13.7.2
Factory building lease:

Lessee:
01/05/Y1 obtain right of use
• Cost as specified in contract - spread over 4 months
remaining lease period (max. 25 years) 01/09/Y1 complete improvements
• Remaining period = Original period minus 01/10/Y1 improvements brought into use
period from date of right of use until date of 31/12/Y1 year of assessment ends 3 months
completion of improvements plus renewal 15 yrs = 15 x 12
period = 180 mths
Contract period = 15 years;
• Pro-rata for part of year as from date brought into use
Contract price R1 500 000
• Extension periods – Renewal periods are taken into
account Amount actually incurred on improvements R2 000 000)
• 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
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105 106
105 106
Example Solution - Leasehold improvements Deductions iro improvements not

(s 11(g)) owned by taxpayer S 12N
Silke 13.7.4
Allowance (s 11(g): 3/12 Lessee:

R1 500 000 • Lessee effects and completes
(180 mths – 4 mths) X 3 = R25 568 (s 11(g)) improvements to leased property.
• Uses property for production of income or
If period = 26 years in this example, then
15yrs – 4 mths = 176 mths income is derived there from.
remaining period is limited to 25 years.
Lessor:
Allowance (s 13): • Lessor: government or certain tax exempt entities.
S 13 allowance on the excess cost not qualifying for the
s 11(g) S 12N deems lessee to be the owner of the improvements
R2 000 000 – R1 500 000 (s 11(g)) = R 500 000 • If s 12N is applicable → for purposes of any deduction ito s
R 500 000 x 5% = R25 000 (s 13 - deduction) 12B, 12C, 13, 13quin & 13sex lessee is deemed to be the
owner
Silke Example 13.19
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TL105 Recoupment – s 8(4)(a)

Recoupments 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
https://w ww.freepik.com/search?format=search&query=recoupments 109 110
109 110
Disposal (or donation) of an asset Example - Disposal (donation) of assets

Silke 13.10.1
• Allowance asset, is either disposed of (sold / distributed) or R R
donated (s 8(4)(k)) → the allowances that were previously
Cost price (purchased after 1/10/2001) CP 100 000
allowed as deductions against income, can be recouped (added
back to taxable income). Note that if there is a change of use and Less: Wear‐and‐tear allowances w+t (80 000)
Tax value TV 20 000
assets are now held as trading stock, this section will also apply
Selling price SP see 
• 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) Yes recoupment ‐ s 8(4)(a) /
– if expected useful life of asset ≤ 10 years and asset not sold to connected Is SP > TV? s 8(4)(e) / 13(3)
person. No scrapping ‐ s 11(o) (if elected)
• All previously allowed allowances are recouped ito either s 8(4)(a) Recoupment:
or s 8(4)(e), (eA)-(eE) or 8(4)(k), except:
Is SP > CP?
– If section 13(3) is elected (iro qualifying buildings)
(limiting recoupment to w+t
• Section 8(4)(e) - deferred recoupment, if there is a replacement Yes ‐‐‐‐‐‐‐> recoupment = CP minus TV
previously allowed)
asset and the taxpayer has elected that par 65 or 66 of the 8th
Schedule must apply, then s 8(4)(e) is applicable. No ‐‐‐‐‐‐‐> recoupment = SP minus TV
111 112
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Example - Disposal (donation) of assets Example – Allowances and Recoupments
Recoupment
& Cap Gain
Recoupment Scrapping On 1 October Y2, Fast Feathers Ltd
R R R (December year-end) sold a manufacturing
  
70 000 5 000
machine to Slow Feathers (Pty) Ltd (its
Selling Price (SP) 130 000
100% subsidiary) for R1 500 000 (when
Lower of CP or SP 100 000 70 000 5 000 market value was R1 800 000). Fast
Less: TV (20 000) (20 000) (20 000) Feathers Ltd originally bought the new
Recoupment s8(4)(a)/
(Scrapping s11(o)) 80 000 50 000 (15 000)
machine for R3 000 000 on 1 March Y1.
Proceeds (SP less recoupment) 50 000 20 000 5 000 Calculate all the tax implications of the sale
Less: Base cost of the machine for Fast Feathers Limited for
(CP less allow claimed) (20 000) (20 000) (5 000)
the Y2 year of assessment.
Capital gain (Proceeds – BC) 30 000 Nil Nil
113 114
113 114
Example Solution– Allowances and Recoupments Example – Allowances and Recoupments
Year ending 31 December Y2 - Fast Feathers Ltd On 1 October Y2, Fast Feathers Ltd (December
SP, R1 500 000, but sold to a connected person, it is deemed to have year-end) sold a manufacturing machine to Slow
been sold at MV at date of sale, R1 800 000 (1 October Y2) (s Feathers (Pty) Ltd (its 100% subsidiary) for
8(4)(k)).
R1.5 mil (when market value was R1.8mil). Fast
Recoupment in respect of sold machinery under s 8(4)(a):
Feathers Ltd originally bought the new machine
• R1 800 000 (value (proceeds) in terms of s 8(4)(k)) for R3 000 000 on 1 March Y1.
Less:
If the market value on 1 October Y2 was R3 200 000
• 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 Calculate all the tax implications of the sale of
R1 800 000 the machine for Fast Feathers Limited for the Y2
Recoupment of (R1 800 000 – R1 200 000) year of assessment.
= R600 000 → Taxable income
115 116
115 116
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Example Solution– Allowances and Recoupments Recoupment – s 13(3)

Silke 13.4.1
Year ending 31 December Y2 – Fast Feathers Ltd
SP, R1 500 000, but sold to a connected person, it is deemed to • The annual allowance on buildings and
have been sold at MV at date of sale, R3 200 000 (1 Oct Y2) improvements is subject to recoupment ito
(s 8(4)(k)). s 8(4)(a) EXCEPT if the taxpayer has
Recoupment in respect of sold machinery under s 8(4)(a): elected s 13(3) to apply.
• 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 • If elected, the recoupment is not included in taxable
of R1 800 000 claimed. income, but set off against the cost of a replacement
Slow Feathers (Pty) Ltd building, provided:
• As the machine was bought from a connected person, Slow – Building purchased or erected within 12 months from date of
Feathers (Pty) Ltd can only claim the s 12C allowance of 20% recoupment (event); and
(as it is a second-hand machine). – The replacement building qualifies for annual allowance under
• The 20% will be claimed on the lower of cost or cash cost in s 13(1).
arm’s length transaction (normal section 12C cost rules);
therefore R1 500 000. • Any excess over the cost of the replacement building is
recouped ito s 8(4)(a).
117 118
117 118
Example – Recoupment s 13(3) Example Solution - Recoupment s 13(3)
As a result of an insurance claim following the destruction of Cost of erection of the further building (factory) R1 600 000
his leased premises (factory) by fire, lessee has enjoyed a
recoupment of past allowances claimed on the cost of the Portion of the cost subject to the annual allowance:
destroyed building (factory) amounting to R500 000.
The untaxed recoupment will therefore be:
Tshlaene erects a further qualifying building (factory), this
recoupment is available for set-off against the cost of the Cost of further building R1 600 000
further building instead of being taxed immediately. Portion of cost deductible under s11(g) (R750 000)
The cost of the newly erected building amounts to R1.6 mil. R850 000
Calculate the allowances on this building if the portion of the Recoupment arising from prior building (s13(3)) (R500 000)
cost of that building deductible under s 11(g) (obligation to Cost on which annual allowance is based R350 000
effect improvements) is R750 000.
The taxpayer will elect any option available to him to minimise his Annual allowance (s 13(1)) (5% of R350 000) (R17 500)
tax liability.
119 120
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Example Solution - Recoupment

Recoupment – s 8(4)(e)
Assume the Lessor is a municipality and erected office building Silke 13.10.3
Cost of erection of the further building (offices) R1 600 000

• Capital gain is either deferred in full (non-
Portion of the cost subject to the s13quin allowance if erected
depreciable assets) until date of sale or
on property owned by tax exempt entity (s12N):
capital gain and recoupment spread over
The untaxed recoupment will therefore be: the same period as the replacing asset is
written off (depreciable asset), if taxpayer
Cost of further building R1 600 000
made election ito par 65 or 66 of the 8th
Portion of cost deductible under s11(g) - none (Rnil)
Schedule.
R1 600 000
• Par 65 - involuntary disposal of asset other than financial
Recoupment arising from prior building (no s13(3)) Rnil
instrument (expropriation, loss or destruction) & acquire
Cost on which annual allowance is based R1 600 000
replacement asset - defer capital gain
Annual allowance (s 13quin) (5% of R1 600 000) (R80 000) • Par 66 – voluntary disposal of asset subject to a deduction
Recoupment added to taxable income (8(4)(a)) R500 000 ito s 11(e), 12B, 12C, 12E and proceeds are reinvested in
replacement asset(s) - defer recoupment & capital gain
If office building is erected on leased land and s 12N is not applicable, then NO s 13quin ALLOWANCE
NOT s13/13quin/13sex
121 122
121 122
Roll-overs: Para 65/66 Recoupment – s 8(4)(e)

Involuntary disposals (Par 65) Re-investment in replacement assts Silke 13.10.3
(Par 66)
If a person disposes of an asset • Contract for replacement asset concluded
Involuntary disposal (operation of law, theft or Replaced asset qualified for capital allowances
within 12 months & asset brought into use
destruction) & proceeds accrues to taxpayer (e.g. under ss 11(e), 11D(2), 12B, 12C, 12DA, 12E, 14, within 3 yrs
insurance) - (Movable & immovable assets) 14bis (Movable assets)
Proceeds =/> base cost of the asset (Proceeds & base cost as defined in 8th schedule)
• If proceeds ≥ base cost and depreciable
asset:
FULL amount =/> receipts & accruals from the disposal to be expended to
acquire one or more replacement assets
• Capital gain per year =
Replacement assets = assets contemplated in s 9(2)(k) or (j)
X
Capital allowance in year on replacement asset
Capital Gain
Contracts for the acquisition of the replacement asset/ assets to be concluded Total cap allowance (cost) of replacement asset
within 12 months after the disposal of the asset
Replacement asset to be brought into use within three (3) years of the disposal • Recoupment per year = same % that allowance on
of the asset and that asset is not deemed to have been disposed of and replacement asset is calculated at
reacquired by that person Silke Example 13.32 – 13.34
123 124
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Example - Recoupment Example Solution - recoupment

Silke Example 13.32 Year ending 31 December Y5
During the Y5 year of assessment, Diverse Ltd’s S 12C allowance on new plant and machinery
manufacturing plant and machinery was destroyed in a fire. (40% × R2 000 000) ........................................ (R800 000)
The plant and machinery qualified for the accelerated s12C Recoupment of destroyed plant and machinery – deferred in
allowance (fully written off in Y4).
The company was insured, and received an insurance
accordance to allowance on new asset
payment of R1 800 000 in the same year of assessment (Y5). R700 000 × R800 000/R2 000 000 (or R700 000 × 40%)
The amount was immediately used to fund the purchase of a ............................................................................ 280 000
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 Years ending 31 December Y6, Y7 and Y8
assessment ends in December.
S 12C allowance on new plant and machinery purchased
Y5 (20% × R2 000 000).................................. (400 000)
Calculate the allowances and recoupments with regard to the
above if the company elected the application of par 65 of the Recoupment of destroyed plant and machinery – deferred in
Eighth Schedule (ignore capital gains tax and VAT). accordance to allowance on new asset
R700 000 × R400 000/R2 000 000 (or 20% × R700 000)
......... .... 140 000
125 126
125 126
Example - Recoupment Example Solution - recoupment

Silke Example 13.33
Recoupment amounted to R250 000:
During the Y1 year of assessment, Brando Ltd’s manufacturing Recoupment allocated to machine B:
machine A was destroyed by a fire. Manufacturing machine A R250 000 × R1 750 000/R3 750 000 = .......... R116 667
qualified for the accelerated s 12C allowance. The company was (This part of the recoupment will be deferred in
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 accordance to the allowance on machine B, thus
made. 40:20:20:20 over the next 4 years.)
Brando Ltd used the insurance amount received to immediately
replace manufacturing machine A with a similar, but smaller, new Recoupment allocated to office building:
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 R250 000 × R2 000 000/R3 750 000 = .......... R133 333
block. (This part of the recoupment will be deferred in
The company elected that the provisions of par 65 of the Eighth accordance to the allowance on the office block
Schedule be applicable to the sale. (s 13quin) at 5% over the next 20 years.)
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.)
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Recoupment – Hired assets – s 8(5) Recoupment – Hired assets – s 8(5)

Silke 13.10.6 Commencement of lease Silke 13.10.6
• When rent (or lease payments or a lease Rental/lease payments allowed as deductions
premium) has been paid for the right of use or
occupation of movable or immovable property; Termination of lease
and
• the amount has been allowed as a deduction for Asset acquired by lessee or Asset not acquired but continuance
Asset returned to lessor
tax purposes; and the asset has been either: other person of use by lessee
• returned to lessor (no tax implications); OR 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
• acquired by taxpayer and rentals paid are taken into consideration price consideration
payment
10%) value
towards the settlement of the purchase price of the property (s 8(5)(a)) ;
OR No further normal Amount so applied
Excess of market value
Deemed re- No deemed
taxed as deemed coupment of fair
• acquired by taxpayer for no or inadequate consideration (s 8(5)(b)); tax implications
recoupment
over consideration taxed
as deemed recoupment in
market value
recoupment
OR (section 8(5)(a))
hands of person acquiring
(section 8(5)(bA))
asset (i.e. lessee or other
• continued to be used at no or nominal rent (s 8(5)(bA); OR person) (s8(5)(b))
• continued to be used at rent payments > nominal rent (no deemed

recoupment).
Deemed recoupment limited to rental
deductions allowed
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129 130
129 130
Example - Hired assets – s 8(5)(bA) Example - Hired assets – s 8(5)(bA)
Crock Earthmoving Equipment is a company Since 1 April 2019, Crock Earthmoving Equipment leased a
delivery truck (with a cost price of R780 000) from Rentals
that manufactures earthmoving equipment (clas- Limited, a non-connected company, for R25 000 per month in
sified as a process of manufacture by SARS) terms of a 3-year lease agreement. The agreement stated
that Crock Earthmoving Equipment will be permitted to
that is used both locally and internationally by continue using the delivery truck at the end of the 3-year
mining and other construction companies. 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
The following transaction relate to the 2022 year 1 April 2022), if applicable.
of assessment ending 31 December 2022 (all
REQUIRED:
amounts exclude VAT):
Calculate the Income Tax implications of the above
transaction for Crock Earthmoving Equipment (Pty) Ltd for its
2022 year of assessment.
131 132
131 132
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Example Solution - Hired assets (s 8(5)(bA)) Example Solution - Hired assets (s 8(5)(bA))
Rental payments until 31 March 2022: 3 x R25 000 (75 000) But a s 8(5) recoupment, since the annual rental of R36 000 (R3 000
Rental payments from 1 April ‐ allowed under s 11(a) x 12) payable from 1 April 2022 is less than 10% of the fair market
(R3 000 x 9) (27 000) value determined above (10% x R399 360 = R39 936), the rental is
Determination of the fair market value of the delivery truck: deemed to be nominal and Crock Earthmoving Equipment is
deemed to have acquired the delivery truck for no consideration for
Cost to Rentals Limited 780 000
purposes of s 8(5)(bA).
Less: 20% depreciation on the reducing balance The company must include in its income the lesser of the fair market
method per full year (s 8(5)(bB)(i)) value of R399 360, or rentals previously deducted of:
2020: (R780 000 x 20%) (156 000)
624 000 R900 000 (36 x R25 000) (s 8(5)(b) read with s 8(5)(a)) 399 360
2021: (R 624 000 x 20%) (124 800) S 11(e) allowance – R399 360/2 x 9/12 (149 760)
499 200
2022: (R499 200 x 20%) (99 840)
Deemed fair market value 399 360
133 134
133 134
Alienation, loss or destruction

allowance - s 11(o)
Silke 13.11
TL105 • Elected by taxpayer (but not if sold to

connected person!)
• Claim if Cost > Proceeds + Tax allowances
(i.e. if Tax value > Proceeds) AND
Alienation, loss or • Allowance on qualifying assets iro sec
destruction 11(e), 12B, 12C, 12E has been allowed
(NOT land & buildings)
allowance - s • Expected useful life ≤10 years (from date of acquisition)
11(o) • 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 135
http://grassgreener.co.uk/bad-hire-calculator 136
135 136
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TL105 Concession or compromise of debt –

S 19 & par 12A of the 8th Schedule S 19 - Silke 13.10.7
Concession or compromise in Par 12A -Silke 17.8.4
respect of debt 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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137 138
137 138
Concession or compromise of debt – Concession or compromise of debt –

S 19 & par 12A of the 8th Schedule S 19 - Silke 13.10.7 S 19 S 19 - Silke 13.10.7
Par 12A -Silke 17.8.4
Debt benefit in respect of a debt owed by a person S 19 applies when:

means: • a debt benefit in respect of debt that is owed by a
• if debt is cancelled or waived → amount cancelled person
or waived • arises due to or because of a concession or compromise regarding
• in case of redemption of debt or where debt is extinguished by way of that debt, and
merger → amount by which face value of debt exceeds the
expenditure incurred to redeem the debt / acquire the claim iro of • that debt was used, either directly or indirectly, to fund any
that debt 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
• where shares are acquired in exchange for or as payment of debt to commercial reasons (i.e.
– person did not previously hold effective interest in debtor company → face value • A bequest, or inability to pay).
of debt less market value of those shares, or • A donation/deemed donation subject to donations tax, or
– person did previously hold effective interest in company → face value of debt Exceptions
less difference between market value of shares held in company after
• A taxable fringe benefit (i.e. discharge of employee debt), or
apply
concession or compromise and market value of shares held in company • To a dormant company in the same group of companies, or
before concession or compromise
• Share issue within same group to settle debt between group companies, or
• Where debt is settled by applying proceeds of shares issued → face • Iro debt owed (to the extent that debt does not represent interest incurred
value of debt before share issue less market value of shares. by debtor) converted or exchanged for shares OR proceeds from shares
MV of shares immediately after concession or compromise
139 issued, used to settle debt. 140
139 140
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S 19 & par 12A of the 8th Schedule S 19 - Silke 13.10.7 S 19 & par 12A of the 8th Schedule S 19 - Silke 13.10.7
(70% shareholding ito s 41) (70% shareholding ito s 41)
S 19 does NOT apply when the debt benefit is: S 19 does NOT apply when the debt benefit is:
• To a dormant company in the same group of • Share issue within same group to settle debt
companies not carried on a trade in the between group companies
current or previous YOA
• This exclusion will not apply to debt: • This exclusion will not apply to debt:
– Used to directly or indirectly fund expenditure for an asset that was – incurred when the debtor was not part of the same group
S 19 later disposed of under the corporate roll-over relief provisions S 19 – settled or reduced by the issuing of shares in the debtor when the
applies (ss 42, 44, 45 or 47 – see TL107) applies debtor was not part of the same group
– 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
Silke Example 13.37 – 13.40 Silke Example 13.37 – 13.40
141 142
141 142

par 12A of the 8th Schedule par 12A of the 8th Schedule – revise TL104
Par 12A -Silke 17.8.4 Par 12A -Silke 17.8.4
Par 12A applies when:
No Is there a debt benefit?
Is there a debt benefit?
• Amount of the debt benefit = same as definition in
Yes Par 12A is NOT s 19
applicable. Silke Example 17.15 – 17.18
Is the debt benefit specifically
excluded from the provisions of par 12A? Yes The debt benefit is specifically excluded from par 12A if:
No • Donation (debt reduced by way of) & donations tax is payable; OR
What was the debt used for, i.e. what was • Bequest (debt owed by an heir to a deceased estate); OR
the purpose of the debt? • Taxable fringe benefit (employee debt); OR
• Intra-group (min. 70% shareholding ito s 41) debt owed by a
dormant group company
Capital assets / Tax deductible Exceptions apply
allowance assets expenditure • Liquidation, winding-up or deregistration
• Intra-group debts settled by issuing shares
Par 12A • Debt substituted or converted to shares - debt that does not
applies 1st apply par 12A, then S 19 consist of interest, therefore only the capital portion of the debt
143 144
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par 12A of the 8th Schedule Par 12A does apply par 12A of the 8th Schedule
Par 12A -Silke 17.8.4.2 DEBTOR Par 12A -Silke 17.8.4
Paragraph 12A(6) exclusion will not apply if:
Group of companies ito section 41 – TL107:
• Intra-group (min. 70% shareholding ito s 41) debt
• At least 70% of equity shares in each controlled
& debtor = dormant: and
group company is held (directly/indirectly) by
o Used to directly or indirectly fund expenditure for an asset that was
controlling group company or 1 or more
later disposed of under the corporate roll-over relief provisions; or
controlled group company, and
o incurred to settle, take over, refinance or renew, directly or indirectly,
any debt of another company that forms part of the same group • The controlling group company directly holds at least 70% of the
equity shares in at least one controlled group company
• Debt reduced, between connected persons, due to liquidation,
winding up or deregistration of debtor: and • BUT excludes:
o Debtor and creditor became connected persons after debt arose; or – Any company that is incorporated under the law of a country other
than RSA unless that company has its place of effective
o Transaction part of scheme to avoid tax
management in the Republic;
(Note: If steps not taken to liquidate within 36 months, or liquidation – Any company that has its place of effective management outside the
withdrawn or debtor invalidates any step – par 12A will apply) Republic;
• Intra-group (min. 70% shareholding ito s 41) debt settled by share – PBO;
issue: and – Non-profit companies.
o non-member of group at time (debt incurred/shares issued)
145 146
145 146
Concession or compromise of debt – Treatment of a debt benefit

Par 56 of the 8th Schedule Section 19 Par 12A
CREDITOR Par 12A -Silke 17.8.4
•
Debt is reduced and creditor disposes of asset – Tax deductible Allowance Capital asset:
Trading stock:
= 8th Schedule applicable – calculate capital expenses asset: Still held during yoa
loss. and/or trading Still held during yoa of debt benefit:
1. Reduce cost
• If debtor and creditor are connected persons, par 39 (ring- stock already of debt benefit: 1. Reduce base cost
(s 19)
fencing) and/or par 56 may be applicable 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))
• Par 56 disregards capital loss unless: Loss IS taken into recoup 2. Excess ‐ recoup remaining balance
– Base cost of asset reduced ito par 12A(3) account under s 19(4) under s 19(6) and
1.Recoupment No longer held:
– Capital gain included by debtor ito par 12A(4) and s 8(4)(a) s 8(4)(a) 1. Additional capital
under s 19(5)
– Creditor proves amount included in gross income of acquirer of debt No longer held: gain in yoa of debt
and s 8(4)(a) 1. Additional benefit (par
– Amount included in gross income or income of debtor or taken into recoupment in 12A(4))
account in balance of assessed loss yoa of debt
– Debtor includes capital gain in aggregate capital gain or loss benefit (s 19(6A)
(creditor must provide proof) and s 8(4)(a)) and
2. Additional capital
• If par 56 is not applicable (capital loss not disregarded), capital gain in yoa of
loss is ring-fenced ito par 39. Loss can only be set off against debt benefit (par
capital gains realised with same debtor. 147
12A(4)) 148
147 148
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Example – Debt benefit (s 19 & par 12A) 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 REQUIRED
financial difficulty over the past few months and has
requested a concession for its debts from several of its Discuss, supported by calculations and with
creditors in order to try and regain its financial stability.
On 31 December Y1 Scrapbook (Pty) Ltd’s creditor account
reference to Income Tax legislation, the normal
for Snapshot’s records amounted to R475 000, which tax implications of the transactions for
represented trading stock purchases made on credit during Scrapbook (Pty) Ltd for the company’s Y1 year
Scrapbook (Pty) Ltd’s prior YOA. Scrapbook (Pty) Ltd has
requested a concession of this debt from Snapshot. of assessment.
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.
149 150
149 150
Treatment of a debt benefit Example Solution – Debt benefit

Par 12A (s 19 & par 12A)
Section 19 4862 Exam 2013 adapted
Tax deductible Allowance Capital asset: Trading stock – Snapshot (Pty) Ltd
Trading stock:
expenses asset: Still held during yoa The R475 000 debt benefit will first be applied to reduce the cost of the
and/or trading Still held during yoa of debt benefit:
stock already 1. Reduce cost trading stock still on hand at the time of debt concession. The deduction
of debt benefit: 1. Reduce base cost
(s 19) under section 22(2) for the opening stock on hand at the beginning of Y1 will
sold at time of 1. Reduce base cost (par 12A(3))
2. Excess ‐ be reduced to Rnil.
debt benefit: to nil (par 12A(3)) 2. No tax effect if
recoup 2. Excess ‐ recoup remaining balance R
1.Recoupment under s 19(4) under s 19(6) and

No longer held:
Opening stock (s 22(2)) (150 000)
under s 19(5) and s 8(4)(a) s 8(4)(a) 1. Additional capital Debt concession under s 19(3) 150 000
No longer held: gain in yoa of debt Closing stock (s 22(1)) 0
and s 8(4)(a) 1. Additional benefit (par
recoupment in 12A(4)) The remaining R325 000 (R475 000 – R150 000) of the debt 325 000
yoa of debt benefit will be a deemed recoupment in income under s
benefit (s 19(6A) 8(4)(a) – (s 19(5))
and s 8(4)(a)) and
2. Additional capital
gain in yoa of
debt benefit (par
12A(4)) 151 152
151 152
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Treatment of a debt benefit

Example – Debt benefit (s 19 & par 12A)
4862 Exam 2013 adapted Section 19 Par 12A
Scrapbook (Pty) Ltd also requested and was granted a Tax deductible
concession on its outstanding debt from the following Allowance
expenses Trading stock:
creditor (an independent party) asset:
Capital asset:
and/or trading Still held during yoa
• Photoshop Ltd for computer equipment purchased on stock already 1. Reduce cost of debt benefit: Still held during yoa
1 October PY (prior year) for R350 000. SARS allows of debt benefit:
for a three year write off period on computer sold at time of (s 19) 1. Reduce base cost
equipment in terms of Interpretation Note No. 47. The debt benefit: 2. Excess ‐ to nil (par 12A(3)) 1. Reduce base cost
computer equipment is used for purposes of trade. recoup 2. Excess ‐ recoup (par 12A(3))
R275 000 of this debt was still outstanding on under s 19(6) and 2. No tax effect if
1.Recoupment under s 19(4) remaining balance
31 December Y1. under s 19(5) and s 8(4)(a)
s 8(4)(a)
No longer held: No longer held:
and s 8(4)(a) 1. Additional 1. Additional capital
REQUIRED recoupment in gain in yoa of debt
Discuss, supported by calculations and with reference to yoa of debt benefit (par
Income Tax legislation, the normal tax implications of the benefit (s 19(6A) 12A(4))
transactions for Scrapbook (Pty) Ltd for the company’s Y1 and s 8(4)(a)) and
year of assessment. 2. Additional capital
gain in yoa of
debt benefit (par
153
12A(4)) 154
153 154
Example Solution – Debt benefit Example – Debt benefit (s 19 & par 12A)
(s 19 & par 12A) 4862 Exam 2013 adapted 4862 Exam 2013 adapted
Computer equipment – Photoshop Ltd Scrapbook (Pty) Ltd also requested and was granted
concession on its outstanding debt from another creditor
The asset is still held. The R275 000 debt benefit will first be applied to
(independent party) as listed below:
reduce the base cost of the asset in terms of par 12A
• Frame It (Pty) Ltd for the purchase of two small second-
Base Cost: par 20 expenditure R 350 000
hand office blocks six years ago at a total cost of R850 000
less: s 11(e) allowance PY: R350 000 / 3 x 3/12 (R29 167) each. One of these office blocks was sold during PY for
less: s 11(e) allowance Y1: R350 000 / 3 x 12/12 (R116 667) R700 000. R630 000 of this debt was still outstanding on
Base cost (= Tax Value) R204 166 31 December Y1. 50% of the debt related to the property
Debt benefit under s 19(3) ❶ (R204 166) still held and 50% related to the property sold during PY.
The base cost of the asset will therefore now be Rnil No allowances could be claimed for tax purposes.
Base cost R nil The request for the concession on its outstanding debt was
No further allowances on the computer equipment will be allowed under s 19(7). granted on 31 December Y1.
The remaining R70 834 (R275 000 – R204 166) will be a recoupment.
Scrapbook (Pty) Ltd had an assessed capital loss brought
Recoupment under s 19(6) read with s 8(4)(a) ❷ R70 834
forward from the PY year of assessment of R150 000.
155 156
155 156
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Treatment of a debt benefit Example Solution – Debt benefit

Section 19 Par 12A (s 19 & par 12A)
Office blocks – Frame It (Pty) Ltd

Tax deductible Allowance
expenses Trading stock: Of the R630 000 of debt cancelled, 50% or R315 000 is attributable to the office
asset:
and/or trading Still held during yoa
Capital asset: building still held at the date of the debt reduction.
Still held during yoa This will be applied to reduce the base cost of the office building to R535 000
stock already 1. Reduce cost of debt benefit:
of debt benefit: (R850 000 – R315 000) ❶ in terms of par 12A(3) of the Eighth Schedule.
sold at time of (s 19) 1. Reduce base cost
debt benefit: 2. Excess ‐ to nil (par 12A(3)) 1. Reduce base cost The remaining R315 000 debt reduction is attributable to the office building that
2. Excess ‐ recoup (par 12A(3)) was sold in the prior year for R700 000. The debt benefit of R315 000 cannot be
recoup 2. No tax effect if
under s 19(6) and applied against the base cost of this other office building, since it is no longer
1.Recoupment under s 19(4) s 8(4)(a) remaining balance
under s 19(5) and s 8(4)(a) held during the year of assessment of the debt benefit.
No longer held: No longer held: Instead the capital gain or loss determined in the PY (i.e. proceeds of R700 000
and s 8(4)(a) 1. Additional 1. Additional capital
less base cost of R850 000 = capital loss of R150 000) must be recalculated
recoupment in gain in yoa of debt
yoa of debt benefit (par taking into account the R315 000 debt benefit as if it accrued prior to the
benefit (s 19(6A) 12A(4)) disposal of the building, i.e. proceeds of R700 000 less base cost of R535 000
and s 8(4)(a)) and (R850 000 – R315 000) = recalculated capital gain of R165 000. The difference
2. Additional capital between the original capital loss of R150 000 and the recalculated capital gain of
gain in yoa of
debt benefit (par R165 000 results in an absolute difference of a R315 000 capital gain (par
12A(4)) 12A(4)) and is subject to capital gains tax in the CY.
157 158
157 158
Treatment of a debt benefit

Example – Debt benefit (s 19 & par 12A)
Section 19 Par 12A
Example -Silke 13.38
On 1 June Y1, Nocash (Pty) Ltd owed a debt of Tax deductible

Allowance
R500 000. Nocash (Pty) Ltd has trading stock on hand of expenses Trading stock:
asset:
R430 000, on that date, purchased during the year. and/or trading Still held during yoa
Capital asset:
stock already 1. Reduce cost Still held during yoa
Nocash (Pty) Ltd’s creditors conceded the R500 000 of of debt benefit:
of debt benefit:
debt due by Nocash (Pty) Ltd’s inability to pay. Of the sold at time of (s 19) 1. Reduce base cost
debt benefit: 2. Excess ‐ to nil (par 12A(3)) 1. Reduce base cost
debt owing, R430 000 stems from trading stock held and (par 12A(3))
recoup 2. Excess ‐ recoup
the other R70 000 relates to trading stock previously 1.Recoupment under s 19(4) under s 19(6) and 2. No tax effect if
remaining balance
held and purchased in the prior period (not included in under s 19(5) and s 8(4)(a)
s 8(4)(a)
opening stock). and s 8(4)(a)
No longer held: No longer held:
1. Additional 1. Additional capital
recoupment in gain in yoa of debt
Calculate the tax implications for Nocash (Pty) Ltd of the yoa of debt benefit (par
benefit (s 19(6A) 12A(4))
debt benefit for the year of assessment ending on and s 8(4)(a)) and
31 December Y1. 2. Additional capital
gain in yoa of
debt benefit (par
159
12A(4)) 160
159 160
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Example Solution – Debt benefit (s 19 & par 12A) Example Solution – Debt benefit (s 19 & par 12A)
Example -Silke 13.38 Example -Silke 13.38
Year ending 31 December Y1 Year ending 31 December Y1

The amount of the debt benefit of R500 000 will first be Purchase of trading stock (s 11(a)) (R430 000)
applied to reduce the cost price of the trading stock still
held at the time of the debt benefit. The deduction for the Debt benefit under s 19(3) R430 000
trading stock purchased under s 11(a) will be reduced to Closing stock (s 22(1)) Rnil
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 The remaining R70 000 of the debt benefit will be a
cost price was reduced to Rnil, will accordingly not have
any value for tax purposes if still on hand at year end. deemed recoupment in income under s 8(4)(a) (s 19(5)).
Note that no reduction is made against the R70 000 of Recoupment (s 8(4)(a)) R70 000
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.
161 162
161 162
Example – Debt benefit (s 19 & par 12A) Example Solution – Debt benefit (s 19 & par 12A)
Example -Silke 13.39 Example -Silke 13.39
On 1 June Y1, Nofuss (Pty) Ltd borrows R1,5 mil to Year ending 31 December Y1
acquire a new plant. Nofuss (Pty) Ltd purchased the The amount of the debt benefit of R1 500 000 was used to
plant for a total cost of R1 450 000 and used the fund tax-deductible expenses of R50 000 and the plant of
remaining R50 000 of debt to fund tax deductible R1 450 000. The amount of the debt benefit of R50 000 is not
administrative expenses. Nofuss (Pty) Ltd has claimed in respect of trading stock or allowance assets and will
allowances of R725 000 on the asset, at the stage when therefore be treated as a recoupment under section 19(5)
Nofuss (Pty) Ltd’s creditors discharge the R1 500 000 of read with section 8(4)(a).
debt, due to Nofuss (Pty) (Ltd)’s inability to pay. Nofuss The remaining R1 450 000 will first be applied against the
(Pty) (Ltd) still held the plant at the date on which the base cost of the asset which will be reduced to nil; the base
debt was discharged (i.e. within the same year of cost being R1 450 000 less the allowances claimed of R725
assessment). 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)).
Calculate the tax implications for Nofuss (Pty) (Ltd) of
the debt benefit for the year of assessment ending on Recoupment under s 19(5) read with s 8(4)(a) R 50 000
31 December Y1. Recoupment under s 19(6) read with s 8(4)(a) R725 000
163 164
163 164
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TL105 Incurral & accrual of amounts not

quantified - Section 24M
Unquantified Amounts –s 24M read Level 2 only Silke 17.9.3
with par 39A of 8th Schedule – Level 2 SELLER
ONLY • 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
165 166
https://www.freepik.com/s earc h?format=s earch&query=ques tion% 20m oney
165 166
Incurral & accrual of amounts not

quantified - Section 24M TL105
Level 2 only Silke 17.9.3 Trading Stock – LU 9
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
167 168
https://w ww.cleanpng.com/png-inventory-w arehouse-waste-logistics-lean-manufactu-1420657/preview .html
167 168
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Trading stock - s 22 Trading stock - s 22(1) amendment
• Closing stock should be included at cost or an

• Defined in section 1 Silke 14.1
amount as approved by Commissioner if stock
• Know how to calculate and take into has diminished by reason of:
consideration opening stock, closing
– damage
stock and the cost price of trading stock.
– deterioration
Silke 14.2, 14.3, 14.4
– change of fashion
• Change of intention (s 22(3)(a)(ii)) : revenue to capital
or otherwise: – decrease in the market value; or
– general rule: trading stock → capital asset recoup @ MV (except if it – for any other reason listed satisfactory to the
is a manufactured asset (par (jA) of gross income) Commissioner (excluding financial
instruments).
• Closing stock must be included in GROSS income
Silke Example 14.1 & 14.2
169 170
169 170
Trading stock - s 22 4862 Test 2 2014 adapted
• Goods taken from stock → deemed PART A

recoupment – s 22(8): Silke 14.6
• Private or domestic consumption recoup @ Standby Elec (Pty) Ltd (“Standby”) is a resident company
cost that specialises in the manufacturing and maintenance of
• Donated, disposed of < MV or in specie dividend @ MV industrial generators. Standby is a VAT vendor that only
• Donated to PBO and s 18A is applicable - recoup @ cost makes taxable supplies. It has a 31 December year-end
• Donated to PBO and s 18A not applicable - recoup @ MV and does not qualify as a small business corporation.
• Anti-avoidance – s 23F Silke 14.7
The write-off period of generators under Interpretation
• Deemed capital receipts from disposal of shares – s 9C(5)
Note No. 47 is 15 years.
Silke 14.10
http://grassgreener.co.uk/bad-hire-calculator 171 172
171 172
43
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REQUIRED
On 1 September Y1, Standby took one of its manufactured 1. Calculate (supported with reference to legislation) the
generators from its trading stock to be used on a temporary effect on taxable income for Standby Elec (Pty) Ltd in
basis as a capital asset at its administrative office building. It its Y1 and Y2 years of assessment.
is still the intention of Standby to sell this generator. It will,
however, be sold as a used or second-hand generator. The 2. Recalculate (supported with reference to legislation)
cost of this generator (incurred during its Y1 year of the effect on taxable income for Standby Elec (Pty)
assessment) was R1 250 000. Its market value on Ltd’s Y1 and Y2 years of assessment, on the assump-
1 September Y1 was R2 050 000. Its market value on tion that it does NOT manufacture generators, but
31 December Y1 was R1 750 000. merely buys and sells them. Round off all amounts to
the nearest Rand.
On 30 August Y2, Standby sold the generator that it had been
using in its administrative office building for R1 955 000 You can assume that all amounts exclude VAT, unless specifically stated
(including VAT). otherwise.
173 174
173 174

Y1 year of assessment Y1 year of assessment
The manufacturing costs (excluding VAT) are deductible under The acquisition costs (excluding VAT) are deductible
s 11(a) (1 250 000) under section 11(a) (1 250 000)
There is no section 22(8) adjustment because the generator Section 22(8) adjustment at market value 2 050 000
will be dealt with under paragraph (jA) of the "gross income"
definition on disposal. Thus treat as trading stock until sold. - Section 11(e) over 15 years (2 050 000/15 x 4/12) (45 556)
Closing stock is added at the lesser of cost or market value Y2 year of assessment
(s 22(1)) 1 250 000
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
Y2 year of assessment
period exceeds 10 years (Tax Value = R2 050 000 –
Opening stock (section 22(2)) (1 250 000)
"Gross income" (section 1 paragraph (jA)) (selling price,
R136 667 (R91 111 + R45 556) = R1 913 333 whilst
excluding VAT) (R1 955 000 x 100/115) 1 700 000 selling price is R1 700 000 (R1 955 000 x 100/115).
175 176
175 176
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4862 Test 2 2014 adapted Trading stock - s 22

Silke 14.7
CGT:
Proceeds: Selling price is R1 700 000 Limitation of deduction allowed under
(excluding VAT) section 11(a) – Section 23F Deduction
limited to the
Base cost on date of sale: R2 050 000 – extent that
Deductions limited in the following circumstances: payment has
R136 667 (R91 111 + R45 556) = R1 913 333 been received
• Applies to trading stock which was: for stock
– neither disposed of by the taxpayer nor disposed of
Standby will thus have a capital loss of – held by the taxpayer at the end of the year
(s 23F(1))
R213 333 (R1 700 000 – R1 913 333) that may • The deduction is deemed to have been incurred in the first
be deducted from aggregate capital gains 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
177
– For some reason stock can not be disposed of/ 178held by TP
177 178

On 1 August Y1, Yum-Yum donated non-perishable baby food Yum-Yum launched a new Yum-berry range of baby desserts
(= trading stock that was manufactured in the PY) to the “Help during September Y1. For the month of September, every
a Child-Foundation”, a public benefit organisation and customer buying a tin of Yum-Yum baby food received a tin of
received a section 18A certificate. The cost of the stock Yum-berry dessert as a free gift. Stock, with a cost of
donated was R15 000 and the company has a mark-up R75 000, was as a result given to customers as promotional
percentage of 150% on cost on all the products they sell. gifts.
Required:
Indicate what effect this would have on the taxable income for the Solution:
current year of assessment (ended 31 December Y1). No adjustment, since no recoupment under s 22(8) as applied
for purposes of trade
Solution: Alternative (OR):
Opening stock deducted (s 22(2)) (R15 000) Recoup at market value (s 22(8)(b)(iv)) R187 500
Recoupment of cost in terms of section 22(8) – (R75 000 x 150% = R187 500)
donation in terms of section 18A @ cost R15 000 Deduct promotional expenses (R187 500)
Effect on taxable income Nil
179 180
179 180
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Question 4862 Exam 2010 adapted

Question Solution 4862 Exam 2010 adapted
Opening stock – R75 000 x 2 – (section 22(2)(a))

On 1 January Y1 Watson transferred two manufacturing
machines that were originally manufactured for resale to (R150 000)
their shoe manufacturing department. The machines
were brought into use in the shoe manufacturing No recoupment in terms of section 22(8),
department on 31 January Y1. The machines were section 1, definition of gross income,
manufactured at a cost of R75 000 each. The market par (jA) applicable.
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
Closing stock at lesser of cost or if the
Commissioner approved the fact that the stock
end).
had diminished in value
(R65 000 x 2) (section 22(1)(a)) R130 000
181 182
181 182
Example – Trading stock (s 22) Example Solution

You have purchased trading stock at a cost of R10 000 during R
the current YOA and these items are still on hand at the end (i) Sales – gross income (no receipt or accrual) -
of the year. The market value of such trading stock at year Purchases – allowable deduction (section 11(a)) (10 000)
end amounts to R12 000.
Add back: Closing stock (lower of cost or market value – s 22(1)) 10 000
Taxable income (no effect) -
Required:
i. Indicate what effect this would have on your taxable
(ii) Sales – gross income (no receipt or accrual) -
income for the current YOA (hint: deal with sales,
purchases and trading stock). Ignore any VAT. Purchases – allowable deduction (section 11(a)) (10 000)
ii. If it is assumed that the above mentioned items are not on Add back: Closing stock (none on hand) -
hand at year-end, because they were donated to a local Deemed recoupment per s 22(8) of amount equal to market value 12 000
church (not a PBO), indicate what effect this would have
Taxable income (increase) 2 000
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? (iii) If approved PBO – deemed recoupment at cost 10 000
183 184
183 184
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Framework for calculation of Taxable Income

TL105 GROSS INCOME XXX
LEARNING LESS: EXEMPT INCOME (ss10, 10A, 10B, 10C and 12T)
INCOME
( XXX )
XX
UNIT 10 LESS: DEDUCTIONS AND ALLOWANCES
(ss11 – 17A & 21 – 24P, excluding s 18A) (note: s 11F excluded) ( XXX )
• Interest-bearing LESS: ASSESSED LOSS (ss 20 – 20A) (XXX)
XX
instruments (ss 24J, 24O)
ADD: AMOUNTS INCLUDED IN TAXABLE INCOME (e.g. s 8(1)(a)) XXX
• Hybrid instruments (s ADD: TAXABLE CAPITAL GAIN (s 26A) XXX
8F) - TAX4862 only XX
• Foreign exchange (s 24I) LESS: s 11F PENSION, PROVIDENT & RAF contributions deduction (XXX)
• International LESS: DEDUCTIONS in terms of s 18A (qualifying donations) (Remember –
(XXX)
transactions (s 31) - excess can be carried forward to following year of assessment)
TAX4862 only TAXABLE INCOME XX
• Tax morality, strategy
and risk management 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.
185
186
185 186
Interest-bearing instruments – s 24J Example: Yield to maturity – s 24J

(TAX4862 only)
• Deduction of interest: Interest of R27 500 for the year was received by
• Deemed to be incurred ito s 24J(2) if Macaroni Limited in respect of a financial
incurred in the production of income (and instrument which Macaroni Limited purchased on
carrying on of a trade)  must be deducted 1 September Y1 at a discount of 6% on its face
from income from issuer/borrower
value of R550 000. Interest is receivable six-
• Taxation of interest: monthly (on 28/29 February and 31 August)
• Deemed to accrue ito s 24J(3) irrespective calculated on the face value at 5% per year. The
if it is of a capital nature or not  must be instrument will mature on 31 August Y3, when
included in gross income of holder/lender
Macaroni Limited will receive the face value plus a
• Use a timeline for accrual periods versus year- premium of 10%.
end (see par 10.6 in TL105 for an example)
Calculate the yield to maturity.
• Yield to maturity  calculate (TAX4862 only)
187 188
187 188
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Example Solution: Yield to maturity – s 24J Example (s 24J)

(TAX4861 & TAX4862)
On 1 August Y1, Construct (Pty) Ltd (‘Construct’)

Calculate as follows: entered into an instalment credit agreement for the
• PV = -517 000 (R550 000 - 6%) purchase of a new concrete mixer truck, to be used in
the company’s manufacturing process. In terms of the
• FV = 605 000 (R550 000 + 10%)
agreement, 12 instalments are payable on a three
• N=6 month‐basis, commencing on 31 October Y1. The
• P/YR = 2 (HP) company made all payments on time as stipulated in
• PMT = 13 750 ((5% x 550 000)/2) the agreement. The concrete mixer truck was brought
• Comp i = 5.15242% (10.30484% / 2 HP) into use on 1 September Y1.
The company has a 31 December year‐end.
Yield to maturity (YTM)
Instalments were calculated as follows:
189 190
189 190
Example (s 24J) Solution section 24J

ICA BIU 1st pmt Yr‐end 2nd pmt
R
Cash cost (excluding VAT) 810 000 31 Oct 31 Dec 31 Jan
1 Aug 1 Sept
Add: VAT 121 500
1st Interest (92 days)
931 500
2nd Interest
Less: Deposit (192 780) 1st Pmt - Interest
738 720 R738 720 x 3.06% = R22 605
Add: Finance charges (YTM = 3.06% per 3 month-period) 155 034 x 61/92 = R14 988
Total 893 754

2nd Pmt - Interest
(R738 720 + R22 605 – R74 479) = R686 846
Instalments per three month-period 74 479 R686 846 x 3.06% = R21 017
x 61/92 = R13 936
Required:
Calculate the effect on Construct’s taxable income for the Y1 y.o.a.
191 192
191 192
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Interest incurred in respect of debts used to acquire certain

Solution section 24J shares is deemed to be in production of income s 24O
Section 12C deduction • Interest incurred to acquire shares in a local

 R810 000 x 40% (324 000) company is usually not deductible as –
• Local dividends are exempt and therefore not in the
Section 24J production of income
 31 October Y1 (R738 720 x 3.06% = (14 988) • INCOME = Gross income – exempt income
R22 605), but may only claim interest • S 24O provides relief if a company issues,
for Sep and Oct (once asset BIU), assumes or uses debt to acquire a controlling
therefore R22 605 x 61/92) interest, directly or indirectly, in an operating
 31 December Y1 (interest accrued) company in terms of an acquisition transaction.
(R738 720 + R22 605 – R74 479) (13 936)
= R686 846 x 3.06% x 61/92
193 194
193 194
Interest incurred in respect of debts used to acquire certain Interest incurred in respect of debts used to acquire certain
shares is deemed to be in production of income s 24O shares is deemed to be in production of income s 24O
• An “acquisition transaction” is where: Definitions:

• Equity shares are acquired Operating company:
• in an operating company (on date of acquiring those
shares) and after entering into transaction At least 80% of the aggregate amount received
• acquiring company is a controlling group company in relation to
the company whose shares are acquired, and by/ accrued to the company during a year of
• the 2 companies form part of same group of companies (as assessment constitutes income (gross income –
defined in s 41(1))
OR exempt income), and
• in a controlling group company in relation to an operating • the company derived the income from a business
company (on date of acquiring those shares) that form carried on continuously, and
part of the same group of companies (as defined in s 41(1)
and after entering into transaction • in the course of which goods or services are
• the acquiring company is a controlling group company in provided or rendered by the company for
relation to the acquired controlling group company, and
• the 2 companies form part of same group of companies (as consideration
defined in s 41(1))
195 2022/03/30 196
195 196
49
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Interest incurred in respect of debts used to acquire certain Interest incurred in respect of debts used to acquire certain
shares is deemed to be in production of income s 24O shares is deemed to be in production of income s 24O
Definitions:
Note:
The determination as to whether the equity
shares represent a qualifying interest must In terms of the definition of an “acquisition
be done annually on one of the following transaction” the transaction in terms of
measurement dates: which the company acquires equity shares in
• Equity share held at year-end → determination is
another company must be with a company
done on the year-end date. that does not form part of the same group of
• Equity share disposed of by company → companies as that company
determination is done on the date of disposal.
197 198
197 198
Interest on hybrid debt instruments deemed Interest on hybrid debt instruments deemed
to be dividends in specie (s 8F) (TAX4862 only) to be dividends in specie (s 8F)
• Hybrid debt instrument = only an instrument in terms of
which a company owes an amount to another person can Company paying interest Company receiving
be a hybrid debt instrument. The following instruments are interest (holder)
classified as hybrid debt instruments:
• Interest paid deemed to • Interest received deemed to
• The company is entitled to or obliged to convert or be dividend received –
exchange the instrument (or part thereof) in any YOA be dividend paid therefor dividend included in gross
for shares, unless mv of shares = amount owed in no deduction allowed income (s 8F(2)(a))
terms of instrument;
• The obligation to pay an amount so owed on a date or (s 8F(2)(b)). • Dividend exemption:
dates falling in the YOA has been deferred as the (s 10(1)(k)(i))
obligation is conditional upon the mv of assets of
company not < than amount of liabilities of company (Note: def. of instrument –
(obligation to pay based on solvency of company) holder is a resident company
• Company owes amount to connected person and has or non-resident company if
no obligation to repay within 30 years of issue of the interest in respect of the
instrument (date liability comes into existence) unless instrument is attributable to a
repayable on demand. permanent establishment of
the non-resident company in
South-Africa)
199 200
199 200
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Foreign exchange (Ss 25D & 24I)
EVERY FOREIGN
EXCHANGE TRANSACTION
Transactions
in foreign UNDERLYING ASSET EXCHANGE ITEM
currency
NON-MONETARY ITEM MONETARY ITEM
Section 25D Section 24I
201
202
201 202
Section 25D Foreign exchange (S 24I)

• Section 25D is used to convert foreign currency: • Study par 15.2 (excluding 15.2.3 & 15.2.4), 15.3 and 15.4 in Silke
together with this summary
• Receipts (examples: Interest received or accrued on a • If either trading stock or an asset is purchased in foreign currency –
foreign investment); and convert the cost on transaction date using the spot rate (s 25D) (cost
price)
• Expenses (examples: Interest paid or incurred on a foreign • If the purchase price is not settled in full on transaction date 
loan or debt, assets or stock purchased) exchange item – s 24I
• Individuals & non-trading trusts, use • If a forward exchange contract (FEC) is obtained  exchange item
• Calculate exchange differences (gains or losses) between:
• Spot rate on day foreign amount received/accrued, or • the transaction date and either translation date (end of year of
• Average exchange rate for year of assessment assessment) and / or realisation date (payment date); or
• the translation date and either next translation date or realisation
• Companies and trading trusts, use date
• of the exchange items by making use of the ruling rate
• Spot rate on day foreign amount received/accrued
• In terms of section 24I(7) the exchange difference must be deferred
(Note that par 43(1A) of 8th Schedule contradicts s 25D. Par 43(1A) and taken into account in the year of assessment during which the
allows companies & trusts to use the average rate when disposing asset is brought into use.
of non-monetary assets in a foreign currency.)
Special rule for s 6quat foreign tax – convert at average rate Trading Stock?
for year of assessment. 203 204
203 204
51
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Foreign exchange Example
Wooden Joy (Pty) Ltd (“Wooden”) is a resident company. Wooden is a registered

Transaction Translation Realisation 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
date date (YE) date assemble and install wooden playground equipment (not classified as a process of
manufacturing) at clients’ premises. Wooden has a December year-end. Wooden
Loan,
is not a small business corporation as defined.
advance or Spot rate Spot rate Spot rate
debt 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‐
Market‐related on‐board) on 30 September 2022. The machines arrived in South Africa on
FEC Forward rate FEC rate for Spot rate 15 October 2022 and was cleared immediately. Import duties of R28 750 were
remaining period paid, as well as the correct amount of VAT. 25% of the outstanding debt was paid
Goods shipped free-on-board (FOB) – transaction date = shipping date to the supplier on the date of the safe arrival of the two machines in South Africa.
Goods shipped on a cost-insurance-freight basis (CIF) – transaction date = On 1 November 2022 the two excavators were brought into use by Wooden. On
shipping date 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.
205 206
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205 206
Example Example
Transaction Date Spot rate
Date
$1 = R
16 September 2022 $1 = R15,85
30 September 2022 $1 = R15,80
25% paid
REQUIRED Marks
15 October 2022 $1 = R15,95
1 November 2022 $1 = R15,60
$1 = R15,90 (forward rate under Calculate all the implications on Wooden Joy (Pty) Ltd’s
a four‐month FEC) taxable income regarding the acquisition and settlement of
Year-end 31 December 2022 $1 = R16,05 the debt of the two excavation machines for the 2022 year of 9
$1 = R16,25 (forward rate under assessment. Show all calculations and round off all amounts
a two‐month FEC) to the nearest Rand.
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.
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208
207 208
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Example – foreign exchange - solution

Import duty
Example added to cost of

assets, VAT
claimed Purchase of the two excavation machines:
Rx: 25% of debt Rx: remaining 75%
Shipped Delivered & of debt
Order BIU Yr‐end Paid 2022 Cost of excavation machines:
FOB Pd 25%
$31 600 ($15 800 x 2 machines) x R15,80 (s 25D) = R499 280 +
Tx: Cost – s25D R28 750 (import duties) = R528 030
16 Sept ‘22 30 Sept ‘22 15 Oct ‘22 1 Nov ‘22 31 Dec ‘22 28 Feb ‘23
2 x $15 800 = Section 11(e) allowance = R528 030 / 4 years x 2/12 (22 001)
$31 600 ($31 600 x 25% = $7 900) x (15.95 – 15.80) loss (S24I) Foreign exchange differences (section 24I):
DEBT 15.85 15.80 15.95 15.60 16.05 16.15
Debt:
15 October 2022
($31 600 x 75% = $23 700) x (15.80 – 16.05) loss (S24I)
$7 900 ($31 600 x 25%) x (R15,80 – R15,95) – Loss (1 185)
31 December 2022
1 Nov ‘22 31 Dec ‘22 28 Feb ‘23 $23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) – Loss (5 925)
FEC:
FEC 15.90 16.25 16.15
(2 mth FEC) 31 December 2022
$23 700 x (R16,25 – R15,90) – Gain 8 295
($31 600 x 75% =$R23 700) x (15.90 – 16.25) gain (S24I)
209 210
209 210
Example Example
Rx: 25% of debt Rx: remaining 75%
USING THE SAME INFORMATION AS THE PREVIOUS EXAMPLE, JUST CHANGING THE DATE Shipped Delivered & of debt
Order Yr‐end BIU Paid
THAT THE ASSETS WERE BROUGHT INTO USE FOB Pd 25%
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 Tx: Cost – s25D 1 Feb ‘22
16 Sept ‘22 30 Sept ‘22 15 Oct ‘22 31 Dec ‘22 28 Feb ‘23
makes taxable supplies. The company’s primary business is to assemble and install wooden
2 x $15 800 =
playground equipment (not classified as a process of manufacturing) at clients’ premises. s24I(7) deferred
$31 600 ($31 600 x 25% = $7 900) x (9.95 – 9.80) loss (S24I) unrealised g/(l)
Wooden has a December year-end. Wooden is not a small business corporation as defined. 15.95 15.60
DEBT 15.85 15.80 16.05 10.15
Wooden ordered two new excavating machines from an American company for $15 800 s24I(7) deferred
each on 16 September 2022 The two excavators were shipped FOB (free‐on‐board) on ($31 600 x 75% = $23 700) x (15.80 – 16.05) loss (S24I) unrealised g/(l)
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 1 Nov ‘22 31 Dec ‘22 28 Feb ‘23
the two machines in South Africa.
FEC 15.90 16.25 16.15
On 1 November 2022, Wooden entered into a four-month FEC in order to hedge the (2 mth FEC)
outstanding purchase price. The two excavators were brought into use by Wooden on s24I(7) deferred
1 February 2023. The outstanding debt was settled in full on 28 February 2023. ($31 600 x 75% =$R23 700) x (15.90 – 16.25) gain (S24I) unrealised g/(l)
211 212
211 212
53
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Solution Solution
2023:
2022 Cost of excavation machines: Section 11(e) allowance = R528 030/4 years x 11/12 (brought
$31 600 ($15 800 x 2 machines) x R15,80 (s 25D) = R499 280 + R28 750 into use on 1 February 2023) (121 007)
(import duties) = R528 030 Foreign exchange differences (section 24I):
Section 11(e) allowance cannot be claimed as the asset has not been Debt: Deferred – 2022
brought into use in 2022 yoa 15 October 2022
Foreign exchange differences (section 24I): $7 900 ($31 600 x 25%) x (R15,80 – R15,95) = R1 185 loss (1 185)
Debt: 15 October 2022 (section 24I(7) 31 December 2022
$7 900 ($31 600 x 25%) x (R15,80 – R15,95) = R1 185 loss that cannot be $23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) = R5 925 loss (5 925)
claimed as the asset has not been brought into use – defer to 2023 28 February 2023 (when realised)
31 December 2022 (section 24I(7)) $23 700 ($31 600 ‐ $7 900) x (R16.05 – R16,15) = R2 370 loss (2 370)
$23 700 ($31 600 ‐ $7 900) x (R15,80 – R16,05) = R5 925 loss deferred to FEC: Deferred - 31 December 2022
2023 $23 700 x (R16,25 – R15,90) = R 8 295 gain 8 295
FEC: 31 December 2022 (section 24I(7)) 28 February 2023 (when realised)
$23 700 x (R16,25 – R15,90) = R 8 295 gain deferred to 2023 $23 700 x (R16,25 – R16.15) = R2 370 loss (2 370)
213 214
213 214
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:
FOREX
s24I(10A)
• 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
TAX4862 ONLY
215 216
54
3/30/2022
Section 24I(10A) - Transactions between group Section 24I(10A) - Transactions between group
companies or connected persons companies or connected persons
Section 24I(10A) exchange gains/losses

• Section 24I(10A) defers unrealised exchange gains
and losses in respect of debts/loans until realised or recognised when:
conditions below no longer met; if • gain/loss realised (debt/loan repaid);
• The lender and borrower are part of the same group of • or requirements of section 24I(10A) no longer met
companies; or
• The lender and borrower are connected persons Exchange difference calculation:
AND (exchange rate last day of preceding YOA less
• The loan is not hedged by a FEC or FCOC; & exchange rate on transaction date) x debt/loan
• 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- amount
classified as current liability); &
• Loan not directly/indirectly funded by independent party
217 218
217 218
Example - section 24I(10A) Example - section 24I(10A)
On 1 January 2022 Watson (VAT vendor) purchased a new Date Spot rate
manufacturing machine on credit for €300 000 from €=R
Tsonga (a connected person). 1 January 2022 €1 = R18,00
On 1 February 2022 the machine was shipped (FOB). 1 February 2022 (transaction) €1 = R18,05
On 1 March 2022 the machine was cleared by Customs 1 March 2022 €1 = R18,14
(customs duty value was R 3 420 000) and on 15 March 15 March 2022 €1 = R18,25
2022 the machine was brought into use by Watson. 31 March 2022 (year-end) €1 = R18,32
31 March 2023 €1 = R18,37
It was agreed that Watson would pay Tsonga the full 31 December 2023 €1 = R18,40
amount of the debt on 31 December 2023. Watson did (payment/realisation)
not enter into any FEC to serve as a hedge in respect of Required:
the debt. (Year end = 31 March ) Calculate all the implications on the taxable income of Watson for the 2022 and 2023
year of assessment.
219 220
219 220
55
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Capital Gains Tax – Par 43 of 8th

Solution - section 24I(10A) Schedule (TAX4862 only)
2022 - New manufacturing machine Par 43 of 8th Schedule deals with the disposal of non-
Cost (€300 000 x R18,05) 5 415 000 monetary assets acquired or disposed of in foreign currency.
Customs Duty (R3 420 000 x 10%) 342 000
VAT claimed ‐ Par Natural persons or non‐ Determine gain/loss in foreign
5 757 000 43(1) trading trusts if base cost currency
Section 12C – R5 415 000 x 40% (2 166 000) and proceeds in same Gain/loss converted to RAND at:
Customs duty isn’t a “cost” of the machine it is only used to
calculate the value for VAT purposes. foreign currency • Spot rate ‐date of disposal; or
Foreign exchange • Average rate for year of disposal
Debt – not realised, requirements of s24I(10A) met thus Par When par 43(1) does not Determine gain/loss in RAND
defer to 2023 43(1A) apply • Base cost ‐ spot rate date of
acquisition or average rate year of
2023
Debt – not realised, requirements of s 24I(10A) not met. acquisition
Payable within 12 months = current liability) • Proceeds – spot rate date of
€300 000 x (R18,05 – R18,32) – loss from 2022 (81 000) disposal or average rate year of
Debt – €300 000 x (R18,32 – R18,37) – loss (15 000) disposal
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221 222
International transactions (s 31)

INTERNATIONAL Section 31 applies to any affected transaction that leads to a tax
TRANSACTIONS 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)
TAX4862 ONLY
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223 224
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Section 31 – Connected persons Example: connected person S1 & S31

Connected persons for section 31 refers to the definition Foreign Co 1 Foreign Co 2
in section 1, with one meaningful disregard in respect
of ONLY financial assistance: Non-resident companies
• 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
20% 80%
• Any person (except a company) that alone or together with
connected person directly/indirectly holds at least 20% of equity SA Co 3
shares or voting rights (par (d)(iv)); or
• Any company that holds at least 20% of equity shares or voting South African company
rights if no other company holds majority voting rights (par
(d)(v); or S 1: Only Foreign Co 2 is a
• Other company managed or controlled by a connected person to connected person with SA Co 3.
the company or a person connected to such connected person
(par (d)(vA)); S 31: Foreign Co 1 & Foreign Co 2 will
A co. that holds 20% will qualify as a connected person for s 31
(financial assistance NOT transfer pricing) regardless of whether both be connected persons with SA Co 3
another co. holds majority voting rights.
225 226
225 226
International transactions (s 31) International transactions (s 31)

Transfer Pricing
Section 31(2): Are the parties a
resident and non-
Has a tax benefit
If an affected transaction leads to a tax benefit for any resident and Yes
arisen?
party, calculate the taxable income of the person receiving connected? Section 1
the benefit by applying arm’s length conditions to the Only allow the South African company to deduct or
transaction include amount equal to amount under arm’s length Yes
transaction ((S31(2))
Difference in taxable income:
• If resident = company deemed distribution of asset in Difference between actual amount charged/paid and
specie thus dividend in specie and adjusted amount treated as follows (S31(3)):
• Natural person – donation
• If resident = other than company donation • Companies – deemed distribution of asset in specie
On last day of 6‐month period following the end of the YOA
When? last day of 6-month period following the end of the (year of assessment) in respect of which adjustment was
YOA in resect of which adjustment was made. made.
Section 31 (5) – (7) - Excluded from the syllabus
227 228
227 228
57
3/30/2022
Example section 31 Example (s 31) - Solution

Transfer Pricing
Section 31(2) adjustment: R

Turkey (Pty) Ltd (“Turkey”), a resident company,
sells trading stock with a cost price of R150 000 to Gross income – proceeds from sale 180 000
a non-resident connected party, Goose Plc
(“Goose”) for R180 000 when the market value of Section 32(2) adjustment (R250 000 ‐ 70 000
the stock is R250 000. Goose is managed and R180 000)
controlled in a country with a 15% tax rate. Turkey Opening stock (150 000)
has a December 2022 year-end.
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%)
229 230
229 230
Section 31 – Financial assistance Section 31 – Financial assistance

Are the parties
Has a tax benefit
connected? Section Yes
arisen?
1 & Section 31(4)
• An affected transaction can also be financial
assistance provided, for example
Only allow the South African company to deduct an amount equal
• Low/high interest rate levied/paid on loan granted to an arm’s length rate of interest.
to/by connected foreign party; or Only allow the deductible interest to be based on an amount that Yes
• Excessive financial assistance provided where the an arm’s length lender would have lent (and on the amount that the
party would normally qualify for much less financial South African company would have borrowed in the circumstances).
assistance.
• Financial assistance includes debt, security or a Difference between actual interest charged/paid and adjusted
interest treated as follows (S 31(3)):
guarantee. • 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.
231 232
231 232
58
3/30/2022
Example – Financial assistance Example – Financial assistance -

Solution
On 1 January 2022 Turkey (Pty) Ltd (“Turkey”), a In terms of section 1, definition of connected persons, Goose and
Turkey are not connected parties BUT section 31(4) states that for
resident company received a loan of purposes of financial assistance if a company holds at least 20%
shares in another company they will be connected persons even if
R1 000 000 at 20% interest per annum from another company holds the majority voting rights. This is also
between a resident and non-resident company –thus an affected
Goose Plc (“Goose”), a non-resident company transaction.
that holds 21% of the shares in Turkey. The Interest incurred for 2022:
other shares (79%) in Turkey are held by R1 000 000 x 20% x 365/365 (days) = R 200 000
Chicken (Pty) Ltd. Reasonable interest applied to a reasonable loan amount:
R600 000 x 15% = R90 000 (allowable deduction for Income Tax
Turkey could only qualify for a loan of purposes)
R600 000 at 15% interest per annum at all local Thus excessive interest:
R200 000 – R 90 000 = R110 000 deemed dividend in specie.
banks. Turkey has a December 2022 year-end.
233 234
233 234
Tax morality, strategy and risk

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

for reading)
The chapter includes:
• Overview
Tax morality, • Moral and legal responsibilities of taxpayers
• General tax risk management strategy
strategy and • Specific tax related risks
risk • Operation risk
• Compliance risk
management • Tax uncertainty or interpretation risk
• Reputation risk
• https://www.freepik.com/search?format=search&query=strategy
235
236
235 236
59
3/30/2022
Define tomorrow.
237
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Tutorial Letter 105 TL105 Topics

Framework for calculation of Taxable Income

GROSS INCOME XXX

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

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

ADD: AMOUNTS TO BE INCLUDED IN TAXABLE INCOME, INCLUDING

excess can be carried forward to following year of assessment

General deduction formula General deduction formula

• Expended (in full / in part) for purposes of trade. • Conclude

Prohibited deductions (s 23) Prohibited deductions (s 23)

• 23(a) – Private maintenance expenditure Section (continued):

Pre-trade expenditure and losses (s 11A)

Pre-Trade expenses • Also read: Interpretation Note No. 51 (Issue 5):

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

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

Pre-paid expenditure (s 23H) Pre-paid expenditure (s 23H)

Pre-paid expenditure (s 23H)

Not deductible as it is > 6 months after YE and

Integrated Example Integrated Example Solution

Integrated Example Solution Integrated Example Solution

Special deductions and allowances

Special deductions and allowances Legal expenses – s 11(c)

Example Legal expenses – s 11(c)) Example Solution Legal expenses – s 11(c)

Example Solution Legal expenses – s 11(c) Repairs – s 11(d)

Example Example Required

On 15 September Reno Vate (a 40 year old female) decided to buy a small

Example Solution Example Solution

Example Solution Doubtful debt allowance – s 11(j)

Doubtful debt allowance – s 11(j) –no

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

Learnership Agreements - S 12H Learnership Agreements S 12H

• Employer deduction additional to salary costs (ignore

Example: Learnership Agreements S 12H Example Solution: Learnership Agreements S 12H

Learner Shezi (in possession of a NQF level 8

Allowance in respect of future expenditure

Framework for calculation of Taxable Income Qualifying donations – s 18A

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

Qualifying donations – s 18A Example: Donations deduction – S 18A

Prior year of assessment Taxable Current year of assessment

Less: Deductions ito s 18A (qualifying donations) Less:

Taxable income 1 665 000 Taxable income 2 885 000

Silke Example 12.18 to 12.22

Capital Allowances & Recoupments Capital Allowances & Recoupments

Recoupment on Leases 8(5)

Capital Allowances & Recoupments Capital Allowances & Recoupments

Topic Section Topic Section

TL105 Cost or value of assets – Movable assets

Section 11(e) Section 12B Section 12C Section 12E

Section 11(e) Section 12B Section 12C Section 12E

Movable Assets Allowances

Example Solution – Movable Assets Example Solution – Movable Assets

Year ended 31 Dec Y4 Year ended 31 Dec Y5

Example Solution – Movable Assets Example – Movable Assets

Electra Ltd, a small business corporation, commenced trading on

Example Solution – Movable Assets Example Solution – Movable Assets

TL105 Immovable Property

Also consider lease premium and leasehold improvements on land or to

IMMOVABLE PROPERTY ALLOWANCES Manufacturing buildings (factories)

Section 13 Section 13quin Section 13sex